Edgar Filing: RARE HOSPITALITY INTERNATIONAL INC

/s/Eugene I. Lee, Jr.

March 6, 2006

Eugene I. Lee, Jr.

President, Chief Operating Officer

and Director

2005 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 25, 2005

COMMISSION FILE NUMBER 0-19924

RARE HOSPITALITY INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


Georgia (State or other jurisdiction of incorporation or organization) 8215 Roswell Rd; Bldg. 600; Atlanta, GA (Address of principal executive offices)	58-1498312 (I. R. S. Employer Identification No.) 30350 (Zip Code)

770-399-9595

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

NONE

Securities Registered Pursuant to Section 12(g) of the Act:

COMMON STOCK, NO PAR VALUE

SERIES A JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes x

No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.

Yes o

No x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

x Large accelerated filer

o Accelerated filer

o Non-accelerated filer

The aggregate market value of the voting and non-voting common stock held by non-affiliates (assuming for these purposes, but not conceding, that all executive officers and directors are “affiliates” of the Registrant) of the Registrant was approximately $980.1 million based upon the last reported sale price in the Nasdaq National Market of $29.67 as of the last business day of the Registrant’s most recently completed second fiscal quarter.

As of February 28, 2006, the number of shares outstanding of the Registrant’s Common Stock, no par value, was 33,633,722 (excluding 1,951,500 shares held in the Company’s treasury).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 9, 2006 are incorporated by reference in Part III hereof.

FORWARD-LOOKING STATEMENTS

Certain of the matters discussed in this Form 10-K, particularly regarding estimates of the number and locations of new restaurants that RARE Hospitality International, Inc. and its subsidiaries (the “Company”) intend to open during fiscal 2006 and statements included in the section of Management’s Discussion and Analysis of Financial Condition and Results of Operations entitled “OUTLOOK FOR FUTURE OPERATING RESULTS,” constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements regarding the intent, belief or current expectations of the Company and members of its management team, as well as assumptions on which such statements are based. All forward-looking statements in this Form 10-K are based upon information available to the Company on the date of this report. Forward-looking statements involve a number of risks and uncertainties, and in addition to the factors discussed elsewhere in this Form 10-K, other factors that could cause actual results, performance or developments to differ materially from those expressed or implied by those forward-looking statements include the following: failure of facts to conform to necessary management estimates and assumptions regarding financial and operating matters; the Company’s ability to identify and secure suitable locations for new restaurants on acceptable terms, open the anticipated number of new restaurants on time and within budget, achieve anticipated rates of same store sales, hire and train additional restaurant personnel and integrate new restaurants into its operations; the continued implementation of the Company’s business discipline over a large and growing restaurant base; increases in the cost of construction of new restaurants; unexpected increases in cost of sales or employee, pre-opening or other expenses; the economic conditions in the new markets into which the Company expands and possible uncertainties in the customer base in these areas; fluctuations in quarterly operating results; seasonality; unusual weather patterns or events; changes in customer dining patterns; the impact of any negative publicity or public attitudes related to the consumption of beef or other products sold by the Company; unforeseen increases in commodity pricing; disruption of established sources of product supply or distribution; competitive pressures from other national and regional restaurant chains; legislation adversely affecting the restaurant industry, including (without limitation) minimum wage and mandatory healthcare legislation; business conditions, such as inflation or a recession, or other negative effect on dining patterns, or some other negative effect on the economy, in general, including (without limitation) war, insurrection and/or terrorist attacks on United States soil; growth in the restaurant industry and the general economy; changes in monetary and fiscal policies, laws and regulations; and the risks set forth in this Form 10-K and other risks identified from time to time in the Company’s SEC reports, registration statements and public announcements. Any forward-looking statement speaks only as of the date on which it was made, and the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

RARE HOSPITALITY INTERNATIONAL, INC.

INDEX

		Page
Part I
Item 1.	Business	4
Item 1A.	Risk Factors	4
Item 1B.	Unresolved Staff Comments	4
Item 2.	Properties	18
Item 3.	Legal Proceedings	18
Item 4.	Submission of Matters to a Vote of Security Holders	19

Part II
Item 5.	Market for Registrant's Common Equity and Related Stockholder Matters	19
Item 6.	Selected Financial Data	20
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 8.	Financial Statements and Supplementary Data	34
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	56
Item 9A.	Controls and Procedures	56

Part III
Item 10.	Directors and Executive Officers of the Registrant	56
Item 11.	Executive Compensation	56
Item 12.	Security Ownership of Certain Beneficial Owners and Management	56
Item 13.	Certain Relationships and Related Transactions	56
Item 14.	Principal Accountant Fees and Services	56

Part IV
Item 15.	Exhibits and Financial Statement Schedules	56
Signature		59

PART I

ITEM 1. BUSINESS

GENERAL

RARE Hospitality International, Inc. and subsidiaries operates and franchises 303 restaurants as of February 21, 2006, including 247 LongHorn Steakhouse restaurants, 23 The Capital Grille restaurants and 31 Bugaboo Creek Steak House restaurants, as well as two additional restaurants (the “specialty restaurants”), Hemenway’s Seafood Grille & Oyster Bar (“Hemenway’s”) and The Old Grist Mill Tavern. The Company was incorporated in Georgia in December 1982. In this Form 10-K, unless the context otherwise requires, “RARE Hospitality,” the “Company,” “we,” “us,” or “our” refers to RARE Hospitality International, Inc. and its subsidiaries.

CONCEPTS

LongHorn Steakhouse restaurants are casual dining, full-service establishments serving both lunch and dinner an attractive and inviting atmosphere. With locations spread throughout 25 states primarily in the Eastern half of the United States, LongHorn Steakhouse restaurants feature a variety of top quality menu items including signature steaks, as well as salmon, shrimp, chicken, ribs, pork chops, burgers and prime rib. Designed with an inviting décor reminiscent of the classic American West, LongHorn Steakhouse restaurants appeal to all ages with a unique combination of hospitable, attentive service, moderate prices, high quality menu items and a comfortable atmosphere.

The Capital Grille, with locations in major metropolitan cities in the United States, boasts relaxed elegance and style. Nationally acclaimed for dry aging steaks on premises, The Capital Grille is also known for fresh seafood flown in daily and culinary specials created by its chefs. The restaurants feature an award-winning wine list offering over 300 selections, personalized service, comfortable club-like atmosphere and premiere private dining rooms. The Capital Grille is the ideal dining choice for business meetings and social occasions.

Bugaboo Creek Steak House restaurants are designed as attractive, family-friendly establishments featuring moderately priced, flavorful food items and an offering of full liquor service. Primarily located in states on the Eastern seaboard, Bugaboo Creek Steak House restaurants attract guests of all ages with a rustic décor reminiscent of an authentic Rocky Mountain lodge. Stressing a friendly and attentive service style, Bugaboo Creek Steak House restaurants offer a variety of menu offerings including signature seasoned steaks, prime rib, smoked baby-back ribs, spit roasted half chicken, grilled salmon and shrimp.

RESTAURANT LOCATIONS

The following tables set forth the location of each existing restaurant and restaurants under construction by concept at February 21, 2006 and the number of restaurants in each area.

LONGHORN STEAKHOUSE RESTAURANTS

EXISTING COMPANY-OWNED/JOINT VENTURE RESTAURANTS

ALABAMA

	Auburn	1
	Birmingham	1
	Dothan	1
	Huntsville	1
	Mobile	2
	Montgomery	2

DELAWARE

Bear

FLORIDA

Daytona Beach		1
Destin		1
Ft. Myers		2
Ft. Walton Beach		1
Jacksonville		8
Miami/Ft. Lauderdale		7
Ocala		1
Orlando		8
St. Augustine		1
Tallahassee		1
Tampa/ St. Petersburg	11
West Palm Beach		4

GEORGIA

Albany		1
Athens		1
Atlanta	30
Augusta		1
Carrollton		1
Columbus		1
Dalton		1
Dawsonville		1
Ellijay		1
Gainesville		1
Macon		1
Rome		1
Savannah		1
Statesboro		1
Tifton		1
Valdosta		1
Warner Robbins		1

ILLINOIS

	Chicago	1
	Fairview Heights	1
	Springfield	1

INDIANA

	Evansville	1
	Indianapolis	5

KANSAS

	Kansas City	3
	Topeka	1

KENTUCKY

	Bowling Green	1
	Cold Springs	1
	Florence	1
	Frankfort	1
	Lexington	1
	Louisville	1

MAINE

	Augusta	1
	Portland	1

MARYLAND

	Baltimore	4
	Frederick	1
	Hagerstown	1
	Waldorf	1

MASSACHUSETTS

	Boston	8
	Springfield	1

MICHIGAN

Detroit

MISSISSIPPI

Hattiesburg

MISSOURI

	Jefferson City	2
	Kansas City	4
	St. Louis	7

NEW HAMPSHIRE

	Concord	2
	Keene	1
	Manchester	1
	Portsmouth	1

NEW JERSEY

	Edison	3
	Flanders	1
	Howell	1
	Parsippany	1
	Rochelle Park	1

NORTH CAROLINA

	Asheville	1
	Charlotte	7
	Greensboro	5
	Greenville	1
	Raleigh	1
	Wilmington	1

OHIO

	Akron			5
	Cincinnati			5
		Cleveland	6
		Columbus	7
		Dayton	1
		Toledo	1
PENNSYLVANIA
		Erie	1
		Lancaster	1
		Philadelphia	6
		Pittsburgh	2

RHODE ISLAND

Warwick

SOUTH CAROLINA

	Charleston	2
	Columbia	3
	Greenville	3
	Myrtle Beach	1
	Hilton Head	1
	Rock Hill	1

TENNESSEE

	Chattanooga	1
	Jackson	1
	Nashville	7

VERMONT

Montpelier

VIRGINIA

McLean

WEST VIRGINIA

Charleston

Total Existing Company-Owned/Joint Venture Restaurants 243

EXISTING FRANCHISEE-OWNED RESTAURANTS

PUERTO RICO

	Bayamon	1
Carolina			1
San Patricio			1
Mayaguez			1

Total Existing Franchisee-Owned Restaurants

Total LongHorn Steakhouse Restaurants

247

BUGABOO CREEK STEAK HOUSE RESTAURANTS

EXISTING COMPANY-OWNED RESTAURANTS

CONNECTICUT

Manchester

DELAWARE

Newark

DISTRICT OF COLUMBIA

Washington

GEORGIA

Atlanta

MAINE

	Bangor	1
	Portland	1

MARYLAND

Gaithersburg

MASSACHUSETTS

	Boston	10
	Seekonk		1
Shrewsbury				1

NEW HAMPSHIRE

	Newington	1
	Nashua	1

NEW YORK

	Albany	1
	Poughkeepsie	1
	Rochester	1

PENNSYLVANIA

Philadelphia

RHODE ISLAND

Warwick

Total Bugaboo Creek Steak House Restaurants

THE CAPITAL GRILLE RESTAURANTS

EXISTING COMPANY-OWNED RESTAURANTS

ARIZONA

	Phoenix	1
	Scottsdale	1

COLORADO

Denver

DISTRICT OF COLUMBIA

Washington

FLORIDA

Miami

	Ft. Lauderdale	1
	Tampa	1

GEORGIA

Atlanta

ILLINOIS

Chicago

MARYLAND

Baltimore

MASSACHUSETTS

Boston

MICHIGAN

Troy

MINNESOTA

Minneapolis

MISSOURI

Kansas City

NEVADA

Las Vegas

NEW YORK

New York

NORTH CAROLINA

Charlotte

PENNSYLVANIA

Philadelphia

RHODE ISLAND

Providence

TEXAS

	Dallas	1
	Houston	1

VIRGINIA

McLean

Total The Capital Grille Restaurants

SPECIALTY RESTAURANTS

EXISTING COMPANY-OWNED RESTAURANTS

MASSACHUSETTS

The Old Grist Mill Tavern, Seekonk

RHODE ISLAND

Hemenway’s Seafood Grille & Oyster Bar, Providence

Total Specialty Restaurants

RESTAURANTS UNDER CONSTRUCTION

FLORIDA

LongHorn Steakhouse, Lakeland

The Capital Grille, Orlando

GEORGIA

LongHorn Steakhouse, Commerce

ILLINOIS

The Capital Grille, Lombard

LongHorn Steakhouse, Peoria

INDIANA

LongHorn Steakhouse, Bloomington

LongHorn Steakhouse, Merrillville

MAINE

LongHorn Steakhouse, Auburn

MICHIGAN

LongHorn Steakhouse, Allen Park

LongHorn Steakhouse, Clinton Township

LongHorn Steakhouse, Grand Rapids

NEW HAMPSHIRE

Bugaboo Creek Steak House, Bedford

NEW JERSEY

LongHorn Steakhouse, Hamilton

PENNSYLVANIA

LongHorn Steakhouse, Warrington

TENNESSEE

LongHorn Steakhouse, Hixson

VIRGINIA

LongHorn Steakhouse, Massaponax

WISCONSIN

The Capital Grille, Milwaukee

Total Restaurants Under Construction

UNIT ECONOMICS

LongHorn Steakhouse

The Company’s prototypical LongHorn Steakhouse restaurant has an average seating capacity of approximately 188 seats in approximately 5,600 square feet of space. The prototype has been modified over the years with the objective of increasing the Company’s return on investment on new LongHorn Steakhouse restaurants by increasing the sales capacity and reducing capital expenditures as a percentage of revenue. The Company purchases land in those circumstances it believes are cost-effective; however, most commonly, the owners of proposed restaurant locations have a strong desire to lease rather than sell. Accordingly, the Company currently leases the sites for all but 68 of its LongHorn Steakhouse restaurants in operation. The Company also owns four sites for restaurants under construction and owns the sites for two restaurants with construction scheduled to begin later in 2006. Seven of the 27 LongHorn Steakhouse restaurants opened in 2005 were located on property purchased at an average cost of approximately $949,000 per location. The average cash investment to construct a LongHorn Steakhouse restaurant in 2005 was approximately $1,952,000, excluding real estate costs and excluding pre-opening expenses of approximately $195,000.

The Capital Grille

The Capital Grille restaurant development strategy includes the use of sites that are historic or unique in nature. Accordingly, the Company utilizes methods to balance control of the construction costs with the retention of the unique ambiance of each location. The Company currently leases all of its The Capital Grille restaurant sites, but intends to purchase land in those circumstances it believes are cost-effective. Three The Capital Grille restaurants were opened in 2005. The average cash investment to construct a The Capital Grille restaurant in 2005 was approximately $4,134,000, excluding real estate costs and pre-opening expenses of approximately $413,000.

Bugaboo Creek Steak House

The Company has continued to develop and refine the Bugaboo Creek Steak House restaurant design with the objective of reducing the capital expenditure required for new restaurant construction and reducing ongoing operating costs. This modified design is smaller than earlier designs and utilizes approximately 6,400 square feet with a capacity of approximately 230 seats. The Company continues to refine this prototype for restaurants to be opened in the future.

Three Bugaboo Creek Steak House restaurants were opened in 2005. The average cash investment to construct a Bugaboo Creek Steak House in 2005 was approximately $2,542,000, excluding real estate costs and excluding pre-opening expenses of approximately $225,000. All of the Bugaboo Creek Steak House restaurants opened in 2005 were located on leased property.

The Company purchases land in those circumstances it believes are cost-effective; however, most commonly, the owners of proposed restaurant locations have a strong desire to lease rather than sell. Accordingly, the Company currently leases the sites for all but four of its Bugaboo Creek Steak House restaurants in operation.

EXPANSION STRATEGY

LongHorn Steakhouse and Bugaboo Creek Steak House restaurants:

The Company plans to expand through the development of additional Company-owned LongHorn Steakhouse and Bugaboo Creek Steak House restaurants in existing markets and in selected new markets primarily in the Eastern half of the United States. The Company believes that clustering in existing and new markets enhances its ability to supervise operations, market the Company’s concepts and distribute supplies. The Company, however, also intends to open single restaurants in smaller markets in sufficiently close proximity to the Company’s other markets to enable the Company to efficiently supervise operations and distribute supplies. LongHorn Steakhouse restaurants are currently located primarily in the Eastern half of the United States and Bugaboo Creek Steak House restaurants are located primarily in states on the Eastern seaboard.

The Capital Grille:

The Company plans to expand through the development of additional Company-owned The Capital Grille restaurants in selected metropolitan markets nationwide.

Overall:

The Company’s restaurant development objective is to increase earnings by expanding market share in existing markets and by developing restaurants in new markets. The Company currently plans to open a total of 34 to 35 Company-owned restaurants in 2006; 29 to 30 LongHorn Steakhouse restaurants; two Bugaboo Creek Steak House restaurants (including reopening one restaurant closed due to a fire in the first quarter of 2005) and three The Capital Grille restaurants. Of the restaurants proposed for 2006, as of February 21, 2006, the Company has opened six LongHorn Steakhouse restaurants and has reopened the one Bugaboo Creek Steakhouse restaurant that closed in 2005. The Company has 17 restaurants under construction in Florida, Georgia, Illinois, Indiana, Maine, Michigan, New Hampshire, New Jersey, Pennsylvania, Tennessee, Virginia and Wisconsin, and has signed leases, purchased land or signed agreements to purchase land for 14 additional restaurants. Additionally, the Company’s franchisee in Puerto Rico has opened one LongHorn Steakhouse restaurant in 2006. The Company expects that all of the restaurants to be opened in 2006 (other than franchised restaurants in Puerto Rico) will be Company-owned.

The Company will continue to evaluate suitable acquisitions in the restaurant industry as they are identified. The Company will continue to evaluate franchising of either LongHorn Steakhouse restaurants or Bugaboo Creek Steak House restaurants in markets in which the Company would not otherwise expand.

SITE SELECTION AND RESTAURANT LAYOUT

The Company considers the location of a restaurant to be a critical factor to that restaurant’s long-term success, and the Company devotes significant effort to the investigation and evaluation of potential sites. The site selection process focuses on trade area demographics, the success or failure of relevant competitive restaurants operating in the area, population growth rates, as well as specific site characteristics such as visibility, accessibility and traffic volumes. Senior management inspects and approves each restaurant site. It typically takes approximately 120 to 140 days to construct and open a new LongHorn Steakhouse restaurant, approximately 140 to 160 days to construct and open a new Bugaboo Creek Steak House restaurant and approximately 170 to 185 days to construct and open a new The Capital Grille restaurant. Currently, the Company owns 79 of its restaurant sites (including one specialty restaurant site, four sites for restaurants currently under construction and two sites for restaurants with construction scheduled to begin later in 2006).

The Company has modified its LongHorn Steakhouse prototype restaurant design over the years to an average of approximately 188 seats in approximately 5,600 square feet of space for prototypical LongHorn Steakhouse restaurants opened in 2005. An expanded kitchen design incorporating equipment needed for a broader menu is also part of the prototype. The Company believes its kitchen design simplifies training, lowers costs and improves the consistency and quality of the food. The prototype restaurant design also includes cosmetic changes that provide a total restaurant concept intended to be inviting and comfortable while maintaining the ambiance of a Western-style steakhouse.

The Company has renovated and remodeled some of the older LongHorn Steakhouse restaurants to include cosmetic improvements such as repainting and refinishing, new booths, updated kitchen facilities and equipment, new lighting and various decor adjustments. Exterior improvements encompassed repainting and additional lighting designed to convey a more inviting image.

Due to the historic nature and site specific characteristics of many of the locations selected for The Capital Grille restaurants (which are incorporated into the design of the facility), the development of a prototype restaurant design is not feasible.

The Company developed a Bugaboo Creek Steak House restaurant design, which served as the prototype for the three Bugaboo Creek Steak House restaurants constructed in 2005. This modified design is smaller than earlier designs and utilizes approximately 6,400 square feet with a capacity of approximately 230 seats. The Company continues to refine this prototype, with the objective of reducing the capital expenditure required for new restaurant construction and reducing ongoing operating costs at new restaurants to be opened in the future.

