UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K











T
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934





For the
fiscal year ended: August 31, 2008





OR





£
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For the
transition period from _______________ to _________________





Commission
File Number 0-18859





SONIC
CORP.


(Exact
name of registrant as specified in its charter)





Delaware
                  
                  73-1371046(State
      of incorporation)
                  
                  (I.R.S.
      Employer Identification
No.)





300
      Johnny Bench DriveOklahoma City, Oklahoma
                  
                  73104(Address
      of principal executive offices)
                  
                  Zip
      Code





Registrant’s
telephone number, including area code:   (405)
225-5000





Securities
registered pursuant to section 12(b) of the Act:





None





Securities
registered pursuant to section 12(g) of the Act:





Common
Stock, Par Value $.01 (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  T.  No  £.





(Facing
Sheet Continued)












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  £.  No  T.





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 the reports), and (2) has been subject to the filing requirements for
the past 90 days.    Yes  T.  No  £.





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) 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.  T.





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





Large
      accelerated filer  T.
              Accelerated
      filer  £.
              Non-accelerated
      filer  £.
              Smaller
      reporting company  £.





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes  £.  No  T.





As of
February 29, 2008, the aggregate market value of the 56,613,244 shares of common
stock of the Company held by non-affiliates of the Company equaled
$1,207,560,495 based on the closing sales price for the common stock as reported
for that date.





As of
October 16,2008, the
Registrant had 60,447,333shares of
common stock issued and outstanding.








Documents Incorporated by
Reference





Part III
of this report incorporates by reference certain portions of the definitive
proxy statement which the Registrant will file with the Securities and Exchange
Commission no later than 120 days after August 31, 2008.










FORM 10-K OF SONIC CORP.





TABLE
OF CONTENTS





PART IItem 1.
                        Business
                        1Item 1A.
                        Risk Factors
                        7Item 1B.
                        Unresolved Staff Comments
                        12Item 2.
                        Properties
                        12Item 3.
                        Legal Proceedings
                        12Item 4.
                        Submission of Matters to a Vote of Security
      Holders
                        12Item 4A.
                        Executive Officers of the Company
                        12PART IIItem 5.
                        Market for the Company's Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                        14Item 6.
                        Selected Financial Data
                        14Item 7.
                        Management's Discussion and Analysis of Financial Condition and
      Results of Operations
                        16Item 7A.
                        Quantitative and Qualitative Disclosures About Market
      Risk
                        26Item 8.
                        Financial Statements and Supplementary Data
                        27Item 9.
                        Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
                        27Item 9A.
                        Controls and Procedures
                        27Item 9B.
                        Other Information
                        29PART IIIItem 10.
                        Directors, Executive Officers and Corporate
      Governance
                        29Item 11.
                        Executive Compensation
                        29Item 12.
                        Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                        29Item 13.
                        Certain Relationships and Related Transactions, and Director
      Independence
                        29Item 14.
                        Principal Accounting Fees and Services
                        29PART IVItem 15.
                        Exhibits and Financial Statement Schedules
                        30




Table of Contents





FORM
10-K





SONIC
CORP.





PART I





Item
1.  Business





General





Sonic
Corp. operates and franchises the largest chain of drive-in restaurants (“Sonic
Drive-Ins”) in the United States.  References to “Sonic Corp.,” “the
Company,” “we,” “us,” and “our” in this Form 10-K are references to Sonic Corp.
and its subsidiaries.





The Sonic
Drive-In restaurant chain was begun in the early 1950’s.  Sonic Corp.
was incorporated in the State of Delaware in 1990 in connection with its 1991
public offering of common stock.  Our principal executive offices are
located at 300 Johnny Bench Drive, Oklahoma City, Oklahoma 73104.  Our
telephone number is (405) 225-5000.





The
Sonic Brand





At a
standard Sonic Drive-In restaurant, a customer drives into one of 20 to 36
covered drive-in spaces, orders through an intercom speaker system, and has the
food delivered by a carhop.  Many Sonic Drive-Ins also include a
drive-thru lane and patio seating.





Sonic
Drive-Ins feature Sonic signature items, such as specialty drinks including
cherry limeades and slushes, frozen desserts, made-to-order sandwiches and
hamburgers, extra-long cheese coneys, hand-battered onion rings, tater tots,
salads, and wraps.  Sonic Drive-Ins also offer breakfast items that
include sausage, ham, or bacon with egg and cheese Breakfast Toaster®or Bistro
sandwiches, sausage and egg burritos, and specialty breakfast
drinks.  Sonic Drive-Ins serve the full menu all day.





Business
Strategy





Our
objective is to maintain our position as or to become a leading operator in all
of our markets.  We have developed and implemented a strategy designed
to build the Sonic brand and to maintain high levels of customer satisfaction
and repeat business.  The key elements of that strategy
are:  (1) a unique drive-in concept focusing on a distinctive menu of
quality made-to-order food products including several signature items; (2) a
commitment to customer service featuring the quick delivery of food by carhops;
(3) the expansion of Sonic Drive-Ins within the continental United States; (4)
an owner/operator philosophy, in which managers have an equity interest in their
restaurants, thereby providing an incentive for managers to operate restaurants
profitably and efficiently; and (5) a commitment to strong franchisee
relationships.





Restaurant
Locations





As of
August 31, 2008, the Company had 3,475 Sonic Drive-Ins in operation from coast
to coast, consisting of 684 Partner Drive-Ins and 2,791 Franchise
Drive-Ins.  Partner Drive-Ins are those Sonic Drive-Ins in which the
Company owns a majority interest and the supervisor and manager of the drive-in
own a minority interest.  Franchise Drive-Ins are owned and operated
by our franchisees.  The following table sets forth the number of
Partner Drive-Ins and Franchise Drive-Ins by state as of August 31,
2008:





1
 Table of Contents




States
                                        Partner
                                        Franchise
                                        TotalAlabama
                                        33
                                        
                                        81
                                        
                                        114Arizona
                                        
                                        
                                        98
                                        
                                        98Arkansas
                                        30
                                        
                                        165
                                        
                                        195California
                                        
                                        
                                        40
                                        
                                        40Colorado
                                        35
                                        
                                        47
                                        
                                        82Delaware
                                        
                                        
                                        3
                                        
                                        3Florida
                                        38
                                        
                                        80
                                        
                                        118Georgia
                                        18
                                        
                                        116
                                        
                                        134Idaho
                                        
                                        
                                        20
                                        
                                        20Illinois
                                        2
                                        
                                        32
                                        
                                        34Indiana
                                        1
                                        
                                        22
                                        
                                        23Iowa
                                        2
                                        
                                        15
                                        
                                        17Kansas
                                        41
                                        
                                        95
                                        
                                        136Kentucky
                                        1
                                        
                                        81
                                        
                                        82Louisiana
                                        24
                                        
                                        142
                                        
                                        166Michigan
                                        
                                        
                                        1
                                        
                                        1Minnesota
                                        
                                        
                                        3
                                        
                                        3Mississippi
                                        
                                        
                                        123
                                        
                                        123Missouri
                                        46
                                        
                                        166
                                        
                                        212Nebraska
                                        9
                                        
                                        19
                                        
                                        28New
      Jersey
                                        
                                        
                                        3
                                        
                                        3Nevada
                                        
                                        
                                        21
                                        
                                        21New
      Mexico
                                        
                                        
                                        73
                                        
                                        73North
      Carolina
                                        
                                        
                                        95
                                        
                                        95Ohio
                                        7
                                        
                                        22
                                        
                                        29Oklahoma
                                        94
                                        
                                        176
                                        
                                        270Oregon
                                        
                                        
                                        7
                                        
                                        7Pennsylvania
                                        
                                        
                                        10
                                        
                                        10South
      Carolina
                                        
                                        
                                        74
                                        
                                        74South
      Dakota
                                        
                                        
                                        3
                                        
                                        3Tennessee
                                        52
                                        
                                        175
                                        
                                        227Texas
                                        226
                                        
                                        712
                                        
                                        938Utah
                                        
                                        
                                        28
                                        
                                        28Virginia
                                        25
                                        
                                        29
                                        
                                        54Washington
                                        
                                        
                                        5
                                        
                                        5West
      Virginia
                                        
                                        
                                        4
                                        
                                        4Wyoming
                                        
                                        
                                        5
                                        
                                        5Total
                                        684
                                        
                                        2,791
                                        
                                        3,475





We
identify markets based on television viewing areas and further classify markets
as either core or developing.  We define our core television markets
as those markets where the penetration of Sonic Drive-Ins (as measured by
population per restaurant, advertising level, and share of restaurant spending)
has reached a certain level of market maturity established by
management.  All other television markets where Sonic Drive-Ins are
located are referred to as developing markets.  Our core markets
contain approximately 75% of all Sonic Drive-Ins as of August 31,
2008.





Expansion





During fiscal year
2008, we opened 169 Sonic Drive-Ins, which consisted of 29 Partner
Drive-Ins and 140 Franchise Drive-Ins.  Expansion plans for fiscal
year 2009 involve the opening of multiple Sonic Drive-Ins under area development
agreements, as well as single-store development by long-standing
franchisees.  We believe that our existing as well as newly opened
markets offer significant growth opportunities for both Partner Drive-In and
Franchise Drive-In expansion.  The ability of Sonic and its
franchisees to open the anticipated number of Sonic Drive-Ins during fiscal year
2009 necessarily will depend on various factors, including those discussed in
this Form 10-K under Item
1A.  Risk Factors – Failure to successfully implement our growth
strategy could reduce, or reduce the growth of, our revenue and net
income.





2
 Table of Contents





Restaurant
Design and Construction





The
typical Sonic Drive-In consists of a kitchen housed in a one-story building
flanked by canopy-covered rows of 20 to 36 parking spaces, with each space
having its own intercom speaker system and menu board.  In addition,
since 1995, most new Sonic Drive-Ins have incorporated a drive-thru service and
patio seating area.





Marketing





We have
designed our marketing program to differentiate Sonic Drive-Ins from our
competitors by emphasizing five key areas of customer
satisfaction:  (1) wide variety of distinctive made-to-order menu
items, (2) personal delivery of service by carhops, (3) speed of service, (4)
quality, and (5) value.  The marketing plan includes promotions for
use throughout the Sonic chain.  We support those promotions with
television, radio, interactive media, point-of-sale materials, and other media
as appropriate.  Those promotions generally center on products which
highlight limited time new product introductions or signature menu items of
Sonic Drive-Ins.





Each year
Sonic develops a marketing plan with the involvement of the Sonic Franchise
Advisory Council.  (Information concerning the Sonic Franchise
Advisory Council is set forth on page 5 under Franchise Program -Franchise Advisory
Council.)  Funding for our marketing plan is comprised of the
System Marketing Fund, the Sonic Brand Fund and local advertising
expenditures.





The
System Marketing Fund focuses on purchasing advertising on national cable and
broadcast networks and other national media, sponsorship and brand enhancement
opportunities.  The Sonic Brand Fund is our national media production
fund.    Our franchise agreements require advertising
contributions to these funds by franchisees.  Franchisees are also
required to spend additional amounts on local advertising, typically through
participation in the local advertising cooperative.





The total
amount spent on media (principally television) was approximately $190 million
for fiscal year 2008, and we expect media expenditures to exceed $200
million for fiscal 2009.





Purchasing





We
negotiate with suppliers for our primary food products and packaging supplies to
ensure adequate quantities of food and supplies and to obtain competitive
prices.  We seek competitive bids from suppliers on many of our food
products.  We approve suppliers of those products and require them to
adhere to our established product and food safety
specifications.  Suppliers manufacture several key products for Sonic
under private label and sell them to authorized distributors for resale to Sonic
Drive-Ins.  We require all Sonic Drive-Ins to purchase from approved
distribution centers.





Food
Safety and Quality Assurance





To ensure
the consistent delivery of safe, high-quality food, we created a food safety and
quality assurance program.  Sonic’s food safety program promotes the
quality and safety of all products and procedures utilized by all Sonic
Drive-Ins, and provides certain requirements that must be adhered to by all
suppliers, distributors, and Sonic Drive-Ins.  We also have a
comprehensive, restaurant-based food safety program called Sonic
Safe.  Sonic Safe is a risk-based system that utilizes Hazard Analysis
& Critical Control Points (HACCP) principles for managing food safety and
quality.  Our food safety system includes employee training, supplier
product testing, unannounced drive-in food safety auditing by independent
third-parties, and other detailed components that monitor the safety and quality
of Sonic’s products and procedures at every stage of the food preparation and
production cycle.  Employee food safety training is covered under our
Sonic Drive-In training program, referred to as the STAR Training
Program.  This program includes specific training information and
requirements for every station in the drive-in.  We also require our
drive-in managers and assistant managers to pass the ServSafe training
program.  ServSafe is the most recognized food safety training
certification in the restaurant industry.





3
 Table of Contents





Company
Operations





Restaurant
Personnel.  A typical Partner Drive-In is operated by a
manager, two to four assistant managers, and approximately 25 hourly employees,
many of whom work part-time.  The manager has responsibility for the
day-to-day operations of the Partner Drive-In.  Each supervisor has
the responsibility of overseeing an average of four to seven Partner
Drive-Ins.  Sonic Restaurants, Inc. (“SRI”), Sonic’s operating
subsidiary, oversees the operations and development of and provides
administrative services to all Partner Drive-Ins.  SRI employs
directors of operations who oversee an average of four to seven supervisors
within their respective regions and report to either a regional vice president
or a vice president of SRI.





Ownership
Program.  Our philosophy stresses an ownership relationship
with supervisors and managers.  As part of the ownership program,
either a limited liability company or a general partnership is formed to own and
operate each individual Partner Drive-In.  SRI owns a majority
interest, typically at least 60%, in each of these limited liability companies
and partnerships.  Generally, the supervisors and managers own a
minority interest in the limited liability company or partnership. The amount of
ownership percentage is separately negotiated for each Partner
Drive-In.  Supervisors and managers are not employees of Sonic or of
the limited liability companies or partnerships in which they have an ownership
interest.  As owners, they share in the cash flow and are responsible
for their share of any losses incurred by their Partner Drive-Ins.  We
believe that our ownership structure provides a substantial incentive for
Partner Drive-In supervisors and managers to operate their restaurants
profitably and efficiently.  Additional information regarding our
ownership program can be found under Ownership Program,in Part
II, Item 7, at page 25 of this Form 10-K.





Sonic
records the interests of supervisors and managers as “minority interest in
earnings of Partner Drive-Ins” under costs and expenses on its financial
statements.  We estimate that the average percentage interest of a
supervisor was 16% and the average
percentage interest of a manager in a Partner Drive-In was 19% in fiscal year
2008.  Each Partner Drive-In distributes its available cash flow to
its supervisors and managers and to Sonic on a monthly basis pursuant to the
terms of the operating agreement or partnership agreement for that
restaurant.  Sonic has the right, but not the obligation, to purchase
the minority interest of the supervisor or manager in the
restaurant.  The amounts of the buy-in and the buy-out are generally
based on the Partner Drive-In’s sales during the preceding 12 months and
approximate the fair market value of a minority interest in that
restaurant.  Most supervisors and managers finance the buy-in with a
loan from a third-party financial institution.





Each
Partner Drive-In usually purchases equipment with funds borrowed from Sonic at
competitive rates.  In most cases, Sonic also owns or leases the land
and building and guarantees any third-party lease entered into for the
site.





Partner Drive-In
Data.  The following table provides certain financial
information relating to Partner Drive-Ins and the number of Partner Drive-Ins
opened and closed during the past five fiscal years.





2008
                                          
                                          
                                          2007
                                          
                                          
                                          2006
                                          
                                          
                                          2005
                                          
                                          
                                          2004Average
      Sales per Partner Drive-In(in thousands)
                                          
                                          $
                                          1,007
                                          
                                          
                                          $
                                          1,017
                                          
                                          
                                          $
                                          980
                                          
                                          
                                          $
                                          957
                                          
                                          
                                          $
                                          886Number
      of Partner Drive-Ins:Total
      Open at Beginning of Year
                                          
                                          
                                          654
                                          
                                          
                                          
                                          623
                                          
                                          
                                          
                                          574
                                          
                                          
                                          
                                          539
                                          
                                          
                                          
                                          497Newly-Opened
      and Re-Opened
                                          
                                          
                                          29
                                          
                                          
                                          
                                          29
                                          
                                          
                                          
                                          35
                                          
                                          
                                          
                                          37
                                          
                                          
                                          
                                          21Purchased
      from Franchisees
                                          
                                          
                                          18
                                          
                                          
                                          
                                          15
                                          
                                          
                                          
                                          15
                                          
                                          
                                          
                                          4
                                          
                                          
                                          
                                          24Sold
      to Franchisees
                                          
                                          
                                          (12
                                          )
                                          
                                          
                                          (10
                                          )
                                          
                                          
                                          --
                                          
                                          
                                          
                                          (5
                                          )
                                          
                                          
                                          (3
                                          )Closed
                                          
                                          
                                          (5
                                          )
                                          
                                          
                                          (3
                                          )
                                          
                                          
                                          (1
                                          )
                                          
                                          
                                          (1
                                          )
                                          
                                          
                                          0Total
      Open at Year End
                                          
                                          
                                          684
                                          
                                          
                                          
                                          654
                                          
                                          
                                          
                                          623
                                          
                                          
                                          
                                          574
                                          
                                          
                                          
                                          539








Franchise
Program





General.  As of
August 31, 2008, we had 2,791 Franchise Drive-Ins in operation.  A
large number of successful multi-unit franchisee groups have developed during
the Sonic system’s 55 years of operation. Those franchisees continue to develop
new Franchise Drive-Ins in their franchise territories either through area
development agreements or single site development.  Our franchisees
opened 140 Franchise Drive-Ins during fiscal year 2008.  We consider
our franchisees a vital part of our continued growth and believe our
relationship with our franchisees is good.





4
 Table of Contents




Franchise
Agreements.  For traditional drive-ins, the current franchise
agreement provides for an initial franchise fee of $45,000 per drive-in, a
royalty fee of up to 5% of gross sales on a graduated percentage
basis,  advertising fees of up to 5.9% of gross sales, and a 20-year
term.  For fiscal year 2008, Sonic’s average royalty rate equaled
3.88%.





Area Development
Agreements.  We use area development agreements to facilitate
the planned expansion of the Sonic Drive-In restaurant chain through multiple
unit development.  While many existing franchisees continue to expand
on a single drive-in basis, approximately 79% of the new Franchise Drive-Ins
opened during fiscal year 2008 occurred as a result of then-existing area
development agreements.  Each area development agreement gives a
developer the exclusive right to construct, own, and operate Sonic Drive-Ins
within a defined area.  In exchange, each developer agrees to open a
minimum number of Sonic Drive-Ins in the area within a prescribed time
period.





During
fiscal year 2008, we entered into 27 new area development agreements calling for
the opening of 212Franchise
Drive-Ins and amended 18 existing area development agreements calling for the
opening of an additional 107 Franchise Drive-Ins, all during the next seven
years.  We currently have more than 150 area development agreements in
effect, calling for the development of approximately 970 Sonic Drive-Ins during
the next seven years. We cannot give any assurance that our franchisees will
achieve that number of new Franchise Drive-Ins during the next seven
years.  Of the 207 Franchise Drive-Ins scheduled to open during fiscal
year 2008 under area development agreements in place at the beginning of that
fiscal year, 133 or 64% opened during the period.  During fiscal year
2008, we terminated 27 of the 179 area development agreements existing at the
beginning of the fiscal year.  The terminated area development
agreements called for the opening of 32 Franchise Drive-Ins in fiscal year 2008
and an additional 56 Franchise Drive-Ins in the next seven fiscal
years.  All of these terminations were as a result of the franchisee
failing to meet the development schedule under the area development
agreement.





In
addition to the area development agreement commitments, during fiscal 2007,
existing franchisees purchased options to develop approximately 400 drive-ins,
which allow them to open new drive-ins under an older form of license agreement
with a lower franchise fee and royalty rate, rather than the current form of
license agreement.  The development options and area development agreements
together reflect a development pipeline of over 1,360 drive-ins in the next
seven fiscal years.





Franchise Drive-In
Development.  We assist each franchisee in selecting sites and
developing Sonic Drive-Ins.  Each franchisee has responsibility for
selecting the franchisee’s drive-in location, but must obtain our approval of
each Sonic Drive-In design and each location based on accessibility and
visibility of the site and targeted demographic factors, including population
density, income, age, and traffic.  We provide our franchisees with
the physical specifications for the typical Sonic Drive-In.





Franchisee
Financing.  Other than the agreements described below, we do
not generally provide financing to franchisees or guarantee loans to franchisees
made by third-parties.





We had an
agreement with GE Capital Franchise Finance Corporation (“GEC”) pursuant to
which GEC made loans to existing Sonic franchisees who met certain underwriting
criteria set by GEC.  Under the terms of the agreement with GEC, Sonic
provided a guaranty of 10% of the outstanding balance of a loan from GEC to the
Sonic franchisee.  The portions of loans made by GEC to Sonic
franchisees that are guaranteed by the Company total $1.5 million as of August
31, 2008.  We ceased guaranteeing new loans made under the program
during fiscal year 2003 and have not been required to make any payments under
our agreement with GEC.





