ITEM 7.    Management’s Discussion and Analysis of Financial Condition

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain risk factors including, but not limited to, those discussed in “Risk Factors” and elsewhere in this annual report on Form 10-K.

Unless otherwise provided in this annual report on Form 10-K, references to “Red Robin,” “we,” “us,” and “our” refer to Red Robin Gourmet Burgers, Inc. and our consolidated subsidiaries. Our fiscal years ended December 29, 2002, December 30, 2001 and December 31, 2000 are referred to as 2002, 2001 and 2000, respectively. 2002 and 2001 each contained 52 weeks, while 2000 contained 53 weeks. We also refer to our fiscal year ending December 28, 2003 as 2003.

Overview

We currently own and operate 100 casual dining restaurants under the name “Red Robin® America’s Gourmet Burgers & Spirits®” in 13 states and have 98 additional restaurants operating under franchise or license agreements in 17 states and Canada. During 2002, we opened ten new company-owned restaurants and relocated one restaurant. In addition, we acquired ten restaurants in January and February 2002, which were previously operated under franchise agreements.

Financial definitions

Revenues.    Our revenues are comprised of restaurant sales, franchise royalties and fees and rent. Our restaurant sales are comprised almost entirely of food and beverage sales. Our franchise royalties and fees consist primarily of royalty income and initial franchise fees. Rent revenue is comprised of rents received from leasing properties to franchisees and others.

Cost of sales; labor; operating; and occupancy.    Cost of sales is comprised of food and beverage expenses. The components of cost of sales are variable and increase with sales volume. Labor costs include direct controllable restaurant hourly wages, hourly floor supervisory wages and management salaries, bonuses, taxes and benefits for restaurant team members. Operating and occupancy costs include restaurant supplies, marketing costs, fixed rent, percentage rent, common area maintenance charges, utilities, real estate taxes, repairs and maintenance and other related costs. Our operating and occupancy costs generally increase with sales volume but decline as a percentage of restaurant sales.

Depreciation and amortization.    Depreciation and amortization principally includes depreciation on capital expenditures for restaurants as well as amortization of intangible assets including franchise rights and liquor licenses.

General and administrative.    General and administrative costs include all corporate and administrative functions that support existing operations and provide infrastructure to facilitate our future growth. Components of this category include management, supervisory and staff salaries, bonuses and related employee benefits, travel, information systems, training, corporate rent, professional and consulting fees and marketing costs.

Franchise development.    Franchise development costs include corporate and administrative costs that support franchise operations, including site selection and prototype plans for new restaurants, marketing services and analysis, franchise team member training, equipment purchasing and franchise bad debts. These costs also include ongoing franchise site visits, meetings and conferences, financial studies and analysis and other operational assistance as necessary.

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