RESTAURANT OPERATIONS

Management and Employees. The management staff of a typical Company restaurant consists of one general manager or managing partner, one to four assistant managers and one or two kitchen managers. In addition, a typical LongHorn Steakhouse restaurant employs approximately 40 to 80 staff members, a typical Bugaboo Creek Steak House restaurant employs approximately 50 to 85 staff members, and a typical The Capital Grille restaurant employs approximately 60 to 80 staff members. The general manager or managing partner of each restaurant has primary responsibility for the day-to-day operation of the restaurant and is responsible for maintaining Company-established operating standards. The Company employs LongHorn Steakhouse regional managers, who each have responsibility for the operating performance of three to eight Company-owned LongHorn Steakhouse restaurants or joint venture restaurants and report directly to one of the six Regional Vice Presidents for the LongHorn Steakhouse concept. The Regional Vice Presidents report to the Senior Vice President of Operations of the LongHorn Steakhouse division. The Senior Vice President of Operations of the LongHorn Steakhouse division reports to the President of the LongHorn Steakhouse division. The Company employs Bugaboo Creek Steak House regional managers, who have responsibility for the operating performance of five to six Bugaboo Creek Steak House restaurants. All of these regional managers report directly to the Senior Director of Operations for the Bugaboo Creek Steak House concept. The Senior Director of Operations for the Bugaboo Creek Steak House concept reports to the President of the Bugaboo Creek Steak House division. The Company also employs regional directors who have responsibility for four to five The Capital Grille restaurants, The Old Grist Mill Tavern and Hemenway’s Seafood Grille & Oyster Bar, all reporting directly to the Vice President of Operations for The Capital Grille. The Vice President of Operations for The Capital Grille reports to the President of The Capital Grille division.

The Company seeks to recruit managers with appropriate restaurant experience. The Company selects its restaurant personnel utilizing a selection process which includes psychological and analytical testing designed to identify individuals with traits the Company believes are important to achieving success in the restaurant industry. The Company requires new managers to complete an intensive training program focused on both on-the-job training as well as a rigorous in-house classroom-based educational course. The program is designed to encompass all phases of restaurant operations, including the Company’s philosophy, management strategy, policies, procedures and operating standards. Through its management information systems, senior management receives daily reports on sales, and weekly reports on guest counts, payroll, cost of sales and other restaurant operating expenses. Based upon these reports, management believes that it is able to closely monitor the Company’s operations.

The Company maintains performance measurement and incentive compensation programs for its management-level employees. The performance programs reward restaurant management teams with cash bonuses for meeting sales and profitability targets. The Company has also implemented a managing partner program in which qualifying general managers receive cash compensation and restricted stock awards based upon individual performance. During 2005, restricted stock awards were made to 170 restaurant-level managing partners in compliance with their respective managing partner agreements.

Management Information Systems. The Company utilizes a Windows-based accounting software package and a network that enables electronic communication throughout the Company. In addition, all of the Company’s restaurants utilize touch screen point-of-sales (POS) and electronic gift card systems, and the LongHorn Steakhouse and Bugaboo Creek Steak House restaurants employ a theoretical food costing program. The Company utilizes its management information systems to develop pricing strategies, identify food cost issues, monitor new product reception and evaluate restaurant-level productivity. The Company expects to continue to develop its management information systems in each concept to assist restaurant management in analyzing their business and to improve efficiency.

Purchasing. The Company establishes product quality standards for beef and other protein products, then negotiates directly with suppliers to obtain the lowest possible prices for the required quality. The Company utilizes longer-term contracts on certain items to avoid short-term cost fluctuations. The Company pays market prices for other products such as produce and fresh seafood and for any protein purchases in excess of contracted amounts. For the LongHorn Steakhouse and Bugaboo Creek Steak House restaurants, beef is aged at the facility of the Company’s supplier or distributor, who delivers the beef to the LongHorn Steakhouse and Bugaboo Creek Steak House restaurants when the age reaches specified guidelines. This arrangement is closely monitored by Company personnel, and management believes it provides for efficient and cost-effective meat processing and distribution, while maintaining the Company’s control and supervision of purchasing and aging. The Company purchases a majority of its protein products under fixed price contracts with its primary suppliers. The failure of any of these suppliers to honor the prices under these contracts would have an adverse effect on the Company’s results of operations to the extent that the then current market prices exceed the prices under the contracts. The Company’s management negotiates directly with suppliers for most other food and beverage products to ensure uniform quality and adequate supplies and to obtain competitive prices. The Company purchases these other products, and supplies from a sufficient number of approved suppliers such that the loss of any one supplier would not have a material adverse effect on the Company’s results of operations or financial condition.

The Company utilizes one primary distributor for all of its restaurants, which delivers approximately 70-75% of the products (other than alcoholic beverages) and supplies that the Company utilizes in the operation of its restaurants. In the event of a disruption of service from the Company’s primary distributor, management believes that alternative distribution channels could be arranged such that there would not be a material adverse effect on the Company’s financial condition.

Seasonality. Although individual restaurants have seasonal patterns of performance that depend on local factors, aggregate sales by the Company’s restaurants have not displayed pronounced seasonality other than lower sales during the Company’s third fiscal quarter. Extreme weather, especially during the winter months, may adversely affect sales.

OWNERSHIP STRUCTURES

The Company’s interests in its restaurants are divided into three categories: (1) Company-owned restaurants, (2) joint venture restaurants and (3) franchised restaurants.

Company-owned restaurants. As of February 21, 2006, 243 LongHorn Steakhouse restaurants, all Bugaboo Creek Steak House restaurants, all The Capital Grille restaurants, Hemenway’s Seafood Grille & Oyster Bar and The Old Grist Mill Tavern are owned and operated by the Company. The general manager or managing partner of each of these restaurants is employed and compensated by the Company. See “Restaurant Operations - Management and Employees” above.

Joint Venture Restaurants. The Company is a partner in joint ventures that, as of February 21, 2006, in the aggregate, operate three LongHorn Steakhouse restaurants. These restaurants are located in Central Florida and owned by joint ventures managed by the Company. The joint ventures pay management fees to the Company at the rate of 4% of monthly restaurant sales, and the Company controls the joint ventures’ use of the Company’s service marks.

Franchised Restaurants. The Company has one unaffiliated franchisee with an area development agreement with the right to operate franchised LongHorn Steakhouse restaurants in Puerto Rico. As of February 21, 2006, this franchisee operated four LongHorn Steakhouse restaurants in Puerto Rico.

The franchise agreements are granted with respect to individual restaurants and are either for a term of ten years with a right of the franchisee to acquire a successor franchise for an additional ten-year period if specified conditions are met or for a period of twenty years. The franchise agreements require payment to the Company of a franchise fee and royalties based upon gross sales and require the franchisee to expend a percentage of gross sales on advertising.

The franchisee has the right to terminate its franchise agreements upon default by the Company. The Company also retains the right to terminate a franchise for a variety of reasons, including the franchisee’s failure to pay amounts due under the agreement or to otherwise comply with the terms of the franchise agreement.

An important element of the Company’s franchise program is the training the Company provides for each franchisee. Franchisees are required to operate their restaurants in compliance with the Company’s methods, standards and specifications regarding such matters as menu items, ingredients, materials, supplies, services, fixtures, furnishings, decor and signs. The franchisee has full discretion to determine the prices to be charged to all customers. In addition, all franchisees are required to purchase food, ingredients, supplies and materials that meet standards established by the Company or which are provided by suppliers approved by the Company. The Company does not receive fees or profits on sales by third-party suppliers to franchisees.

The franchise laws of many jurisdictions limit the ability of a franchisor to terminate or refuse to renew a franchise.

SERVICE MARKS

The Company has registered LONGHORN STEAKS and design, LONGHORN STEAKHOUSE and design, BUGABOO CREEK STEAK HOUSE and design, THE CAPITAL GRILLE and design, and HEMENWAY’S SEAFOOD GRILLE & OYSTER BAR and design as service marks with the United States Patent and Trademark Office. The Company has additional registered marks used in connection with the operation of its various restaurants. The Company regards its service marks as having significant value and as being important factors in the marketing of its restaurants. The Company is aware of names and marks similar to the service marks of the Company used by other persons in certain geographic areas; however, the Company believes such uses will not adversely affect the Company. It is the Company’s policy to pursue registration of its marks whenever possible and to oppose vigorously any infringement of its marks.

COMPETITION

The restaurant industry is intensely competitive with respect to price, service, location and food quality, and there are many well-established competitors, both steakhouses and non-steakhouses, with substantially greater financial and other resources than the Company. Such competitors include a large number of national and regional restaurant chains. Some of the Company’s competitors have been in existence for a substantially longer period than the Company and may be better established in the markets where the Company’s restaurants are or may be located. The restaurant business is often affected by changes in consumer tastes, national, regional or local economic conditions, demographic trends, traffic patterns, and the type, number and location of competing restaurants. In addition, factors such as inflation, increased food, labor and benefits costs and the lack of experienced management and hourly employees may adversely affect the restaurant industry in general and the Company’s restaurants in particular.

GOVERNMENT REGULATION

The Company is subject to various federal, state and local laws affecting its business. Each of the Company’s restaurants is subject to licensing and regulation by a number of governmental authorities, which may include alcoholic beverage control, health, safety, sanitation, building and fire agencies in the state or municipality in which the restaurant is located. In addition, most municipalities in which the Company’s restaurants are located require local business licenses. Difficulties in obtaining or failures to obtain the required licenses or approvals could delay or prevent the development of a new restaurant in a particular area. The Company is also subject to federal and state environmental regulations, but they have not had a material effect on the Company’s operations.

During 2005, approximately 14.4% of the Company’s restaurant sales were attributable to the sale of alcoholic beverages. Alcoholic beverage control regulations require each of the Company’s restaurants to apply to a state authority and, in certain locations, county or municipal authorities for a license or permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays. In addition, some licenses may need to be purchased from third parties, as opposed to acquired from a governmental authority, and are not readily available. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. The Company has not experienced, and does not presently anticipate experiencing, any significant delays or other problems in obtaining or renewing licenses or permits to sell alcoholic beverages. However, the failure of a restaurant to obtain or retain liquor or food service licenses would adversely affect the restaurant’s operations.

The Company and its franchisees are subject in each state in which they operate restaurants to “dram shop” statutes or case law interpretations, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment which wrongfully served alcoholic beverages to the intoxicated person. The Company carries liquor liability coverage as part of its existing comprehensive general liability insurance.

The Company is also subject to federal and state laws regulating the offer and sale of franchises administered by the Federal Trade Commission and various similar state agencies. Such laws impose registration and disclosure requirements on franchisors in the offer and sale of franchises. These laws often apply substantive standards to the relationship between franchisor and franchisee and limit the ability of a franchisor to terminate or refuse to renew a franchise.

The Federal Americans With Disabilities Act prohibits discrimination on the basis of disability in public accommodations and employment. The Company designs its restaurants to be accessible to the disabled and believes that it is in substantial compliance with all current applicable regulations relating to restaurant accommodations for the disabled.

Title VII of the Civil Rights Act of 1964 and other federal and state employment laws, rules and regulations prohibit discrimination on the basis of race, gender, color, religion, national origin and veteran status. In addition, the Age Discrimination in Employment Act protects some people from discrimination on the basis of age. The Company does not tolerate discrimination of any kind in violation of law and promotes an open and respectful environment in its workplaces.

The Company’s restaurant operations are also subject to federal and state laws governing such matters as wages, working conditions, citizenship requirements, overtime and tip credits. A significant number of the Company’s food service and preparation personnel receive gratuities and are paid at rates related to the federal or applicable state minimum wage. Significant additional government-imposed increases in minimum wages, paid leaves-of-absence, mandated health benefits or increased tax reporting and tax payment requirements with respect to employees who receive gratuities would have an adverse effect on the profitability of the Company.

The Company operates under a Tip Rate Alternative Commitment (“TRAC”) agreement with the Internal Revenue Service. Through increased educational and other efforts in the restaurants, the TRAC agreement reduces the likelihood of potential Company-wide employer-only FICA assessments for unreported tips.

The Company is subject to the Employee Retirement Income Security Act and other federal and state laws governing retirement plans and employee benefits. The Company believes that it is in substantial compliance with all current applicable federal and state laws regarding employee benefits and retirement plans.

EMPLOYEES

As of February 21, 2006, the Company employed approximately 18,700 persons, 267 of whom were corporate personnel, 1,495 of whom were restaurant management personnel and the remainder of whom were hourly personnel. Of the 267 corporate employees, 173 are in management positions and 94 are administrative or office employees. None of the Company’s employees are covered by a collective bargaining agreement. The Company considers its employee relations to be good.

AVAILABLE INFORMATION

The Company’s primary website can be found at www.rarehospitality.com. The Company makes available, free of charge, on or through its website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). On the same website, the Company also makes available Form 4 and Form 5 filings made by officers and directors of the Company in compliance with Section 16 of the Exchange Act. All such reports are made available on the website as soon as reasonably practical after their filing with, or furnishing to, the Securities and Exchange Commission. Furthermore, the Company also makes available on its website, and in print to any shareholder who requests it, the Company’s Corporate Governance Policy, the Committee Charters for the Audit, Compensation, and Governance/Nominating Committees of the Company’s Board of Directors, as well as the Code of Conduct that applies to all directors, officers, employees and those that do business with the Company. Amendments to these documents or waivers related to the Code of Conduct with respect to the Company’s principal executive officer, principal financial officer and principal accounting officer will be made available on the Company’s website as soon as reasonably practicable after their execution.

ITEM 1A. RISK FACTORS

The following important factors, in addition to those mentioned throughout this annual report on Form 10-K, could adversely impact the Company’s business. These factors could cause the Company’s actual results to differ materially from the forward-looking and other statements that the Company makes in registration statements, periodic reports and other filings with the SEC, and that the Company makes from time to time in its news releases, annual reports and other written communications, as well as oral forward-looking and other statements made from time to time by the Company’s representatives.

Fluctuations in our operating results may result in decreases in our stock price.

Our operating results may fluctuate significantly because of several factors, including the timing of new restaurant openings and related expenses, profitability of new restaurants, increases or decreases in same store sales, increases in food and other costs not offset by menu price increases, weather conditions, availability of adequate sources of supply or distribution, changes in consumer preferences, consumer concern over food quality or health issues, competitive factors, war, insurrection and/or terrorist attacks on United States soil. As a result, our operating results may fall below the expectations of public market analysts and investors. In such event, the price of our common stock would likely decrease.

In the past, our pre-opening costs have varied significantly from quarter to quarter primarily due to the timing of restaurant openings. We typically incur most pre-opening costs for a new restaurant within the two months immediately preceding, and the month of, its opening. In addition, our labor and operating costs for a newly opened restaurant during the first three to six months of operation are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of restaurant sales. Accordingly, the volume and timing of new restaurant openings in any quarter has had, and is expected to continue to have, a significant impact on quarterly pre-opening costs, labor, direct and occupancy costs. Due to these factors, results for a quarter may not indicate results to be expected for any other quarter or for a full fiscal year.

We may experience volatility in our stock price due to factors other than our operating results.

The market price of our common stock may experience significant volatility from time to time. Such volatility may be affected by factors other than our operating results such as changes in the economy, financial markets, consumer confidence, and the operating results of our competitors or the restaurant industry in general. In recent years, the stock market has experienced extreme price and volume fluctuations, which have had a significant effect on the market prices of the securities issued by a company, which may be unrelated to the operational performance of the company. In addition, we may be subject to securities class action litigation if the market price of our stock experiences significant volatility. Our management’s attention and resources may be diverted from normal operations if we would become subject to any securities class action, which may have a material adverse effect on our business.

We may experience higher operating costs due to increased food prices, wages and other costs which will reduce our profits if we cannot increase menu prices to cover them.

If we have to pay higher prices for food, supplies, energy, or other items, or increase the compensation or benefits to our employees, we will have an increase in operating costs. If we are unable or unwilling to increase our menu prices or take other actions to offset our increased operating costs, our profits will decrease. Many factors affect the prices that we have to pay for the various food and other items that we need to operate our restaurants, including seasonal fluctuations, longer term cycles and other fluctuations in livestock markets, changes in weather or demand and inflation. Factors that may affect the salaries and benefits that we pay to our employees include the local unemployment rates and changes in minimum wage and employee benefits laws. For example, during 2005, the states of Connecticut, Florida, Illinois, Maine, Minnesota, Nevada, New Jersey, New York and Vermont increased the minimum wage of workers in the respective states, resulting in higher operating costs for us in those states. In addition to the above factors over which we have no control, we may introduce new menu items and operating procedures, which may either temporarily or permanently result in increased food or labor costs.

We may incur additional costs or liabilities and lose revenue as the result of government regulation.

Our restaurants are subject to extensive federal, state and local government regulation, including regulations related to the preparation and sale of food, the sale of alcoholic beverages, zoning and building codes, and other health, sanitation and safety matters. Our restaurants may lose revenue if they are unable to maintain liquor or other licenses required to serve alcoholic beverages or food. If one or more of our restaurants was unable to serve alcohol or food for even a short time period, we could experience a reduction in our overall revenue.

Our restaurants are subject in each state in which we operate to “dram shop” laws which allow a person to sue us if that person was injured by a legally intoxicated person who was wrongfully served alcoholic beverages at one of our restaurants. A lawsuit under a dram shop law may result in a verdict in excess of our liability insurance policy limits which could result in substantial liability for us and which may have a material adverse effect on our profitability.

The costs of operating our restaurants may increase if there are changes in laws governing minimum hourly wages, mandatory healthcare coverage for employees, workers’ compensation insurance rates, unemployment tax rates, sales taxes or other laws and regulations such as those governing access for the disabled, such as the Federal Americans with Disabilities Act. If any of the above costs increased and we were unable to offset such increase by increasing our menu prices or by other means, we would generate lower profits.

The food service industry is affected by publicity concerning food quality, health and other issues. Such publicity, which could be publicity of a national or industry nature or litigation or publicity specific to us, could cause customers to avoid our restaurants and products.

The food service business can be affected by adverse publicity concerning food quality, health and other issues. That publicity has the potential to affect consumer and employee behavior and may lead consumers and employees to avoid public places, including restaurants. This behavior would have a negative impact on our restaurant sales and profitability.

The food service businesses can also be adversely affected by litigation and complaints from customers or government authorities resulting from food quality, illness, injury or other health concerns, guest service patterns or other operating issues stemming from one store or a limited number of stores, including stores operated by our franchisees or other food service operators. Adverse publicity about these allegations may negatively affect us, regardless of whether the allegations are true, by discouraging customers from buying our products. Because one of our competitive strengths is the taste and quality of our food, adverse publicity relating to food quality or other similar concerns affects us more than it would food service businesses that compete primarily on other factors. We could also incur significant liabilities if a lawsuit or claim resulted in a decision against us, or in significant litigation costs, regardless of the result.

Changing consumer preferences and discretionary spending patterns could force us to modify our restaurant’s concept and menu and could result in a reduction in our revenues.

Even if we are able to successfully compete with other restaurant companies with similar concepts, we may be forced to make changes in one or more of our concepts in order to respond to changes in consumer tastes or dining patterns. Consumer preferences could be affected by health concerns about the consumption of beef, the primary item on our LongHorn Steakhouse, Bugaboo Creek Steak House and The Capital Grille menu, or by specific events such as the outbreak of “mad cow disease.” If we change a restaurant concept, we may lose customers who do not prefer the new concept and menu, and may not be able to attract a sufficient new customer base to produce the revenue needed to make the restaurant profitable. We may have different or additional competitors for our intended customers as a result of such a concept change and may not be able to successfully compete against such competitors. In addition, consumer preferences could be affected by a public concern over health issues, such as the “avian flu,” causing fear about the consumption of chicken, eggs and other products derived from poultry. The inability to serve poultry-based products would greatly restrict our ability to provide a variety of menu items to our guests. Our success also depends on numerous factors affecting discretionary consumer spending, including economic conditions, disposable consumer income, consumer confidence and the United States’ participation in war activities. Adverse changes in these factors could reduce guest traffic or impose practical limits on pricing, either of which could reduce revenues and operating income.