We have
an agreement with Irwin Franchise Capital Corporation (“IFCC”) pursuant to which
IFCC has agreed to make loans to existing Sonic franchisees who meet certain
underwriting criteria set by IFCC to finance the equipment and improvements for
our retrofit program in which significant trade dress modifications are being
made to Sonic Drive-Ins.  Under the terms of the agreement with IFCC, we
will provide a guaranty to IFCC of the greater of (i) 5% of the outstanding
balance of a loan from IFCC to the Sonic franchisee or (ii) $250,000, provided
that in no event will our maximum liability to IFCC exceed $2,500,000 in the
aggregate.  As of August 31, 2008, the total amount guaranteed under
the IFCC agreement was $0.7 million.





Franchise Advisory
Council.  Our Franchise Advisory Council provides advice,
counsel, and input to Sonic on important issues impacting the business, such as
marketing and promotions, operations, purchasing, building design, human
resources, technology, and new products.  The Franchise Advisory
Council currently consists of 20 members selected by Sonic.  We have
seven executive committee members who are selected at large, 12 regional members
representing four defined regions of the country, and one at large member
representing new franchisees and smaller operators.  We have five
Franchise Advisory Council task groups comprised of 53total members who serve
two-year terms and lend support on individual key priorities.





5
 Table of Contents




Franchise Drive-In
Data.  The following table provides certain financial
information relating to Franchise Drive-Ins and the number of Franchise
Drive-Ins opened, purchased from or sold to Sonic, and closed during Sonic’s
last five fiscal years.





2008
                                      
                                      
                                      2007
                                      
                                      
                                      2006
                                      
                                      
                                      2005
                                      
                                      
                                      2004Average
      Sales Per FranchiseDrive-In (in
      thousands)
                                      
                                      $
                                      1,154
                                      
                                      
                                      $
                                      1,132
                                      
                                      
                                      $
                                      1,092
                                      
                                      
                                      $
                                      1,039
                                      
                                      
                                      $
                                      983Number
      of Franchise Drive-Ins:Total
      Open at Beginning of Year
                                      
                                      
                                      2,689
                                      
                                      
                                      
                                      2,565
                                      
                                      
                                      
                                      2,465
                                      
                                      
                                      
                                      2,346
                                      
                                      
                                      
                                      2,209New
      Franchise Drive-Ins
                                      
                                      
                                      140
                                      
                                      
                                      
                                      146
                                      
                                      
                                      
                                      138
                                      
                                      
                                      
                                      138
                                      
                                      
                                      
                                      167Sold
      to the Company
                                      
                                      
                                      (18
                                      )
                                      
                                      
                                      (15
                                      )
                                      
                                      
                                      (15
                                      )
                                      
                                      
                                      (4
                                      )
                                      
                                      
                                      (24
                                      )Purchased
      from the Company
                                      
                                      
                                      12
                                      
                                      
                                      
                                      10
                                      
                                      
                                      
                                      --
                                      
                                      
                                      
                                      5
                                      
                                      
                                      
                                      3Closed
      and Terminated,Net
      of Re-openings
                                      
                                      
                                      (32
                                      )
                                      
                                      
                                      (17
                                      )
                                      
                                      
                                      (23
                                      )
                                      
                                      
                                      (20
                                      )
                                      
                                      
                                      (9
                                      )Total
      Open at Year End
                                      
                                      
                                      2,791
                                      
                                      
                                      
                                      2,689
                                      
                                      
                                      
                                      2,565
                                      
                                      
                                      
                                      2,465
                                      
                                      
                                      
                                      2,346





Competition





We
compete in the restaurant industry, a highly competitive industry in terms of
price, service, location, and food quality.  The restaurant industry
is often affected by changes in consumer trends, economic conditions,
demographics, traffic patterns, and concerns about the nutritional content of
quick-service foods.  We compete on the basis of speed and quality of
service, method of food preparation (made-to-order), food quality and variety,
signature food items, and monthly promotions.  The quality of service,
featuring Sonic carhops, constitutes one of our primary marketable points of
difference from the competition.  There are many well-established
competitors with substantially greater financial and other
resources.  These competitors include a large number of national,
regional, and local food services, including quick-service restaurants and
casual dining restaurants.  A significant change in pricing or other
marketing strategies by one or more of those competitors could have an adverse
impact on Sonic’s sales, earnings, and growth.  In selling franchises,
we also compete with many franchisors of quick-service and other restaurants and
other business opportunities.





Seasonality





Our
results during Sonic’s second fiscal quarter (the months of December, January
and February) generally are lower than other quarters because of the lower
temperatures in the locations of a number of Partner Drive-Ins and Franchise
Drive-Ins, which tends to reduce customer visits to our drive-ins.





Employees





As of
August 31, 2008, we had 383 full-time corporate employees.  This
number does not include the approximately 21,000 full-time and part-time
employees employed by separate partnerships and limited liability companies that
operate our Partner Drive-Ins or the supervisors or managers of the Partner
Drive-Ins who own a minority interest in the separate partnerships or limited
liability companies.





None of
our employees is subject to a collective bargaining agreement.  We
believe that we have good labor relations with our employees.





Intellectual
Property




Sonic
owns or is licensed to use valuable intellectual property including trademarks,
service marks, patents, copyrights, trade secrets and other proprietary
information, including the “Sonic” logo and trademark, which are of material
importance to our business.  Depending on the jurisdiction, trademarks
and service marks generally are valid as long as they are used and/or
registered.  Patents, copyrights and licenses are of varying
durations.




Customers





Our
business is not dependent upon either a single customer or small group of
customers.





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Government
Contracts





No
portion of our business is subject to renegotiation of profits or termination of
contracts or subcontracts at the election of the U.S. government.





Environmental
Matters





We are
not aware of any federal, state or local environmental laws or regulations that
will materially affect our earnings or competitive position or result in
material capital expenditures. However, we cannot predict the effect on
operations of possible future environmental legislation or regulations. During
fiscal year 2008, there were no material capital expenditures for environmental
control facilities, and no such material expenditures are anticipated.





Available
Information





We
maintain a website with the address of www.sonicdrivein.com.  Copies
of the Company’s reports filed with, or furnished to, the Securities and
Exchange Commission on Forms 10-K, 10-Q, and 8-K and any amendments to such
reports are available for viewing and copying at such website, free of charge,
as soon as reasonably practicable after filing such material with, or furnishing
it to, the Securities and Exchange Commission.  In addition, copies of
Sonic’s corporate governance materials, including the Corporate Governance
Guidelines, Audit Committee Charter, Compensation Committee Charter, Nominating
and Corporate Governance Committee Charter, Code of Ethics for Financial
Officers, and Code of Business Conduct and Ethics are available for viewing and
copying at the website, free of charge.





Item 1A.  Risk Factors





This
Annual Report on Form 10-K includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.  A
forward-looking statement is neither a prediction nor a guarantee of future
events or circumstances, and those future events or circumstances may not
occur.  Investors should not place undue reliance on the
forward-looking statements, which speak only as of the date of this
report.  These forward-looking statements are all based on currently
available operating, financial and competitive information and are subject to
various risks and uncertainties.  Our actual future results and trends
may differ materially depending on a variety of factors including, but not
limited to, the risks and uncertainties discussed below.  Accordingly,
such forward-looking statements do not purport to be predictions of future
events or circumstances and may not be realized.  For these reasons,
you should not place undue reliance on forward-looking statements.  We
undertake no obligation to publicly update or revise them, except as may be
required by law.




Events
reported in the media, such as incidents involving food-borne illnesses or food
tampering, whether or not accurate, can cause damage to our reputation and
rapidly affect sales and profitability.




Reports,
whether true or not, of food-borne illnesses, such as e-coli, avian flu, bovine
spongiform encephalopathy (commonly known as mad cow disease), hepatitis A or
salmonella, and injuries caused by food tampering have in the past severely
injured the reputations of participants in the restaurant industry and could in
the future affect us.  The potential for terrorism of our nation’s
food supply also exists and, if such an event occurs, it could have a negative
impact on our brand’s reputation and could severely hurt sales, revenues, and
profits.




Our
brand’s reputation is an important asset to the business; as a result, anything
that damages our brand’s reputation could immediately and severely hurt sales,
revenues, and profits.  If customers become ill from food-borne
illnesses or food tampering, we could also be forced to temporarily close some,
or all, Sonic Drive-Ins.  In addition, instances of food-borne
illnesses or food tampering occurring at the restaurants of competitors could,
by resulting in negative publicity about the restaurant industry, adversely
affect our sales on a local, regional, or national basis.  A decrease
in customer traffic as a result of these health concerns or negative publicity,
or as a result of a temporary closure of any Sonic Drive-Ins, could materially
harm our brand, sales, and profitability.




The
restaurant industry is highly competitive, and that competition could lower our
revenues, margins, and market share.




The
restaurant industry is intensely competitive with respect to price, service,
location, personnel, including nutritional content of quick-service foods,
dietary trends, and quality of food, and is often affected by changes in
consumer tastes and preferences, economic conditions, population, and traffic
patterns. We compete with international, regional and local restaurants, some of
which operate more restaurants and have greater financial
resources.  We compete primarily through the quality, price, variety,
and value of food products offered. Other key competitive factors include the
number and location of restaurants, quality and speed of service, attractiveness
of facilities, effectiveness of advertising and marketing programs, and new
product development by us and our competitors.  Some of our
competitors have substantially larger marketing budgets, which may provide them
with a competitive advantage.  In addition, our system competes within
the quick-service restaurant industry not only for customers but also for
management and hourly employees, suitable real estate sites, and qualified
franchisees.





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Changing
dietary preferences may cause consumers to avoid our products in favor of
alternative foods.




The
restaurant industry is affected by consumer preferences and
perceptions.  Although we monitor these changing preferences and
strive to adapt to meet changing consumer needs, growth of our brand and,
ultimately, system-wide sales depend on the sustained demand for our
products.  If dietary preferences and perceptions cause consumers to
avoid certain products offered by Sonic Drive-Ins in favor of alternative foods,
demand for our products may be reduced, and our business could be
harmed.




Our
earnings and business growth strategy depends in large part on the success of
our franchisees, who exercise independent control of their
businesses.




A portion
of our earnings comes from royalties, rents and other amounts paid by our
franchisees. Franchisees are independent contractors, and their employees are
not our employees.  We provide training and support to, and monitor
the operations of, our franchisees, but the quality of their drive-in operations
may be diminished by any number of factors beyond our
control.  Franchisees may not successfully operate drive-ins in a
manner consistent with our high standards and requirements, and franchisees may
not hire and train qualified managers and other restaurant
personnel.  Any operational shortcoming of a Franchise Drive-In is
likely to be attributed by consumers to the entire Sonic brand, thus damaging
our reputation and potentially affecting revenues and
profitability.




Changes
in economic, market and other conditions could adversely affect Sonic and its
franchisees, and thereby Sonic’s operating results.




The
quick-service restaurant industry is affected by changes in economic conditions,
consumer tastes and preferences and spending patterns, demographic trends,
consumer perceptions of food safety, weather, traffic patterns, the type, number
and location of competing restaurants, and the effects of war or terrorist
activities and any governmental responses thereto.  Factors such as
interest rates, inflation, gasoline prices, food costs, labor and benefit costs,
legal claims, and the availability of management and hourly employees also
affect restaurant operations and administrative expenses.  Economic
conditions, including interest rates and other government policies impacting
land and construction costs and the cost and availability of borrowed funds,
affect our ability and our franchisees’ ability to finance new restaurant
development, improvements and additions to existing restaurants, and the
acquisition of restaurants from, and sale of restaurants to,
franchisees.  Inflation can cause increased food, labor and benefits
costs and can increase our operating expenses.  As operating expenses
increase, we recover increased costs by increasing menu prices, to the extent
permitted by competition, or by implementing alternative products or cost
reduction procedures.  We cannot ensure, however, that we will be able
to recover increases in operating expenses due to inflation in this
manner.




Our
financial results may fluctuate depending on various factors, many of which are
beyond our control.





Our sales
and operating results can vary from quarter to quarter and year to year
depending on various factors, many of which are beyond our
control.  Certain events and factors may directly and immediately
decrease demand for our products.  If customer demand decreases
rapidly, our results of operations would also decline
precipitously.  These events and factors include:





•
            variations
      in the timing and volume of Sonic Drive-Ins’
  sales;


•
            sales
      promotions by Sonic and its
competitors;


•
            changes
      in average same-store sales and customer
visits;


•
            variations
      in the price, availability and shipping costs of supplies such as food
      products;


•
            seasonal
      effects on demand for Sonic’s
products;


•
            unexpected
      slowdowns in new drive-in development
efforts;


•
            changes
      in competitive and economic conditions generally including increases in
      energy costs;


•
            changes
      in the cost or availability of ingredients or
  labor;


•
            weather
      and other acts of God; and


•
            changes
      in the number of franchise agreement
renewals.





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Our
profitability may be adversely affected by increases in energy
costs.





Our
success depends in part on our ability to absorb increases in energy
costs.  Various regions of the United States in which we operate
multiple drive-ins have experienced significant increases in energy
prices.  If these increases continue to occur, it would have an
adverse effect on our profitability.





Shortages
or interruptions in the supply or delivery of perishable food products or rapid
price increases could adversely affect our operating results.





We are
dependent on frequent deliveries of perishable food products that meet certain
specifications.  Shortages or interruptions in the supply of
perishable food products may be caused by unanticipated demand, problems in
production or distribution, acts of terrorism, financial or other difficulties
of suppliers, disease or food-borne illnesses, inclement weather or other
conditions.  We purchase large quantities of food and supplies, which
can be subject to significant price fluctuations due to seasonal shifts, climate
conditions, industry demand, energy costs, changes in international commodity
markets and other factors.  These shortages or rapid price increases
could adversely affect the availability, quality and cost of ingredients, which
would likely lower revenues and reduce our profitability.





Failure
to successfully implement our growth strategy could reduce, or reduce the growth
of, our revenue and net income.





We plan
to increase the number of Sonic Drive-Ins, but may not be able to achieve our
growth objectives, and any new drive-ins may not be profitable.  The
opening and success of drive-ins depend on various factors,
including:





•
            competition
      from other restaurants in current and future
  markets;


•
            the
      degree of saturation in existing
markets;


•
            consumer
      interest in the Sonic brand;


•
            the
      identification and availability of suitable and economically viable
      locations;


•
            sales
      levels at existing drive-ins;


•
            the
      negotiation of acceptable lease or purchase terms for new
      locations;


•
            permitting
      and regulatory compliance;


•
            the
      cost and availability of construction
resources;


•
            the
      ability to meet construction
schedules;


•
            the
      availability of qualified franchisees and their financial and other
      development capabilities;


•
            the
      ability to hire and train qualified management
  personnel;


•
            weather;
      and


•
            general
      economic and business conditions.




If we are
unable to open as many new drive-ins as planned, if the drive-ins are less
profitable than anticipated or if we are otherwise unable to successfully
implement our growth strategy, revenue and profitability may grow more slowly or
even decrease.




Our
outstanding and future leverage could have an effect on our
operations.





On
December 20, 2006, the Company closed on a securitized financing facility
comprised of a $600 million fixed rate term loan and a $200 million variable
rate revolving credit facility.  As of August 31, 2008, we had $573.3
million in outstanding debt under the fixed rate note at an interest rate of
5.7% and $185 million outstanding under the variable rate note at an interest
rate of 3.7%.





Our
increased leverage could have the following consequences:




•
            We
      may be more vulnerable in the event of deterioration in our business, in
      the restaurant industry or in the economy generally.  In
      addition, we may be limited in our flexibility in planning for or reacting
      to changes in our business and the industry in which we
      operate.


•
            We
      may be required to dedicate a substantial portion of our cash flow to the
      payment of interest on our indebtedness, which could reduce the amount of
      funds available for operations or development of new Partner Drive-Ins and
      thus place us at a competitive disadvantage as compared with competitors
      that are less highly leveraged.


•
            From
      time to time, we may engage in various capital markets, bank credit and
      other financing activities to meet our cash requirements.  We
      may have difficulty obtaining additional financing at economically
      acceptable interest rates.





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•
            Our
      existing and future debt obligations may contain certain negative
      covenants including limitations on liens, consolidations and mergers,
      indebtedness, capital expenditures, asset dispositions, sale-leaseback
      transactions, stock repurchases and transactions with affiliates, which
      may reduce our flexibility in responding to changing business and economic
      conditions.


•
            Our
      debt obligations are subject to customary rapid amortization events and
      events of default.  Although management does not anticipate an
      event of default or any other event of noncompliance with the provisions
      of the notes, if such an event occurred, the unpaid amounts outstanding
      could become immediately due and
payable.


•
            The
      third-party insurance company that provides credit enhancements in the
      form of financial guaranties of our fixed and variable rate note payments
      is AA/Aa3 rated by Standard & Poor’s and Moody’s,
      respectively.  However, Moody’s has placed the insurer under
      review for a possible downgrade.  We are unable to determine the
      impact a downgrade would have on our insurer’s financial
      condition.  However, if the insurance company were to become the
      subject of insolvency or similar proceedings, our lenders would not be
      required to fund our variable rate notes.  In addition, an event
      of default would occur if: (i) the insurance company were to become the
      subject of insolvency or similar proceedings and (ii) the insurance policy
      were not continued or sold to a third party (who would assume the
      insurance company’s obligations under the policy), but instead were
      terminated or canceled as a result of those proceedings. In an event of
      default, all unpaid amounts under the fixed and variable rate notes could
      become immediately due and payable only at the direction or consent of
      holders with a majority of the outstanding principal.  Such
      acceleration of our debt could have a material adverse effect on our
      liquidity if we were unable to negotiate mutually acceptable new terms
      with our lenders or if alternate funding were not available to
      us.





Sonic
Drive-Ins are subject to health, employment, environmental and other government
regulations, and failure to comply with existing or future government
regulations could expose us to litigation, damage to our reputation and lower
profits.





Sonic and
its franchisees are subject to various federal, state and local laws affecting
their businesses.  The successful development and operation of
restaurants depends to a significant extent on the selection and acquisition of
suitable sites, which are subject to zoning, land use (including the placement
of drive-thru windows), environmental (including litter), traffic and other
regulations.  Restaurant operations are also subject to licensing and
regulation by state and local departments relating to health, food preparation,
sanitation and safety standards, federal and state labor and immigration laws
(including applicable minimum wage requirements, overtime, working and safety
conditions and work authorization requirements), federal and state laws
prohibiting discrimination and other laws regulating the design and operation of
facilities, such as the Americans with Disabilities Act.  If we fail
to comply with any of these laws, we may be subject to governmental action or
litigation, and our reputation could be accordingly harmed.  Injury to
our reputation would, in turn, likely reduce revenues and profits.





In recent
years, there has been an increased legislative, regulatory and consumer focus on
nutrition and advertising practices in the food industry, particularly among
restaurants.  As a result, we may become subject to regulatory
initiatives in the area of nutrition disclosure or advertising, such as
requirements to provide information about the nutritional content of our food
products, which could increase expenses.  The operation of our
franchise system is also subject to franchise laws and regulations enacted by a
number of states and rules promulgated by the U.S. Federal Trade
Commission.  Any future legislation regulating franchise relationships
may negatively affect our operations, particularly our relationship with our
franchisees.  Failure to comply with new or existing franchise laws
and regulations in any jurisdiction or to obtain required government approvals
could result in a ban or temporary suspension on future franchise
sales.  Changes in applicable accounting rules imposed by governmental
regulators or private governing bodies could also affect our reported results of
operations.





We are
subject to the Fair Labor Standards Act, which governs such matters as minimum
wage, overtime and other working conditions, along with the Americans with
Disabilities Act, various family leave mandates and a variety of other laws
enacted, or rules and regulations promulgated, by federal, state and local
governmental authorities that govern these and other employment
matters.  We have experienced and expect further increases in payroll
expenses as a result of federal and state mandated increases in the minimum
wage, and although such increases are not expected to be material, there may be
material increases in the future.  In addition, our vendors may be
affected by higher minimum wage standards, which may increase the price of goods
and services they supply to us.





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Litigation
from customers, franchisees, employees and others could harm our reputation and
impact operating results.





Claims of
illness or injury relating to food quality or food handling are common in the
quick-service restaurant industry.  In addition, class action lawsuits
have been filed, and may continue to be filed, against various quick-service
restaurants alleging, among other things, that quick-service restaurants have
failed to disclose the health risks associated with high-fat foods and that
quick-service restaurants’ marketing practices have encouraged
obesity.  In addition to decreasing our sales and profitability and
diverting management resources, adverse publicity or a substantial judgment
against us could negatively impact our reputation, hindering the ability to
attract and retain qualified franchisees and grow the business.