Our restaurants may not be able to continue to compete successfully with other restaurants or restaurant concepts, which could lead to a reduction in our revenues.

If our restaurants are unable to continue to compete successfully with other restaurants in new and existing markets, we may lose significant revenue. Our industry is intensely competitive with respect to price, service, location, type and quality of food. We compete with other restaurants for customers, restaurant locations and qualified management and other restaurant staff. Our LongHorn Steakhouse and Bugaboo Creek Steak House restaurants compete with other mid-priced, full service, casual dining restaurants, including steakhouses such as Outback Steakhouse, Lone Star Steaks, Texas Roadhouse and Logan’s Roadhouse and other casual dining restaurants such as Red Lobster, Olive Garden and Chili’s. Our The Capital Grille restaurants compete with other upscale restaurants, including steakhouses, such as Morton’s of Chicago, Ruth’s Chris Steakhouse, Flemming’s Prime Steakhouse and Wine Bars and The Palm, as well as independent operators. Some of our competitors have greater financial resources than we have, have been in business longer or are better established in the markets where our restaurants are located or are planned to be located.

Even if we do not incur substantial opening and promotion costs in opening a new restaurant that we would not otherwise usually incur, we may not be able to profitably operate a new restaurant in new markets. If we open restaurants in areas where we did not previously have a restaurant, we may not be able to attract enough customers to operate those restaurants at a profit because potential customers may be unfamiliar with our restaurants or the atmosphere or the menu of our restaurants might not appeal to them.

Part of our expansion plans includes opening restaurants in markets in which we already have existing restaurants. We may be unable to attract enough customers to the new restaurants for them to operate at a profit. Even if we are able to attract enough customers to the new restaurants to operate them at a profit, those customers may be former customers of one of our existing restaurants in that market and the opening of a new restaurant in the existing market could reduce the revenue of our existing restaurants in that market.

We could face shortages of qualified labor, which could slow our growth or otherwise strain our infrastructure.

Our success depends in part upon our ability to attract, motivate and retain a sufficient number of qualified employees, including restaurant managers, kitchen staff and servers, necessary to keep pace with our expansion schedule. Qualified individuals of the requisite caliber and a number needed to fill these positions are in short supply in some areas. Any future inability to recruit and retain sufficient individuals may delay the planned openings of new restaurants. Any such delays, any material increases in employee turnover rates in existing restaurants, or any wide spread employee dissatisfaction resulting in a class action lawsuit could have a material adverse effect on our business, financial condition, operating results or cash flows. Additionally, competition for qualified employees could require us to pay higher wages to attract sufficient employees, which could result in higher labor costs.

We may also face the risk that our existing systems and procedures, restaurant management systems, financial controls and information systems will be inadequate to support our planned expansion. We cannot predict whether we will be able to respond on a timely basis to all of the changing demands that our planned expansion will impose on management and this infrastructure. If we fail to continue to improve our information systems and financial controls or to manage other factors necessary for us to achieve our expansion objectives our operating results or cash flows could be materially adversely affected.

Unanticipated expenses and market acceptance could affect the profitability of restaurants we open in new markets.

As part of our expansion plans, we may open new restaurants in areas in which we have little or no operating experience and in which potential customers may not be familiar with our restaurants. As a result, we may have to incur costs related to the opening, operation and promotion of those new restaurants that are substantially greater than those incurred in other areas. Even though we may incur substantial additional opening and promotion costs with these new restaurants, they may fail to attract the number of customers that our more established restaurants in existing markets attract. As a result, the revenue and profit generated at new restaurants may not equal the revenue and profit generated by our existing restaurants. The new restaurants may even operate at a loss. Because of our limited number of existing restaurants, if we open one or more new restaurants that we are unable to operate at a profit, this could have a significant adverse effect on our overall profits.

We may incur additional costs and reduced profits by failing to open or by delaying the opening of planned restaurants.

We currently plan to open approximately 34 to 35 new restaurants in 2006. If we are unable to open a new restaurant or have to delay the opening of a new restaurant, we may incur substantial costs we would not otherwise incur, which may directly decrease our profits. We may be unable to open such restaurants, or unable to open them on time, due to weather and acts of God or factors such as our inability to:

•

find quality locations to open new restaurants;

•

reach acceptable agreements regarding the lease or purchase of locations on which to open new restaurants;

•

raise or have available an adequate amount of money to construct and open new restaurants;

•

hire, train and retain the skilled management and other employees necessary to staff new restaurants when they are scheduled to open;

•

obtain, for an acceptable cost, the permits and approvals required to open new restaurants; and

•

efficiently manage the amount of time and money used to build and open each new restaurant.

In addition, if we believe that we will be unable to open a new restaurant because of one of the above factors, we may have to stop construction of the restaurant or terminate any lease or purchase contract that we entered into regarding such restaurant and pay accelerated rent, damages and/or a termination fee to the other party to the contract. All of these factors could lead to an increase in our operating expenses and result in a decrease in our profits. The failure to open new restaurants on a timely basis will also reduce the sales those restaurants would have contributed to our projected revenues.

We may incur additional costs or liabilities due to changes in our income tax provision.

Our income tax provision is sensitive to expected earnings and, as expectations change, our income tax provisions may vary from quarter-to-quarter and year-to-year. In addition, from time to time, we may take positions for filing our tax returns that differ from the treatment for financial reporting purposes. The ultimate outcome of such positions could cause our effective tax rate to fluctuate from quarter to quarter.

Our future performance depends on our senior management who are experienced in restaurant management and who could not easily be replaced with executives of equal experience and capabilities.

We believe that we depend significantly on the services of Philip J. Hickey, Jr., our Chairman of the Board of Directors and Chief Executive Officer, and Eugene I. Lee, Jr., our President and Chief Operating Officer. If we lost the services of either Messrs. Hickey or Lee, for any reason, we may be unable to replace them quickly with qualified personnel, which could have a material adverse effect on our business and development. Although we have employment agreements with Messrs. Hickey and Lee, we could not prevent them from terminating their employment with us. Also, we do not carry key person life insurance on Messrs. Hickey or Lee.

Our operating results could be negatively affected by our inability to acquire the proper supply of our products.

Our business is dependent upon our ability to purchase high-quality food products in sufficient quantity. Economic conditions affecting our suppliers, or animal or plant disease could adversely affect our ability to obtain an adequate supply of products of the proper quality. In the event that we are unable to obtain an adequate supply of food products of the proper quality, our revenues and operating income would decrease.

We may lose revenue or incur increased costs if our restaurants do not receive frequent deliveries of food and other supplies.

We have a contract with a single distributor for the distribution of most meat, food and other supplies for our LongHorn Steakhouse, Bugaboo Creek Steak House and The Capital Grille restaurants. If this distributor does not perform adequately or otherwise fails to distribute product or supplies to our restaurants, our inability to replace this distributor in a short period of time on acceptable terms could increase our costs or could cause shortages at our restaurants of food and other items which may cause us to remove certain items from a restaurant’s menu or temporarily close a restaurant. If we temporarily close a restaurant or remove popular items from a restaurant’s menu, that restaurant may experience a significant reduction in revenue during the time affected by the shortage or thereafter as a result of our customers changing their dining habits.

Our anti-takeover provisions may limit shareholder value.

We have provisions in our articles of incorporation and in our shareholder protection rights agreement that may discourage or prevent a person or group from acquiring us without our approval. A shareholder may not receive as much in exchange for their shares of common stock as they could without these provisions. The following is a description of the above provisions that may reduce the market value of our shares of common stock.

Under our shareholder protection rights agreement, we distributed one preferred stock purchase right for each outstanding share of our common stock to the shareholders of record on November 20, 1997. Each right entitles holders of a share of our common stock to purchase one one-hundredth of a share of our junior participating preferred stock at an exercise price initially equal to $48.00 and currently $21.33 after giving effect to two 3 for 2 stock splits. Each one one-hundredth of a share of our junior participating preferred stock (1) has the same voting rights as one share of our common stock and (2) would be paid dividends at least equal to the dividends paid on each share of our common stock. Our preferred stock purchase rights are exercisable only if a person or group acquires beneficial ownership of 15% or more of our common stock, or announces a tender or exchange offer upon completion of which such person or group would beneficially own 15% or more of our common stock. If a person or group becomes a beneficial owner of 15% or more of our common stock, then each right not owned by the person or group entitles its holder to purchase, for an amount of cash equal to the right’s then-current exercise price, shares of our common stock having a value equal to twice the right’s exercise price. We may redeem the rights at a price of $.01 per right at any time until the close of business on the tenth business day following our announcement that a person or group has become the beneficial owner of 15% or more of our common stock.

Our articles of incorporation contain a provision, which provides that our board of directors consists of three classes of directors. Each class has the same number of directors or as close to equal as possible. The directors of each class serve for a term of three years with each class’ term expiring in different successive years. For example, the term of the first class may expire in 2006 and each director elected in the first class in 2006 would serve until 2009, the term of the second class would expire in 2007 and each director elected in the second class in 2007 would serve until 2010, and the term of the third class would expire in 2008 and each director elected in 2008 would serve until 2011. As a result, shareholders with sufficient shares to determine the election of directors would have to vote for their nominees at two successive annual meetings of shareholders in order to elect a majority of the directors.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

As of February 21, 2006, 226 of the Company’s restaurants were located in leased space (in addition, the Company has leased the space for 13 restaurants under construction and 12 sites for restaurants with construction scheduled to begin later in 2006). Initial lease expirations typically range from ten to fifteen years, with the majority of these leases providing for an option to renew for at least one additional term of three to 15 years. All of the Company’s leases provide for a minimum annual rent, and approximately 40% of the leases call for additional rent based on sales volume (generally 2.0% to 8.0%) at the particular location over specified minimum levels. Generally the leases are net leases, which require the Company to pay the costs of insurance, taxes and a portion of lessors’ operating costs.

The leases on the existing Company-owned restaurants will expire over the period from 2006 through 2044 (assuming exercise of all renewal options). The locations of the Company’s existing restaurants and restaurants under construction are set forth under Item 1. Business.

The Company owns six office buildings in Atlanta, Georgia aggregating 60,000 square feet in which its corporate offices and central training facility are located.

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in various legal actions incidental to the normal conduct of its business. Management does not believe that the ultimate resolution of these incidental actions will have a material adverse effect on the Company’s results of operations or financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted for a vote of security holders during the fourth quarter of 2005.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company’s common stock trades on the NASDAQ National Market under the symbol “RARE.” The table below sets forth the high and low sales prices of the Company’s common stock, as reported on the Nasdaq National Market, during the periods indicated:

FISCAL YEAR ENDED DECEMBER 25, 2005		HIGH		LOW
	First Quarter		$32.59		$28.21
	Second Quarter		31.80		27.55
	Third Quarter		31.77		24.81
	Fourth Quarter		32.84		25.43

FISCAL YEAR ENDED DECEMBER 26, 2004		HIGH		LOW
	First Quarter		$29.46		$24.25
	Second Quarter		29.25		24.25
	Third Quarter		28.96		23.56
	Fourth Quarter		31.43		26.26

The closing price of a share of the Company’s common stock on February 28, 2006, was $32.00. As of February 28, 2006, there were approximately 554 holders of record of the Company’s common stock.

The Company’s Board of Directors has authorized the purchase of shares of the Company’s common stock from time to time through open market transactions, block purchases or in privately negotiated transactions. On April 20, 2005, the Board of Directors authorized the Company to use up to $29.0 million to purchase shares of its common stock and on July 22, 2005, the Board of Directors authorized the repurchase of up to an additional $30.0 million of the Company’s common stock. During the second quarter of 2005, the Company repurchased 690,000 shares of its common stock at an average price of $28.88 for an aggregate cost of $19,930,000. During the third quarter of 2005, the Company repurchased 669,000 shares of its common stock at an average price of $28.95 for an aggregate cost of $19,368,000. The Company did not repurchase any of its common stock during the fourth quarter of 2005. As of December 25, 2005, approximately $19,702,000 remained available under the Company’s aggregate $59.0 million share repurchase authorization.

Since the Company’s initial public offering in 1992, the Company has not declared or paid any cash dividends on its capital stock. The Company does not intend to pay any cash dividends on its common stock in the foreseeable future, as the current policy of the Company’s Board of Directors is to retain all earnings to support operations and finance expansion. The Company’s existing revolving line of credit restricts the payment of cash dividends without prior lender approval. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.” Future declaration and payment of dividends, if any, will be determined in light of then current conditions, including the Company’s earnings, operations, capital requirements, financial condition, restrictions in financing arrangements and other factors deemed relevant by the Board of Directors.

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information about the common stock that may be issued under all of the Company’s existing equity compensation plans as of December 25, 2005. Details of the plans are discussed in Note 10 to the Company’s Consolidated Financial Statements.

Plan Category			Weighted Average Exercise Price of Outstanding Options
Equity Compensation	1,644,286	(1)	$	24.77	2,272,182	(6)
Plans Approved by	776,263	(2)	$	13.67	9,731
Stockholders	137,812	(3)	$	16.36	11,251
	610,776	(4)	$	8.19	--
Equity Compensation Plans
not Approved by Stockholders	44,242	(5)	$	8.29	--

Total	3,213,379		$	18.35	2,293,164

(1)

RARE Hospitality International, Inc. Amended and Restated 2002 Long-Term Incentive Plan.

(2)

RARE Hospitality International, Inc. 1997 Long-Term Incentive Plan.

(3)

Amended and Restated RARE Hospitality International, Inc. 1996 Stock Plan for Outside Directors.

(4)

LongHorn Steaks, Inc. Amended and Restated 1992 Incentive Plan. No further options may be granted under the terms of this plan.

(5)

These options were granted on the same terms as those under the Company’s 1997 Long-Term Incentive Plan and were granted at prices which equated to current market value on the date of grant, are exercisable after three to five years, and must be exercised within ten years from the date of grant.

(6)

Includes up to 2,262,639 shares that may be granted as future awards of restricted stock.

ITEM 6. SELECTED FINANCIAL DATA

The following presents selected consolidated financial data as of and for each of the fiscal years in the five-year period ended December 25, 2005. The Consolidated Financial Statements as of December 25, 2005 and December 26, 2004 and for each of the fiscal years in the three-year period ended December 25, 2005 and the independent registered public accounting firm’s report thereon are included in this Form 10-K. All share and per share amounts have been restated to give retroactive effect to the Company’s 50% stock dividend in 2003 (see Note 1 to consolidated financial statements). The data should be read in conjunction with the Consolidated Financial Statements of the Company and related notes in this Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” also included in this Form 10-K.

	FISCAL YEARS ENDED
	DEC 25, 2005		DEC 26, 2004		DEC 28, 2003		DEC 29, 2002		DEC 30, 2001

STATEMENT OF OPERATIONS DATA:	(in thousands, except per share data)
Revenues:
Restaurant sales	$	936,140	$	812,160	$	680,458	$	584,159	$	519,998
Franchise revenues		436		403		374		345		328

Total revenues		936,576		812,563		680,832		584,504		520,326
Costs and expenses:
Cost of restaurant sales		343,188		299,448		245,094		211,006		189,869
Operating expenses-- restaurants		415,732		354,679		298,978		257,252		228,340
Provision for asset impairments,
restaurant closings, and other charges		3,269		2,700		--		495		2,802
Depreciation and amortization--restaurants		35,857		30,793		26,508		23,920		21,248
Pre-opening expense		7,191		6,865		5,782		3,802		3,764
General and administrative expenses		52,112		45,244		40,515		34,933		31,675

Total costs and expenses		857,349		739,729		616,877		531,408		477,698

Operating income		79,227		72,834		63,955		53,096		42,628
Interest expense, net		1,920		1,328		1,015		1,718		2,128
Early termination of interest rate swap
agreement		--		--		--		1,540		1,100
Minority interest		215		300		300		448		639

Earnings before income taxes		77,092		71,206		62,640		49,390		38,761
Income tax expense		25,010		23,676		20,363		15,951		12,603

Net earnings	$	52,082	$	47,530	$	42,277	$	33,439	$	26,158

Basic earnings per common share	$	1.54	$	1.41	$	1.27	$	1.03	$	0.83

Diluted earnings per common share	$	1.50	$	1.34	$	1.21	$	0.98	$	0.79

Weighted average common shares outstanding (basic)		33,764		33,811		33,162		32,586		31,503

Weighted average common shares outstanding (diluted)		34,817		35,374		34,843		34,268		33,216

	FISCAL YEARS ENDED
	DEC 25, 2005			DEC 26, 2004			DEC 28, 2003		DEC 29, 2002			DEC 30, 2001
BALANCE SHEET DATA:	(in thousands)
Working capital (deficit)	$	(53,069	)	$	(7,542	)	$	3,606	$	(3,326	)	$	(10,458	)
Total assets		609,362			568,120			467,037		389,309			352,456
Debt, net of current installments		--			--			--		--			10,000
Obligations under capital leases, net of
current installments		38,991			37,136			27,462		22,406			20,867
Minority interest		1,193			1,309			1,371		1,411			1,329
Total shareholders’ equity		430,345			404,634			352,055		300,132			256,530

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company’s revenues are derived primarily from restaurant sales from Company-owned LongHorn Steakhouse, The Capital Grille, and Bugaboo Creek Steak House restaurants. The Company also derives a small percentage of its total revenue from two Company-owned specialty restaurants and franchise revenues from three franchised LongHorn Steakhouse restaurants. Cost of restaurant sales consists of food and beverage costs for all restaurants other than the franchised LongHorn Steakhouse restaurants in Puerto Rico. Operating expenses – restaurants consist of other costs incurred by the Company to operate its restaurants, including the cost of labor, advertising, operating supplies, rent and utilities. Depreciation and amortization - restaurants includes the depreciation attributable to restaurant-level capital expenditures. The depreciation and amortization relating to non-restaurant level capital expenditures is included in general and administrative expenses.

Preopening costs include direct and incremental costs such as payroll, food and beverage costs, and trainer payroll and travel expenses incurred prior to opening of new restaurants. General and administrative expenses include restaurant supervision expenses, accounting, finance, management information systems and other administrative overhead related to support functions for Company-owned, joint venture, and franchise restaurant operations. Interest expense, net includes interest on capital lease obligations and amortization of loan issue costs partially offset by capitalized construction period interest and interest income. Minority interest consists of the partner’s 50% share of earnings in the three LongHorn Steakhouse restaurants that are operated as joint venture restaurants.

The Company’s management believes in the importance of building incremental top line sales at each restaurant to support the longer-term profitability of the Company. The change in year-over-year sales for the comparable restaurant base is referred to as “same store sales.” The Company defines the comparable restaurant base to include those restaurants open for a full 18 months prior to the beginning of each fiscal quarter. Same store sales increases can be generated by an increase in guest traffic counts (“guest counts”) or by increases in guest average check amount (“average check”). The average check can be affected by menu price changes and the mix of menu items sold (“menu mix”). The Company gathers sales data daily and regularly analyzes the guest counts and menu mix for each concept to assist in developing menu pricing, product offering and promotion strategies. Management believes that increases in guest counts are an indication of the long-term health of a concept, while increases in average check and menu mix contribute more significantly to current period profitability. The Company works to balance the pricing and product offerings with other initiatives to achieve the long-term goal of sustainable increases in same store sales.

Average weekly sales are defined as total restaurant sales divided by restaurant weeks. A “restaurant week” is one week during which a single restaurant is open, so that two restaurants open during the same week constitutes two restaurant weeks. Growth in average weekly sales includes the effect of newer restaurants that are not yet included in the same store sales base. Growth in average weekly sales in excess of growth in same store sales is generally an indication that newer restaurants are operating with sales levels in excess of the system average. Conversely, growth in average weekly sales less than growth in same store sales is generally an indication that newer restaurants are operating with sales levels lower than the system average. It is not uncommon in the casual dining industry for new restaurant locations to open with an initial honeymoon period of higher than normalized sales volumes and then to experience a drop off in sales after initial customer trials.