Further,
we may be subject to employee, franchisee and other claims in the future based
on, among other things, discrimination, harassment, wrongful termination and
wage, rest break and meal break issues, including those relating to overtime
compensation.





We
may not be able to adequately protect our intellectual property, which could
decrease the value of our brand and products.





The
success of our business depends on the continued ability to use existing
trademarks, service marks and other components of our brand in order to increase
brand awareness and further develop branded products.  All of the
steps we have taken to protect our intellectual property may not be
adequate.





Our
reputation and business could be materially harmed as a result of data
breaches.





Unauthorized
intrusion into portions of our computer systems or those of our franchisees that
process and store information related to customer transactions may result in the
theft of customer data.  We rely on proprietary and commercially
available systems, software, tools and monitoring to provide security for
processing, transmission and storage of confidential customer information, such
as payment card and personal information.  Further, the systems
currently used for transmission and approval of payment card transactions, and
the technology utilized in payment cards themselves, all of which can put
payment card data at risk, are determined and legally mandated by payment card
industry standards, not by us.  Improper activities by third-parties,
advances in computer and software capabilities and encryption technology, new
tools and discoveries and other events or developments may facilitate or result
in a compromise or breach of our or our franchisees’ computer
systems.  Any such compromises or breaches could cause interruptions
in our operations and damage to our reputation, subject us to costs and
liabilities and hurt sales, revenues and profits.




Ownership
and leasing of significant amounts of real estate exposes us to possible
liabilities and losses.




We own or
lease the land and building for all Partner Drive-Ins.  Accordingly,
we are subject to all of the risks associated with owning and leasing real
estate.  In particular, the value of our assets could decrease and our
costs could increase because of changes in the investment climate for real
estate, demographic trends and supply or demand for the use of our drive-ins,
which may result from competition from similar restaurants in the area, as well
as liability for environmental conditions.  We generally cannot cancel
the leases, so if an existing or future Sonic Drive-In is not profitable, and we
decide to close it, we may nonetheless be committed to perform our obligations
under the applicable lease including, among other things, paying the base rent
for the balance of the lease term.  In addition, as each of the leases
expires, we may fail to negotiate renewals, either on commercially acceptable
terms or at all, which could cause us to close drive-ins in desirable
locations.




Catastrophic
events may disrupt our business.




Unforeseen
events, including war, terrorism and other international conflicts, public
health issues, and natural disasters such as hurricanes, earthquakes, or other
adverse weather and climate conditions, whether occurring in the United States
or abroad, could disrupt our operations, disrupt the operations of franchisees,
suppliers or customers, or result in political or economic
instability.  These events could reduce demand for our products or
make it difficult or impossible to receive products from suppliers.




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Item
1B.  Unresolved Staff Comments.





None.





Item
2.  Properties





Of the684 Partner Drive-Ins
operating as of August 31, 2008, we operated 271of them on property leased from
third-parties and 413 of them on property we own.  The leases
expire on dates ranging from 2008 to 2028, with the majority of the leases
providing for renewal options.  All leases provide for specified
monthly rental payments, and some of the leases call for additional rentals
based on sales volume.  All leases require Sonic to maintain the
property and pay the cost of insurance and taxes.





Our
corporate headquarters are located in the Bricktown district of downtown
Oklahoma City.  We have a 15-year lease to occupy approximately 83,000
square feet.  The lease expires in November 2018 and has two five-year
renewal options.  Sonic believes its properties are suitable for the
purposes for which they are being used.





Item
3.  Legal Proceedings





The
Company is involved in various legal proceedings and has certain unresolved
claims pending.  Based on the information currently available,
management believes that all claims currently pending are either covered by
insurance or would not have a material adverse effect on the Company’s business
or financial condition.





Item
4.  Submission of Matters to a Vote of Security
Holders





Sonic did
not submit any matter during the fourth quarter of the Company’s last fiscal
year to a vote of Sonic’s stockholders, through the solicitation of proxies or
otherwise.





Item
4A.  Executive Officers of the Company





Identification
of Executive Officers





The
following table identifies the executive officers of the Company:





Name
                  Age
                  Position
                  Executive
                    Officer SinceJ.
      Clifford Hudson
                  53
                  Chairman
      of the Board of Directors and  Chief Executive
      Officer
                  June
      1985W.
      Scott McLain
                  46
                  President
      of Sonic Corp. and President of Sonic Industries Services
    Inc.
                  April
      1996Stephen
      C. Vaughan
                  42
                  Executive
      Vice President and Chief Financial Officer
                  January
      1996E.
      Edward Saroch
                  51
                  President
      of Sonic Restaurants, Inc.
                  May
      2008Michael
      A. Perry
                  50
                  Executive
      Vice President of Sonic Restaurants, Inc. and Sonic Industries Services
      Inc.
                  August
      2003Paige
      S. Bass
                  39
                  Vice
      President and General Counsel
                  January
      2007Carolyn
      C. Cummins
                  50
                  Vice
      President of Compliance and Corporate Secretary
                  April
      2004Terry
      D. Harryman
                  43
                  Vice
      President and Controller
                  January
      1999Claudia
      San Pedro
                  39
                  Vice
      President of Investor Relations and Treasurer
                  January
      2007Sharon
      T. Strickland
                  55
                  Vice
      President of People
                  January
      2008




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Business
Experience





The
following sets forth the business experience of the executive officers of the
Company for at least the past five years:





J.
Clifford Hudson has served as the Company’s Chairman of the Board since January
2000 and Chief Executive Officer since April 1995.  Mr. Hudson served
as President of the Company from April 1995 to January 2000 and reassumed that
position from November 2004 until May 2008.  He has served in various
other offices with the Company since 1984.  Mr. Hudson has served as a
Director of the Company since 1993.  Mr. Hudson has served on the
Board of Trustees of the Ford Foundation since January 2006 and on the Board of
Trustees of the National Trust for Historic Preservation since January 2001,
where he now serves as Chairman of the Board.





W. Scott
McLain has served as President of the Company since May 2008.  He also
has served as President of Sonic Industries Services Inc. since September
2004.  He served as Executive Vice President of the Company from
September 2004 until May 2008.  He served as the Company’s Executive
Vice President and Chief Financial Officer from January 2004 until November 2004
and as the Company’s Senior Vice President and Chief Financial Officer from
January 2000 until January 2004.  Mr. McLain joined the Company in
1996.





Stephen
C. Vaughan has served as Executive Vice President of the Company and Chief
Financial Officer since August 2008 and was the Company’s Vice President and
Chief Financial Officer from November 2004 until August 2008.  Mr.
Vaughan also served as Treasurer of the Company from November 2004 until April
2005.  Mr. Vaughan served as Vice President of Planning and Analysis
and Treasurer from November 2001 until November 2004.  He joined the
Company in 1992.





E. Edward
Saroch has served as President of Sonic Restaurants, Inc. since May
2008.  He served as Senior Vice President of Field Services for Sonic
Industries Services Inc. from August 2005 until May 2008, and Vice President of
Field Services for Sonic Industries Services Inc. from September 2003 until
August 2005.  Mr. Saroch joined the Company in 1995.





Michael
A. Perry has served as Executive Vice President of Sonic Restaurants, Inc. and
Sonic Industries Services Inc. since August 2008.  He served as Chief
Operating Officer of Sonic Restaurants, Inc. and Sonic Industries Services Inc.
from May 2008 until August 2008.  He served as President of Sonic
Restaurants, Inc. from September 2004 until May 2008 and as Senior Vice
President of Operations from August 2003 until September 2004.  Mr.
Perry joined the Company in 1998.





Paige S.
Bass has served as Vice President and General Counsel of the Company since
January 2007.  Ms. Bass joined the Company as Associate General
Counsel in April 2004.  Prior to joining the Company, Ms. Bass was
employed seven years as an
associate with the law firm of Crowe & Dunlevy in Oklahoma City,
Oklahoma.





Carolyn
C. Cummins has served as the Company’s Corporate Secretary since January 2007
and as the Company’s Vice President of Compliance since April
2004.  Ms. Cummins joined the Company as Assistant General Counsel in
January 1999.





Terry D.
Harryman has served as Vice President of the Company since January 2008 and as
the Company’s Controller since January 1999.  Mr. Harryman has also
served as the Controller of Sonic Restaurants, Inc. and Sonic Industries
Services Inc. since January 2002.  Mr. Harryman joined the Company in
1996.





Claudia
San Pedro has served as Vice President of Investor Relations and Treasurer of
the Company since January 2007 and as Treasurer of Sonic Industries Services
Inc. since November 2006.  She served as the Director of the Oklahoma
Office of State Finance from June 2005 through November 2006.  From
July 2003 to May 2005, Ms. San Pedro served as the Budget Division Director for
the Office of State Finance.





Sharon T.
Strickland has served as Vice President of People of the Company since January
2008.  She served as Senior Director of Potential from August 2005
until January 2008.  Ms. Strickland was a Human Resources Advisor for
Kerr-McGee Corporation from April 2004 until June 2005, and was Human Resources
Manager for Hydraulic Specialists, Inc. from April 2002 until April
2004.




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PART II





Item
5.  Market for the Company’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities





Market
Information





The
Company’s common stock trades on the Nasdaq National Market (“Nasdaq”) under the
symbol “SONC.” The following table sets forth the high and low closing bids for
the Company’s common stock during each fiscal quarter within the two most recent
fiscal years as reported on Nasdaq.




Fiscal
      Year Ended
                      August 31, 2008
                    
                    High
                    
                    
                    Low
                    
                    Fiscal
      Year Ended
                      August 31, 2007
                    
                    High
                    
                    
                    LowFirst
      Quarter
                    
                    $
                    26.19
                    
                    
                    $
                    21.57
                    
                    First
      Quarter
                    
                    $
                    24.23
                    
                    
                    $
                    21.55Second
      Quarter
                    
                    $
                    24.65
                    
                    
                    $
                    18.53
                    
                    Second
      Quarter
                    
                    $
                    24.75
                    
                    
                    $
                    21.24Third
      Quarter
                    
                    $
                    23.33
                    
                    
                    $
                    18.54
                    
                    Third
      Quarter
                    
                    $
                    25.09
                    
                    
                    $
                    20.58Fourth
      Quarter
                    
                    $
                    19.38
                    
                    
                    $
                    12.50
                    
                    Fourth
      Quarter
                    
                    $
                    24.98
                    
                    
                    $
                    20.02




Stockholders





As of
October 16, 2008, the Company had 670 record holders of its common
stock.





Dividends





The
Company did not pay any cash dividends on its common stock during its two most
recent fiscal years and does not intend to pay any dividends in the foreseeable
future as profits are reinvested in the Company to fund expansion of its
business, repurchases of the Company’s common stock, and payments under the
Company’s financing arrangements.  As in the past, future payment of
dividends will be considered after reviewing, among other factors, returns to
stockholders, profitability expectations and financing needs.





Issuer
Purchases of Equity Securities





None.




Item
6.  Selected Financial Data





The
following table sets forth selected financial data regarding the Company’s
financial condition and operating results.  One should read the
following information in conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” below, and the Company’s
Consolidated Financial Statements included elsewhere in this
report.




14
 Table of Contents





Selected
Financial Data


(In
thousands, except per share data)








Year
      ended August 31,2008
                                                  
                                                  
                                                  2007
                                                  
                                                  
                                                  2006
                                                  
                                                  
                                                  2005(1)
                                                  
                                                  
                                                  2004(1)Income
      Statement Data:Partner
      Drive-In sales
                                                  
                                                  $
                                                  671,151
                                                  
                                                  
                                                  $
                                                  646,915
                                                  
                                                  
                                                  $
                                                  585,832
                                                  
                                                  
                                                  $
                                                  525,988
                                                  
                                                  
                                                  $
                                                  449,585Franchise
      Drive-Ins:Franchise
      royalties
                                                  
                                                  
                                                  121,944
                                                  
                                                  
                                                  
                                                  111,052
                                                  
                                                  
                                                  
                                                  98,163
                                                  
                                                  
                                                  
                                                  88,027
                                                  
                                                  
                                                  
                                                  77,518Franchise
      fees
                                                  
                                                  
                                                  5,167
                                                  
                                                  
                                                  
                                                  4,574
                                                  
                                                  
                                                  
                                                  4,747
                                                  
                                                  
                                                  
                                                  4,311
                                                  
                                                  
                                                  
                                                  4,958Other
                                                  
                                                  
                                                  6,451
                                                  
                                                  
                                                  
                                                  7,928
                                                  
                                                  
                                                  
                                                  4,520
                                                  
                                                  
                                                  
                                                  4,740
                                                  
                                                  
                                                  
                                                  4,385Total
      revenues
                                                  
                                                  
                                                  804,713
                                                  
                                                  
                                                  
                                                  770,469
                                                  
                                                  
                                                  
                                                  693,262
                                                  
                                                  
                                                  
                                                  623,066
                                                  
                                                  
                                                  
                                                  536,446Cost
      of Partner Drive-In sales
                                                  
                                                  
                                                  548,102
                                                  
                                                  
                                                  
                                                  520,176
                                                  
                                                  
                                                  
                                                  468,627
                                                  
                                                  
                                                  
                                                  421,906
                                                  
                                                  
                                                  
                                                  358,859Selling,
      general and administrative
                                                  
                                                  
                                                  61,179
                                                  
                                                  
                                                  
                                                  58,736
                                                  
                                                  
                                                  
                                                  52,048
                                                  
                                                  
                                                  
                                                  47,503
                                                  
                                                  
                                                  
                                                  44,765Depreciation
      and amortization
                                                  
                                                  
                                                  50,653
                                                  
                                                  
                                                  
                                                  45,103
                                                  
                                                  
                                                  
                                                  40,696
                                                  
                                                  
                                                  
                                                  35,821
                                                  
                                                  
                                                  
                                                  32,528Provision
      for impairment of long-lived assets
                                                  
                                                  
                                                  571
                                                  
                                                  
                                                  
                                                  1,165
                                                  
                                                  
                                                  
                                                  264
                                                  
                                                  
                                                  
                                                  387
                                                  
                                                  
                                                  
                                                  675Total
      expenses
                                                  
                                                  
                                                  660,505
                                                  
                                                  
                                                  
                                                  625,180
                                                  
                                                  
                                                  
                                                  561,635
                                                  
                                                  
                                                  
                                                  505,617
                                                  
                                                  
                                                  
                                                  436,827Income
      from operations
                                                  
                                                  
                                                  144,208
                                                  
                                                  
                                                  
                                                  145,289
                                                  
                                                  
                                                  
                                                  131,627
                                                  
                                                  
                                                  
                                                  117,449
                                                  
                                                  
                                                  
                                                  99,619Debt
      extinguishment and other costs
                                                  
                                                  ─
                                                  
                                                  
                                                  
                                                  6,076
                                                  
                                                  
                                                  ─
                                                  
                                                  
                                                  ─
                                                  
                                                  
                                                  ─Interest
      expense, net
                                                  
                                                  
                                                  47,927
                                                  
                                                  
                                                  
                                                  38,330
                                                  
                                                  
                                                  
                                                  7,578
                                                  
                                                  
                                                  
                                                  5,785
                                                  
                                                  
                                                  
                                                  6,378Income
      before income taxes
                                                  
                                                  $
                                                  96,281
                                                  
                                                  
                                                  $
                                                  100,883
                                                  
                                                  
                                                  $
                                                  124,049
                                                  
                                                  
                                                  $
                                                  111,664
                                                  
                                                  
                                                  $
                                                  93,241Net
      income
                                                  
                                                  $
                                                  60,319
                                                  
                                                  
                                                  $
                                                  64,192
                                                  
                                                  
                                                  $
                                                  78,705
                                                  
                                                  
                                                  $
                                                  70,443
                                                  
                                                  
                                                  $
                                                  58,031Income
      per share (2):Basic
                                                  
                                                  $
                                                  1.00
                                                  
                                                  
                                                  $
                                                  0.94
                                                  
                                                  
                                                  $
                                                  0.91
                                                  
                                                  
                                                  $
                                                  0.78
                                                  
                                                  
                                                  $
                                                  0.65Diluted
                                                  
                                                  $
                                                  .97
                                                  
                                                  
                                                  $
                                                  0.91
                                                  
                                                  
                                                  $
                                                  0.88
                                                  
                                                  
                                                  $
                                                  0.75
                                                  
                                                  
                                                  $
                                                  0.63Weighted
      average shares used in calculation (2):Basic
                                                  
                                                  
                                                  60,403
                                                  
                                                  
                                                  
                                                  68,019
                                                  
                                                  
                                                  
                                                  86,260
                                                  
                                                  
                                                  
                                                  89,992
                                                  
                                                  
                                                  
                                                  88,970Diluted
                                                  
                                                  
                                                  62,270
                                                  
                                                  
                                                  
                                                  70,592
                                                  
                                                  
                                                  
                                                  89,239
                                                  
                                                  
                                                  
                                                  93,647
                                                  
                                                  
                                                  
                                                  92,481Balance
      Sheet Data:Working
      capital (deficit)
                                                  
                                                  $
                                                  (13,115
                                                  )
                                                  
                                                  $
                                                  (40,784
                                                  )
                                                  
                                                  $
                                                  (35,585
                                                  )
                                                  
                                                  $
                                                  (30,093
                                                  )
                                                  
                                                  $
                                                  (14,537
                                                  )Property,
      equipment and capital leases, net
                                                  
                                                  
                                                  586,245
                                                  
                                                  
                                                  
                                                  529,993
                                                  
                                                  
                                                  
                                                  477,054
                                                  
                                                  
                                                  
                                                  422,825
                                                  
                                                  
                                                  
                                                  376,315Total
      assets
                                                  
                                                  
                                                  836,312
                                                  
                                                  
                                                  
                                                  758,520
                                                  
                                                  
                                                  
                                                  638,018
                                                  
                                                  
                                                  
                                                  563,316
                                                  
                                                  
                                                  
                                                  518,633Obligations
      under capital leases (including current portion)
                                                  
                                                  
                                                  37,385
                                                  
                                                  
                                                  
                                                  39,318
                                                  
                                                  
                                                  
                                                  36,625
                                                  
                                                  
                                                  
                                                  38,525
                                                  
                                                  
                                                  
                                                  40,531Long-term
      debt (including current portion)
                                                  
                                                  
                                                  759,422
                                                  
                                                  
                                                  
                                                  710,743
                                                  
                                                  
                                                  
                                                  122,399
                                                  
                                                  
                                                  
                                                  60,195
                                                  
                                                  
                                                  
                                                  82,169Stockholders’
      equity (deficit)
                                                  
                                                  
                                                  (64,116
                                                  )
                                                  
                                                  
                                                  (106,802
                                                  )
                                                  
                                                  
                                                  391,693
                                                  
                                                  
                                                  
                                                  387,917
                                                  
                                                  
                                                  
                                                  337,900Cash
      dividends declared per common share
                                                  
                                                  ─
                                                  
                                                  
                                                  ─
                                                  
                                                  
                                                  ─
                                                  
                                                  
                                                  ─
                                                  
                                                  
                                                  ─





(1)
            Previously
      reported prior-year results have been adjusted to implement SFAS 123R on a
      modified retrospective basis.


(2)
            Adjusted
      for three-for-two stock splits in 2006 and
2004.





15
 Table of Contents





Item
7.  Management's Discussion and Analysis of Financial Condition
and Results of Operations





Overview





Description
of the Business.Sonic operates
and franchises the largest chain of drive-in restaurants in the United
States.  As of August 31, 2008, the Sonic system was comprised of
3,475 drive-ins, of which 20% were Partner Drive-Ins and 80% were Franchise
Drive-Ins.  Sonic Drive-Ins feature signature menu items such as
specialty drinks and frozen desserts, made-to-order sandwiches and a unique
breakfast menu.  We derive our revenues primarily from Partner
Drive-In sales and royalties from franchisees.  We also receive
revenues from initial franchise fees, and to a lesser extent, from the selling
and leasing of signs and real estate.





Costs of
Partner Drive-In sales, including minority interest in earnings of drive-ins,
relate directly to Partner Drive-In sales.  Other expenses, such as
depreciation, amortization, and general and administrative expenses, relate to
the Company’s franchising operations, as well as Partner Drive-In
operations.  Our revenues and expenses are directly affected by the
number and sales volumes of Partner Drive-Ins.  Our revenues and, to a
lesser extent, expenses also are affected by the number and sales volumes of
Franchise Drive-Ins.  Initial franchise fees and franchise royalties
are directly affected by the number of Franchise Drive-In openings.





Overview
of Business Performance.Fiscal year 2008 marked our
22nd
consecutive year of positive same store sales growth and earnings per share
increased slightly.  Investments by franchisees in new and existing
development remained solid throughout the year, with the opening of 140 new
drive-ins, the relocation or rebuilding of 64 existing drive-ins, and the
completion of 800 retrofits for the fiscal year. We also opened the first Sonic
drive-ins in several new markets and new states with very strong opening
results.





Despite
the strength of our business in core and new markets, we face a number of
challenges in our transition from a regional to a national brand, particularly
in developing markets (which represent approximately 25% of all
drive-ins).  In addition, the performance of our Partner Drive-Ins has
lagged behind our franchisees. Our profitability has also been negatively
impacted by the general business climate including low consumer sentiment and
rising commodity and labor costs.