The incremental sales generated as a result of increases in same store sales make a significant contribution to the Company’s profitability through the leveraging of certain restaurant level expenses. Many restaurant level expenses are relatively fixed in nature and do not increase at the same rate as same store sales increases. With sales increasing and certain restaurant-level expenses staying fixed or semi-variable (rising more slowly than incremental sales), the incremental sales measured by these same store sales increases should be the Company’s most profitable. When new restaurants are opened, there are preopening costs and certain relatively fixed costs including expense items such as management labor, rent and depreciation that must be absorbed. Additionally, it generally takes some period of time after opening before restaurant margins normalize. Accordingly, the sales at newly opened restaurants do not make a significant contribution to profitability in their initial months of operation.

The Company’s revenues and expenses can be affected significantly by the number and timing of the opening of additional restaurants. For instance, preopening expenses for any particular period may reflect expenses associated with restaurants to be opened in future periods, in addition to those restaurants opened during the current period. The timing of restaurant openings also can affect the average weekly sales and other period-to-period comparisons.

The following table sets forth the percentage relationship to total revenues of the listed items included in the Company’s consolidated statements of operations, except as indicated (percentages may not add due to rounding):

	FISCAL YEARS ENDED
	DECEMBER 25, 2005		DECEMBER 26, 2004		DECEMBER 28, 2003
Revenues:
Restaurant sales:
LongHorn Steakhouse	71	.1%	71	.2%	71	.6%
The Capital Grille	17	.6	16	.1	15	.0
Bugaboo Creek Steak House	10	.4	11	.7	12	.2
Other restaurants	0	.8	0	.9	1	.1

Total restaurant sales	100	.0	100	.0	99	.9
Franchise revenues	0	.0	0	.0	0	.1

Total revenues	100	.0	100	.0	100	.0
Costs and expenses:
Cost of restaurant sales(1)	36	.7	36	.9	36	.0
Operating expenses--restaurants(1)	44	.4	43	.7	43	.9
Provision for asset impairments,
restaurant closings, and other charges	0	.3	0	.3	--
Depreciation and amortization--restaurants(1)	3	.8	3	.8	3	.9
Pre-opening expense -- restaurants(1)	0	.8	0	.8	0	.8
General and administrative expenses	5	.6	5	.6	6	.0

Total costs and expenses	91	.5	91	.0	90	.6

Operating income	8	.5	9	.0	9	.4
Interest expense, net	0	.2	0	.2	0	.1
Minority interest	0	.0	0	.0	0	.0

Earnings before income taxes	8	.2	8	.8	9	.2
Income tax expense	2	.7	2	.9	3	.0

Net earnings	5	.5%	5	.8%	6	.2%

(1) Cost of restaurant sales, operating expenses -- restaurants, depreciation and amortization -- restaurants and pre-opening expense -- restaurants are expressed as a percentage of total restaurant sales.

RESULTS OF OPERATIONS

Year Ended December 25, 2005 Compared to Year Ended December 26, 2004

REVENUES

Total revenues increased 15.3% to $936.6 million for 2005, compared to $812.6 million for 2004.

LongHorn Steakhouse:

Sales in the LongHorn Steakhouse restaurants increased 15.2% to $666.1 million for 2005, compared to $578.3 million for 2004. The increase reflects a 12.4% increase in restaurant operating weeks in 2005 as compared to 2004, resulting from an increase in the restaurant base from 210 Company-owned and joint venture LongHorn Steakhouse restaurants at the end of 2004 to 237 restaurants at the end of 2005. Average weekly sales for Company-owned and joint venture LongHorn Steakhouse restaurants in 2005 were $56,876, a 2.5% increase over 2004. Same store sales for LongHorn Steakhouse restaurants increased 2.8% in 2005 as compared to 2004. The increase in same store sales for 2005 at LongHorn Steakhouse was attributable to an increase in average check, as guest counts were approximately flat compared to the prior year. Menu price increases of approximately 2.0% to 2.5% account for a majority of the check average increase with the remainder due to the impact of quarterly promotions and menu mix shifts. Management believes a number of factors have contributed to the guest counts remaining flat compared to last year, including the negative impact of severe winter weather and hurricanes, as well as the general economic impact on consumer spending of higher gasoline prices.

The Capital Grille:

Sales in The Capital Grille restaurants increased 25.9% to $165.2 million for 2005, compared to $131.2 million for 2004. The increase reflects a 16.9% increase in restaurant operating weeks in 2005 as compared to 2004, resulting from the three new The Capital Grille restaurants opened during 2005, bringing the total The Capital Grille restaurants in operation to 23. Average weekly sales for The Capital Grille restaurants in 2005 were $149,070, a 7.7% increase from 2004. Same store sales for The Capital Grille restaurants increased 5.8% in 2005, as compared to 2004. The increase in same store sales at The Capital Grille restaurants was primarily attributable to an increase in average check of approximately 4.8% and the remainder was due to an increase in guest counts. Management believes that a number of factors have contributed to the increase in check average, including price increases on menu items of approximately 3.0% and the introduction of higher-priced culinary specials that are not included on the menu.

Bugaboo Creek Steak House:

Sales in the Bugaboo Creek Steak House restaurants increased 2.3% to $97.3 million for 2005, compared to $95.1 million for 2004. The increase reflects a 7.8% increase in restaurant weeks in 2005 as compared to 2004, resulting from an increase in the restaurant base from 28 Bugaboo Creek Steak House restaurants at the end of 2004 to 30 restaurants in operation at the end of 2005, partially offset by a decrease in average weekly sales and by the temporary closure of one restaurant due to a fire during the first quarter. Average weekly sales for all Bugaboo Creek Steak House restaurants in 2005 were $66,062, a 5.0% decrease from the average weekly sales rate for 2004. Same store sales for the comparable Bugaboo Creek Steak House restaurants decreased 4.7% in 2005, as compared to 2004. The decrease in same store sales at Bugaboo Creek Steak House restaurants was attributable to an approximate 1.0% decrease in average check and the remainder was due to a decrease in guest counts.

Franchise Revenue:

The Company has a franchisee that operates three LongHorn Steakhouse restaurants in Puerto Rico. The Company earned $436,000 and $403,000 in franchise revenue in 2005 and 2004, respectively. Franchise revenue is computed based on a fixed percentage of the franchisee’s sales; therefore, the increase in 2005 franchise revenue over the prior year was due to the 8.2% increase in sales for the Company’s franchised restaurants.

COSTS AND EXPENSES

Cost of restaurant sales increased 14.7% to $343.2 million for 2005, compared to $299.4 million for 2004. Cost of restaurant sales, as a percentage of restaurant sales, decreased to 36.7% in 2005 from 36.9% in 2004. In addition to the leverage that was provided by a 2% - 3% increase in menu prices, this decrease resulted from lower priced beef contracts on a portion of the Company’s beef purchases renewed in mid 2005, as well as favorable menu mix shifts.

Restaurant operating expenses increased as a percentage of total restaurant sales in 2005 to 44.4%, from 43.7% in 2004. During 2005, the Company experienced cost pressures from labor costs resulting from increases in state minimum wage rates, including mandated increases in the minimum wage for workers in Connecticut, Florida, Illinois, Maine, Minnesota, Nevada, New Jersey, New York and Vermont, and increases in unemployment taxes. Additionally, utility costs and credit card fees increased during 2005 as compared to 2004 as a percentage of restaurant sales. Utility costs increased by 0.10% as a percentage of sales due to operating inefficiencies related to the extreme winter weather in the first quarter of 2005 as compared to 2004 and generally higher utility costs in the third and fourth quarter of 2005. Increased credit card usage by customers caused credit card processing fees to increase by 0.10% as a percentage of sales. These increases in restaurant operating expenses were partially offset by the positive impact from increased average weekly sales rate in 2005, which leveraged fixed and semi-variable expenses as a percentage of total restaurant sales.

Depreciation and amortization -- restaurants increased to $35.9 million in 2005, from $30.8 million in 2004, due to the Company’s new restaurant construction and depreciation of capital expenditures associated with the Company’s remodeling of older restaurants. The amount of depreciation expense per operating week increased slightly in 2005 as compared to 2004; however, depreciation as a percentage of total restaurant sales was flat due to the leveraging effect of increased average weekly sales in 2005.

Pre-opening expense increased to $7.2 million or 0.8% of total restaurant sales in 2005 from $6.9 million or 0.8% of total restaurant sales in 2004. This dollar increase was the result of the Company opening a total of 33 new restaurants in 2005 as compared to opening 30 restaurants in 2004. The amount of pre-opening expense per new restaurant in 2005 was approximately equal to preopening expense per new restaurant in 2004.

The provision for asset impairments, restaurant closings and other charges of approximately $3.3 million in 2005 consisted primarily of the write down of asset values for three LongHorn Steakhouse restaurants and two Bugaboo Creek Steak House restaurants. The impairment for each LongHorn Steakhouse restaurant related to management’s decision to not exercise future lease options for these restaurants as the current lease term expires. The impairment for all these restaurants related to forecasts by management that indicate that the investment for each of these restaurants would not be fully recovered by anticipated future cash flows. The impairment charge represents the sum of the differences between the estimated fair value, using discounted estimated future cash flows, and the carrying value of each of these restaurants.

General and administrative expenses increased to $52.1 million in 2005, from $45.2 million in 2004. As a percentage of total revenues, general and administrative expenses remained flat at 5.6% in 2005 and 2004. Higher accruals for management bonuses in 2005 offset the leverage of fixed and semi-fixed general and administrative expenses resulting from higher average weekly sales volumes and greater number of restaurants in operation during 2005 as compared to 2004.

Interest expense, net increased to $1.9 million in 2005, from $1.3 million in 2004. The increase in interest expense, net was due to the interest expense associated with new capital lease obligations. The Company had no amounts outstanding under its revolving credit facility during 2004. There were no amounts outstanding under the revolving credit facility at the end of 2005; however, the Company did pay approximately $100,000 in interest expense on borrowings under its revolving credit facility during the course of 2005 at an average rate of 6.2%.

Minority interest was $215,000 in 2005 compared with $300,000 in 2004. This expense reflects the joint venture partner’s interest in the Company’s three joint venture LongHorn Steakhouse restaurants.

Income tax expense in 2005 was 32.44% of earnings before income taxes as compared to 33.25% in 2004. This decrease in the Company’s effective income tax rate is primarily due to an increase in the FICA tip tax credit recognized in 2005. The Company’s effective income tax rate differs from applying the statutory Federal income tax rate of 35% to earnings before income taxes primarily due to employee FICA tip tax credits partially offset by state income taxes.

Net income of $52.1 million in 2005, as compared to net income of $47.5 million in 2004, reflects the net effect of the items discussed above.

RESULTS OF OPERATIONS

Year Ended December 26, 2004 Compared to Year Ended December 28, 2003

REVENUES

Total revenues increased 19.3% to $812.6 million for 2004, compared to $680.8 million for 2003.

LongHorn Steakhouse:

Sales in the LongHorn Steakhouse restaurants increased 18.7% to $578.3 million for 2004, compared to $487.2 million for 2003. The increase reflects a 12.4% increase in restaurant operating weeks in 2004 as compared to 2003, resulting from an increase in the restaurant base from 187 Company-owned and joint venture LongHorn Steakhouse restaurants at the end of 2003 to 210 restaurants at the end of 2004. Average weekly sales for Company-owned and joint venture LongHorn Steakhouse restaurants in 2004 were $55,504, a 5.6% increase over 2003. Same store sales for LongHorn Steakhouse restaurants increased 5.0% in 2004 as compared to 2003. The increase in same store sales for 2004 at LongHorn Steakhouse was attributable to an increase in guest counts of approximately 1.1% and the remainder was due to an increase in average check. Management believes a number of factors have contributed to the increased guest counts including improved restaurant-level execution; menu evolution with more appealing menu offerings; and effective use of media advertising; all of which work together to provide a better overall customer experience.

The Capital Grille:

Sales in The Capital Grille restaurants increased 28.1% to $131.2 million for 2004, compared to $102.4 million for 2003. The increase reflects a 15.5 % increase in restaurant operating weeks in 2004 as compared to 2003, resulting from the three new The Capital Grille restaurants opened during 2004, bringing the total The Capital Grille restaurants in operation to 20. Average weekly sales for The Capital Grille restaurants in 2004 were $138,405, an 11.0% increase from 2003. Same store sales for The Capital Grille restaurants increased 11.7% in 2004, as compared to 2003. The increase in comparable restaurant sales at The Capital Grille restaurants was primarily attributable to an increase in guest counts of approximately 6.6% and the remainder was due to an increase in average check.

During 2004, average weekly sales increased at a rate slightly less than the increase in same store sales. The Capital Grille restaurants have historically opened at lower sales volumes and not experienced the drop off in sales after an initial honeymoon period commonly characteristic in the restaurant industry.

Bugaboo Creek Steak House:

Sales in the Bugaboo Creek Steak House restaurants increased 14.1% to $95.1 million for 2004, compared to $83.3 million for 2003. The increase reflects a 14.1% increase in restaurant weeks in 2004 as compared to 2003, resulting from an increase in the restaurant base from 25 Bugaboo Creek Steak House restaurants at the end of 2003 to 28 restaurants at the end of 2004. Average weekly sales for the Bugaboo Creek Steak House restaurants in 2004 were $69,562, which was approximately flat with the average weekly sales rate for 2003. Same store sales for the Bugaboo Creek Steak House restaurants increased 2.2% in 2004, as compared to 2003. The increase in same store sales at Bugaboo Creek Steak House restaurants is attributable to an increase in average check offset by a 2.9% decrease in guest counts. During 2004, average weekly sales increased at a rate less than the increase in same store sales due to lower average weekly sales at restaurants opened in new competitive markets.

Franchise Revenue:

The Company has a franchisee that operates three LongHorn Steakhouse restaurants in Puerto Rico. The Company earned $403,000 and $374,000 in franchise revenue in 2004 and 2003, respectively. Franchise revenue is computed based on a fixed percentage of the franchisee’s sales; therefore, the increase in 2004 franchise revenue over the prior year was due to the 7.8% increase in sales for the Company’s franchised restaurants.

COSTS AND EXPENSES

Cost of restaurant sales, as a percentage of restaurant sales, increased to 36.9% in 2004 from 36.0% in 2003. This increase resulted primarily from higher contract pricing on commodities in 2004, particularly pricing with respect to beef contracts, and was partially offset by a 2% - 3% increase in menu prices.

Restaurant operating expenses decreased as a percentage of total restaurant sales in 2004 to 43.7%, from 43.9% in 2003. The increased average weekly sales rate in 2004 leveraged fixed and semi-variable expenses as a percentage of total restaurant sales. The leveraging of these fixed and semi-variable expenses was partially offset by slight increases in unemployment taxes, management labor, advertising spending and credit card fees as a percentage of restaurant sales. Increased credit card usage by customers caused credit card processing fees to increase by 0.10% as a percentage of sales.

Depreciation and amortization - restaurants increased to $30.8 million in 2004, from $26.5 million in 2003, due to the Company’s new restaurant construction and depreciation of capital expenditures associated with the Company’s remodeling of older restaurants. Depreciation as a percentage of total restaurant sales decreased slightly due to the leveraging effect of increased average weekly sales in 2004. The amount of depreciation expense per operating week was approximately the same in 2004 as it was in 2003.

Pre-opening expense increased to $6.9 million or 0.8% of total restaurant sales in 2004 from $5.8 million or 0.8% of total restaurant sales in 2003. This dollar increase was the result of the Company opening a total of 30 new restaurants in 2004 as compared to opening 26 restaurants in 2003. The amount of pre-opening expense per new restaurant in 2004 was approximately equal to preopening expense per new restaurant in 2003.

The provision for asset impairments, restaurant closings and other charges of approximately $2.7 million in 2004 consisted of the write down of asset values related to two LongHorn Steakhouse restaurants and one Bugaboo Creek Steak House restaurant, located in three separate markets. The impairment charge represents the sum of the differences between the estimated fair value, using discounted estimated future cash flows, and the carrying value of each of these restaurants.

General and administrative expenses increased to $45.2 million in 2004, from $40.5 million in 2003. As a percentage of total revenues, general and administrative expenses decreased to 5.6% in 2004 from 6.0% in 2003. This decrease was primarily associated with lower management bonuses and the greater leverage of fixed and semi-fixed general and administrative expenses resulting from higher average weekly sales volumes in 2004.

Interest expense, net increased to $1.3 million in 2004, from $1.0 million in 2003. The increase in interest expense, net was due to the interest expense associated with new capital lease obligations partially offset by an increase in the level of capitalized interest associated with the Company’s new restaurant construction program. The Company had no amounts outstanding under its revolving credit facility during 2004 or 2003.

Minority interest was $300,000 in both 2004 and 2003. This expense reflects the joint venture partner’s interest in the Company’s three joint venture LongHorn Steakhouse restaurants.

Income tax expense in 2004 was 33.25% of earnings before income taxes. The Company’s effective income tax rate differs from applying the statutory Federal income tax rate of 35% to earnings before income taxes primarily due to employee FICA tip tax credits partially offset by state income taxes.

Net income of $47.5 million in 2004, as compared to net income of $42.3 million in 2003, reflects the net effect of the items discussed above.

LIQUIDITY AND CAPITAL RESOURCES

The Company requires capital primarily for the development of new restaurants, selected acquisitions and the refurbishment of existing restaurants. The Company’s principal sources of funds in 2005 were (i) cash flow from operations ($125.5 million), which included the sale of short-term investments ($28.7 million) and (ii) proceeds from the exercise of employee stock options ($7.2 million). The primary uses of funds consisted of costs associated with expansion, principally leasehold improvements, equipment, land and buildings associated with the construction of new restaurants ($104.2 million) and the purchase of common stock for treasury ($39.3 million).

Due to the relatively short time period (less than 30 days) between the ordering of inventories, preparation for sale, collection of payment and subsequent payment for inventories, there are no material changes in the underlying drivers of cash flows that are not clearly identifiable in the Company’s consolidated statement of cash flows.

Since substantially all sales in the Company’s restaurants are for cash or credit card receipts, which are generally settled in three days, and accounts payable are generally due in seven to 30 days, the Company operates with little or negative working capital. The Company’s working capital deficit increased from $7.5 million on December 26, 2004 to $53.1 million on December 25, 2005, principally due to the purchase of $39.3 million of common stock for treasury during fiscal 2005.

The increases in accounts receivable, inventory, and accrued expenses are principally due to the new restaurants which were opened during 2005 and the result of generally higher average unit volumes experienced during 2005. Further increases in current asset and liability accounts are expected as the Company continues its restaurant development program.

The Company has a revolving credit facility, which allows the Company to borrow up to $100.0 million through its maturity in July 2010. The terms of the revolving credit facility require the Company to pay interest on outstanding borrowings at LIBOR plus a margin of 0.50% to 1.25% (depending on the Company’s leverage ratio) or the administrative agent’s prime rate of interest, at the Company’s option, and to pay a commitment fee of 0.1% to 0.2% (depending on the Company’s leverage ratio) per year on any unused portion of the facility. No amounts were outstanding, and $100.0 million was available, under the Company’s revolving credit agreement on December 25, 2005. As of December 25, 2005, terms of the revolving credit facility provide for interest to be accrued at LIBOR plus 0.5% or the prime rate and payment of the commitment fee at a rate of 0.10% per year on any unused portion of the facility.

The revolving credit facility contains various covenants and restrictions which, among other things, require the maintenance of stipulated leverage and fixed charge coverage ratios and minimum consolidated net worth, as defined, and limit the incurrence of additional indebtedness in excess of specified amounts. The Company is currently in compliance with such covenants.

The Company currently plans to open 29 or 30 LongHorn Steakhouse restaurants, two Bugaboo Creek Steak House restaurants (including one restaurant closed due to a fire in the first quarter of 2005) and three The Capital Grille restaurants in 2006. The Company estimates that its capital expenditures will be approximately $115 to $125 million in 2006. The capital expenditure estimate for 2006 includes the estimated cost of developing 34 to 35 new restaurants, ongoing refurbishment in existing restaurants, costs associated with obtaining real estate for year 2006 planned openings and continued investment in improved management information systems.