As a
result, we plan to refine our strategy in the coming year including
refranchising underperforming Partner Drive-Ins and slowing the growth of new
Partner Drive-Ins.  We believe reducing the number of Partner
Drive-Ins we operate will allow us to improve sales and operations for remaining
Partner Drive-Ins while we continue to emphasize new store development,
promotions and other initiatives to drive sales for the entire
system.





The
refranchising initiative is anticipated to occur over the next four years and
will target underperforming Partner Drive-Ins in core and developing
markets.  Currently, Partner Drive-Ins comprise approximately 20% of the
entire system.  Over time, accelerated expansion by franchisees, combined
with the refranchising and slower growth of Partner Drive-Ins, is anticipated to
reduce this number to 12% to 14% of the system.  Increased development of
new Franchise Drive-Ins is expected to continue with particular emphasis on new
markets.  Further, implementation of the franchise retrofit program will
continue to be an important initiative for the Sonic system.  In addition
to refranchising efforts, other initiatives, such as increases in media
expenditures, new product news and improved sales performance of Partner
Drive-Ins, are expected to have a positive impact on earnings in fiscal year
2009.





The
growth and success of our business is built around implementation of our
multi-layered growth strategy, which features the following
components:





·
            Positive
      same-store sales growth fueled by the ongoing retrofit program, the
      relocation and rebuilding of existing drive-ins and the installation of
      electronic messaging signs;


·
            Expansion
      of the Sonic brand through new unit growth, particularly by
      franchisees;


·
            Increased
      franchising income stemming from franchisee new unit growth, same-store
      sales growth and our unique ascending royalty rate;
  and


·
            The
      use of excess operating cash flow and proceeds from refranchising of
      Partner Drive-Ins to pay down debt.





16
 Table of Contents




The
following table provides information regarding the number of Partner Drive-Ins
and Franchise Drive-Ins in operation as of the end of the periods indicated as
well as the system-wide growth in sales and average unit volume. System-wide
information includes both Partner Drive-In and Franchise Drive-In information,
which we believe is useful in analyzing the growth of the brand as well as the
Company’s revenues since franchisees pay royalties based on a percentage of
sales.





System-Wide
Performance


($
in thousands)





Year
      Ended August 31,2008
                
                
                2007
                
                
                2006Percentage
      increase in sales
                
                
                5.6
                %
                
                
                8.6
                %
                
                
                10.7
                %System-wide
      drive-ins in operation (1):Total
      at beginning of period
                
                
                3,343
                
                
                
                3,188
                
                
                
                3,039Opened
                
                
                169
                
                
                
                175
                
                
                
                173Closed
      (net of re-openings)
                
                
                (37
                )
                
                
                (20
                )
                
                
                (24
                )Total
      at end of period
                
                
                3,475
                
                
                
                3,343
                
                
                
                3,188Core
      markets (2)
                
                
                2,602
                
                
                
                2,500
                
                
                
                2,435Developing
      markets (2)
                
                
                873
                
                
                
                843
                
                
                
                753All
      markets
                
                
                3,475
                
                
                
                3,343
                
                
                
                3,188Average
      sales per drive-in:Core
      markets
                
                $
                1,175
                
                
                $
                1,145
                
                
                $
                1,105Developing
      markets
                
                
                973
                
                
                
                998
                
                
                
                954All
      markets
                
                
                1,125
                
                
                
                1,109
                
                
                
                1,070Change
      in same-store sales (3):Core
      markets
                
                
                2.4
                %
                
                
                3.6
                %
                
                
                5.3
                %Developing
      markets
                
                
                (5.2
                %)
                
                
                1.2
                
                
                
                1.5All
      markets
                
                
                0.9
                %
                
                
                3.1
                
                
                
                4.5





(1)
            Drive-ins
      that are temporarily closed for various reasons (repairs, remodeling,
      relocations, etc.) are not considered closed unless the Company determines
      that they are unlikely to reopen within a reasonable
  time.


(2)
            Markets
      are identified based on television viewing areas and further classified as
      core or developing markets based upon number of drive-ins in a market and
      the level of advertising support.  Market classifications are
      updated periodically.


(3)
            Represents
      percentage change for drive-ins open for a minimum of 15
      months.





System-wide
same-store sales increased 0.9% during fiscal year 2008 as a result of slight
increases in traffic (number of transactions per drive-in) and average
check.  The increase in traffic was aided by the system-wide
implementation of Happy Hour in November 2007, which features half-price drinks
from 2:00 pm to 4:00 pm every day.





The
Company continues to pursue specific sales-driving initiatives including, but
not limited to:





·
            The
      ongoing physical retrofit of drive-ins with a new
  look;


·
            The
      relocation and rebuilding of existing drive-ins which often result in
      significant sales increases;


·
            The
      ongoing installation of electronic messaging
  signs;


·
            Increasing
      our share of sales in non-traditional day parts including the morning,
      afternoon, and evening day parts;


·
            Providing
      an exceptional customer service
experience;


·
            Using
      technology to reach customers and improve the customer
      experience;


·
            Promoting
      new products on a monthly basis focused on quality and expanded choice for
      our customers; and


·
            Growing
      brand awareness through increased media spending and greater use of
      network cable advertising.





17
 Table of Contents




During
fiscal year 2008, our system-wide media expenditures were approximately $190
million as compared to $175 million in fiscal year 2007, which we believe
continues to increase overall brand awareness.  Approximately one-half
of our media dollars are spent on system-wide marketing fund efforts, which are
largely used for network cable television advertising.  Expenditures
for national cable advertising increased from approximately $90 million in
fiscal year 2007 to approximately $95 million in fiscal year
2008.  Increased network cable advertising provides several benefits
including the ability to more effectively target and better reach the cable
audience, which has now surpassed broadcast networks in terms of
viewers.  In addition, national cable advertising also allows us to
bring additional depth to our media and expand our message beyond our
traditional emphasis on a single monthly promotion.  The balance of
our system-wide media expenditures is focused on local store
advertising.  Looking forward, we expect system-wide media
expenditures to exceed $200 million in fiscal 2009, with the system-wide
marketing fund representing approximately one-half of total media
expenditures.





The
following table provides information regarding drive-in development across the
system.  Retrofits represent investments to upgrade the exterior look
of our drive-ins, typically including an upgraded building exterior, new more
energy-efficient lighting, a significantly enhanced patio area, and improved
menu housings.





Year
      ended
                          August
      31,2008
                        
                        
                        2007
                        
                        
                        2006New
      drive-ins:Partner
                        
                        
                        29
                        
                        
                        
                        29
                        
                        
                        
                        35Franchise
                        
                        
                        140
                        
                        
                        
                        146
                        
                        
                        
                        138System-wide
                        
                        
                        169
                        
                        
                        
                        175
                        
                        
                        
                        173Rebuilds/relocations:Partner
                        
                        
                        5
                        
                        
                        
                        7
                        
                        
                        
                        6Franchise
                        
                        
                        64
                        
                        
                        
                        35
                        
                        
                        
                        11System-wide
                        
                        
                        69
                        
                        
                        
                        42
                        
                        
                        
                        17Retrofits,
      including rebuilds/relocations:Partner
                        
                        
                        167
                        
                        
                        
                        175
                        
                        
                        
                        120Franchise
                        
                        
                        800
                        
                        
                        
                        316
                        
                        
                        
                        12System-wide
                        
                        
                        967
                        
                        
                        
                        491
                        
                        
                        
                        132




Results
of Operations





Revenues.  The following
table sets forth the components of revenue for the reported periods and the
relative change between the comparable periods.





Revenues


($
in thousands)




Year
      Ended August 31,
                                            
                                            2008
                                            
                                            
                                            2007
                                            
                                            
                                            Increase/
                                              (Decrease)
                                            
                                            
                                            Percent
                                              Increase/
                                              (Decrease)Revenues:Partner
      Drive-In sales
                                            
                                            $
                                            671,151
                                            
                                            
                                            $
                                            646,915
                                            
                                            
                                            $
                                            24,236
                                            
                                            
                                            
                                            3.8
                                            %Franchise
      revenues:Franchise
      royalties
                                            
                                            
                                            121,944
                                            
                                            
                                            
                                            111,052
                                            
                                            
                                            
                                            10,892
                                            
                                            
                                            
                                            9.8Franchise
      fees
                                            
                                            
                                            5,167
                                            
                                            
                                            
                                            4,574
                                            
                                            
                                            
                                            593
                                            
                                            
                                            
                                            13.0Other
                                            
                                            
                                            6,451
                                            
                                            
                                            
                                            7,928
                                            
                                            
                                            
                                            (1,477
                                            )
                                            
                                            
                                            (18.6
                                            )Total
      revenues
                                            
                                            $
                                            804,713
                                            
                                            
                                            $
                                            770,469
                                            
                                            
                                            $
                                            34,244
                                            
                                            
                                            
                                            4.4





Year
      Ended August 31,
                                              
                                              2007
                                              
                                              
                                              2006
                                              
                                              
                                              Increase/
                                                (Decrease)
                                              
                                              
                                              Percent
                                                Increase/
                                                (Decrease)Revenues:Partner
      Drive-In sales
                                              
                                              $
                                              646,915
                                              
                                              
                                              $
                                              585,832
                                              
                                              
                                              $
                                              61,083
                                              
                                              
                                              
                                              10.4
                                              %Franchise
      revenues:Franchise
      royalties
                                              
                                              
                                              111,052
                                              
                                              
                                              
                                              98,163
                                              
                                              
                                              
                                              12,889
                                              
                                              
                                              
                                              13.1Franchise
      fees
                                              
                                              
                                              4,574
                                              
                                              
                                              
                                              4,747
                                              
                                              
                                              
                                              (173
                                              )
                                              
                                              
                                              (3.6
                                              )Other
                                              
                                              
                                              7,928
                                              
                                              
                                              
                                              4,520
                                              
                                              
                                              
                                              3,408
                                              
                                              
                                              
                                              75.4Total
      revenues
                                              
                                              $
                                              770,469
                                              
                                              
                                              $
                                              693,262
                                              
                                              
                                              $
                                              77,207
                                              
                                              
                                              
                                              11.1




18
 Table of Contents





The
following table reflects the growth in Partner Drive-In sales and changes in
comparable drive-in sales for Partner Drive-Ins.  It also presents
information about average unit volumes and the number of Partner Drive-Ins,
which is useful in analyzing the growth of Partner Drive-In sales.





Partner
Drive-In Sales


($
in thousands)





Year
      Ended August 31,2008
                
                
                2007
                
                
                2006Partner
      Drive-In sales
                
                $
                671,151
                
                
                $
                646,915
                
                
                $
                585,832Percentage
      increase
                
                
                3.8
                %
                
                
                10.4
                %
                
                
                11.4
                %Partner
      Drive-Ins in operation (1):Total
      at beginning of period
                
                
                654
                
                
                
                623
                
                
                
                574Opened
                
                
                29
                
                
                
                29
                
                
                
                35Acquired
      from (sold to) franchisees, net
                
                
                6
                
                
                
                5
                
                
                
                15Closed
                
                
                (5
                )
                
                
                (3
                )
                
                
                (1
                )Total
      at end of period
                
                
                684
                
                
                
                654
                
                
                
                623Average
      sales per Partner Drive-In
                
                $
                1,007
                
                
                $
                1,017
                
                
                $
                980Percentage
      increase
                
                
                (1.0
                %)
                
                
                3.8
                %
                
                
                2.4
                %Change
      in same-store sales (2)
                
                
                (1.6
                %)
                
                
                2.5
                %
                
                
                1.9
                %





(1)
            Drive-ins
      that are temporarily closed for various reasons (repairs, remodeling,
      relocations, etc.) are not considered closed unless the Company determines
      that they are unlikely to reopen within a reasonable
  time.


(2)
            Represents
      percentage change for drive-ins open for a minimum of 15
      months.





For
fiscal year 2008, Partner Drive-In sales increased 3.8%.  The increase
was comprised of sales from newly constructed drive-ins and acquired drive-ins,
offset by the decrease in sales from lower same-store sales.  During
fiscal year 2007, Partner Drive-In sales increased 10.4%.  The
majority of this increase came from sales for newly constructed drive-ins as
well as increases in same-store sales.





During
fiscal year 2008, same-store sales at Partner Drive-Ins declined 1.6%, as
compared to the 0.9% increase for the system.  The Company believes
the declining performance at Partner Drive-Ins is attributable, at least in
part, to consumer reaction to aggressive price increases taken last year
combined with a decline in service.  Since the deterioration in
performance became apparent during the third quarter, several actions have been
taken, including an organizational restructure (management and other personnel
changes) as well as a simplified incentive compensation plan, which strengthens
the partnership program and places increased emphasis on customer service,
particularly at the assistant manager level.  In addition, we are
implementing a more strategic approach to pricing.  These efforts are
expected to have a positive impact on Partner Drive-In sales.




19
 Table of Contents





The
following table reflects the growth in franchise income (franchise royalties and
franchise fees) as well as franchise sales, average unit volumes and the number
of Franchise Drive-Ins.  While we do not record Franchise Drive-In
sales as revenues, we believe this information is important in understanding our
financial performance since these sales are the basis on which we calculate and
record franchise royalties.  This information is also indicative of
the financial health of our franchisees.





Franchise
Information


($
in thousands)





Year
      Ended August 31,2008
                
                
                2007
                
                
                2006Franchise
      fees and royalties (1)
                
                $
                127,111
                
                
                $
                115,626
                
                
                $
                102,910Percentage
      increase
                
                
                9.9
                %
                
                
                12.4
                %
                
                
                11.4
                %Franchise
      Drive-Ins in operation (2):Total
      at beginning of period
                
                
                2,689
                
                
                
                2,565
                
                
                
                2,465Opened
                
                
                140
                
                
                
                146
                
                
                
                138Acquired
      from (sold to) Company, net
                
                
                (6
                )
                
                
                (5
                )
                
                
                (15
                )Closed
                
                
                (32
                )
                
                
                (17
                )
                
                
                (23
                )Total
      at end of period
                
                
                2,791
                
                
                
                2,689
                
                
                
                2,565Franchise
      Drive-In sales
                
                $
                3,139,996
                
                
                $
                2,961,168
                
                
                $
                2,735,802Percentage
      increase
                
                
                6.0
                %
                
                
                8.2
                %
                
                
                10.6
                %Effective
      royalty rate
                
                
                3.88
                %
                
                
                3.75
                %
                
                
                3.59
                %Average
      sales per Franchise Drive-In
                
                $
                1,154
                
                
                $
                1,132
                
                
                $
                1,092Change
      in same-store sales (3)
                
                
                1.4
                %
                
                
                3.3
                %
                
                
                5.1
                %





(1)
            See
      Revenue Recognition
      Related to Franchise Fees and Royalties in the Critical Accounting Policies
      and Estimates section of Management’s Discussion and Analysis of
      Financial Condition and Results of
Operations.


(2)
            Drive-ins
      that are temporarily closed for various reasons (repairs, remodeling,
      relocations, etc.) are not considered closed unless the Company determines
      that they are unlikely to reopen within a reasonable
  time.


(3)
            Represents
      percentage change for drive-ins open for a minimum of 15
      months.





Franchise
royalties experienced a 9.9% increase related primarily to royalties from new
Franchise Drive-Ins and the increasing effective royalty rate.  A
smaller portion of the increase relates to growth in same-store sales at
Franchise Drive-Ins.





The
increase in the effective royalty rate includes the beneficial impact from the
conversion of licenses for approximately 790 Franchise Drive-Ins in April
2007.  These conversions resulted in the franchisees paying a higher
royalty rate in exchange for the extension of their license term.





Franchisees
opened 140 new drive-ins in fiscal year 2008, down from 146 new drive-ins in
fiscal year 2007. However, franchisee investment in existing drive-ins increased
considerably during fiscal year 2008, including the relocation or rebuild of 64
drive-ins (versus 35 in the prior year) and the retrofit of 800 drive-ins
(versus 316 in fiscal year 2007).  Despite the decrease in new
drive-ins opened, franchise fees increased 13.0% to $5.2
million.  Fees associated with the termination of area development
agreements increased $0.5 million in fiscal year 2008 compared to prior
year.  These termination fees were the primary reason for the
year-over-year increase in overall franchise fees, and despite the termination
of some of these agreements, the number of drive-ins expected to be built in
connection with such agreements has increased over the prior
year.  For fiscal year 2007, franchise fees decreased 3.6% as a result
of approximately $0.3 million more in fees recognized in fiscal year 2006 from
terminations of area development agreements.





Other
income decreased 18.6% to $6.5 million in fiscal year 2008 from $7.9 million in
fiscal year 2007.  The decrease relates primarily to the net favorable
impact of non-income tax matters recognized in fiscal year 2007 with no
comparable benefit in fiscal year 2008.





Operating
Expenses.  The following
table presents the overall costs of drive-in operations, as a percentage of
Partner Drive-In sales.  Minority interest in earnings of Partner
Drive-Ins is included as a part of cost of sales, in the table below, since it
is directly related to Partner Drive-In operations.





20
 Table of Contents




Restaurant-Level
Margins





Year
      ended
                                      August
      31,
                                    
                                    
                                    Percentage
      points
                                      Increase/2008
                                    
                                    
                                    2007
                                    
                                    
                                    (Decrease)Costs
      and expenses:Partner
      Drive-Ins:Food
      and packaging
                                    
                                    
                                    26.5
                                    %
                                    
                                    
                                    25.7
                                    %
                                    
                                    
                                    0.8Payroll
      and other employee benefits
                                    
                                    
                                    31.1
                                    
                                    
                                    
                                    30.4
                                    
                                    
                                    
                                    0.7Minority
      interest in earnings of Partner Drive-Ins
                                    
                                    
                                    3.3
                                    
                                    
                                    
                                    4.1
                                    
                                    
                                    
                                    (0.8
                                    )Other
      operating expenses
                                    
                                    
                                    20.9
                                    
                                    
                                    
                                    20.1
                                    
                                    
                                    
                                    0.881.8
                                    %
                                    
                                    
                                    80.3
                                    %
                                    
                                    
                                    1.5





Year
      ended
                                      August
      31,
                                    
                                    
                                    Percentage
      points
                                      Increase/2007
                                    
                                    
                                    2006
                                    
                                    
                                    (Decrease)Costs
      and expenses:Partner
      Drive-Ins:Food
      and packaging
                                    
                                    
                                    25.7
                                    %
                                    
                                    
                                    25.9
                                    %
                                    
                                    
                                    (0.2
                                    )Payroll
      and other employee benefits
                                    
                                    
                                    30.4
                                    
                                    
                                    
                                    30.0
                                    
                                    
                                    
                                    0.4Minority
      interest in earnings of Partner Drive-Ins
                                    
                                    
                                    4.1
                                    
                                    
                                    
                                    4.3
                                    
                                    
                                    
                                    (0.2
                                    )Other
      operating expenses
                                    
                                    
                                    20.1
                                    
                                    
                                    
                                    19.8
                                    
                                    
                                    
                                    0.380.3
                                    %
                                    
                                    
                                    80.0
                                    %
                                    
                                    
                                    0.3





Restaurant-level
margins declined overall in fiscal year 2008 as a result of higher commodity
prices, higher labor costs driven by minimum wage increases and the
de-leveraging impact of lower same-store sales.  These negative
impacts were offset by the decline in minority partners’ share of earnings
reflecting the margin pressures described above.  Looking forward, the
Company expects the cost pressures to continue into 2009 as another increase in
the minimum wage occurred in July 2008 and commodity cost pressures are
ongoing.





Selling,
General and Administrative (“SG&A”).  SG&A
expenses increased 4.2% to $61.2 million during fiscal year 2008 and 12.8% to
$58.7 million during fiscal year 2007 reflecting, in part, ongoing efforts to
manage expenses with slowing revenue growth.  Headcount additions,
offset by reduced management bonuses, were the primary contributor to the
increase for fiscal year 2008.  The increase in fiscal year 2007
related to the addition of headcount and other infrastructure to support growth
of our business.  As a percentage of total revenues, SG&A expenses
remained relatively constant at 7.6% in both fiscal year 2008 and 2007 and 7.5%
in fiscal year 2006.  Stock-based compensation is included in
SG&A, and, as of August 31, 2008, total remaining unrecognized compensation
cost related to unvested stock-based arrangements was $13.4 million and is
expected to be recognized over a weighted average period of 1.7
years.  See Note 1 and Note 12 of the Notes to the Consolidated
Financial Statements included in this Form 10-K for additional information
regarding our stock-based compensation.