TREASURY STOCK

The Company’s Board of Directors has authorized the purchase of shares of the Company’s common stock from time to time through open market transactions, block purchases or in privately negotiated transactions. On April 20, 2005, the Board of Directors authorized the Company to use up to $29.0 million to purchase shares of its common stock and on July 22, 2005, the Board of Directors authorized the repurchase of up to an additional $30.0 million of the Company’s common stock. During the second quarter of 2005, the Company repurchased 690,000 shares of its common stock at an average price of $28.88 for an aggregate cost of approximately $19.9 million. During the third quarter of 2005, the Company repurchased 669,000 shares of its common stock at an average price of $28.95 for an aggregate cost of approximately $19.4 million. The Company did not repurchase any of its common stock during the fourth quarter of 2005. As of December 25, 2005, approximately $19.7 million remained available under the Company’s aggregate $59.0 million share repurchase authorization.

The Company expects that available borrowings under the Company’s revolving credit facility, together with cash on hand and cash provided by operating activities, will provide sufficient funds to finance its expansion and share repurchase plans through the year 2007.

OUTLOOK FOR FUTURE OPERATING RESULTS

The Company’s fiscal year is a 52- or 53-week year ending on the last Sunday in each calendar year. All fiscal years since 2001 have been 52-week periods; however, since fiscal 2006 will end on December 31st, it will be a 53-week period. Each of the four fiscal quarters is typically made up of 13 weeks; however, the first quarter of 2006 will contain 14 weeks. During 2006, the Company expects to realize incremental profits from this extra week of sales and beneficial leverage of the sales during this extra sales week upon fixed and semi-fixed expenses.

Revenues. The Company plans to grow revenues by opening additional restaurants and by increasing average unit volumes at both existing and new restaurants. The Company’s new restaurant development plans for 2006 are summarized in the section entitled “LIQUIDITY AND CAPITAL RESOURCES.” Based upon current economic conditions and the Company’s business trends, the Company is targeting same store sales increases for 2006 of 3% to 4% for LongHorn Steakhouse, 3% to 4% for The Capital Grille and 1% to 2% for Bugaboo Creek Steak House. The Company anticipates that the same store sales increases for LongHorn Steakhouse, The Capital Grille and Bugaboo Creek Steak House each include guest count increases of approximately 1.0%. The remainder of the targeted same store sales increase for all three concepts is expected to come from menu price increases and shifts in menu mix. New restaurant development and the targeted same store sales growth are expected to result in an increase in total revenue of approximately 19% to 20%.

Cost of restaurant sales. The Company is anticipating increased commodity prices in 2006 based primarily on higher protein pricing particularly with respect to beef. The Company is under fixed price contracts with its primary suppliers for the majority of its anticipated usage of protein products in 2006; however, the Company pays market prices for other products such as produce and fresh seafood and for any protein purchases in excess of contracted amounts. Based on the fixed prices negotiated for its protein products, partially offset by current and anticipated menu price increases, the Company expects its costs of goods sold as a percentage of total restaurant sales to be flat to up 0.1% in 2006 as compared with 2005.

Operating expenses -- restaurants. For the last several years, the Company has experienced cost pressure related to a number of operating expense line items including management and hourly labor. Additionally, several states in which the Company operates restaurants have either recently enacted or are considering enacting an increase in the minimum wage rate, which will result in an increase in hourly labor costs. Based upon labor market conditions that exist today, the Company expects these trends to continue in 2006. In addition, the Company expects increases in (i) the cost of utilities, (ii) unemployment tax expense, and (iii) credit card processing fees due to the greater percentage of credit card usage. The Company’s targeted growth in same store sales, if achieved, will create favorable leverage and offset a portion of these cost pressures, resulting in a slight increase in operating expenses as a percentage of total restaurant sales.

Pre-opening expense. Pre-opening costs are expensed as incurred and are expected to approximate $195,000 for each LongHorn Steakhouse restaurant, $230,000 for each Bugaboo Creek Steak House restaurant, and $400,000 for each The Capital Grille restaurant. Beginning in fiscal 2006, preopening will also include additional cost associated with operating leases incurred during the construction period. These costs are expected to average from $50,000 to $60,000 per operating lease. Restaurant pre-opening expenses may vary materially from period to period depending on when restaurants open. The Company anticipates that pre-opening expenses will be higher in 2006 by approximately $1.6 to $2.1 million (including $1.2 to $1.5 million as a result of the change in accounting for rent during the construction period) as a result of the planned opening of more new restaurants in 2006, as compared to 2005.

Depreciation and amortization -- restaurants. The Company expects depreciation and amortization to increase as it invests in the development of new restaurants and the ongoing refurbishment in existing restaurants. Due to an increase in the average cost to construct new restaurants offset by leverage of this fixed expense resulting from expected average weekly sales increases in 2006, the Company expects depreciation and amortization to remain flat as a percentage of restaurant sales.

General and administrative expenses. The Company expects general and administrative expenses to increase by approximately 0.80% to 0.90%, as a percent of total revenues in 2006 as compared with 2005. Approximately 0.70% of that increase reflects the impact of the Company’s adoption of the stock-based expense provisions of SFAS 123R at the beginning of 2006.

Interest expense, net. The Company does not plan to have any material amount outstanding under its revolving credit facility during 2006. However, due to the addition of capital leases during 2005 and expected additions of capital leases in 2006, as well as lower forecasted invested cash balances for 2006, the Company expects net interest expense to increase in 2006 compared with 2005 by approximately $700,000 to $800,000.

Income tax expense. The Company expects its effective income tax rate for 2006 to be approximately 33.25% to 33.50% of earnings before income taxes.

Earnings per share. Based upon the net effect of the items discussed above, the Company expects 2006 diluted earnings per common share in a range of $1.62 to $1.66, which includes the anticipated impact of the Company’s adoption of SFAS 123R and FSP 13-1.

The preceding discussion of liquidity and capital resources and outlook for future operating results contain certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements regarding the intent, belief or current expectations of the Company and members of its management team, as well as assumptions on which such statements are based. All forward-looking statements in this Form 10-K are based upon information available to the Company on the date of this report. Forward-looking statements involve a number of risks and uncertainties, and in addition to the factors discussed elsewhere in this Form 10-K, other factors that could cause actual results, performance or developments to differ materially from those expressed or implied by those forward-looking statements include the following: failure of facts to conform to necessary management estimates and assumptions regarding financial and operating matters; the Company’s ability to identify and secure suitable locations for new restaurants on acceptable terms, open the anticipated number of new restaurants on time and within budget, achieve anticipated rates of same store sales, hire and train additional restaurant personnel and integrate new restaurants into its operations; the continued implementation of the Company’s business discipline over a large and growing restaurant base; increases in the cost of construction of new restaurants; unexpected increases in cost of sales or employee, pre-opening or other expenses; the economic conditions in the new markets into which the Company expands and possible uncertainties in the customer base in these areas; fluctuations in quarterly operating results; seasonality; unusual weather patterns or events; changes in customer dining patterns; the impact of any negative publicity or public attitudes related to the consumption of beef or other products sold by the Company; unforeseen increases in commodity pricing; disruption of established sources of product supply or distribution; competitive pressures from other national and regional restaurant chains; legislation adversely affecting the restaurant industry, including (without limitation) minimum wage and mandatory healthcare legislation; business conditions, such as inflation or a recession, or other negative effect on dining patterns, or some other negative effect on the economy, in general, including (without limitation) war, insurrection and/or terrorist attacks on United States soil; growth in the restaurant industry and the general economy; changes in monetary and fiscal policies, laws and regulations; and the risks set forth in this Form 10-K and other risks identified from time to time in the Company’s SEC reports, registration statements and public announcements. Any forward looking statement speaks only as of the date of which it was made, and the Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has not entered into any transactions with unconsolidated entities, that are financial guarantees, retained or contingent interests in transferred assets, derivative instruments, or obligations arising out of a variable interest entity that provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with the Company and that have a material current effect, or that are reasonably likely to have a material future effect, on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

The table below summarizes the Company’s significant contractual obligations, by maturity, as of December 25, 2005 (in thousands):

	TOTAL	LESS THAN 1 YEAR	1 - 3 YEARS	4 - 5 YEARS	AFTER 5 YEARS
Bank revolving credit facility	$ --	$ --	$ --	$ --	$ --
Capital lease obligations (1)	94,411	3,897	8,191	8,631	73,692
Operating lease obligations	142,360	22,648	42,319	34,463	42,930
Purchase obligations (2)	246,667	234,346	12,321	--	--

Total contractual cash obligations	$483,438	$260,891	$62,831	$43,094	$116,622

(1)

Amounts reflected include imputed interest of $55,151.

(2)

Purchase obligations consist of commitments under food contracts and the estimated costs of completing capital project commitments.

EFFECT OF INFLATION

Management believes that inflation has not had a material effect on earnings during the past several years. Inflationary increases in the cost of labor, food and other operating costs could adversely affect the Company’s restaurant operating margins. In the past, however, the Company generally has been able to modify its operations and increase menu prices to offset inflationary increases in its operating costs.

A majority of the Company’s employees are paid hourly rates related to federal and state minimum wage laws and various laws that allow for credits to that wage. Although the Company has generally been able to and will continue to attempt to pass along increases in the minimum wage and in other costs through food and beverage price increases, there can be no assurance that all such increases can be reflected in its prices or that increased prices will be absorbed by customers without diminishing, at least to some degree, customer spending at its restaurants.

RECENT ACCOUNTING PRONOUNCEMENTS

On October 6, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position 13-1, “Accounting for Rental Costs Incurred During a Construction Period” (“FSP 13-1”). FSP 13-1 is effective for the Company’s fiscal 2006 and requires the Company to expense rental costs incurred during the construction period associated with ground or building operating leases. The Company has previously capitalized these costs. Retrospective application, which permits entities to restate financial statements of previous periods is permitted but not required. Beginning effective for fiscal 2006, the Company intends to adopt the provisions of FSP 13-1 using retrospective application. This will result in the revision of previously issued financial statements as if the provisions of FSP 13-1 had always been used. Management currently estimates that the adoption of FSP 13-1 will result in a decrease of approximately $0.03 in net earnings per diluted share for fiscal 2006 and approximately $0.02 in net earnings per diluted share for fiscal 2005.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (SFAS 123R). SFAS 123R is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” Among other items, SFAS 123R eliminates the use of the intrinsic value method of accounting, and requires companies to recognize the cost of awards of equity instruments granted in exchange for employee services received, based on the grant date fair value of those awards, in their financial statements. The effective date of SFAS 123R was the first interim period beginning after June 15, 2005; however, on April 14, 2005, the SEC announced that the effective date of SFAS 123R was postponed until the first annual period beginning after June 15, 2005.

SFAS 123R permits companies to adopt its requirements using either a “modified prospective” method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after that date, and based on the requirements of SFAS 123 for all unvested awards granted prior to the effective date of SFAS 123R. Under the “modified retrospective” method, the requirements are the same as under the “modified prospective” method, but this method also permits entities to restate financial statements of previous periods based on proforma disclosures made in accordance with SFAS 123. The Company intends to adopt the provisions of SFAS 123R using modified prospective application.

The Company currently utilizes the Black-Scholes option-pricing model to measure the fair value of stock options granted to employees. While SFAS 123R permits entities to continue to use this model, the standard also permits the use of a “lattice” model. SFAS 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current standards. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated because they depend on, among other things, when employees exercise stock options.

As described in Note 1 to the Consolidated Financial Statements, compensation cost for stock options for which the requisite future service has not yet taken place is disclosed as a pro forma expense by applying the provisions of SFAS 123. The pro forma application of SFAS 123 had a dilutive effect of approximately $0.12 per diluted share for 2005. Compensation cost for stock options vesting beginning in fiscal 2006, and all restricted stock, will be expensed in accordance with the provisions of SFAS 123R, which will be effective for the Company at the beginning of fiscal 2006. The Company estimates that stock-based compensation expense for fiscal 2006 will be approximately $6.5 to $7.5 million ($5.0 to $5.7 million after tax or $0.14 to $0.16 per diluted share). This estimate includes costs related to unvested stock options and restricted stock grants associated with new compensation programs.

In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB No. 143” (“FIN 47”). Asset retirement obligations are legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of a long-lived asset. FIN 47 clarifies that liabilities associated with asset retirement obligations whose timing or settlement method are conditional on future events should be recorded at fair value as soon as fair value is reasonably estimable. FIN 47 also provides guidance on the information required to reasonably estimate the fair value of the liability. The provisions of FIN 47 are effective for fiscal years ending after December 15, 2005. The Company adopted the provisions of FIN 47 during the fourth quarter of 2005. The impact of adoption was not material.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 replaces APB No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting changes in Interim Financial Statements, and changes the requirements for the accounting for, and reporting of, a change in accounting principle. SFAS 154 requires retrospective application of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. SFAS 154 also redefines “restatement” as the revising of previously issued financial statements to reflect the correction of an error. SFAS 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005.

DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company’s most critical accounting policies, the judgments and uncertainties affecting the application of those policies, and the likelihood that materially different amounts would be reported under different conditions or using different assumptions.

PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of such assets. Changes in circumstances such as technological advances, changes to the Company’s business model or changes in the Company’s capital strategy can result in the actual useful lives differing from the Company’s estimates. In those cases where the Company determines that the useful life of property and equipment should be shortened, the Company would depreciate the net book value in excess of the salvage value, over its revised remaining useful life thereby increasing depreciation expense. Factors such as changes in the planned use of fixtures or software or closing of facilities could also result in shortened useful lives.

The Company’s accounting policies regarding property and equipment include judgments by management regarding the estimated useful lives of these assets, the residual values to which the assets are depreciated, the expected lease term for assets related to leased properties and the determination as to what constitutes enhancing the value of or increasing the life of existing assets. These judgments and estimates may produce materially different amounts of depreciation and amortization expense than would be reported if different assumptions were used. As discussed further below, these judgments may also impact the Company’s need to recognize an impairment charge on the carrying amount of these assets as the cash flows associated with the assets are realized.

LEASE ACCOUNTING

The Company is obligated under various lease agreements for certain restaurant facilities. For operating leases, the Company recognizes rent expense on a straight-line basis over the expected lease term. Capital leases are recorded as an asset and an obligation at an amount equal to the present value of the minimum lease payments during the lease term.

Under the provisions of certain of the Company’s leases, there are rent holidays and/or escalations in payments over the base lease term, as well as renewal periods. The effects of the holidays and escalations have been reflected in rent expense on a straight-line basis over the expected lease term, which includes cancelable option periods when it is deemed to be reasonably assured that the Company will exercise such option periods due to the fact that the Company would incur an economic penalty for not doing so. The lease term commences on the date when the Company becomes legally obligated for the rent payments. The leasehold improvements and property held under capital leases for each restaurant facility are amortized on the straight-line method over the shorter of the estimated life of the asset or the same expected lease term used for lease accounting purposes. For each restaurant facility, the consolidated financial statements reflect the same lease term for amortizing leasehold improvements as the Company uses to determine capital versus operating lease classifications and in calculating straight-line rent expense. Percentage rent expense is generally based upon sales levels and is accrued at the point in time the Company determines that it is probable that such sales levels will be achieved. Leasehold improvements paid for by the lessor are recorded as leasehold improvements and deferred rent.

Judgments made by the Company related to the probable term for each restaurant facility lease affect i) the classification and accounting for a lease as capital or operating, ii) the rent holidays and/or escalations in payments that are taken into consideration when calculating straight-line rent and iii) the term over which leasehold improvements for each restaurant facility are amortized. These judgments may produce materially different amounts of depreciation, amortization and rent expense than would be reported if different assumed lease terms were used.

IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets, including restaurant sites, leasehold improvements, and fixed assets are reviewed by the Company for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. Expected cash flows associated with an asset is a key factor in determining the recoverability of the asset. Identifiable cash flows are generally measured at the restaurant level. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance. The Company’s estimates of undiscounted cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions, changes to its business model or changes in its operating performance. If the sum of the undiscounted cash flows is less than the carrying value of the asset, the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset.

Judgments made by the Company related to the expected useful lives of long-lived assets and the Company’s ability to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions, and changes in operating performance. As the ongoing expected cash flows and carrying amounts of long-lived assets are assessed, these factors could cause the Company to realize a material impairment charge. In 2005, the Company recognized a $3.3 million charge for the write down of asset values for three LongHorn Steakhouse restaurants and two Bugaboo Creek Steak House restaurants. In 2004, the Company recognized a $2.7 million charge for the write down of asset values related to two LongHorn Steakhouse restaurants and one Bugaboo Creek Steak House restaurant.

SELF-INSURANCE ACCRUALS

The Company self-insures for a significant portion of expected losses under its workers’ compensation, employee medical, employment practices and general liability programs. Accrued liabilities have been recorded based on estimates of the ultimate costs to settle incurred, but unpaid, claims.

The accounting policies regarding self-insurance programs include certain management judgments and assumptions regarding the frequency or severity of claims and claim development patterns, and claim reserve, management, and settlement practices. Unanticipated changes in these factors may produce materially different amounts of expense than that reported under these programs.

INCOME TAXES

Income taxes are accounted for by the Company in accordance with Statement of Financial Accounting Standards No. 109 (“SFAS 109”), “Accounting for Income Taxes” which requires that deferred tax assets and liabilities be recognized for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

The Company reviews and assesses the recoverability of any deferred tax assets recorded on the balance sheet and provides any necessary allowances as required. An adjustment to the deferred tax asset would be charged to income in the period such determination was made.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

The Company may be exposed to market risk from changes in interest rates on debt.

As of December 25, 2005, the Company had no borrowings outstanding under its $100.0 million revolving credit facility. Amounts outstanding under such credit facility bear interest at LIBOR plus a margin of 0.50% to 1.25% (the “applicable margin” depending on the Company’s leverage ratio), or the administrative agent’s prime rate of interest, at the Company’s option. Accordingly, the Company is exposed to the impact of interest rate movements. To achieve the Company’s objective of managing its exposure to interest rate changes, the Company may from time to time use interest rate swaps.

INVESTMENT PORTFOLIO

The Company invests portions of its excess cash, if any, in highly liquid investments. At December 25, 2005, the Company had $5.9 million in high-grade overnight repurchase agreements, and $6.2 million in short-term investments in the form of federal, state, and municipal bonds. As of December 25, 2005, the Company has classified all short-term investments as trading securities. The market risk on such investments is minimal due to their short-term nature.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 25, 2005, DECEMBER 26, 2004 AND DECEMBER 28, 2003

WITH REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	PAGE
Management's Report on Internal Control
over Financial Reporting	36
Reports of Independent Registered Public
Accounting Firm	37
Consolidated Balance Sheets	39
Consolidated Statements of Operations	40
Consolidated Statements of Shareholders' Equity and
Comprehensive Income	41
Consolidated Statements of Cash Flows	42
Notes to Consolidated Financial Statements	43

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 25, 2005. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Management has concluded that, as of December 25, 2005, the Company’s internal control over financial reporting is effective based on these criteria.

The Company’s independent registered public accounting firm, KPMG LLP, has issued an audit report on the Company’s assessment of our internal control over financial reporting, which is included on the following page.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

RARE Hospitality International, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that RARE Hospitality International, Inc. maintained effective internal control over financial reporting as of December 25, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). RARE Hospitality International, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that RARE Hospitality International, Inc. maintained effective internal control over financial reporting as of December 25, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, RARE Hospitality International, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 25, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of RARE Hospitality International, Inc. and subsidiaries as of December 25, 2005 and December 26, 2004, and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 25, 2005, and our report dated March 6, 2006 expressed an unqualified opinion on those consolidated financial statements.

(signed) KPMG LLP

Atlanta, Georgia

March 6, 2006

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

RARE Hospitality International, Inc.