Depreciation
and Amortization.  Depreciation and
amortization expense increased 12.3% to $50.7 million in fiscal year 2008
primarily as a result of additional capital expenditures for newly-constructed
Partner Drive-Ins, the retrofit and relocation of existing Partner Drive-Ins and
the acquisition of Franchise Drive-Ins.  Depreciation and amortization
expense increased 10.8% to $45.1 million in fiscal year 2007 due, in part, to
additional depreciation stemming from acquisitions, as well as the reduction in
remaining useful life for certain assets related to the retrofit of Partner
Drive-Ins in the late 1990s. Capital expenditures during fiscal year 2008 were
$127.2 million, including $20.9 million related to the acquisition of drive-ins
from franchisees.  For fiscal year 2009, capital expenditures are
expected to be approximately $60 to $70 million.





Provision
for Impairment of Long-Lived Assets.  We assess
drive-in assets for impairment on a quarterly basis under the guidelines of SFAS
144 – “Accounting for the Impairment or Disposal of Long-Lived
Assets.”  During fiscal year 2008, seven properties were impaired,
resulting in charges of $0.6 million to reduce the carrying cost of the related
assets to estimated fair value.  During fiscal year 2007, five
properties were impaired which resulted in charges of $1.2 million to reduce the
carrying cost of the assets to estimated fair value.  During fiscal
year 2006, three properties were impaired which resulted in a provision for
impairment of $0.3 million for carrying cost in excess of estimated fair value
for the assets.  We continue to perform quarterly analyses of certain
underperforming drive-ins. It is reasonably possible that the estimate of future
cash flows associated with these drive-ins could change in the future resulting
in the need to write-down assets associated with one or more of these drive-ins
to fair value.  While it is impossible to predict if future write
downs will occur, we do not believe that future write-downs will impede our
ability to continue growing earnings at a solid rate.





21
 Table of Contents




Interest
Expense.  Net interest
expense increased $3.5 million to $47.9 million in fiscal year 2008 and
increased $36.8 million to $44.4 million in fiscal year 2007.  The
increase in fiscal year 2008 is the result of interest on increased borrowings
primarily used to fund share repurchases earlier in the year and drive-in
acquisitions from franchisees. The increase in fiscal year 2007 was the result
of interest on increased borrowings used to fund the purchase of shares in the
Company’s tender offer and subsequent repurchases, as well as $6.1 million in
debt extinguishment charges related to financing the Company’s tender offer and
other share repurchase activities.





Income
taxes.  The provision for income taxes increased for fiscal
year 2008 with an effective federal and state tax rate of 37.4% compared with
36.4% in fiscal year 2007 and 36.6% in fiscal year 2006. The lower rate in
fiscal year 2007 related to the favorable resolution of state tax matters and
the retroactive extension of the Work Opportunity Tax Credit.  Our tax
rate may continue to vary significantly from quarter to quarter depending on the
timing of option exercises and dispositions by option-holders and as
circumstances on individual tax matters change.





Financial
Position





During
fiscal year 2008, current assets increased 34.9% to $99.4 million compared to
$73.7 million as of the end of fiscal year 2007.  Cash balances
increased by $20.3 million primarily as a result of advances taken on the
Company’s variable credit facility to ensure adequate liquidity for the
Company’s short-term financing needs.  In addition, the combination of
current and non-current notes receivable increased $3.7 million, primarily as a
result of proceeds of $4.1 million in transit at year-end for the sale of two
drive-ins to a franchisee.  Net property and equipment increased by
$56.3 million primarily as a result of capital expenditures of $127.2 million,
which includes $20.9 million related to the acquisition of drive-ins, offset by
depreciation of $50.2 million, and sales and retirement of assets for the
balance of the change.  Debt origination costs decreased by $4.8
million as a result of amortizing these fees over the expected financing term of
the debt.  These changes combined with the increase in current assets
resulted in a 10.3% increase in total assets to $836.3 million as of the end of
fiscal year 2008.





Total
current liabilities decreased $1.9 million or 1.7% during fiscal year 2008
primarily as a result of an $18.2 million increase in the current portion of the
securitized debt based on increasing principal payment
requirements.  This increase was offset by decreases resulting from
settlement of $14.4 million in accrued share repurchases entered into in August
2007 that settled in September, as well as a general decline in payables
associated with slower sales relative to the prior year and the timing of
payments.  The noncurrent portion of long-term debt increased $30.5
million as a result of debt primarily used to fund the repurchase of stock and
drive-in acquisitions.  Overall, total liabilities increased $35.1
million or 4.1% as a result of the items discussed above.





Stockholders’
deficit decreased $42.7 million or 40.0% during fiscal year
2008.  Earnings of $60.3 million, along with $15.6 million for the
combination of stock compensation and the proceeds and related tax benefits from
the exercise of stock options, decreased the stockholders’
deficit.  These decreases were offset by treasury stock transactions
totaling $32.7 million, along with the reduction in retained earnings of $1.2
million for adoption of FIN48 in the first fiscal quarter.





Liquidity
and Sources of Capital





Operating
Cash Flows.Net cash
provided by operating activities increased $6.1 million or 5.1% to $127.1
million in fiscal year 2008 as compared to $121.0 million in fiscal year
2007.  This increase generally results from growth in operating
results as reflected by the increase in net income before the effect of
depreciation and amortization.  The prior fiscal year also reflected
$9.0 million as an outflow from operating cash flows to restricted cash,
compared to a small inflow back to operating cash for reductions to restricted
amounts for fiscal year 2008.





Investing
Cash Flows.Net cash used in
investing activities increased $12.5 million or 13.2% to $107.1 million in
fiscal year 2008 as compared to $94.6 million in fiscal year
2007.  During fiscal year 2008, we opened 29 newly-constructed Partner
Drive-Ins, acquired 18 drive-ins from franchisees and sold 12 drive-ins to
franchisees.  The acquisition of 18 drive-ins was funded from cash
generated by operating activities and borrowing for a total of $20.9
million.  The following table sets forth the components of our
investments in capital additions for fiscal year 2008 (in
millions):





22
 Table of Contents




New
      Partner Drive-Ins, including drive-ins under construction
                  
                  $
                  43.6Retrofits,
      drive-thru additions and LED signs in existing drive-ins
                  
                  
                  27.3Rebuilds,
      relocations and remodels of existing drive-ins
                  
                  
                  13.9Replacement
      equipment for existing drive-ins and other
                  
                  
                  20.6Total
      investing cash flows for capital additions
                  
                  $
                  105.4





During
fiscal year 2008, we purchased the real estate for 19 of the 29 newly
constructed drive-ins.





Financing
Cash Flows.Net cash used in
financing activities decreased by $9.4 million or 88.7% to $1.2 million in
fiscal year 2008 as compared to $10.6 million in fiscal year
2007.  The Company has a securitized financing facility of Variable
Funding Notes that provides for the issuance of up to $200.0 million in
borrowings and certain other credit instruments, including letters of
credit.  As of August 31, 2008, our outstanding balance under the
Variable Funding Notes totaled $185.0 million at an effective borrowing rate of
3.69%, as well as $0.3 million in outstanding letters of credit.  The
amount available under this variable credit facility as of August 31, 2008, was
$14.7 million.  A lender who committed to advance one-half of the
funds for the Variable Funding Notes, filed for Chapter 11 bankruptcy on
September 15, 2008, at which time the available balance was $24.7
million.  The remaining balance of the lender’s commitment of $12.5
million may no longer be available, depending on how the commitment is
ultimately resolved in the bankruptcy proceedings.  The financial
status of the remaining lender appears solid and the Company believes it will be
able to access the other half of the available funding.  The Company
was aware of possible issues with the lender before August 31, 2008 and had
taken advances that were held in cash to ensure liquidity for short-term
financing needs.





Despite
recent challenges with Partner Drive-In operations, operating cash flows remain
healthy and we believe that cash flows from operations, along with existing cash
balances, will be adequate for mandatory repayment of any long-term debt and
funding of planned capital expenditures in fiscal year 2009.  See Note
9 of the Notes to Consolidated Financial Statements for additional information
regarding our long-term debt.





Our
variable and fixed rate notes are subject to a series of covenants and
restrictions customary for transactions of this type, including (i) required
actions to better secure collateral upon the occurrence of certain
performance-related events, (ii) application of certain disposition proceeds as
note prepayments after a set time is allowed for reinvestment, (iii) maintenance
of specified reserve accounts, (iv) maintenance of certain debt service coverage
ratios, (v) optional and mandatory prepayments upon change in control, (vi)
indemnification payments for defective or ineffective collateral, and (vii)
covenants relating to recordkeeping, access to information and similar
matters.  The notes are also subject to customary rapid amortization
events and events of default.  Although management does not anticipate
an event of default or any other event of noncompliance with the provisions of
the debt, if such an event occurred, the unpaid amounts outstanding could become
immediately due and payable.  See Note 1 – Restricted Cash of the Notes
to Consolidated Financial Statements for additional information regarding
restrictions on cash.





Under the
share repurchase program authorized by our Board of Directors, the Company
acquired 1.5 million shares for a total cost of $32.2 million during fiscal
2008.   In addition to the current-year share repurchases, $14.4
million in share repurchases entered into at the end of fiscal year 2007 were
settled and paid in fiscal year 2008.  The share repurchase program
expired August 31, 2008.





We plan
capital expenditures of approximately $60 to $70 million in fiscal year 2009,
excluding potential share repurchases. These capital expenditures primarily
relate to the development of additional Partner Drive-Ins, retrofit of existing
Partner Drive-Ins and other drive-in level expenditures. We expect to fund these
capital expenditures through cash flow from operations as well as cash on
hand.





As of
August 31, 2008, our total cash balance of $70.4 million reflected the impact of
the cash generated from operating activities, borrowing activity, including
additional advances on our credit facility at year-end, and capital expenditures
mentioned above.  We believe that existing cash and funds generated
from operations, as well as borrowings under the Variable Funding Notes, will
meet our needs for the foreseeable future.




23
 Table of Contents





Off-Balance
Sheet Arrangements





The
Company has obligations for guarantees on certain franchisee loans and lease
agreements. See Note 16 of the Notes to Consolidated Financial Statements for
additional information about these guarantees. Other than such guarantees and
various operating leases, which are disclosed more fully in “Contractual
Obligations and Commitments” below and Note 6 to our Consolidated Financial
Statements, the Company has no other material off-balance sheet
arrangements.





Contractual
Obligations and Commitments





In the
normal course of business, Sonic enters into purchase contracts, lease
agreements and borrowing arrangements.  Our commitments and
obligations as of August 31, 2008 are summarized in the following
table:





Payments
Due by Period


(In
Thousands)





Total
                            
                            
                            Less
      than
                              1
      Year
                            
                            
                            1
      – 3
                              Years
                            
                            
                            3
      – 5
                              Years
                            
                            
                            More
      than
                              5
      YearsContractual
      ObligationsLong-term
      debt(1)
                            
                            $
                            1,057,188
                            
                            
                            $
                            70,363
                            
                            
                            $
                            183,434
                            
                            
                            $
                            803,199
                            
                            
                            $
                            192Capital
      leases
                            
                            
                            52,987
                            
                            
                            
                            5,571
                            
                            
                            
                            10,989
                            
                            
                            
                            10,280
                            
                            
                            
                            26,147Operating
      leases
                            
                            
                            195,220
                            
                            
                            
                            12,152
                            
                            
                            
                            23,707
                            
                            
                            
                            22,672
                            
                            
                            
                            136,689Total
                            
                            $
                            1,305,395
                            
                            
                            $
                            88,086
                            
                            
                            $
                            218,130
                            
                            
                            $
                            836,151
                            
                            
                            $
                            163,028





(1)
            The
      fixed-rate interest payments included in the table above assume that the
      related notes will be outstanding for the expected six-year term, and all
      other fixed-rate notes will be held to maturity.  Interest
      payments associated with variable-rate debt have not been included in the
      table.  Assuming the amounts outstanding under the variable-rate
      notes as of August 31, 2008 are held to maturity, and utilizing interest
      rates in effect at August 31, 2008, the interest payments will be
      approximately $6.8 million on an annual basis through December
      2013.





Impact
of Inflation





We have
experienced impact from inflation. Inflation has caused increased food, labor
and benefits costs and has increased our operating expenses. To the extent
permitted by competition, increased costs are recovered through a combination of
menu price increases and reviewing, then implementing, alternative products or
processes, or by implementing other cost reduction procedures.





Seasonality





We do not
expect seasonality to affect our operations in a materially adverse
manner.  Our results during the second fiscal quarter (the months of
December, January and February) generally are lower than other quarters because
of the climate of the locations of a number of Partner and Franchise
Drive-Ins.





Critical
Accounting Policies and Estimates





The
Consolidated Financial Statements and Notes to Consolidated Financial Statements
included in this document contain information that is pertinent to management's
discussion and analysis. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to use its
judgment to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities.
These assumptions and estimates could have a material effect on our financial
statements.  We evaluate our assumptions and estimates on an ongoing
basis using historical experience and various other factors that are believed to
be relevant under the circumstances.  Actual results may differ from
these estimates under different assumptions or conditions.





We
annually review our financial reporting and disclosure practices and accounting
policies to ensure that our financial reporting and disclosures provide accurate
and transparent information relative to the current economic and business
environment.  We believe that of our significant accounting policies
(see Note 1 of Notes to Consolidated Financial Statements), the following
policies involve a higher degree of risk, judgment and/or
complexity.





24
 Table of Contents




Impairment
of Long-Lived Assets.We
review Partner Drive-In and other long-lived assets for impairment when events
or circumstances indicate they might be impaired. We test for impairment using
historical cash flows and other relevant facts and circumstances as the primary
basis for our estimates of future cash flows.  This process requires
the use of estimates and assumptions, which are subject to a high degree of
judgment. In addition, at least annually, we assess the recoverability of
goodwill and other intangible assets related to our brand and drive-ins. These
impairment tests require us to estimate fair values of our brand and our
drive-ins by making assumptions regarding future cash flows and other
factors.  During fiscal year 2008, we reviewed Partner Drive-Ins and
other long-lived assets with combined carrying amounts of $26.1 million in
property, equipment and capital leases for possible impairment, and our cash
flow assumptions resulted in impairment charges totaling $0.6 million to write
down certain assets to their estimated fair value.  During the fourth
quarter of fiscal year 2008, we performed our annual assessment of
recoverability of goodwill and other intangible assets and determined that no
impairment was indicated.  As of August 31, 2008, goodwill and
intangible assets totaled $118.2 million.  If these assumptions change
in the future, we may be required to record impairment charges for these
assets.





Ownership
Program.Our
drive-in philosophy stresses an ownership relationship with supervisors and
drive-in managers.  Most supervisors and managers of Partner Drive-Ins
own an equity interest in the drive-in, which is financed by third
parties.  Supervisors and managers are neither employees of Sonic nor
of the drive-in in which they have an ownership interest.





The
minority ownership interests in Partner Drive-Ins of the managers and
supervisors are recorded as a minority interest liability on the Consolidated
Balance Sheets, and their share of the drive-in earnings is reflected as
minority interest in earnings of Partner Drive-Ins in the costs and expenses
section of the Consolidated Statements of Income.  The ownership
agreements contain provisions, which give Sonic the right, but not the
obligation, to purchase the minority interest of the supervisor or manager in a
drive-in.  The amount of the investment made by a partner and the
amount of the buy-out are based on a number of factors, including primarily the
drive-in’s financial performance for the preceding 12 months, and are intended
to approximate the fair value of a minority interest in the
drive-in.





The
Company acquires and sells minority interests in Partner Drive-Ins from time to
time as managers and supervisors buy out and buy in to the partnerships or
limited liability companies.  If the purchase price of a minority
interest that we acquire exceeds the net book value of the assets underlying the
partnership interest, the excess is recorded as goodwill.  The
acquisition of a minority interest for less than book value is recorded as a
reduction in purchased goodwill.  When the Company sells a minority
interest, the sales price is typically in excess of the book value of the
partnership interest, and the difference is recorded as a reduction of
goodwill.  If the book value exceeds the sales price, the excess is
recorded as goodwill.  In either case, no gain or loss is recognized
on the sale of the minority ownership interest.  Goodwill created as a
result of the acquisition of minority interests in Partner Drive-Ins is not
amortized but is tested annually for impairment under the provisions of SFAS
142, “Goodwill and Other Intangible Assets.”





Revenue
Recognition Related to Franchise Fees and Royalties.  Initial
franchise fees are recognized in income when we have substantially performed or
satisfied all material services or conditions relating to the sale of the
franchise and the fees are nonrefundable.  Area development fees are
nonrefundable and are recognized in income on a pro-rata basis when the
conditions for revenue recognition under the individual area development
agreements are met. Both initial franchise fees and area development fees are
generally recognized upon the opening of a Franchise Drive-In or upon
termination of the agreement between Sonic and the franchisee.





Our
franchisees are required under the provisions of the license agreements to pay
royalties to Sonic each month based on a percentage of actual net
sales.  However, the royalty payments and supporting financial
statements are not due until the 10th of the
following month for the new form of license agreement (Number 7) and the 20th of the
following month for all prior forms of license agreement.  As a
result, we accrue royalty revenue in the month earned based on estimates of
Franchise Drive-Ins sales.  These estimates are based on projections
of average unit volume growth at Franchise Drive-Ins collected from a majority
of Franchise Drive-Ins.





Accounting
for Stock-Based Compensation.  We account for
stock-based compensation in accordance with Statement of Financial Accounting
Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123R”).  We estimate the fair value of options granted using the
Black-Scholes option pricing model along with the assumptions shown in Note 12
of Notes to the Consolidated Financial Statements in this Form
10-K.  The assumptions used in computing the fair value of share-based
payments reflect our best estimates, but involve uncertainties relating to
market and other conditions, many of which are outside of our
control.  We estimate expected volatility based on historical daily
price changes of the Company’s stock for a period equal to the current expected
term of the options.  The expected option term is the number of years
the Company estimates that options will be outstanding prior to exercise
considering vesting schedules and our historical exercise
patterns.  If other assumptions or estimates had been used, the
stock-based compensation expense that was recorded during fiscal year 2008 could
have been materially different.  Furthermore, if different assumptions
are used in future periods, stock-based compensation expense could be materially
impacted.





25
 Table of Contents




Income
Taxes.  We estimate certain components of our provision for
income taxes.  These estimates include, among other items,
depreciation and amortization expense allowable for tax purposes, allowable tax
credits for items such as wages paid to certain employees, effective rates for
state and local income taxes and the tax deductibility of certain other
items.





Our
estimates are based on the best available information at the time that we
prepare the provision, including legislative and judicial
developments.  We generally file our annual income tax returns several
months after our fiscal year end.  Income tax returns are subject to
audit by federal, state and local governments, typically several years after the
returns are filed.  These returns could be subject to material
adjustments or differing interpretations of the tax laws.  Adjustments
to these estimates or returns can result in significant variability in the tax
rate from period to period.





Leases.  Certain Partner
Drive-Ins lease land and buildings from third parties.  Rent expense
for operating leases is recognized on a straight-line basis over the expected
lease term, including cancelable option periods when it is deemed to be
reasonably assured that we would incur an economic penalty for not exercising
the options.  Judgment is required to determine options expected to be
exercised.  Within the provisions of certain of our leases, there are
rent holidays and/or escalations in payments over the base lease term, as well
as renewal periods.  The effects of the rent holidays and escalations
are reflected in rent expense on a straight-line basis over the expected lease
term, including cancelable option periods when appropriate.  The lease
term commences on the date when we have the right to control the use of lease
property, which can occur before rent payments are due under the terms of the
lease.  Contingent rent is generally based on sales levels and is
accrued at the point in time we determine that it is probable that such sales
levels will be achieved.





Item
7A.  Quantitative and Qualitative Disclosures About Market
Risk





Sonic’s
use of debt directly exposes the Company to interest rate
risk.  Floating rate debt, where the interest rate fluctuates
periodically, exposes the Company to short-term changes in market interest
rates.  Fixed rate debt, where the interest rate is fixed over the
life of the instrument, exposes the Company to changes in market interest rates
reflected in the fair value of the debt and to the risk that the Company may
need to refinance maturing debt with new debt at a higher rate.  Sonic
is also exposed to market risk from changes in commodity
prices.  Sonic does not utilize financial instruments for trading
purposes.  Sonic manages its debt portfolio to achieve an overall
desired position of fixed and floating rates and may employ interest rate swaps
as a tool to achieve that goal in the future.





Interest
Rate Risk.  Our exposure to interest rate risk at August 31,
2008 is primarily based on the fixed rate notes with an effective rate of 5.7%,
before amortization of debt-related costs.  At August 31, 2008, the
fair value of the fixed rate notes was estimated at $517.3 million versus
carrying value of $574.2 million (including accrued interest).  The
difference between fair value and carrying value is attributable to interest
rate decreases subsequent to when the debt was originally issued, more than
offset by the increase in credit spreads required by issuers of similar debt
instruments in the current market.  Should interest rates and/or
credit spreads increase or decrease by one percentage point, the estimated fair
value of the fixed rate notes would decrease by approximately $15.4 million or
increase by approximately $16.0 million, respectively.  The variable
funding notes outstanding at August 31, 2008 totaled $185.0 million, with a
variable rate of 3.69%.  The annual impact on our results of
operations of a one-point interest rate change for the balance outstanding at
year-end would be approximately $1.9 million before tax.  We have made
certain loans to our franchisees totaling $5.7 million as of August 31,
2008.  The interest rates on these notes are generally between 5.0%
and 10.5%.  We believe the carrying amount of these notes approximates
their fair value.