We have audited the accompanying consolidated balance sheets of RARE Hospitality International, Inc. and subsidiaries as of December 25, 2005 and December 26, 2004, and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 25, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of RARE Hospitality International, Inc. and subsidiaries as of December 25, 2005 and December 26, 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 25, 2005, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of RARE Hospitality International, Inc.’s internal control over financial reporting as of December 25, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 6, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

(signed) KPMG LLP

Atlanta, Georgia

March 6, 2006

RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 25, 2005 AND DECEMBER 26, 2004
(in thousands)

	2005		2004
ASSETS
Current assets:
Cash and cash equivalents	$ 12,168		$ 19,547
Short-term investments	6,203		34,895
Accounts receivable	15,807		9,212
Inventories	15,428		12,564
Prepaid expenses	6,623		6,898
Refundable income taxes	--		3,327
Deferred income taxes	11,320		9,272

Total current assets	67,549		95,715
Property and equipment, less accumulated depreciation and amortization	503,762		438,479
Goodwill	19,187		19,187
Other	18,864		14,739

Total assets	$ 609,362		$ 568,120

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$ 30,026		$ 33,113
Accrued expenses	89,171		69,937
Income taxes payable	1,152		--
Current installments of obligations under
capital leases	269		207

Total current liabilities	120,618		103,257
Deferred income taxes	9,131		14,964
Obligations under capital leases, net of current installments	38,991		37,136
Other	9,084		6,820

Total liabilities	177,824		162,177
Minority interest	1,193		1,309
Shareholders’ equity:
Preferred stock, no par value. Authorized 10,000 shares, none issued	--		--
Common stock, no par value. Authorized 60,000
shares; 35,436 and 34,802 shares issued; and
33,484 and 34,209 outstanding at December
25, 2005 and December 26, 2004,
respectively	229,955		217,146
Unearned compensation – restricted stock	(1,470	)	(1,588	)
Retained earnings	254,335		202,253
Treasury shares at cost; 1,952 shares and 593 shares
at December 25, 2005 and December 26, 2004,
respectively	(52,475	)	(13,177	)

Total shareholders’ equity	430,345		404,634

Total liabilities and shareholders’ equity	$ 609,362		$ 568,120

See accompanying notes to consolidated financial statements.

RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 25, 2005, DECEMBER 26, 2004 AND DECEMBER 28, 2003

(in thousands, except per share data)

	2005	2004	2003
Revenues:
Restaurant sales:
LongHorn Steakhouse	$666,073	$578,297	$487,221
The Capital Grille	165,169	131,208	102,414
Bugaboo Creek Steak House	97,310	95,091	83,325
Other restaurants	7,588	7,564	7,498

Total restaurant sales	936,140	812,160	680,458
Franchise revenues	436	403	374

Total revenues	936,576	812,563	680,832
Costs and expenses:	--	--	--
Cost of restaurant sales	343,188	299,448	245,094
Operating expenses-- restaurants	415,732	354,679	298,978
Provision for asset impairments, restaurant
closings, and other charges	3,269	2,700	--
Depreciation and amortization-- restaurants	35,857	30,793	26,508
Pre-opening expense	7,191	6,865	5,782
General and administrative expenses	52,112	45,244	40,515

Total costs and expenses	857,349	739,729	616,877

Operating income	79,227	72,834	63,955
Interest expense, net	1,920	1,328	1,015
Minority interest	215	300	300

Earnings before income taxes	77,092	71,206	62,640
Income tax expense	25,010	23,676	20,363

Net earnings	$ 52,082	$ 47,530	$ 42,277

Basic earnings per common share	$ 1.54	$ 1.41	$ 1.27

Diluted earnings per common share	$ 1.50	$ 1.34	$ 1.21

Weighted average common shares outstanding (basic)	33,764	33,811	33,162

Weighted average common shares outstanding (diluted)	34,817	35,374	34,843

See accompanying notes to consolidated financial statements.

RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 25, 2005, DECEMBER 26, 2004 AND DECEMBER 28, 2003
(in thousands)

			STOCK DOLLARS			RESTRICTED STOCK			RETAINED EARNINGS		OTHER TREASURY STOCK			ACCUMULATED TOTAL COMPREHENSIVE INCOME (LOSS)		SHAREHOLDERS' EQUITY
BALANCE, DECEMBER 29, 2002	33,099		$	191,174		$	(1,124	)	$	112,446	$	(2,364	)	$	--	$	300,132
Net earnings and total comprehensive income	--			--			--			42,277		--			--		42,277
Purchase of common stock for treasury	--			--			--			--		(2,625	)		--		(2,625	)
Issuance of shares pursuant to restricted stock awards	47			969			(969	)		--		--			--		--
Amortization of restricted stock	--			--			790			--		--			--		790
Forfeiture of restricted stock	(11	)		(263	)		--			--		--			--		(263	)
Issuance of shares pursuant to exercise of stock options	907			7,120			--			--		--			--		7,120
Tax benefit of stock options exercised	--			4,624			--			--		--			--		4,624

BALANCE, DECEMBER 28, 2003	34,042			203,624			(1,303	)		154,723		(4,989	)		--		352,055
Net earnings and total comprehensive income	--			--			--			47,530		--			--		47,530
Purchase of common stock for treasury	--			--			--			--		(8,188	)		--		(8,188	)
Issuance of shares pursuant to restricted stock awards	61			1,565			(1,565	)		--		--			--		--
Forfeiture of restricted stock	(9	)		(139	)		--			--		--			--		(139	)
Amortization of restricted stock	--			--			1,280			--		--			--		1,280
Issuance of shares pursuant to exercise of stock options	708			7,706			--			--		--			--		7,706
Tax benefit of stock options exercised	--			4,390			--			--		--			--		4,390

BALANCE, DECEMBER 26, 2004	34,802			217,146			(1,588	)		202,253		(13,177	)		--		404,634
Net earnings and total comprehensive income	--			--			--			52,082		--			--		52,082
Purchase of common stock for treasury	--			--			--			--		(39,298	)		--		(39,298	)
Issuance of shares pursuant to restricted stock awards	55			1,656			(1,656	)		--		--			--		--
Forfeiture of restricted stock	(19	)		(332	)		174			--		--			--		(158	)
Amortization of restricted stock	--			--			1,600			--		--			--		1,600
Issuance of shares pursuant to exercise of stock options	598			7,188			--			--		--			--		7,188
Tax benefit of stock options exercised	--			4,297			--			--		--			--		4,297

BALANCE, DECEMBER 25, 2005	35,436		$	229,955		$	(1,470	)	$	254,335	$	(52,475	)	$	--	$	430,345

See accompanying notes to consolidated financial statements.

RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 25, 2005, DECEMBER 26, 2004 AND DECEMBER 28, 2003
(in thousands)

	2005			2004			2003
Cash flows from operating activities:
Net earnings	$	52,082		$	47,530		$	42,277
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization		39,310			33,362			27,992
Provision for asset impairments, restaurant closings and other charges		3,269			2,700			--
Minority interest		215			300			300
Deferred tax expense		(7,881	)		5,127			3,911
Sale (purchase) of short-term investments, net		28,692			(10,859	)		(6,301	)
Changes in assets and liabilities:
Accounts receivable		(6,595	)		(482	)		(2,154	)
Inventories		(2,864	)		(2,744	)		(1,454	)
Prepaid expenses		275			(1,859	)		(1,562	)
Other assets		(1,513	)		(3,087	)		(1,390	)
Refundable income taxes		8,776			3,225			6,586
Accounts payable		(6,669	)		6,044			229
Accrued expenses		18,362			9,514			10,782

Net cash provided by operating activities		125,459			88,771			79,216

Cash flows from investing activities:
Purchase of property and equipment		(104,207	)		(97,246	)		(77,710	)

Net cash used in investing activities		(104,207	)		(97,246	)		(77,710	)

Cash flows from financing activities:		--			--			--
Payments for debt issuance costs		(370	)		--			--
Principal payments on capital leases		(195	)		(128	)		(79	)
Distributions to minority partners		(331	)		(362	)		(340	)
Increase in bank overdraft included
in accounts payable and accrued expenses		4,375			8,486			1,194
Purchase of common stock for treasury		(39,298	)		(8,188	)		(2,625	)
Proceeds from exercise of stock options		7,188			7,706			7,120

Net cash provided by (used in) financing activities		(28,631	)		7,514			5,270

Net increase (decrease) in cash and cash equivalents		(7,379	)		(961	)		6,776
Cash and cash equivalents at beginning of year		19,547			20,508			13,732

Cash and cash equivalents at end of year	$	12,168		$	19,547		$	20,508

Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	23,779		$	15,085		$	9,737

Cash paid for interest net of amounts capitalized	$	2,594		$	1,589		$	1,078

Supplemental disclosure of non-cash financing and investing activities:
Assets acquired under capital lease	$	2,112		$	9,885		$	5,181

See accompanying notes to consolidated financial statements.

RARE HOSPITALITY INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 25, 2005, DECEMBER 26, 2004 AND DECEMBER 28, 2003

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

OPERATIONS

RARE Hospitality International, Inc., including its wholly owned subsidiaries (the “Company”), is a multi-concept restaurant company, which, as of December 25, 2005, operated the following restaurants in 32 states (located primarily in the Eastern half of the United States) and the District of Columbia:

CONCEPT			NUMBER IN OPERATION
LongHorn Steakhouse				237
Bugaboo Creek Steak House				30
The Capital Grille				23
Other specialty concepts				2

Total restaurants				292

The Company is a 50 percent partner in joint ventures that operate three LongHorn Steakhouse restaurants, which are managed by the Company and included in the restaurant counts above. Due to the rights and duties assigned by the attendant joint venture and management agreements, the Company is deemed to have control over these joint ventures.

BASIS OF PRESENTATION

The consolidated financial statements include the financial statements of RARE Hospitality International, Inc., its wholly owned subsidiaries, and joint ventures over which the Company exercises control. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company’s fiscal year is a 52- or 53-week year ending on the last Sunday in each calendar year. Each of the four fiscal quarters is typically made up of 13 weeks.

The Company effected a three-for-two stock split in the form of a 50% stock dividend paid on September 2, 2003 to shareholders of record on August 12, 2003. All references to the number of common shares and per share amounts prior to the stock split have been restated to give retroactive effect to the stock split for all periods presented.

CASH EQUIVALENTS

The Company considers all highly liquid investments which have original maturities of three months or less to be cash equivalents. Cash equivalents are comprised of high-grade overnight repurchase agreements and totaled approximately $5.9 million at December 25, 2005, $14.4 million at December 26, 2004 and $16.0 million at December 28, 2003. The carrying amount of these instruments approximates their fair market values. All overdraft balances have been reclassified as current liabilities.

SHORT TERM INVESTMENTS

Short term investments consist of federal, state and municipal bonds, and commercial paper. The Company accounts for its investments under the provisions of Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”). Pursuant to the provisions of SFAS 115, the Company has classified its investment portfolio as “trading.” Trading securities are bought and held principally for the purpose of selling them in the near term and are recorded at fair value. Unrealized gains and losses on trading securities are included in the determination of net earnings.

INVENTORIES

Inventories, consisting principally of food and beverages, are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Property under capital leases is stated at the present value of minimum lease payments. Leasehold improvements and property held under capital leases are amortized on the straight-line method over the shorter of the estimated life of the asset or the lease term, including renewal periods when the exercise of such renewal periods is deemed to be reasonably assured (generally 15 years for building operating leases and 25 years for land-only operating leases and real property acquired under capital leases). Depreciation on owned property and equipment is calculated on the straight-line method over the estimated useful lives of the related assets, which approximates 25 years for buildings and land improvements, seven years for restaurant equipment, and three years for computer hardware and software.

RENT EXPENSE

The Company recognizes rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty to the Company. Rent expense incurred during the construction period is capitalized to property and equipment. The lease term commences on the date when the Company becomes legally obligated for the rent payments. Percentage rent expense is generally based upon sales levels and is accrued at the point in time the Company determines that it is probable that such sale levels will be achieved. The Company records leasehold improvements funded by landlords under operating leases as leasehold improvements and deferred rent. As described later in this Note, under the section entitled “RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED,” the Company’s accounting for rent incurred during the construction period will change effective at the beginning of fiscal 2006.

PRE-OPENING AND ORGANIZATION COSTS

The Company accounts for pre-opening and organization costs in accordance with the American Institute of Certified Public Accountants Statement of Position (SOP) 98-5, “Reporting on the Costs of Start-Up Activities.” SOP 98-5 requires entities to expense as incurred all organization and pre-opening costs.

COMPUTER SOFTWARE FOR INTERNAL USE

The Company accounts for the costs of developing or acquiring computer software in accordance with the American Institute of Certified Public Accountants SOP 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” SOP 98-1 identifies the characteristics of internal-use software and specifies that once the preliminary project stage is complete, certain external direct costs, certain direct internal payroll and payroll-related costs and interest costs incurred during the development of computer software for internal use should be capitalized and amortized.

REVENUE RECOGNITION

Revenue from restaurant sales is recognized when food and beverage products are sold and receipts from all sales are classified as operating cash flows. Accounts receivable is primarily comprised of amounts due from the Company’s credit card processor. The Company records a liability for gift certificates and gift cards at the time they are issued. Upon redemption, sales are recorded and the liability is reduced by the amount of certificates or card values redeemed. The Company began selling electronic gift cards in August of 2003. Unused gift cards will be recognized as revenue, in proportion to actual gift card redemptions, once the Company has sufficient data to make a reasonable determination of forfeiture levels. Revenues from the sales of franchises are recognized as income when substantially all of the Company’s material obligations under the franchise agreement have been performed. Continuing royalties, which are a percentage of net sales of franchised restaurants, are accrued as income when earned.

COST OF RESTAURANT SALES

Cost of restaurant sales include food and beverage costs, warehousing, and related purchasing and distribution costs. Vendor allowances received in connection with the purchase of a vendor’s products are recognized as a reduction of the related food and beverage costs as earned. These allowances are recognized as earned in accordance with the underlying agreement with the vendor and completion of the earning process. Vendor agreements are generally for a period of one year or less, and payments received are recorded as a current liability until earned.

GOODWILL

The Company accounts for goodwill in accordance with SFAS 142, “Goodwill and Other Intangible Assets,” which provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. The fair value of each reporting unit is compared to its carrying value to determine whether there is an indication that impairment may exist. If an impairment of goodwill is determined to exist, it is measured as the excess of its carrying value over its fair value. Upon performing the annual tests for impairment of the carrying value of the Company’s goodwill, it has been concluded that there was no indication of impairment to goodwill. Accordingly, no impairment losses have been recorded.

As of the date of adoption of SFAS 142, the Company had unamortized goodwill in the amount of approximately $19.2 million, all of which is related to the acquisition of LongHorn Steakhouse franchise and joint venture rights. In accordance with SFAS 142, no goodwill amortization expense was recorded in the Company’s financial statements for fiscal 2005, 2004 or 2003.

OTHER ASSETS

Other assets consist of the investments of the Company’s Supplemental Deferred Compensation Plan, debt issuance costs, trademarks, deposits, and purchased liquor licenses. The Company applies the provisions of SFAS 142 to purchased liquor licenses and trademarks. The 2005 provision for asset impairments includes a $47,000 charge to reflect the diminution in value of a purchased liquor license for a LongHorn Steakhouse restaurant location. Impairment of this liquor license was measured by the amount by which the carrying amount exceeded its fair market value. There has been no other impairment of purchased liquor licenses or trademarks since the adoption of SFAS 142 in 2002. Purchased liquor licenses amounted to approximately $5.3 and $4.2 million at December 25, 2005 and December 26, 2004, respectively. Purchased trademarks aggregated approximately $0.4 million at December 25, 2005. Debt issuance costs are amortized on a straight-line basis over the expected term of the debt facility.

RECOVERABILITY OF LONG-LIVED ASSETS

The Company accounts for long-lived assets in accordance with Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires the Company to review its long-lived assets, which include property and equipment, related to each restaurant periodically or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of assets to be held and used is evaluated by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be held and used are reported at the lower of the carrying amount or fair value, using discounted estimated future cash flows. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Considerable management judgment is required to estimate cash flows and fair value less costs to sell. Accordingly, actual results could vary significantly from such estimates.

See Note 2 for further discussion of the Company’s provision for asset impairments, restaurant closings and other charges.

INCOME TAXES

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Income tax benefits credited to equity relate to tax benefits associated with amounts that are deductible for income tax purposes but do not affect net earnings. These benefits are principally generated from employee exercises of stock options and vesting of employee restricted stock awards.

STOCK-BASED COMPENSATION

Prior to January 1, 1996, the Company accounted for its stock option plan in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation”, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant.

Alternatively, SFAS 123 also allows entities to continue to apply the provisions of APB 25 and provide pro forma net earnings (loss) and pro forma earnings (loss) per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS 123 had been applied. The Company has elected to continue to apply the provisions of APB 25 and provide the pro forma disclosures required by SFAS 123. The fair value of the options granted during 2005, 2004 and 2003 is estimated at approximately $3.5 million, $6.1 million and $5.8 million, respectively, on the date of grant, using the Black-Scholes option pricing model, recognizing compensation cost on a straight-line basis, using the following assumptions:


Dividend yield	0	%	0	%	0	%
Volatility	28.0	%	34.2	%	44.0	%
Risk-free interest rate	4.375	%	3.625	%	3.25	%
Average expected life	4 yrs		4 yrs		5 yrs

In accordance with the provisions of APB 25, the Company did not recognize any compensation expense from the issuance of employee stock options. The following table represents the effect on net earnings and earnings per share if the Company had applied the fair value based method and recognition provisions of SFAS 123 (in thousands except per share amounts):

	2005			2004			2003
Net earnings, as reported	$	52,082		$	47,530		$	42,277
Add: stock-based employee compensation
expense included in reported net earnings,
net of related tax effects		989			795			490
Deduct: stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects		(5,229	)		(4,784	)		(4,343	)

Pro forma net earnings	$	47,843		$	43,541		$	38,424

Basic earnings per common share:
Net earnings, as reported	$	1.54		$	1.41		$	1.27

Net earnings, pro forma	$	1.42		$	1.29		$	1.16

Diluted earnings per common share:
Diluted earnings, as reported	$	1.50		$	1.34		$	1.21

Diluted earnings, pro forma	$	1.38		$	1.24		$	1.12

In December 2004, the FASB issued Statement of Financial Accounting Standard No. 123 (revised 2004) “Share-Based Payment,” (“SFAS 123R”), which requires companies to begin to expense the estimated fair value of employee stock options and similar awards. The accounting provisions of SFAS 123R will be effective for the Company’s first quarter of fiscal 2006. The Company will adopt the provisions of SFAS 123R using the Black-Scholes option pricing formula with a modified prospective application. Modified prospective application recognizes compensation expense for unvested awards as of the effective date of SFAS 123R over the remaining service period.

The pro forma disclosures provided are not likely to be representative of the effects on reported net income for future years due to future grants. The estimated impact of adopting SFAS 123R for fiscal 2006 will be $6.5 to $7.5 million ($5.0 to $5.7 million, net of tax or $0.14 to $0.16 per diluted share). This estimate includes costs related to unvested stock options and restricted stock grants associated with new compensation programs.

See Note 10 for further discussion of the Company’s stock option plans.

MANAGING PARTNER PROGRAM

The Company maintains a compensation program (the “Managing Partner Program”) for its lead restaurant managers (“MPs”). Under the Managing Partner Program, the Company enters into a 5-year employment contract with the MP that provides for i) a fixed salary; ii) quarterly bonuses calculated as a percentage of restaurant profits and as a percentage of any year-over-year increase in sales; and iii) an award of restricted Company common stock, which is issued annually, in arrears, in an amount equal to 10% of the previous four quarters aggregate salary and bonus paid under the Managing Partner Program. All salary, bonuses and restricted stock to be awarded to an MP under the Managing Partner Program is expensed as earned and reflected in the Company’s consolidated statements of operations as compensation expense.

The Company’s accounting for each annual award recognizes the expense associated with that specific award throughout the respective year based on management’s estimates of the individual’s annual salary and bonus for such period. Accordingly, the fair value of each annual award of restricted stock is expensed ratably over the year earned beginning in the first month of participation in the program. See Note 10 for further discussion of the Company’s restricted stock plan.

ADVERTISING EXPENSES

The costs of programming, advertising and other promotions are expensed in the periods in which the costs are incurred. Production costs are charged to expense in the period the advertising is first aired. Total advertising expense included in operating expenses -- restaurants was approximately $30.4 million, $26.1 million and $21.2 million for the years ended December 25, 2005, December 26, 2004 and December 28, 2003, respectively.

SELF-INSURANCE ACCRUALS

The Company self-insures a significant portion of expected losses under its workers’ compensation, employee medical and general liability programs. Accrued liabilities have been recorded based on estimates of the ultimate costs to settle incurred claims, both reported and unreported.

SEGMENT DISCLOSURE

Due to the similar economic characteristics, as well as a single type of product, production process, distribution system and type of customer, the Company reports the operations of its different concepts on an aggregated basis and does not separately report segment information. Revenues from external customers are derived principally from food and beverage sales. The Company does not rely on any major customers as a source of revenue.

EARNINGS PER SHARE

The Company accounts for earnings per share in accordance with the provisions of Statement of Financial Accounting Standards No. 128, “Earnings Per Share” (“SFAS 128”). SFAS 128 requires dual disclosure of earnings per share-basic and diluted. Basic earnings per share equals net earnings divided by the weighted average number of common shares outstanding and does not include the dilutive effects of stock options and restricted stock. Diluted earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding after giving effect to dilutive stock options and restricted stock.

The following table presents a reconciliation of weighted average shares and earnings per share amounts (amounts in thousands, except per share data):

	2005		2004		2003
Weighted average number of common shares used in basic calculation		33,764		33,811		33,162
Dilutive effect of restricted stock awards		58		88		179

Dilutive effect of net shares issuable pursuant to stock option plans		995		1,475		1,502

Weighted average number of common shares used in diluted calculation		34,817		35,374		34,843

Net earnings	$	52,082	$	47,530	$	42,277

Basic earnings per common share	$	1.54	$	1.41	$	1.27

Diluted earnings per common share	$	1.50	$	1.34	$	1.21

Options to purchase 389,083 shares of common stock at December 25, 2005, were excluded from the computation of diluted earnings per common share because the related exercise prices were greater than the average market price for 2005 and would have been antidilutive.

FINANCIAL INSTRUMENTS

The carrying value of the Company’s cash and cash equivalents, short-term investments, accounts receivable, accounts payable, accrued expenses, and obligations under capital leases approximates their fair value. The fair value of a financial instrument is the amount for which the instrument could be exchanged in a current transaction between willing parties. For cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses the carrying amounts approximate fair value because of the short maturity of these financial instruments.

DERIVATIVE FINANCIAL INSTRUMENTS

The Company attempts to mitigate substantially all its commodity price risk associated with the purchase of beef, its primary commodity. The Company uses fixed-price purchase agreements to purchase and take physical delivery of protein products and commodities to be used in the conduct of its business. These purchase agreements provide for the delivery of either agreed upon quantities or a prescribed portion of the Company’s requirements. These contracts qualify under the normal purchase and normal sales exception of Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities, (“FAS 133”). Accordingly, purchases made under these fixed-price purchase agreements are placed in inventory at the contracted price. Any purchase contracts that do not comply with the purchase and sale exception would be measured at fair value in accordance with the mark-to-market provisions of FAS 133.

The Company, from time to time, has used interest rate swap agreements in the management of interest rate risk. These interest rate swap agreements were classified as a hedge of a cash flow exposure under SFAS No. 133, and accordingly, the effective portion of the initial fair value and subsequent changes in the fair value of those agreements are reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted cash flows affect earnings. At December 25, 2005 and December 26, 2004, the Company had no interest rate swap agreements.

USE OF ESTIMATES

Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.

COMPREHENSIVE INCOME

During 2005, 2004 and 2003, net earnings were the same as comprehensive income.

RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED

On October 6, 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position 13-1, “Accounting for Rental Costs Incurred During a Construction Period” (“FSP 13-1”). FSP 13-1 is effective for the Company’s fiscal 2006 and requires the Company to expense rental costs incurred during the construction period associated with ground or building operating leases. The Company has previously capitalized these costs. Retrospective application, which permits entities to restate financial statements of previous periods is permitted but not required. Beginning in fiscal 2006, the Company intends to adopt the provisions of FSP 13-1 using retrospective application. This will result in the revision of previously issued financial statements as if the provisions of FSP 13-1 had always been used. Management currently estimates that the adoption of FSP will result in a decrease of approximately $0.03 per diluted share for fiscal 2006 and approximately $0.02 per diluted share for fiscal 2005.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (SFAS 123R). SFAS 123R is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation.” Among other items, SFAS 123R eliminates the use of the intrinsic value method of accounting, and requires companies to recognize the cost of awards of equity instruments granted in exchange for employee services received, based on the grant date fair value of those awards, in the financial statements. The effective date of SFAS 123R was the first interim period beginning after June 15, 2005; however, on April 14, 2005, the Securities and Exchange Commission announced that the effective date of SFAS 123R was postponed until the first annual period beginning after June 15, 2005.

The Company currently utilizes the Black-Scholes option-pricing model to measure the fair value of stock options granted to employees. While SFAS 123R permits entities to continue to use this model, the standard also permits the use of a “lattice” model. SFAS 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under the current standard. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated because they depend on, among other things, when employees exercise stock options.

As described earlier in this Note, under the section entitled “STOCK-BASED COMPENSATION,” compensation cost for stock options for which the requisite future service has not yet taken place is disclosed as a proforma expense by applying the provisions of SFAS 123. The proforma application of SFAS 123 had a dilutive effect of approximately $0.12 per diluted share for 2005. Compensation cost for stock options vesting beginning in fiscal 2006, and all restricted stock, will be expensed in accordance with the provisions of SFAS 123R, which will be effective for the Company at the beginning of fiscal 2006. The Company estimates that stock-based compensation expense for fiscal 2006 will be approximately $6.5 to $7.5 million ($5.0 to $5.7 million after tax or $0.14 to $0.16 per diluted share). This estimate includes costs related to unvested stock options and restricted stock grants associated with new compensation programs.

RECENTLY ADOPTED ACCOUNTING STANDARDS

RECLASSIFICATIONS

Certain reclassifications have been made to the 2004 and 2003 consolidated financial statements to conform with the 2005 presentation. These reclassifications had no impact on net income or total shareholders’ equity.

(2) PROVISION FOR ASSET IMPAIRMENTS, RESTAURANT CLOSINGS, AND OTHER CHARGES

The provision for asset impairments, restaurant closings, and other charges of approximately $3.3 million in the fourth quarter of 2005 consisted primarily of the write down of asset values for three LongHorn Steakhouse restaurants and two Bugaboo Creek Steak House restaurants. The impairment for each LongHorn Steakhouse restaurant relates to management’s decision to not exercise future lease options for these restaurants as the current lease term expires. The impairment for the two Bugaboo Creek Steak House restaurants relates to forecasts by management that indicate that the investment for those two restaurants would not be fully recovered by anticipated cash flows. The impairment charge represents the sum of the differences between the estimated fair value, using discounted estimated future cash flows and the carrying value of each of these restaurants.

The provision for asset impairments, restaurant closings, and other charges of $2.7 million in the fourth quarter of fiscal 2004 consisted of the partial write down of asset values related to two LongHorn Steakhouse restaurants and one Bugaboo Creek Steak House restaurant. These charges were determined under SFAS 144 by comparing discounted estimated future cash flows to the carrying value of impaired assets.

(3) PROPERTY AND EQUIPMENT

Major classes of property and equipment at December 25, 2005 and December 26, 2004 are summarized as follows (in thousands):

	2005		2004
Land and improvements	$	75,660	$	65,044
Buildings		79,760		68,153
Leasehold improvements		307,314		257,650
Assets under capital lease		39,801		35,995
Restaurant equipment		117,362		105,638
Furniture and fixtures		51,241		45,996
Construction in progress		32,331		31,308

		703,469		609,784
Less accumulated depreciation and amortization		199,707		171,305

	$	503,762	$	438,479

Depreciation and amortization – restaurants on the consolidated statement of operations excludes depreciation of assets in the Company’s corporate offices and training facility. Total depreciation and amortization of property and equipment during 2005, 2004 and 2003 was $37,759,000, $32,197,000 and $27,421,000, respectively.

The Company has, in the normal course of business, entered into agreements with vendors for the purchase of restaurant equipment, furniture, fixtures, buildings, and improvements for restaurants that have not yet opened. At December 25, 2005, such commitments totaled approximately $36.6 million.

(4) ACCRUED EXPENSES

Accrued expenses consist of the following at December 25, 2005 and December 26, 2004 (in thousands):

	2005		2004
Accrued self insurance reserves	$	7,735	$	4,807
Accrued provision for restaurant closings
and other charges		281		330
Accrued rent		20,634		15,673
Accrued compensation		15,255		13,008
Other taxes accrued		8,569		7,017
Unearned revenue - gift cards and
gift certificates		33,036		25,925
Other		3,661		3,177

	$	89,171	$	69,937

(5) DEBT

The Company has a variable interest rate revolving credit facility (the “Revolving Credit Facility”), which permits the Company to borrow up to $100.0 million through the termination date in July 2010. The Revolving Credit Facility is the result of amendments to and a restatement of the Company’s previous $100.0 million credit facility. The Revolving Credit Facility bears interest at the Company’s option of LIBOR plus a margin of 0.5% to 1.25% (the “applicable margin”) depending on the Company’s leverage ratio or the administrative agent’s prime rate of interest, and requires payment of a commitment fee on any unused portion at a rate of 0.1% to 0.2% per year (depending on the Company’s leverage ratio). At December 25, 2005 and December 26, 2004, the applicable margin was 0.5%. On December 25, 2005 and December 26, 2004, there were no amounts outstanding under the Company’s revolving credit facility. The commitment fee on the unused portion of the Revolving Credit Facility on December 25, 2005 and on December 26, 2004 was 0.1% and 0.3% per year, respectively. Amounts available under the Company’s revolving credit facility totaled $100.0 million on both December 25, 2005 and December 26, 2004.

The Revolving Credit Facility restricts payment of dividends, without prior approval of the lender, and contains certain financial covenants, including debt to capitalization, leverage and interest coverage ratios, as well as minimum net worth and maximum capital expenditure covenants. The Revolving Credit Facility is secured by the common stock of entities that own substantially all of the Bugaboo Creek Steak House and The Capital Grille restaurants. At December 25, 2005, the Company was in compliance with the provisions of the Revolving Credit Facility. The average interest rate paid on borrowings under the Company’s Revolving Credit Facility during 2005 was 6.2%. There were no borrowings under the Revolving Credit Facility during 2004 or 2003.

Interest expense, net consists of the following (in thousands):

	2005			2004			2003
Imputed interest on capital leases	$	3,187		$	2,526		$	1,884
Interest expense		590			486			493
Capitalized interest		(998	)		(1,312	)		(1,067	)
Interest income		(859	)		(372	)		(295	)

Interest expense, net	$	1,920		$	1,328		$	1,015

(6) INCOME TAXES

Income tax expense (benefit) consists of (in thousands):

	CURRENT		DEFERRED			TOTAL
Year ended December 25, 2005:
U.S. Federal	$	28,960	$	(6,939	)	$	22,021
State and local		3,931		(942	)		2,989

	$	32,891	$	(7,881	)	$	25,010

Year ended December 26, 2004:
U.S. Federal	$	16,436	$	4,543		$	20,979
State and local		2,113		584			2,697

	$	18,549	$	5,127		$	23,676

Year ended December 28, 2003:
U.S. Federal	$	14,764	$	3,510		$	18,274
State and local		1,688		401			2,089

	$	16,452	$	3,911		$	20,363

The differences between the statutory Federal income tax rate and the effective income tax rate reflected in the consolidated statements of operations are as follows:


Federal statutory income tax rate	35.00	%	35.00	%	35.00	%
State income taxes, net of federal benefit	3.09		2.90		2.60
Meals and entertainment	0.07		0.10		0.10
FICA tip credit	(5.78	)	(4.90	)	(4.70	)
Other	0.06		0.15		(0.50	)

Effective tax rates	32.44	%	33.25	%	32.50	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 25, 2005 and December 26, 2004 are presented below (in thousands):

	2005			2004
Deferred tax assets (liabilities):
Provisions for restaurant closings, and other charges	$	3,544		$	2,289
Accrued rent		5,367			4,136
Accrued insurance		432			293
Accrued workers’ compensation		1,198			833
Property and equipment		(11,282	)		(13,555	)
Deferred compensation plan		3,460			2,586
Restricted stock		1,420			1,498
Smallwares		(3,348	)		(2,909	)
Other		1,398			(863	)

Net deferred tax asset (liability)	$	2,189		$	(5,692	)

The Company’s management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company’s management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections of future taxable income over the periods in which the temporary differences are deductible, the Company’s management believes it is more likely than not the Company will realize the benefits of these deductible differences.

(7) EMPLOYEE BENEFIT PLANS

The Company provides employees who meet minimum service requirements with retirement benefits under a 401(k) plan (the “RARE Plan”). Under the RARE Plan, eligible employees may make contributions of between 1% and 20% of their annual compensation to one or more investment funds. Effective for 2001, officers and highly compensated employees do not participate in this plan. The Company makes quarterly matching contributions in an amount equal to 50% of the first 5% of employee compensation contributed, resulting in a maximum annual Company contribution of 2.5% of employee compensation. The Company’s expense under the RARE Plan was $772,000, $613,000 and $592,000 for 2005, 2004 and 2003, respectively.

Effective January 1, 2000, the Company implemented the Supplemental Deferred Compensation Plan (the “Supplemental Plan”), a nonqualified plan which allows officers and highly compensated employees to defer receipt of a portion of their compensation and contribute such amounts to one or more investment funds. The maximum aggregate amount deferred under the Supplemental Plan and the RARE Plan cannot exceed the lesser of 20% of annual compensation or $50,000. The Company makes quarterly matching contributions in an amount equal to 50% of the first 5% of employee compensation contributed, with a maximum annual Company contribution of the lesser of 2.5% of employee compensation or $5,000 per year. The Company’s expense under the Supplemental Plan was $533,000, $467,000 and $414,000 for 2005, 2004 and 2003, respectively. Company contributions to both the RARE Plan and the Supplemental Plan vest at the rate of 20% each year beginning after the employee’s first year of service and were made in the form of cash in 2005, 2004 and 2003.

The Company entered into a rabbi trust agreement to protect the assets of the Supplemental Plan. Participant’s accounts are comprised of their contribution, the Company’s matching contribution and each participant’s share of earnings or losses in the plan. In accordance with EITF No. 97-14, “Accounting for Deferred Compensation Arrangements Where Amounts Are Held in a Rabbi Trust and Invested,” the accounts of the rabbi trust are reported in the Company’s consolidated financial statements. The Company’s consolidated balance sheet includes the investments in other non-current assets and the offsetting obligation is included in other non-current liabilities. Such amounts at December 25, 2005 and December 26, 2004 totaled $9,084,000 and $6,820,000, respectively. The deferred compensation plan investments are considered trading securities and are reported at fair value with the realized and unrealized holding gains and losses related to these investments, as well as the offsetting compensation expense, recorded in operating income.

(8) LEASES AND RELATED COMMITMENTS

The Company is obligated under various capital leases for certain restaurant facilities that expire at various dates during the next 30 years. Capital leases are recorded as an asset and an obligation at an amount equal to the present value of the minimum lease payments during the lease term. The Company also has noncancelable operating leases for certain restaurant facilities. Rental payments include minimum rentals, plus contingent rentals based on restaurant sales at the individual stores. These leases generally contain renewal options for periods ranging from three to 15 years and require the Company to pay all executory costs such as insurance and maintenance. Under the provisions of certain leases, there are rent holidays and/or escalations in payments over the base lease term, as well as renewal periods. The effects of the holidays and escalations have been reflected in rent expense on a straight-line basis over the anticipated life of the leases. The leasehold improvements for each restaurant facility are amortized over a term that includes renewal options that are reasonably assured. For each restaurant facility, the financial statements reflect the same lease term for amortizing leasehold improvements as used to determine capital versus operating lease classifications and in calculating straight-line rent expense.

Future minimum lease payments under capital lease obligations and noncancelable operating leases at December 25, 2005 are as follows (in thousands):

YEARS ENDING AT OR ABOUT DECEMBER 31:	CAPITAL		OPERATING
2006	$	3,897	$	22,648
2007		4,054		22,076
2008		4,137		20,243
2009		4,243		18,591
2010		4,388		15,872
Thereafter		73,692		42,930

Total minimum lease payments		94,411	$	142,360

Less imputed interest (at 9%)		55,151

Present value of minimum lease payments		39,260
Less current maturities		269

Obligations under capital leases, net of current maturities	$	38,991

Rental expense consisted of the following amounts (in thousands):

	2005		2004		2003
Minimum lease payments	$	23,003	$	19,914	$	17,746
Contingent rentals		3,616		2,816		2,219

Total rental expense	$	26,619	$	22,730	$	19,965

(9) SHAREHOLDERS’ EQUITY

In September 2001, the Company’s Board of Directors authorized the Company to use up to $15.0 million to purchase shares of its common stock through open market transactions, block purchases or in privately negotiated transactions through September 2002. In July 2002, the Company’s Board of Directors extended this share repurchase program through April 2003. During the first quarter of 2003, the Company purchased 150,000 shares of its common stock for a total purchase price of approximately $2.6 million (average price of $17.50 per share). On July 23, 2003, the Company’s Board of Directors authorized the Company to purchase up to an additional $25.0 million of its common stock from time-to-time through May 2005. During the second quarter of 2004, the Company purchased 300,000 shares of its common stock for a total purchase price of approximately $8.2 million (average price of $27.29 per share).

The Company’s Board of Directors has authorized the purchase of shares of the Company’s common stock from time to time through open market transactions, block purchases or in privately negotiated transactions. On April 20, 2005, the Board of Directors authorized the Company to use up to $29.0 million to purchase shares of its common stock and on July 22, 2005, the Board of Directors authorized the repurchase of up to an additional $30.0 million of the Company’s common stock. During the second quarter of 2005, the Company repurchased 690,000 shares of its common stock at an average price of $28.88 for an aggregate cost of approximately $19.9 million. During the third quarter of 2005, the Company repurchased 669,000 shares of its common stock at an average price of $28.95 for an aggregate cost of approximately $19.4 million. The Company did not repurchase any of its common stock during the fourth quarter of 2005. As of December 25, 2005, approximately $19.7 million remained available under the Company’s aggregate $59.0 million share repurchase authorization.

The Company’s Articles of Incorporation authorize 10,000,000 shares of preferred stock, no par value. The Board of Directors of the Company may determine the preferences, limitations, and relative rights of any class of shares of preferred stock prior to the issuance of such class of shares. In November 1997, in connection with the adoption of a Shareholders Rights Plan, the Board of Directors designated 500,000 shares of Series A Junior Participating Preferred Stock (the “Series A Stock”) and filed such designation as an amendment to the Company’s Articles of Incorporation. Holders of shares of Series A Stock are entitled to receive, when, as and if declared by the Board of Directors, (i) on each date that dividends or other distributions (other than dividends or distributions payable in common stock) are payable on the common stock comprising part of the Reference Package (as defined in the Articles of Incorporation), an amount per whole share of Series A Stock equal to the aggregate amount of dividends or other distributions that would be payable on such date to a holder of the Reference Package and (ii) on the last day of March, June, September and December in each year, an amount per whole share of Series A Stock equal to the excess of $1.00 over the aggregate dividends paid per whole share of Series A Stock during the three-month period ending on such last day. If any shares of Series A Stock are outstanding, no dividends (other than dividends payable in common stock or any other stock ranking junior to the Series A Stock as to dividends and upon liquidation) may be declared or paid unless the full cumulative dividends on all outstanding shares of Series A Stock have been or are contemporaneously paid. Upon the liquidation, dissolution or winding up of the affairs of the Company and before any distribution or payment to the holders of common stock, holders of shares of the Series A Stock are entitled to be paid in full an amount per whole share of Series A Stock equal to the greater of (i) $1.00 or (ii) the aggregate amount distributed or to be distributed prior to the date of such liquidation, dissolution or winding up to a holder of the Reference Package. After payment in full to each holder of shares of Series A Stock, the Series A Stock shall have no right or claim to any of the remaining assets of the Company. Each outstanding share of Series A Stock votes on all matters as a class with any other capital stock comprising part of the Reference Package and shall have the number of votes that a holder of the Reference Package would have.