Commodity
Price Risk.  The Company and
its franchisees purchase certain commodities such as beef, potatoes, chicken and
dairy products.  These commodities are generally purchased based upon
market prices established with vendors. These purchase arrangements may contain
contractual features that limit the price paid by establishing price floors or
caps; however, we have not made any long-term commitments to purchase any
minimum quantities under these arrangements. We do not use financial instruments
to hedge commodity prices because these purchase agreements help control the
ultimate cost.





This
market risk discussion contains forward-looking statements.  Actual
results may differ materially from this discussion based upon general market
conditions and changes in financial markets.




26
 Table of Contents





Item
8.  Financial Statements and Supplementary
Data





The
Company has included the financial statements and supplementary financial
information required by this item immediately following Part IV of this report
and hereby incorporates by reference the relevant portions of those statements
and information into this Item 8.





Item
9.  Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure





None.





Item
9A.  Controls and Procedures





As of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s management,
including the Company’s Chief Executive Officer and the Chief Financial Officer,
of the effectiveness of the design and operation of the Company’s disclosure
controls and procedures (as defined in Rule 13a-14 under the Securities Exchange
Act of 1934).  Based upon that evaluation, the Chief Executive Officer
and the Chief Financial Officer concluded that the Company’s disclosure controls
and procedures were effective.  There were no significant changes in
the Company’s internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.





Management's
Report on Internal Control over Financial Reporting





The
management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The Company’s internal
control system was designed to provide reasonable assurance to the Company’s
management and Board of Directors regarding the preparation and fair
presentation of published financial statements. All internal control systems, no
matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.





The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of August 31, 2008.  In making
this assessment, it used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control—Integrated
Framework.  Based on our assessment, we believe that, as of August 31,
2008, the Company’s internal control over financial reporting is effective based
on those criteria.





The
Company’s independent registered public accounting firm that audited the
financial statements included in the annual report has issued an attestation
report on the Company’s internal control over financial reporting. This report
appears on the following page.





27
 Table of Contents





Report
of Independent Registered Public Accounting Firm







The Board
of Directors and Stockholders of Sonic Corp.




We have
audited Sonic Corp.’s internal control over financial reporting as of August 31,
2008, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria).  Sonic Corp.’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
included in the accompanying Management’s Report on Internal Control over
Financial Reporting.  Our responsibility is to express 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, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, 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, Sonic Corp. maintained, in all material respects, effective internal
control over financial reporting as of August 31, 2008, based on the COSO
criteria.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Sonic Corp.
as of August 31, 2008 and 2007, and the related consolidated statements of
income, stockholders' deficit, and cash flows for each of the three years in the
period ended August 31, 2008 of Sonic Corp. and our report dated October 28,
2008 expressed an unqualified opinion thereon.








ERNST
      & YOUNG LLP





Oklahoma
City, Oklahoma


October
28, 2008




28
 Table of Contents





Item
9B.  Other Information





No
information was required to be disclosed in a Form 8-K during the Company’s
fourth quarter of its 2008 fiscal year which was not reported.





PART III





Item
10.  Directors, Executive Officers and Corporate
Governance





Sonic has
adopted a Code of Ethics for Financial Officers and a Code of Business Conduct
and Ethics that applies to all directors, officers and employees.  Sonic
has posted copies of these codes on the investor section of its internet website
at the internet address: http://www.sonicdrivein.com.





Information
regarding Sonic’s executive officers is set forth under Item 4A of Part I of
this report.  The other information required by this item is
incorporated by reference from the definitive proxy statement which Sonic will
file with the Securities and Exchange Commission no later than 120 days after
August 31, 2008 (the “Proxy Statement”), under the captions “Election of
Directors” and “Section 16(a) Beneficial Ownership Reporting
Compliance.”





Item
11.  Executive Compensation





The
information required by this item is incorporated by reference from the Proxy
Statement under the caption “Executive Compensation – Compensation Discussion
and Analysis.”





Item
12.  Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters





The
information required by this item is incorporated by reference from the Proxy
Statement under the captions “Security Ownership of Certain Beneficial Owners
and Management” and “Equity Compensation Plan Information.”





Item
13.  Certain Relationships and Related Transactions, and Director
Independence





The
information required by this item is incorporated by reference from the Proxy
Statement under the captions “Certain Relationships and Related Transactions,”
“Director Independence,” “Committees of the Board of Directors,” and
“Compensation Committee Interlocks and Insider Participation.”





Item
14.  Principal Accounting Fees and Services





The
information required by this item is incorporated by reference from the Proxy
Statement under the caption “Independent Registered Public Accounting
Firm.”




29
 Table of Contents





PART IV





Item
15.  Exhibits and Financial Statement
Schedules





Financial
Statements





The
following consolidated financial statements of the Company appear immediately
following this Item 15:





PagesReport
      of Independent Registered Public Accounting Firm
                F-1Consolidated
      Balance Sheets at August 31, 2008 and 2007
                F-2Consolidated
      Statements of Income for each of the three years in the period ended
      August 31, 2008
                F-4Consolidated
      Statements of Stockholders’ Deficit for each of the three years in the
      period ended August 31, 2008
                F-5Consolidated
      Statements of Cash Flows for each of the three years in the period ended
      August 31, 2008
                F-6Notes
      to Consolidated Financial Statements
                F-8





Financial
Statement Schedules





The
Company has included the following schedule immediately following this Item
15:





PageSchedule
      II     -     Valuation
      and Qualifying Accounts
                    F-32





The
Company has omitted all other schedules because the conditions requiring their
filing do not exist or because the required information appears in Sonic’s
Consolidated Financial Statements, including the notes to those
statements.




30
 Table of Contents





Exhibits





The
Company has filed the exhibits listed below with this report.  The
Company has marked all management contracts and compensatory plans or
arrangements with an asterisk (*).





3.01.           Certificate
of Incorporation of the Company, which the Company hereby incorporates by
reference from Exhibit 3.1 to the Company’s Form S-1 Registration Statement No.
33-37158 filed on October 3, 1990.





3.02.           Certificate
of Amendment of Certificate of Incorporation of the Company, March 4, 1996,
which the Company hereby incorporates by reference from Exhibit 3.05 to the
Company’s Form 10-K for the fiscal year ended August 31, 2000.





3.03.           Certificate
of Amendment of Certificate of Incorporation of the Company, January 22, 2002,
which the Company hereby incorporates by reference from Exhibit 3.06 to the
Company’s Form 10-K for the fiscal year ended August 31, 2002.





3.04.           Certificate of Amendment
of Certificate of Incorporation of the Company, January 31, 2006, which
the Company hereby incorporates by reference from Exhibit 3.04 to the Company’s
Form 10-K for the fiscal year ended August 31, 2006.





3.05.           Bylaws
of the Company, which the Company hereby incorporates by reference from Exhibit
3.2 to the Company’s Form S-1 Registration Statement No. 33-37158 filed on
October 3, 1990.





3.06.           Certificate
of Designations of Series A Junior Preferred Stock, which the Company hereby
incorporates by reference from Exhibit 99.1 to the Company’s Form 8-K filed on
June 17, 1997.





4.01.           Specimen
Certificate for Common Stock, which the Company hereby incorporates by reference
from Exhibit 4.01 to the Company’s Form 10-K for the fiscal year ended August
31, 1999.





10.01.         Form
of Sonic Industries LLC, successor to Sonic Industries Inc., License Agreement
(the Number 4 License Agreement), which the Company hereby incorporates by
reference from Exhibit 10.1 to the Company’s Form S-1 Registration Statement No.
33-37158 filed on October 3, 1990.





10.02.         Form
of Sonic Industries LLC, successor to Sonic Industries Inc., License Agreement
(the Number 5 License Agreement), which the Company hereby incorporates by
reference from Exhibit 10.2 to the Company’s Form S-1 Registration Statement No.
33-37158 filed on October 3, 1990.





10.03.         Form
of Sonic Industries LLC, successor to Sonic Industries Inc., License Agreement
(the Number 4.2 License Agreement and Number 5.1 License Agreement), which the
Company hereby incorporates by reference from Exhibit 10.03 to the Company’s
Form 10-K for the fiscal year ended August 31, 1994.





10.04.         Form
of Sonic Industries LLC, successor to Sonic Industries Inc., License Agreement
(the Number 6 License Agreement), which the Company hereby incorporates by
reference from Exhibit 10.04 to the Company’s Form 10-K for the fiscal year
ended August 31, 1994.





10.05.         Form
of Sonic Industries LLC, successor to Sonic Industries Inc., License Agreement
(the Number 6A License Agreement), which the Company hereby incorporates by
reference from Exhibit 10.05 to the Company’s Form 10-K for the fiscal year
ended August 31, 1998.





10.06.         Form
of Sonic Industries LLC, successor to Sonic Industries Inc., License Agreement
(the Number 5.2 License Agreement), which the Company hereby incorporates by
reference from Exhibit 10.06 to the Company’s Form 10-K for the fiscal year
ended August 31, 1998.





10.07.         Form
of Sonic Industries LLC, successor to Sonic Industries Inc., License Agreement
(the Number 6NT License Agreement), which the Company hereby incorporates by
reference from Exhibit 10.07 to the Company’s Form 10-K for the fiscal year
ended August 31, 2004.





31
 Table of Contents




10.08.         Form
of Sonic Industries LLC License Agreement (the Number 4.4/5.4 License
Agreement), which the Company hereby incorporates by reference from Exhibit No.
10.08 to the Company’s Form 10-K for the fiscal year ended August 31,
2007.





10.09.         Form
of Sonic Industries LLC License Agreement (the Number 5.5 License Agreement),
which the Company hereby incorporates by reference from Exhibit No. 10.09 to the
Company’s Form 10-K for the fiscal year ended August 31, 2007.





10.10.         Form
of Sonic Industries LLC License Agreement (the Number 7 License Agreement),
which the Company hereby incorporates by reference from Exhibit No. 10.10 to the
Company’s Form 10-K for the fiscal year ended August 31, 2007.





10.11.         Form
of Sonic Industries LLC License Agreement (the Number 7NT License Agreement),
which the Company hereby incorporates by reference from Exhibit No. 10.11 to the
Company’s Form 10-K for the fiscal year ended August 31, 2007.





10.12.         Form
of Sonic Industries LLC, successor to Sonic Industries Inc., Area Development
Agreement (the Number 6A Area Development Agreement), which the Company hereby
incorporates by reference from Exhibit 10.05 to the Company’s Form 10-K for the
fiscal year ended August 31, 1995.





10.13.         Form
of Sonic Industries LLC Area Development Agreement (the Number 7 Area
Development Agreement), which the Company hereby incorporates by reference from
Exhibit No. 10.13 to the Company’s Form 10-K for the fiscal year ended August
31, 2007.





10.14.         Form
of Sonic Industries Services Inc. Sign Lease Agreement, which the Company hereby
incorporates by reference from Exhibit 10.4 to the Company’s Form S-1
Registration Statement No. 33-37158.





10.15.         Form
of General Partnership Agreement, Limited Liability Company Operating Agreement
and Master Agreement, which the Company hereby incorporates by reference from
Exhibit 10.09 to the Company’s Form 10-K for fiscal year ended August 31,
2003.





10.16.         1991
Sonic Corp. Stock Option Plan, which the Company hereby incorporates by
reference from Exhibit 10.5 to the Company’s Form S-1 Registration Statement No.
33-37158.*





10.17.         1991
Sonic Corp. Stock Purchase Plan, amended and restated effective April 2,
2008.*





10.18.         1991
Sonic Corp. Directors’ Stock Option Plan, which the Company hereby incorporates
by reference from Exhibit 10.08 to the Company’s Form 10-K for the fiscal year
ended August 31, 1991.*





10.19.         Sonic
Corp. Savings and Profit Sharing Plan, which the Company hereby incorporates by
reference from Exhibit 10.8 to the Company’s Form S-1 Registration Statement No.
33-37158.*





10.20.         Net
Revenue Incentive Plan, which the Company hereby incorporates by reference from
Exhibit 10.19 to the Company’s Form S-1 Registration Statement No.
33-37158.*





10.21.         Form
of Indemnification Agreement for Directors, which the Company hereby
incorporates by reference from Exhibit 10.7 to the Company’s Form S-1
Registration Statement No. 33-37158.*





10.22.         Form
of Indemnification Agreement for Officers, which the Company hereby incorporates
by reference from Exhibit 10.14 to the Company’s Form 10-K for the fiscal year
ended August 31, 1995.*





10.23.         Employment
Agreement with J. Clifford Hudson dated August 20, 1996, which the Company
hereby incorporates by reference from Exhibit 10.18 to the Company’s Form 10-K
for the fiscal year ended August 31, 2002.*





10.24.         Employment
Agreement with W. Scott McLain dated January 27, 1998, which the Company hereby
incorporates by reference from Exhibit 10.21 to the Company’s Form 10-K for the
fiscal year ended August 31, 2002.*





32
 Table of Contents




10.25.         Employment
Agreement with Stephen C. Vaughan dated August 20, 1996, which the Company
hereby incorporates by reference from Exhibit 10.23 to the Company’s Form 10-K
for the fiscal year ended August 31, 2002.*





10.26.         Employment
Agreement with E. Edward Saroch dated August 14, 2008.*





10.27.         Employment
Agreement with Michael A. Perry dated August 20, 2003, which the Company hereby
incorporates by reference from Exhibit 10.22 to the Company’s Form 10-K for the
fiscal year ended August 31, 2003.*





10.28.         Employment Agreement with
Paige S. Bass dated January 31, 2007,which the Company hereby
incorporates by reference from Exhibit 10.01 to the Company’s Form 10-Q for the
quarterly period ended February 28, 2007.*





10.29.         Employment
Agreement with Carolyn C. Cummins dated April 29, 2004, which the Company hereby
incorporates by reference from Exhibit 10.25 to the Company’s Form 10-K for the
fiscal year ended August 31, 2004.*





10.30.         Employment
Agreement with Terry D. Harryman dated January 19, 2000, which the Company
hereby incorporates by reference from Exhibit 10.24 to the Company’s Form 10-K
for the fiscal year ended August 31, 2002.*





10.31.         Employment Agreement with
Claudia San Pedro dated January 31, 2007,which the Company hereby
incorporates by reference from Exhibit 10.02 to the Company’s Form 10-Q for the
quarterly period ended February 28, 2007.*





10.32.         Employment
Agreement with Sharon T. Strickland dated January 10, 2008, which the Company
hereby incorporates by reference from Exhibit 10.01 to the Company’s Form 10-Q
for the quarterly period ended February 28, 2008.*





10.33.         Employment
Agreement with V. Todd Townsend dated August 18, 2005, which the Company hereby
incorporates by reference from Exhibit 10.26 to the Company’s Form 10-K for the
fiscal year ended August 31, 2005.*





10.34.         2001
Sonic Corp. Stock Option Plan, which the Company hereby incorporates by
reference from Exhibit No. 10.32 to the Company’s Form 10-K for the fiscal year
ended August 31, 2001.*





10.35.         2001
Sonic Corp. Directors’ Stock Option Plan, which the Company hereby incorporates
by reference from Exhibit No. 10.33 to the Company’s Form 10-K for the fiscal
year ended August 31, 2001.*





10.36.         Sonic
Corp. 2006 Long Term Incentive Plan which the Company hereby incorporates by
reference from Exhibit No. 10.31 to the Company’s Form 10-K for the fiscal year
ended August 31, 2006.*





21.01.         Subsidiaries
of the Company.





23.01.         Consent
of Independent Registered Public Accounting Firm.





31.01.         Certification
of Chief Executive Officer pursuant to S.E.C. Rule 13a-14.





31.02.         Certification
of Chief Financial Officer pursuant to S.E.C. Rule 13a-14.





32.01.Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.





32.02.Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350.





99.01Base Indenture dated December 20, 2006 among Sonic Capital LLC and
certain other indirect subsidiaries of the Company, and Citibank, N.A. as
Trustee and Securities Intermediary, which the Company hereby incorporates by
reference from Exhibit 99.1 to the Company’s Form 8-K filed on December 27,
2006.





33
 Table of Contents




99.02Supplemental Indenture dated December 20, 2006 among Sonic Capital LLC
and certain other indirect subsidiaries of the Company, and Citibank, N.A. as
Trustee and the Series 2006-1 Securities Intermediary, which the Company hereby
incorporates by reference from Exhibit 99.2 to the Company’s Form 8-K filed on
December 27, 2006.





99.03Class
A-1 Note Purchase Agreement dated December 20, 2006 among Sonic Capital LLC and
certain other indirect subsidiaries of the Company, certain private conduit
investors, financial institutions and funding agents, Bank of America, N.A. as
provider of letters of credit, and Lehman Commercial Paper Inc., as a swing line
lender and as Administrative Agent, which the Company hereby incorporates by
reference from Exhibit 99.3 to the Company’s Form 8-K filed on December 27,
2006.





99.04Guarantee and Collateral Support Agreement dated December 20, 2006 made
by Sonic Industries LLC, as Guarantor in favor of Citibank N.A. as Trustee,
which the Company hereby incorporates by reference from Exhibit 99.4 to the
Company’s Form 8-K filed on December 27, 2006.





99.05Parent Company Support Agreement dated December 20, 2006 made by Sonic
Corp. in favor of Citibank N.A., as Trustee, which the Company hereby
incorporates by reference from Exhibit 99.5 to the Company’s Form 8-K filed on
December 27, 2006.





34
 Table of Contents




Report
of Independent Registered Public Accounting Firm





The Board
of Directors and Stockholders of


Sonic
Corp.





We have
audited the accompanying consolidated balance sheets of Sonic Corp. as of August
31, 2008 and 2007, and the related consolidated statements of income,
stockholders’ deficit, and cash flows for each of the three years in the period
ended August 31, 2008. Our audits also included the financial statement schedule
listed in the Index at Item 15. These financial statements and schedule are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements and schedule 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 financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Sonic Corp. at August
31, 2008 and 2007, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended August 31, 2008, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Sonic Corp.’s internal
control over financial reporting as of August 31, 2008, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated October
28, 2008, expressed an unqualified opinion thereon.





As
discussed in Note 11 to the consolidated financial statements, in fiscal year
2008 the Company adopted Financial Accounting Standards Board Interpretation No.
48 “Accounting for Uncertainty in Income Taxes.”








ERNST
      & YOUNG LLP





Oklahoma
City, Oklahoma


October
28, 2008





F -
1
 Table of Contents





Sonic
Corp.





Consolidated
Balance Sheets





August
      31,2008
                  
                  
                  2007(In
      Thousands)AssetsCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  44,266
                  
                  
                  $
                  25,425Restricted
      cash
                  
                  
                  14,934
                  
                  
                  
                  13,521Accounts
      and notes receivable, net
                  
                  
                  29,838
                  
                  
                  
                  23,084Net
      investment in direct financing leases
                  
                  
                  899
                  
                  
                  
                  1,267Inventories
                  
                  
                  4,553
                  
                  
                  
                  4,444Deferred
      income taxes
                  
                  
                  200
                  
                  
                  
                  517Prepaid
      expenses and other
                  
                  
                  4,737
                  
                  
                  
                  5,445Total
      current assets
                  
                  
                  99,427
                  
                  
                  
                  73,703Noncurrent
      restricted cash
                  
                  
                  11,192
                  
                  
                  
                  11,354Notes
      receivable, net
                  
                  
                  3,163
                  
                  
                  
                  5,532Net
      investment in direct financing leases
                  
                  
                  1,601
                  
                  
                  
                  2,593Property,
      equipment and capital leases, net
                  
                  
                  586,245
                  
                  
                  
                  529,993Goodwill,
      net
                  
                  
                  105,762
                  
                  
                  
                  102,628Trademarks,
      trade names and other intangibles, net
                  
                  
                  12,418
                  
                  
                  
                  11,361Debt
      origination costs, net
                  
                  
                  16,121
                  
                  
                  
                  20,914Other
      assets, net
                  
                  
                  383
                  
                  
                  
                  442Total
      assets
                  
                  $
                  836,312
                  
                  
                  $
                  758,520




F -
2
 Table of Contents





Sonic
Corp.