As of December 25, 2005, there were no shares of Series A Stock issued and outstanding and all of such shares are issuable in accordance with the Company’s Shareholders Rights Plan.

(10) STOCK OPTIONS AND RESTRICED STOCK

The Company’s Amended and Restated 2002 Long-Term Incentive Plan (the “2002 Plan”), provides for the granting of incentive stock options, nonqualified stock options, and restricted stock to employees, officers, directors, consultants, and advisors. All stock options issued under the 2002 Plan were granted at prices which equate to or were higher than current market value on the date of the grant, are generally exercisable after three to five years, and must be exercised within ten years from the date of grant. The aggregate number of shares authorized to be awarded under the 2002 Plan is 4,270,000. Not more than 2,320,000 of such aggregate number of shares may be granted as awards of restricted stock.

Shares of Company common stock are issued as deferred compensation under the Company’s Managing Partner Program. Total shares issued under this program were approximately 55,000, 61,000 and 47,000 for 2005, 2004 and 2003, respectively. Total compensation expense recognized in association with these awards was approximately $1,600,000, $1,280,000 and $790,000 for 2005, 2004 and 2003, respectively.

The Company’s 1997 Long-Term Incentive Plan, as amended (the “1997 Plan”), provides for the granting of incentive stock options, nonqualified stock options, stock appreciation rights, performance units, restricted stock, dividend equivalents and other stock based awards to employees, officers, directors, consultants, and advisors. All stock options issued under the 1997 Plan were granted at prices which equate to or were higher than current market value on the date of the grant, are generally exercisable after three to five years, and must be exercised within ten years from the date of grant. The 1997 Plan authorized the granting of options to purchase 2,981,250 shares of common stock.

The Company’s Amended and Restated 1996 Stock Plan for Outside Directors (the “1996 Stock Option Plan”) provides for the automatic granting of non-qualified stock options to outside directors. The 1996 Stock Option Plan authorizes the granting of options to purchase up to an aggregate of 225,000 shares of common stock. All stock options issued under the 1996 Stock Option Plan are granted at prices which are equal to the current market value on the date of the grant, become exercisable six months and one day after the date of grant, and must be exercised within ten years from the date of grant.

As of December 25, 2005 and December 26, 2004, options to purchase 2,238,110 and 1,958,755 shares of common stock, respectively, were exercisable at weighted average exercise prices of $14.94 and $12.39 per share, respectively. Option activity under the Company’s stock option plans is as follows:

	SHARES		WEIGHTED AVERAGE PRICE $
Outstanding at December 29, 2002	3,939,177		10.57

Granted in 2003	732,003		20.01
Exercised in 2003	(907,252	)	7.85
Canceled in 2003	(31,753	)	16.17

Outstanding at December 28, 2003	3,732,175		12.99

Granted in 2004	701,066		27.20
Exercised in 2004	(709,152	)	10.87
Canceled in 2004	(153,748	)	17.58

Outstanding at December 26, 2004	3,570,341		16.07

Granted in 2005	394,408		30.63
Exercised in 2005	(598,043	)	12.07
Canceled in 2005	(153,327	)	22.14

Outstanding at December 25, 2005	3,213,379		18.35

The following table summarizes information concerning options outstanding and exercisable as of December 25, 2005:

		OPTIONS OUTSTANDING		OPTIONS EXERCISABLE
RANGE OF EXERCISE PRICES	NUMBER OUTSTANDING	WEIGHTED AVERAGE REMAINING LIFE	WEIGHTED AVERAGE EXERCISE PRICE ($)	NUMBER EXERCISABLE	WEIGHTED AVERAGE PRICE ($)
$0.01 to $5.00	47,500	2.10	4.33	47,500	4.33
$5.01 to $10.00	772,145	3.60	8.16	772,145	8.16
$10.01 to $15.0	527,699	5.00	14.62	445,195	14.58
$15.01 to $20.0	654,135	6.50	17.51	561,960	17.33
$20.01 to $25.0	222,015	7.80	22.36	142,449	22.33
$25.01 to $30.0	686,802	8.60	27.37	208,781	27.02
$30.01 or great	303,083	9.10	31.45	60,080	31.34

(11) COMMITMENTS AND CONTINGENCIES

PURCHASE COMMITMENTS

The Company has entered into purchasing agreements with certain meat suppliers requiring the Company to purchase contracted quantities of meat at established prices through their expiration on varying dates in 2006 and 2007. The contracted quantities are based on usage projections management believes to be estimates of actual requirements during the contract terms. The Company does not anticipate any material adverse effect on its financial condition or results of operations from these contracts.

OTHER

Under the Company’s insurance programs, coverage is obtained for significant exposures as well as those risks required to be insured by law or contract. It is the Company’s preference to self-insure a significant portion of certain expected losses related primarily to workers’ compensation, employee medical, employment practices and general liability insurance costs. Provisions for losses expected under these programs are recorded based upon the Company’s estimates of the aggregate liability for claims incurred.

The Company has deposits totaling $5.9 million at December 25, 2005 that are being maintained as security under the Company’s workers’ compensation policies.

(12) QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of the unaudited quarterly results of operations for the years ended December 25, 2005 and December 26, 2004 (in thousands, except per share data):

2005:	First Quarter	Second Quarter	Third Quarter	Fourth Quarter	Total Year
Revenues	$229,970	$234,264	$225,396	$246,946	$936,576
Operating income	23,549	21,135	15,127	19,416	79,227
Earnings before income taxes	23,166	20,681	14,585	18,660	77,092
Net earnings	15,464	13,805	9,737	13,076	52,082
Net earnings per share*:
Basic	0.45	0.41	0.29	0.39	1.54
Diluted	0.44	0.39	0.28	0.38	1.50
2004:
Revenues	$201,117	$204,064	$194,568	$212,814	$812,563
Operating income	22,437	20,186	13,202	17,009	72,834
Earnings before income taxes	22,212	19,887	12,706	16,401	71,206
Net earnings	14,827	13,277	8,481	10,945	47,530
Net earnings per share*:
Basic	0.44	0.39	0.25	0.32	1.41
Diluted	0.42	0.37	0.24	0.31	1.34

* Per share amounts do not necessarily sum to the total year amounts due to changes in shares outstanding and rounding.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

In accordance with the Securities Exchange Act Rule 13a-15, the Company’s management, under the supervision of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation (the “Evaluation”) of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the design and operation of its disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in this Annual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the SEC rules and instructions for Form 10-K. As a result of the evaluation, there were no changes in internal controls over financial reporting or in other factors that has materially affected, or is reasonably likely to materially affect internal controls over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item is incorporated herein by reference from the sections of the Registrant’s definitive Proxy Statement to be delivered to shareholders of the Registrant in connection with the annual meeting of shareholders to be held May 9, 2006 (the “Proxy Statement”) entitled “Certain Information Concerning Nominees and Directors,” and “Meetings of the Board of Directors and Committees,” “Executive Officers of the Company” and “Section 16(a) Beneficial Ownership Reporting Compliance.”

ITEM 11. EXECUTIVE COMPENSATION

Information required by this item is incorporated herein by reference from the section of the Proxy Statement entitled “Executive Compensation”, “Compensation Committee Interlocks and Insider Participation” and “Benefits to Named Executive Officers and Others.” In no event shall the information contained in the Proxy Statement under the sections entitled “Shareholder Return Analysis,” or “Compensation Committee Report on Executive Compensation” be incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this item is incorporated herein by reference from the section of the Proxy Statement entitled “Beneficial Owners of More Than Five Percent of the Company’s Common Stock; Shares Held by Directors and Executive Officers.” Information required by this item is incorporated herein by reference from Item 5, “Market for Registrant’s Common Equity and Related Stockholder Matters - Equity Compensation Plan Information” in this report.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this item, if any, is incorporated herein by reference from the section of the Proxy Statement entitled “Certain Transactions.”

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this item is incorporated herein by reference from the section of the Proxy Statement entitled “Ratification of Selection of Independent Registered Public Accounting Firm.”

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) LISTING OF FINANCIAL STATEMENTS

The following financial statements of the Registrant are set forth herein in Part II, Item 8:

Consolidated Balance Sheets as of December 25, 2005 and December 26, 2004

Consolidated Statements of Operations - For Each of the Years in the Three-Year Period Ended December 25, 2005

Consolidated Statements of Shareholders’ Equity and Comprehensive Income - For Each of the Years in the Three-Year Period Ended December 25, 2005

Consolidated Statements of Cash Flows - For Each of the Years in the Three-Year Period Ended December 25, 2005

Notes to Consolidated Financial Statements

Reports of Independent Registered Public Accounting Firm

(a)(2) LISTING OF FINANCIAL STATEMENT SCHEDULES

Not applicable.

(a)(3) LISTING OF EXHIBITS

EXHIBIT
NUMBER

DESCRIPTION OF EXHIBITS

3(1)

Amended and Restated Articles of Incorporation of the Registrant, as amended (incorporated herein by reference from Exhibit 3.1

of the Registrant’s quarterly report on Form 10-Q for the quarter ended March 31, 2002).

3(2)

Bylaws of the Registrant, as amended (incorporated herein by reference from Exhibit 3(1) of the Registrant’s quarterly report on

Form 10-Q for the quarter ended June 26, 2005).

4(1)

See Exhibits 3(a) and 3(b) for provisions of the Amended and Restated Articles of Incorporation and

Bylaws of the Registrant defining rights of holders of Common Stock of the Registrant.

4(2)

Specimen Stock Certificate for the Common Stock of the Registrant (incorporated herein by reference from Exhibit 4(b) of the

Registrant’s annual report on Form 10-K for the year ended December 27, 1998, File No. 0-19924).

4(3)

Shareholder Protection Rights Agreement, dated as of November 4, 1997, between RARE Hospitality International, Inc. and

SunTrust Bank, Atlanta, as Rights Agent (which includes as Exhibit B thereto the Form of Right Certificate) (incorporated

herein by reference from Exhibit 99.1 of the Registrant’s Form 8-K dated November 4, 1997, File No. 0-19924).

10(1)

Third Amended and Restated Credit Agreement dated July 22, 2005, by and among the Registrant and Wachovia Bank, National

Association as Administrative Agent and Bank of America, N.A. as Syndication Agent and SunTrust Bank as Documentation

Agent (incorporated herein by reference from Exhibit 99(1) of the Registrant’s current report on Form 8-K dated July 22, 2005).

10(2)

LongHorn Steaks, Inc. Amended and Restated 1992 Incentive Plan, as amended (incorporated herein by reference from Exhibit

10(b) of the Registrant’s annual report on Form 10-K for the fiscal year ended December 29, 2002).

10(3)

RARE Hospitality International, Inc. 1996 Stock Plan for Outside Directors, as amended (incorporated herein by reference from

Exhibit 10(c) of the Registrant’s annual report on Form 10-K for the fiscal year ended December 29, 2002).

10(4)

RARE Hospitality International, Inc. Amended and Restated Executive Officer Performance Incentive Plan (incorporated herein

by reference to Exhibit 99.1 of the Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission

on February 14, 2006).

10(5)

RARE Hospitality International, Inc. 1997 Long-Term Incentive Plan (incorporated herein by reference from Exhibit 10(i) of the

Registrant’s annual report on Form 10-K for the fiscal year ended December 28, 1997, File No. 0-19924).

10(6)

Amendment No. 1 to RARE Hospitality International, Inc. 1997 Long-Term Incentive Plan (incorporated herein by reference

from Exhibit 10(j) of the Registrant’s annual report on Form 10-K for the fiscal year ended December 28, 1997, File No. 019924).

10(7)

Amendment No. 2 to RARE Hospitality International, Inc. 1997 Long-Term Incentive Plan (incorporated herein by referencefrom Exhibit 10(i) of the Registrant’s annual report on Form 10-K for the year ended December 27, 1998).

10(8)

Form of stock option agreement under which options were granted to non-executive officer employees on the same terms as the

RARE Hospitality International, Inc. 1997 Long-Term Incentive Plan, but not under that plan (incorporated herein by reference

from Exhibit 10(h) of the Registrant’s annual report on Form 10-K for the year ended December 28, 2003).

10(9)

RARE Hospitality International, Inc. Amended and Restated 2002 Long-Term Incentive Plan (incorporated herein by reference

from Appendix A of the Registrant’s Definitive Proxy Statement as filed with the Commission on April 11, 2003).

10(10)

Stock Plan for Non-Employee Directors (subplan of the RARE Hospitality International, Inc. Amended and Restated 2002 Long

Term Incentive Plan) incorporated herein by reference from Exhibit 99.5 of the Registrant’s current report on Form 8-K filed

with the Securities and Exchange Commission on February 14, 2006.

10(11)

Employment Agreement dated April 28, 2003 between the Registrant and Philip J. Hickey, Jr. (incorporated herein by reference

from Exhibit 10.1 of the Registrant’s quarterly report on Form 10-Q for the fiscal quarter ended June 29, 2003).

10(12)

First Amendment of Employment Agreement dated October 27, 2004 between the Registrant and Philip J. Hickey, Jr.

(incorporated herein by reference from Exhibit 10.1 of the Registrant’s quarterly report on Form 10-Q for the fiscal quarter

ended September 26, 2004).

10(13)

Second Amendment of Employment Agreement, dated October 27, 2005 between the Registrant and Philip J. Hickey, Jr.

(incorporated herein by reference from Exhibit 10.1 of the Registrant’s quarterly report on Form 10-Q for the fiscal quarter

ended September 25, 2005).

10(14)

Employment Agreement dated April 28, 2003 between the Registrant and Eugene I. Lee, Jr. (incorporated herein by reference

from Exhibit 10.2 of the Registrant’s quarterly report on Form 10-Q for the fiscal quarter ended June 29, 2003).

10(15)

First Amendment of Employment Agreement dated October 27, 2004 between the Registrant and Eugene I. Lee, Jr. (incorporated

herein by reference from Exhibit 10.2 of the Registrant’s quarterly report on Form 10-Q for the fiscal quarter ended September

26, 2004).

10(16)

Second Amendment of Employment Agreement, dated October 27, 2005 between the Registrant and Eugene I. Lee, Jr.

(incorporated herein by reference from Exhibit 10.2 of the Registrant’s quarterly report on Form 10-Q for the fiscal quarter

ended September 25, 2005).

10(17)

Employment Agreement dated April 28, 2003 between the Registrant and W. Douglas Benn (incorporated herein by reference

from Exhibit 10.3 of the Registrant’s quarterly report on Form 10-Q for the fiscal quarter ended June 29, 2003).

10(18)

First Amendment of Employment Agreement dated October 27, 2004 between the Registrant and W. Douglas Benn

(incorporated herein by reference from Exhibit 10.3 of the Registrant’s quarterly report on Form 10-Q for the fiscal quarter

ended September 26, 2004).

10(19)

Second Amendment of Employment Agreement, dated October 27, 2005 between the Registrant and W. Douglas Benn

(incorporated herein by reference from Exhibit 10.3 of the Registrant’s quarterly report on Form 10-Q for the fiscal quarter

ended September 25, 2005).

10(20)

Employment Agreement dated April 28, 2003 between the Registrant and Joia M. Johnson (incorporated herein by reference

from Exhibit 10.4 of the Registrant’s quarterly report on Form 10-Q for the fiscal quarter ended June 29, 2003).

10(21)

First Amendment of Employment Agreement dated October 27, 2004 between the Registrant and Joia M. Johnson (incorporated

herein by reference from Exhibit 10.4 of the Registrant’s quarterly report on Form 10-Q for the fiscal quarter ended September

26, 2004).

10(22)

Second Amendment of Employment Agreement, dated October 27, 2005 between the Registrant and Joia M. Johnson

(incorporated herein by reference from Exhibit 10.4 of the Registrant’s quarterly report on Form 10-Q for the fiscal quarter

ended September 25, 2005).

10(23)

Employment Agreement dated April 28, 2003 between the Registrant and Thomas W. Gathers (incorporated herein by reference

from Exhibit 10.5 of the Registrant’s quarterly report on Form 10-Q for the fiscal quarter ended June 29, 2003).

10(24)

First Amendment of Employment Agreement dated October 27, 2004 between the Registrant and Thomas W. Gathers

(incorporated herein by reference from Exhibit 10.5 of the Registrant’s quarterly report on Form 10-Q for the fiscal quarter

ended September 26, 2004).

10(25)

Second Amendment of Employment Agreement, dated October 27, 2005 between the Registrant and Thomas W. Gathers

(incorporated herein by reference from Exhibit 10.5 of the Registrant’s quarterly report on Form 10-Q for the fiscal quarter

ended September 25, 2005).

10(26)

Employment Agreement dated October 27, 2004 between the Registrant and David C. George (incorporated herein by reference

from Exhibit 10.6 of the Registrant’s quarterly report on Form 10-Q for the fiscal quarter ended September 26, 2004).

10(27)

Employment Agreement dated October 27, 2004 between the Registrant and M. John Martin (incorporated herein by reference

from Exhibit 10.7 of the Registrant’s quarterly report on Form 10-Q for the fiscal quarter ended September 26, 2004).

10(28)

Employment Agreement dated October 27, 2004 between the Registrant and Kristin R. Nyhof (incorporated herein by reference

from Exhibit 10.8 of the Registrant’s quarterly report on Form 10-Q for the fiscal quarter ended September 26, 2004).

10(29)

Employment Agreement dated December 23, 2003 between the Registrant and Benjamin A. Waites (incorporated herein by reference from Exhibit 10.1 of the Registrant’s current report on Form 8-K dated February 9, 2005).

21(1)	--	Subsidiaries of the Company.
23(1)	--	Consent of KPMG LLP.
31(1)	--	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act.
31(2)	--	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act.
32(1)	--	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002. (1).

32(2)

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the

Sarbanes-Oxley Act of 2002. (1).

(1) These exhibits are deemed to accompany this report and are not “filed” as part of the report.

(b) EXHIBITS

The exhibits to this Report are listed under Item 15(a)(3) above.

(c) FINANCIAL STATEMENT SCHEDULES

See Item 15(a)(2) above.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

RARE Hospitality International, Inc.

By /s/ Philip J. Hickey, Jr.

Philip J. Hickey, Jr.
Chairman of the Board and Chief Executive Officer

Date: March 6, 2006

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By	/s/ Philip J. Hickey, Jr.	March 6, 2006
	Philip J. Hickey, Jr.

Chairman of the Board and

Chief Executive Officer

(Principal Executive Officer)

By	/s/ W. Douglas Benn	March 6, 2006
	W. Douglas Benn

Executive Vice President, Finance and

Chief Financial Officer

(Principal Financial Officer)

/s/ Benjamin A. Waites

March 6, 2006

Benjamin A. Waites

Vice President, Controller and

Chief Accounting Officer

(Principal Accounting Officer)

By	/s/ Roger L. Boeve	March 6, 2006
	Roger L. Boeve
	Director

By	/s/Carolyn H. Byrd	March 6, 2006
	Carolyn H. Byrd
	Director

By	/s/Don L. Chapman	March 6, 2006
	Don L. Chapman
	Director

By	/s/James D. Dixon	March 6, 2006
	James D. Dixon
	Director

By	/s/Dick R. Holbrook	March 6, 2006
	Dick R. Holbrook
	Director

By	/s/Lewis H. Jordan	March 6, 2006
	Lewis H. Jordan
	Director

By	/s/Ronald W. San Martin	March 6, 2006
	Ronald W. San Martin
	Director