Consolidated
Balance Sheets (continued)





August
      31,2008
                    
                    
                    2007(In
      Thousands)Liabilities
      and stockholders’ deficitCurrent
      liabilities:Accounts
      payable
                    
                    $
                    20,762
                    
                    
                    $
                    25,283Deposits
      from franchisees
                    
                    
                    3,213
                    
                    
                    
                    2,783Accrued
      liabilities
                    
                    
                    46,200
                    
                    
                    
                    55,707Income
      taxes payable
                    
                    
                    1,016
                    
                    
                    
                    7,863Obligations
      under capital leases and long-term debt due within one
year
                    
                    
                    41,351
                    
                    
                    
                    22,851Total
      current liabilities
                    
                    
                    112,542
                    
                    
                    
                    114,487Obligations
      under capital leases due after one year
                    
                    
                    34,503
                    
                    
                    
                    36,773Long-term
      debt due after one year
                    
                    
                    720,953
                    
                    
                    
                    690,437Other
      noncurrent liabilities
                    
                    
                    18,083
                    
                    
                    
                    17,212Deferred
      income taxes
                    
                    
                    14,347
                    
                    
                    
                    6,413Commitments
      and contingencies (Notes
      6, 7, 14, 15 and 16)Stockholders’
      deficit:Preferred
      stock, par value $.01; 1,000,000 shares authorized; none
      outstanding
                    
                    ─
                    
                    
                    ─Common
      stock, par value $.01; 245,000,000 shares authorized; shares issued
      117,044,879 in 2008 and 116,222,839 in 2007
                    
                    
                    1,170
                    
                    
                    
                    1,162Paid-in
      capital
                    
                    
                    209,316
                    
                    
                    
                    193,682Retained
      earnings
                    
                    
                    599,956
                    
                    
                    
                    540,886Accumulated
      other comprehensive income
                    
                    
                    (2,191
                    )
                    
                    
                    (2,848
                    )808,251
                    
                    
                    
                    732,882Treasury
      stock, at cost; 56,600,080 shares in 2008 and 55,078,107 shares in
      2007
                    
                    
                    (872,367
                    )
                    
                    
                    (839,684
                    )Total
      stockholders’ deficit
                    
                    
                    (64,116
                    )
                    
                    
                    (106,802
                    )Total
      liabilities and stockholders’ deficit
                    
                    $
                    836,312
                    
                    
                    $
                    758,520





See
accompanying notes.





F -
3
 Table of Contents





Sonic
Corp.





Consolidated
Statements of Income





Year
      ended August 31,2008
                      
                      
                      2007
                      
                      
                      2006(In
      Thousands, Except Per Share Data)Revenues:Partner
      Drive-In sales
                      
                      $
                      671,151
                      
                      
                      $
                      646,915
                      
                      
                      $
                      585,832Franchise
      Drive-Ins:Franchise
      royalties
                      
                      
                      121,944
                      
                      
                      
                      111,052
                      
                      
                      
                      98,163Franchise
      fees
                      
                      
                      5,167
                      
                      
                      
                      4,574
                      
                      
                      
                      4,747Other
                      
                      
                      6,451
                      
                      
                      
                      7,928
                      
                      
                      
                      4,520804,713
                      
                      
                      
                      770,469
                      
                      
                      
                      693,262Costs
      and expenses:Partner
      Drive-Ins:Food
      and packaging
                      
                      
                      177,533
                      
                      
                      
                      166,531
                      
                      
                      
                      151,724Payroll
      and other employee benefits
                      
                      
                      208,479
                      
                      
                      
                      196,785
                      
                      
                      
                      175,610Minority
      interest in earnings of Partner Drive-Ins
                      
                      
                      21,922
                      
                      
                      
                      26,656
                      
                      
                      
                      25,234Other
      operating expenses, exclusive of depreciation and amortization included
      below
                      
                      
                      140,168
                      
                      
                      
                      130,204
                      
                      
                      
                      116,059548,102
                      
                      
                      
                      520,176
                      
                      
                      
                      468,627Selling,
      general and administrative
                      
                      
                      61,179
                      
                      
                      
                      58,736
                      
                      
                      
                      52,048Depreciation
      and amortization
                      
                      
                      50,653
                      
                      
                      
                      45,103
                      
                      
                      
                      40,696Provision
      for impairment of long-lived assets
                      
                      
                      571
                      
                      
                      
                      1,165
                      
                      
                      
                      264660,505
                      
                      
                      
                      625,180
                      
                      
                      
                      561,635Income
      from operations
                      
                      
                      144,208
                      
                      
                      
                      145,289
                      
                      
                      
                      131,627Interest
      expense
                      
                      
                      49,946
                      
                      
                      
                      41,227
                      
                      
                      
                      8,853Debt
      extinguishment and other costs
                      
                      
                      –
                      
                      
                      
                      6,076
                      
                      
                      
                      –Interest
      income
                      
                      
                      (2,019
                      )
                      
                      
                      (2,897
                      )
                      
                      
                      (1,275
                      )Net
      interest expense
                      
                      
                      47,927
                      
                      
                      
                      44,406
                      
                      
                      
                      7,578Income
      before income taxes
                      
                      
                      96,281
                      
                      
                      
                      100,883
                      
                      
                      
                      124,049Provision
      for income taxes
                      
                      
                      35,962
                      
                      
                      
                      36,691
                      
                      
                      
                      45,344Net
      income
                      
                      $
                      60,319
                      
                      
                      $
                      64,192
                      
                      
                      $
                      78,705Basic
      income per share
                      
                      $
                      1.00
                      
                      
                      $
                      0.94
                      
                      
                      $
                      0.91Diluted
      income per share
                      
                      $
                      0.97
                      
                      
                      $
                      0.91
                      
                      
                      $
                      0.88





See
accompanying notes.





F -
4
 Table of Contents





Sonic
Corp.





Consolidated
Statements of Stockholders’ Deficit





Common Stock
                    
                    
                    Paid-in
                    
                    
                    Retained
                    
                    
                    Accumulated
      Other Comprehensive
                    
                    
                    Treasury StockShares
                    
                    
                    Amount
                    
                    
                    Capital
                    
                    
                    Earnings
                    
                    
                    Income
                    
                    
                    Shares
                    
                    
                    Amount(In
      Thousands)Balance
      at August 31, 2005
                    
                    
                    75,766
                    
                    
                    $
                    758
                    
                    
                    $
                    154,154
                    
                    
                    $
                    397,989
                    
                    
                    $
                    –
                    
                    
                    
                    16,451
                    
                    
                    $
                    (164,984
                    )Exercise
      of common stock options
                    
                    
                    1,003
                    
                    
                    
                    10
                    
                    
                    
                    7,981
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Stock-based
      compensation expense, including capitalized compensation of
      $216
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    7,404
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Tax
      benefit related to exercise of employee stock options
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    4,645
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Purchase
      of treasury stock
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    3,538
                    
                    
                    
                    (94,485
                    )Three-for-two
      stock split
                    
                    
                    38,219
                    
                    
                    
                    382
                    
                    
                    
                    (382
                    )
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    9,517
                    
                    
                    
                    –Deferred
      hedging losses, net of tax of $300
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    (484
                    )
                    
                    
                    –
                    
                    
                    
                    –Net
      income
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    78,705
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Balance
      at August 31, 2006
                    
                    
                    114,988
                    
                    
                    
                    1,150
                    
                    
                    
                    173,802
                    
                    
                    
                    476,694
                    
                    
                    
                    (484
                    )
                    
                    
                    29,506
                    
                    
                    
                    (259,469
                    )Exercise
      of common stock options
                    
                    
                    1,235
                    
                    
                    
                    12
                    
                    
                    
                    8,524
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Stock-based
      compensation expense, including capitalized compensation of
      $232
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    7,290
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Tax
      benefit related to exercise of employee stock options
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    4,066
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Purchase
      of treasury stock
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    25,572
                    
                    
                    
                    (580,215
                    )Net
      change in deferred hedging losses, net of tax of $1,464
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    (2,364
                    )
                    
                    
                    –
                    
                    
                    
                    –Net
      income
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    64,192
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Balance
      at August 31, 2007
                    
                    
                    116,223
                    
                    
                    
                    1,162
                    
                    
                    
                    193,682
                    
                    
                    
                    540,886
                    
                    
                    
                    (2,848
                    )
                    
                    
                    55,078
                    
                    
                    
                    (839,684
                    )Exercise
      of common stock options
                    
                    
                    822
                    
                    
                    
                    8
                    
                    
                    
                    6,285
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Stock-based
      compensation expense
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    7,428
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Tax
      benefit related to exercise of employee stock options
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    1,921
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Purchase
      of treasury stock
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    1,522
                    
                    
                    
                    (32,683
                    )Net
      change in deferred hedging losses, net of tax of $407
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    657
                    
                    
                    
                    –
                    
                    
                    
                    –Retained
      earnings adjustment for adoption of FIN48
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    (1,249
                    )
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Net
      income
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    60,319
                    
                    
                    
                    –
                    
                    
                    
                    –
                    
                    
                    
                    –Balance
      at August 31, 2008
                    
                    
                    117,045
                    
                    
                    $
                    1,170
                    
                    
                    $
                    209,316
                    
                    
                    $
                    599,956
                    
                    
                    $
                    (2,191
                    )
                    
                    
                    56,600
                    
                    
                    $
                    (872,367
                    )





See
accompanying notes.





F -
5
 Table of Contents





Sonic
Corp.





Consolidated
Statements of Cash Flows





Year
      ended August 31,2008
                    
                    
                    2007
                    
                    
                    2006(In
      Thousands)Cash
      flows from operating activitiesNet
      income
                    
                    $
                    60,319
                    
                    
                    $
                    64,192
                    
                    
                    $
                    78,705Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                    
                    
                    50,212
                    
                    
                    
                    44,432
                    
                    
                    
                    40,356Amortization
                    
                    
                    441
                    
                    
                    
                    671
                    
                    
                    
                    340Gain
      on dispositions of assets, net
                    
                    
                    (2,954
                    )
                    
                    
                    (3,267
                    )
                    
                    
                    (422
                    )Stock-based
      compensation expense
                    
                    
                    7,428
                    
                    
                    
                    7,058
                    
                    
                    
                    7,188Provision
      for deferred income taxes
                    
                    
                    (2,439
                    )
                    
                    
                    (1,592
                    )
                    
                    
                    (2,713
                    )Provision
      for impairment of long-lived assets
                    
                    
                    571
                    
                    
                    
                    1,165
                    
                    
                    
                    264Excess
      tax benefit from exercise of employee stock options
                    
                    
                    (2,033
                    )
                    
                    
                    (4,117
                    )
                    
                    
                    (4,645
                    )Debt
      extinguishment and other costs
                    
                    ─
                    
                    
                    
                    5,283
                    
                    
                    ─Payment
      for hedge termination
                    
                    ─
                    
                    
                    
                    (5,640
                    )
                    
                    ─Amortization
      of debt costs to interest expense
                    
                    
                    5,896
                    
                    
                    
                    4,256
                    
                    
                    ─Other
                    
                    
                    190
                    
                    
                    
                    185
                    
                    
                    
                    398Decrease
      (increase) in operating assets:Restricted
      cash
                    
                    
                    212
                    
                    
                    
                    (8,965
                    )
                    
                    ─Accounts
      and notes receivable
                    
                    
                    (3,226
                    )
                    
                    
                    (709
                    )
                    
                    
                    (2,275
                    )Inventories
      and prepaid expenses
                    
                    
                    337
                    
                    
                    
                    159
                    
                    
                    
                    (2,267
                    )Increase
      in operating liabilities:Accounts
      payable
                    
                    
                    2,454
                    
                    
                    
                    106
                    
                    
                    
                    2,821Deposits
      from franchisees
                    
                    
                    1,196
                    
                    
                    
                    3,556
                    
                    
                    
                    227Accrued
      and other liabilities
                    
                    
                    8,539
                    
                    
                    
                    14,242
                    
                    
                    
                    9,496Total
      adjustments
                    
                    
                    66,824
                    
                    
                    
                    56,823
                    
                    
                    
                    48,768Net
      cash provided by operating activities
                    
                    
                    127,143
                    
                    
                    
                    121,015
                    
                    
                    
                    127,473Cash
      flows from investing activitiesPurchases
      of property and equipment
                    
                    
                    (105,426
                    )
                    
                    
                    (110,912
                    )
                    
                    
                    (86,863
                    )Acquisition
      of businesses, net of cash received
                    
                    
                    (20,895
                    )
                    
                    
                    (10,760
                    )
                    
                    
                    (14,601
                    )Acquisition
      of real estate, net of cash received
                    
                    ─
                    
                    
                    ─
                    
                    
                    
                    (12,125
                    )Proceeds
      from sale of real estate
                    
                    ─
                    
                    
                    
                    12,619
                    
                    
                    ─Investments
      in direct financing leases
                    
                    
                    (67
                    )
                    
                    
                    (302
                    )
                    
                    
                    (237
                    )Collections
      on direct financing leases
                    
                    
                    1,427
                    
                    
                    
                    1,544
                    
                    
                    
                    1,342Proceeds
      from dispositions of assets
                    
                    
                    17,339
                    
                    
                    
                    13,668
                    
                    
                    
                    5,271Proceeds
      from sale of minority interests in Partner Drive-Ins
                    
                    
                    5,120
                    
                    
                    
                    3,701
                    
                    
                    
                    6,379Purchases
      of minority interests in Partner Drive-Ins
                    
                    
                    (6,048
                    )
                    
                    
                    (4,369
                    )
                    
                    
                    (5,314
                    )Decrease
      (increase) in intangibles and other assets
                    
                    
                    1,447
                    
                    
                    
                    212
                    
                    
                    
                    (1,822
                    )Net
      cash used in investing activities
                    
                    
                    (107,103
                    )
                    
                    
                    (94,599
                    )
                    
                    
                    (107,970
                    )





(Continued
on following page)





F -
6
 Table of Contents





Sonic
Corp.





Consolidated
Statements of Cash Flows (continued)





Year
      ended August 31,2008
                    
                    
                    2007
                    
                    
                    2006(In
      Thousands)Cash
      flows from financing activitiesProceeds
      from borrowings
                    
                    $
                    165,250
                    
                    
                    $
                    1,404,490
                    
                    
                    $
                    274,763Payments
      on long-term debt
                    
                    
                    (123,321
                    )
                    
                    
                    (815,396
                    )
                    
                    
                    (206,806
                    )Purchases
      of treasury stock
                    
                    
                    (46,628
                    )
                    
                    
                    (564,984
                    )
                    
                    
                    (93,689
                    )Debt
      issuance costs
                    
                    
                    (226
                    )
                    
                    
                    (28,166
                    )
                    
                    ─Restricted
      cash for debt obligations
                    
                    
                    (1,463
                    )
                    
                    
                    (15,910
                    )
                    
                    ─Payments
      on capital lease obligations
                    
                    
                    (2,640
                    )
                    
                    
                    (2,471
                    )
                    
                    
                    (2,444
                    )Exercises
      of stock options
                    
                    
                    5,796
                    
                    
                    
                    7,732
                    
                    
                    
                    7,194Excess
      tax benefit from exercise of employee stock options
                    
                    
                    2,033
                    
                    
                    
                    4,117
                    
                    
                    
                    4,645Net
      cash used in financing activities
                    
                    
                    (1,199
                    )
                    
                    
                    (10,588
                    )
                    
                    
                    (16,337
                    )Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    18,841
                    
                    
                    
                    15,828
                    
                    
                    
                    3,166Cash
      and cash equivalents at beginning of the year
                    
                    
                    25,425
                    
                    
                    
                    9,597
                    
                    
                    
                    6,431Cash
      and cash equivalents at end of the year
                    
                    $
                    44,266
                    
                    
                    $
                    25,425
                    
                    
                    $
                    9,597Supplemental
      cash flow informationCash
      paid during the year for:Interest
      (net of amounts capitalized of $734, $576 and $733,
      respectively)
                    
                    $
                    44,727
                    
                    
                    $
                    36,501
                    
                    
                    $
                    8,769Income
      taxes (net of refunds)
                    
                    
                    35,316
                    
                    
                    
                    32,651
                    
                    
                    
                    48,225Obligation
      to acquire treasury stock
                    
                    ─
                    
                    
                    
                    14,432
                    
                    
                    ─Additions
      to capital lease obligations
                    
                    
                    1,055
                    
                    
                    
                    5,164
                    
                    
                    
                    4,958Accounts
      and notes receivable and decrease in capital lease obligations from
      property and equipment sales
                    
                    
                    348
                    
                    
                    
                    1,500
                    
                    
                    
                    6,514Stock
      options exercised by stock swap
                    
                    
                    488
                    
                    
                    
                    799
                    
                    
                    
                    787Change
      in obligation for purchase of property and equipment
                    
                    
                    (222
                    )
                    
                    
                    1,134
                    
                    
                    ─





See
accompanying notes.




F -
7
 Table of Contents





Sonic
Corp.





Notes
to Consolidated Financial Statements





August
31, 2008, 2007 and 2006





(In
Thousands, Except Per Share Data)








1.  Summary
of Significant Accounting Policies




Operations




Sonic
Corp. (the “Company”) operates and franchises a chain of quick-service drive-ins
in the United States.  It derives its revenues primarily from Partner
Drive-In sales and royalty fees from franchisees.  The Company also
leases signs and real estate, and owns a minority interest in several Franchise
Drive-Ins.





From time
to time, the Company has purchased existing Franchise Drive-Ins with proven
track records in core markets from franchisees and other minority investors as a
means to deploy excess cash generated from operating activities and provide a
foundation for future earnings growth.





Principles
of Consolidation





The
accompanying financial statements include the accounts of the Company, its
wholly-owned subsidiaries and its majority-owned Partner Drive-Ins, organized as
general partnerships and limited liability companies.  All significant
intercompany accounts and transactions have been eliminated.





Certain
amounts have been reclassified in the Consolidated Financial Statements to
conform to the fiscal year 2008 presentation.





Use
of Estimates





The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported and contingent assets
and liabilities disclosed in the financial statements and accompanying
notes.  Actual results may differ from those estimates, and such
differences may be material to the financial statements.





Cash
Equivalents





Cash
equivalents consist of highly liquid investments, primarily money market
accounts that mature in three months or less from date of purchase, and
depository accounts.





Restricted
Cash





As of
August 31, 2008, the Company had restricted cash balances totaling $26,126 for
funds required to be held in trust for the benefit of senior note holders under
the Company’s debt arrangements.  The current portion of restricted
cash of $14,934 represents amounts to be returned to Sonic or paid to service
current debt obligations.  The noncurrent portion of $11,192
represents interest reserves required to be set aside for the duration of the
debt.





Accounts
and Notes Receivable





The
Company charges interest on past due accounts receivable at a rate of 18% per
annum. Interest accrues on notes receivable based on contractual
terms.  The Company monitors all accounts for delinquency and provides
for estimated losses for specific receivables that are not likely to be
collected.  In addition, a general provision for bad debt is estimated
based on historical trends.




F -
8
 Table of Contents















Inventories





Inventories
consist principally of food and supplies that are carried at the lower of cost
(first-in, first-out basis) or market.





Property,
Equipment and Capital Leases





Property
and equipment are recorded at cost, and leased assets under capital leases are
recorded at the present value of future minimum lease payments. Depreciation of
property and equipment and capital leases is computed by the straight-line
method over the estimated useful lives or the lease term, including cancelable
option periods when appropriate, and are combined for presentation in the
financial statements.





Accounting
for Long-Lived Assets





In
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets,” the Company reviews long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset might not
be recoverable.  Assets are grouped and evaluated for impairment at
the lowest level for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets, which generally
represents the individual drive-in.  The Company’s primary test for an
indicator of potential impairment is operating losses.  If an
indication of impairment is determined to be present, the Company estimates the
future cash flows expected to be generated from the use of the asset and its
eventual disposal.  If the sum of undiscounted future cash flows is
less than the carrying amount of the asset, an impairment loss is
recognized.  The impairment loss is measured by comparing the fair
value of the asset to its carrying amount.   Fair value is
typically determined to be the value of the land, since drive-in buildings and
improvements are single-purpose assets and have little value to market
participants.  The equipment associated with a store can be easily
relocated to another store, and therefore is not adjusted.





Surplus
property assets are carried at the lower of depreciated cost or fair value less
cost to sell.  The majority of the value in surplus property is
land.  Fair values are estimated based upon appraisals or independent
assessments of the assets’ estimated sales values.





Goodwill
and Other Intangible Assets





The
Company accounts for goodwill and other intangible assets in accordance with
SFAS No. 142, “Goodwill and Other Intangible Assets.”  Goodwill is
determined based on acquisition purchase price in excess of the fair value of
identified assets.  Intangible assets with lives restricted by
contractual, legal, or other means are amortized over their useful
lives.  The Company tests all goodwill and other intangible assets not
subject to amortization at least annually for impairment using the fair value
approach on a reporting unit basis in accordance with SFAS No.
142.  The Company’s reporting units are defined as Partner Drive-Ins
and Franchise Operations (see additional information regarding the Company’s
reporting units in footnote 13, Segment Information).  SFAS No. 142
requires a two-step process for testing impairment.  The first step is
to compare the fair value of each reporting unit to its carrying value to
determine whether an indication of impairment exists.  If impairment
is indicated, then the fair value of the reporting unit’s goodwill is determined
by allocating the unit’s fair value to its assets and liabilities (including any
unrecognized intangible assets) as if the reporting unit had been acquired in a
business combination.  The amount of impairment for goodwill and other
intangible assets is measured as the excess of its carrying value over its fair
value.




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The
Company’s intangible assets subject to amortization under SFAS No. 142 consist
primarily of acquired franchise agreements, franchise fees, and other
intangibles.  Amortization expense is calculated using the
straight-line method over the expected period of benefit, not exceeding 20
years.  The Company’s trademarks and trade names were deemed to have
indefinite useful lives and are not subject to amortization.  See Note
5 for additional disclosures related to goodwill and other
intangibles.





Ownership
Program





The
Company’s drive-in philosophy stresses an ownership relationship with drive-in
supervisors and managers.  Most supervisors and managers of Partner
Drive-Ins own an equity interest in the drive-in, which is financed by third
parties.  Supervisors and managers are neither employees of the
Company nor of the drive-in in which they have an ownership
interest.





The
minority ownership interests in Partner Drive-Ins of the managers and
supervisors are recorded as a minority interest liability in accrued liabilities
and other noncurrent liabilities on the Consolidated Balance Sheets, and their
share of the drive-in earnings is reflected as Minority interest in earnings of
Partner Drive-Ins in the Costs and expenses section of the Consolidated
Statements of Income. The ownership agreements contain provisions, which give
the Company the right, but not the obligation, to purchase the minority interest
of the supervisor or manager in a drive-in.   The amount of the
investment made by a partner and the amount of the buy-out are based on a number
of factors, including primarily the drive-in’s financial performance for the
preceding 12 months, and are intended to approximate the fair value of a
minority interest in the drive-in.





The
Company acquires and sells minority interests in Partner Drive-Ins from time to
time as managers and supervisors buy out and buy in to the partnerships or
limited liability companies.   If the purchase price of a
minority interest that we acquire exceeds the net book value of the assets
underlying the partnership interest, the excess is recorded as
goodwill.  The acquisition of a minority interest for less than book
value is recorded as a reduction in purchased goodwill.  When the
Company sells a minority interest, the sales price is typically in excess of the
book value of the partnership interest, and the difference is recorded as a
reduction of goodwill.  If the book value exceeds the sales price, the
excess is recorded as goodwill.  In either case, no gain or loss is
recognized on the sale of a minority ownership
interest.   Goodwill created as a result of the acquisition of
minority interests in Partner Drive-Ins is not amortized but is tested annually
for impairment under the provisions of SFAS No. 142.





Revenue
Recognition, Franchise Fees and Royalties





Revenue
from Partner Drive-In sales is recognized when food and beverage products are
sold.  We present Partner Drive-In sales net of sales tax and other
sales-related taxes.





Initial
franchise fees are recognized in income when all material services or conditions
relating to the sale of the franchise have been substantially performed or
satisfied by the Company and the fees are nonrefundable.  Area
development agreement fees are nonrefundable and are recognized in income on a
pro rata basis when the conditions for revenue recognition under the individual
area development agreements are met.  Both initial franchise fees and
area development fees are generally recognized upon the opening of a franchise
drive-in or upon termination of the agreement between the Company and the
franchisee.




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The
Company’s franchisees are required under the provisions of the license
agreements to pay the Company royalties each month based on a percentage of
actual net royalty sales.  However, the royalty payments and
supporting financial statements are not due until the following
month.  As a result, the Company accrues royalty revenue in the month
earned based on estimates of Franchise Drive-In sales.  These
estimates are based on projections of average unit volume growth at Franchise
Drive-Ins from preliminary data collected from drive-ins for the month, along
with consideration of actual sales at Partner Drive-Ins.





Operating
Leases





Rent
expense is recognized on a straight-line basis over the expected lease term,
including cancelable option periods when it is deemed to be reasonably assured
that we would incur an economic penalty for not exercising the
options.  Within the provisions of certain of our 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 appropriate.  The
lease term commences on the date when we have the right to control the use of
the leased property, which can occur before rent payments are due under the
terms of the lease.  Percentage rent expense is generally based on
sales levels and is accrued at the point in time we determine that it is
probable that such sales levels will be achieved.





Advertising
Costs





Costs
incurred in connection with the advertising and promoting of the Company’s
products are included in other operating expenses and are expensed as
incurred.  Such costs amounted to $36,801, $35,241, and $30,948 for
fiscal years 2008, 2007 and 2006, respectively.





Under the
Company’s license agreements, both Partner-Drive-Ins and Franchise Drive-Ins
must contribute a minimum percentage of revenues to a national media production
fund (Sonic Brand Fund) and spend an additional minimum percentage of gross
revenues on local advertising, either directly or through Company-required
participation in advertising cooperatives. A portion of the local advertising
contributions is redistributed to a System Marketing Fund, which purchases
advertising on national cable and broadcast networks and other national media
and sponsorship opportunities.  As stated in the terms of existing
license agreements, these funds do not constitute assets of the Company, and the
Company acts with limited agency in the administration of these funds.
Accordingly, neither the revenues and expenses nor the assets and liabilities of
the advertising cooperatives, the Sonic Brand Fund, or the System Marketing Fund
are included in the Company’s consolidated financial
statements.  However, all advertising contributions by Partner
Drive-Ins are recorded as expense on the Company’s financial
statements.





Stock-Based
Compensation





In
accordance with Statement of Financial Accounting Standards No. 123 (revised
2004), “Share-Based Payment” (“SFAS 123R”), stock-based compensation is measured
at the grant date, based on the calculated fair value of the award, and is
recognized as an expense over the requisite employee service period (generally
the vesting period of the grant).  The Company adopted SFAS 123R
effective September 1, 2005, using the modified retrospective application method
and, as a result, financial statement amounts for all periods presented in this
Form 10-K reflect the fair value method of expensing prescribed by SFAS
123R.




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The
following table shows total stock-based compensation expense and the tax benefit
included in the Consolidated Statements of Income and the effect on basic and
diluted earnings per share for the years ended August 31:





2008
                  
                  
                  2007
                  
                  
                  2006Selling,
      general and administrative
                  
                  $
                  7,428
                  
                  
                  $
                  7,059
                  
                  
                  $
                  7,187Income
      tax benefit
                  
                  
                  (2,820
                  )
                  
                  
                  (2,254
                  )
                  
                  
                  (2,266
                  )Net
      stock-based compensation expense
                  
                  $
                  4,608
                  
                  
                  $
                  4,805
                  
                  
                  $
                  4,921Impact
      on net income per share:Basic
                  
                  $
                  0.08
                  
                  
                  $
                  0.07
                  
                  
                  $
                  0.06Diluted
                  
                  $
                  0.07
                  
                  
                  $
                  0.07
                  
                  
                  $
                  0.06





Many of
the options granted by Sonic are incentive stock options, for which a tax
benefit only results if the option holder has a disqualifying
disposition.  For grants of non-qualified stock options, the Company
expects to recognize a tax benefit on exercise of the option, so the full tax
benefit is recognized on the related stock-based compensation
expense.  As a result of the limitation on the tax benefit for
incentive stock options, the tax benefit for stock-based compensation will
generally be less than the Company’s overall tax rate, and will vary depending
on the timing of employees’ exercises and sales of stock.





Income
Taxes





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. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those 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 earnings. These
benefits are principally generated from employee exercises of non-qualified
stock options and disqualifying dispositions of incentive stock
options.




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New
Accounting Pronouncements





In
September 2006, the FASB issued FASB Statement No. 157, “Fair Value Measures”
(“SFAS 157”).  SFAS 157 defines fair value, establishes a framework
for using fair value to measure assets and liabilities, and expands disclosures
about fair value measurements.  This standard was issued to be
effective for our fiscal year beginning September 1, 2008. The FASB approved a
one-year deferral of adoption of the standard as it relates to non-financial
assets and liabilities with the issuance in February 2008 of FASB Staff Position
SFAS 157-2, “Effective Date of FASB Statement No. 157.”  In addition,
the FASB has excluded leases from the scope of SFAS 157 with the issuance of
FASB Staff Position SFAS 157-1, “Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements that Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement
13.”  In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities” (“SFAS 159”).  SFAS 159 permits companies to
choose to measure many financial instruments and certain other items at fair
value.  If the fair value option is elected, unrealized gains and
losses will be recognized in earnings at each subsequent reporting date. SFAS
159 has the same effective date as SFAS 157.  The Company continues to
assess the impact that these standards may have on its consolidated financial
position and results of operations.





In
December 2007, the FASB issued FASB Statement No. 141(revised 2007), “Business
Combinations” (“SFAS 141(R)”).  This standard retains the fundamental
requirements in SFAS No. 141 that the acquisition method of accounting
be used for all business combinations and for an acquirer to be identified for
each business combination. SFAS No. 141(R) requires an acquirer to
recognize the assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree at their fair values at the acquisition date. Costs
incurred by the acquirer to effect the acquisition are not allocated to the
assets acquired or liabilities assumed, but are recognized
separately.  SFAS No. 141(R) is effective prospectively to
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after
December 15, 2008, which for us will be business combinations with an
acquisition date beginning on or after September 1, 2009.  The Company
is evaluating the impact that SFAS 141(R) will have on its consolidated
financial position and results of operations.





In
December 2007, the FASB issued FASB Statement No. 160, “Noncontrolling Interests
in Consolidated Financial Statements, an amendment to ARB No. 51” (“SFAS
160”).  This standard establishes accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary and clarifies that a noncontrolling interest in a subsidiary is an
ownership interest that should be reported as equity in the consolidated
financial statements. SFAS No. 160 establishes a single method of
accounting for changes in a parent’s ownership interest in a subsidiary that do
not result in deconsolidation and requires a parent to recognize a gain or loss
in net income when a subsidiary is deconsolidated. SFAS No. 160 also
requires consolidated net income to be reported at amounts that include the
amounts attributable to both the parent and the noncontrolling interest and to
disclose, on the face of the consolidated statement of income, the amounts of
consolidated net income attributable to the parent and to the noncontrolling
interest. SFAS No. 160 is effective for fiscal years beginning on or
after December 15, 2008, which for us will be our fiscal year beginning
September 1, 2009.  The Company is evaluating the impact that SFAS 160
will have on its consolidated financial position and results of
operations.




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2.  Net
Income Per Share





The
following table sets forth the computation of basic and diluted earnings per
share for the years ended August 31:





2008
                  
                  
                  2007
                  
                  
                  2006Numerator:Net
      income
                  
                  $
                  60,319
                  
                  
                  $
                  64,192
                  
                  
                  $
                  78,705Denominator:Weighted
      average shares outstanding – basic
                  
                  
                  60,403
                  
                  
                  
                  68,019
                  
                  
                  
                  86,260Effect
      of dilutive employee stock options
                  
                  
                  1,867
                  
                  
                  
                  2,573
                  
                  
                  
                  2,979Weighted
      average shares – diluted
                  
                  
                  62,270
                  
                  
                  
                  70,592
                  
                  
                  
                  89,239Net
      income per share – basic
                  
                  $
                  1.00
                  
                  
                  $
                  0.94
                  
                  
                  $
                  0.91Net
      income per share – diluted
                  
                  $
                  0.97
                  
                  
                  $
                  0.91
                  
                  
                  $
                  0.88Anti-dilutive
      employee stock options excluded
                  
                  
                  3,255
                  
                  
                  
                  1,858
                  
                  
                  
                  1,378





3.  Impairment
of Long-Lived Assets





During
the fiscal years ended August 31, 2008, 2007 and 2006, the Company identified
impairments for certain drive-in assets and surplus property through regular
quarterly reviews of long-lived assets.  During fiscal year 2008,
these analyses resulted in provisions for impairment totaling $571, including
$99 to write down the carrying amount of building and leasehold improvements on
an underperforming drive-in, and $472 to reduce the carrying amount of five
surplus properties down to fair value.  During fiscal year 2007, these
analyses resulted in provisions for impairment totaling $1,165, including $412
to reduce the carrying amount of assets in excess of fair value for two
drive-ins, and $753 to reduce to fair value the carrying amount of assets for
three properties leased to franchisees.  During fiscal year 2006,
these analyses resulted in provisions for impairment totaling $264 to reduce the
carrying amount of three surplus properties down to fair value.





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4.  Accounts
and Notes Receivable





Accounts
and notes receivable consist of the following at August 31, 2008 and
2007:





2008
                    
                    
                    2007Current Accounts and Notes
      Receivable:Royalties
      and other trade receivables
                    
                    $
                    14,556
                    
                    
                    $
                    12,792Notes
      receivable from franchisees
                    
                    
                    2,387
                    
                    
                    
                    528Notes
      receivable from advertising funds
                    
                    
                    2,587
                    
                    
                    
                    4,083Other
                    
                    
                    10,922
                    
                    
                    
                    6,27530,452
                    
                    
                    
                    23,678Less
      allowance for doubtful accounts and notes receivable
                    
                    
                    614
                    
                    
                    
                    594$
                    29,838
                    
                    
                    $
                    23,084Noncurrent Notes
Receivable:Notes
      receivable from franchisees
                    
                    $
                    3,266
                    
                    
                    $
                    5,649Less
      allowance for doubtful notes receivable
                    
                    
                    103
                    
                    
                    
                    117$
                    3,163
                    
                    
                    $
                    5,532





The
Company’s receivables are primarily due from franchisees, all of whom are in the
restaurant business.  The notes receivable from advertising funds
represent transactions in the normal course of
business.  Substantially all of the notes receivable from franchisees
are collateralized by real estate or equipment.





5.  Goodwill,
Trademarks, Trade Names and Other Intangibles





The gross
carrying amount of franchise agreements, franchise fees and other intangibles
subject to amortization was $8,013 and $6,529 at August 31, 2008 and 2007,
respectively.  The estimated amortization expense for each of the five
years after August 31, 2008 is approximately $466. Accumulated amortization
related to these intangible assets was $1,639 and $1,212 at August 31, 2008 and
2007, respectively.  The carrying amount of trademarks and trade names
not subject to amortization was $6,044 at August 31, 2008 and 2007.





The
entire balance of the Company’s goodwill relates to Partner
Drive-Ins.  The changes in the carrying amount of goodwill for fiscal
years ending August 31, 2008 and 2007 were as follows:





2008
                  
                  
                  2007Balance
      as of September 1,
                  
                  $
                  102,628
                  
                  
                  $
                  96,949Goodwill
      acquired during the year
                  
                  
                  4,422
                  
                  
                  
                  4,852Goodwill
      acquired for minority interests in Partner Drive-Ins
                  
                  
                  4,007
                  
                  
                  
                  3,018Goodwill
      disposed of for minority interests in Partner Drive-Ins
                  
                  
                  (3,229
                  )
                  
                  
                  (2,090
                  )Goodwill
      disposed of related to the sale of Partner Drive-Ins
                  
                  
                  (2,066
                  )
                  
                  
                  (101
                  )Balance
      as of August 31,
                  
                  $
                  105,762
                  
                  
                  $
                  102,628




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6.  Leases





Description
of Leasing Arrangements





The
Company’s leasing operations consist principally of leasing certain land,
buildings and equipment (including signs) and subleasing certain buildings to
franchise operators. The land and building portions of these leases are
classified as operating leases and expire over the next 16
years.   The equipment portions of these leases are classified
principally as direct financing leases and expire principally over the next 10
years. These leases include provisions for contingent rentals that may be
received on the basis of a percentage of sales in excess of stipulated amounts.
Income is not recognized on contingent rentals until sales exceed the stipulated
amounts.  Some leases contain escalation clauses over the lives of the
leases.  Most of the leases contain one to four renewal options at the
end of the initial term for periods of five years.  The Company
classifies income from leasing operations as other revenue in the Consolidated
Statements of Income.





Certain
Partner Drive-Ins lease land and buildings from third parties. These leases,
which expire over the next 18 years, include provisions for contingent rentals
that may be paid on the basis of a percentage of sales in excess of stipulated
amounts. For the majority of leases, the land portions are classified as
operating leases and the building portions are classified as capital
leases.





Direct
Financing Leases





Components
of net investment in direct financing leases are as follows at August 31, 2008
and 2007:





2008
                
                
                2007Minimum
      lease payments receivable
                
                $
                3,292
                
                
                $
                5,098Less
      unearned income
                
                
                792
                
                
                
                1,238Net
      investment in direct financing leases
                
                
                2,500
                
                
                
                3,860Less
      amount due within one year
                
                
                899
                
                
                
                1,267Amount
      due after one year
                
                $
                1,601
                
                
                $
                2,593





Initial
direct costs incurred in the negotiations and consummations of direct financing
lease transactions have not been material.  Accordingly, no portion of
unearned income has been recognized to offset those costs.





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Future
minimum rental payments receivable as of August 31, 2008 are as
follows:





Operating
                
                
                Direct
      FinancingYear
      ending August 31:2009
                
                $
                405
                
                
                $
                1,1842010
                
                
                386
                
                
                
                6732011
                
                
                374
                
                
                
                4742012
                
                
                355
                
                
                
                3412013
                
                
                328
                
                
                
                253Thereafter
                
                
                1,592
                
                
                
                3673,440
                
                
                
                3,292Less
      unearned income
                
                ─
                
                
                
                792$
                3,440
                
                
                $
                2,500





Capital
Leases





Components
of obligations under capital leases are as follows at August 31, 2008 and
2007:





2008
                
                
                2007Total
      minimum lease payments
                
                $
                52,988
                
                
                $
                57,332Less
      amount representing interest averaging 7.1% in 2008 and
    2007
                
                
                15,603
                
                
                
                18,014Present
      value of net minimum lease payments
                
                
                37,385
                
                
                
                39,318Less
      amount due within one year
                
                
                2,882
                
                
                
                2,545Amount
      due after one year
                
                $
                34,503
                
                
                $
                36,773




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Maturities
of these obligations under capital leases and future minimum rental payments
required under operating leases that have initial or remaining noncancelable
lease terms in excess of one year as of August 31, 2008 are as
follows:





Operating
                
                
                CapitalYear
      ending August 31:2009
                
                $
                12,152
                
                
                $
                5,5712010
                
                
                11,973
                
                
                
                5,5942011
                
                
                11,734
                
                
                
                5,3952012
                
                
                11,503
                
                
                
                5,1452013
                
                
                11,169
                
                
                
                5,135Thereafter
                
                
                136,689
                
                
                
                26,148195,220
                
                
                
                52,988Less
      amount representing interest
                
                
                –
                
                
                
                15,603$
                195,220
                
                
                $
                37,385





Total
rent expense for all operating leases and capital leases consists of the
following for the years ended August 31:





2008
                        
                        
                        2007
                        
                        
                        2006Operating
      leases:Minimum
      rentals
                        
                        $
                        14,438
                        
                        
                        $
                        13,644
                        
                        
                        $
                        12,731Contingent
      rentals
                        
                        
                        163
                        
                        
                        
                        229
                        
                        
                        
                        199Sublease
      rentals
                        
                        
                        (527
                        )
                        
                        
                        (553
                        )
                        
                        
                        (542
                        )Capital
      leases:Contingent
      rentals
                        
                        
                        1,326
                        
                        
                        
                        1,300
                        
                        
                        
                        1,123$
                        15,400
                        
                        
                        $
                        14,620
                        
                        
                        $
                        13,511





The
aggregate future minimum rentals receivable under noncancelable subleases of
operating leases as of August 31, 2008 was $1,704.




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7.  Property,
Equipment and Capital Leases





Property,
equipment and capital leases consist of the following at August 31, 2008 and
2007:





Estimated
      Useful Life
                    
                    2008
                    
                    
                    2007Property
      and equipment:Home
      office:Leasehold
      improvements
                    Life
      of lease
                    
                    $
                    3,891
                    
                    
                    $
                    3,082Computer
      and other equipment
                    2 –
      5 yrs
                    
                    
                    40,043
                    
                    
                    
                    33,134Drive-ins,
      including those leased to others:Land
                    
                    
                    
                    176,201
                    
                    
                    
                    158,968Buildings
                    8 –
      25 yrs
                    
                    
                    382,268
                    
                    
                    
                    331,901Equipment
                    5 –
      7 yrs
                    
                    
                    192,323
                    
                    
                    
                    179,863Property
      and equipment, at cost
                    
                    
                    
                    794,726
                    
                    
                    
                    706,948Less
      accumulated depreciation
                    
                    
                    
                    240,251
                    
                    
                    
                    211,327Property
      and equipment, net
                    
                    
                    
                    554,475
                    
                    
                    
                    495,621Capital
      Leases:Leased
      home office building
                    Life
      of lease
                    
                    
                    9,321
                    
                    
                    
                    9,321Leased
      drive-in buildings, equipment and other assets under capital leases,
      including those held for sublease
                    Life
      of lease
                    
                    
                    40,298
                    
                    
                    
                    40,125Less
      accumulated amortization
                    
                    
                    
                    17,849
                    
                    
                    
                    15,074Capital
      leases, net
                    
                    
                    
                    31,770
                    
                    
                    
                    34,372Property,
      equipment and capital leases, net
                    
                    
                    $
                    586,245
                    
                    
                    $
                    529,993





Land,
buildings and equipment with a carrying amount of $27,302 at August 31, 2008
were leased under operating leases to franchisees or other
parties.  The accumulated depreciation related to these buildings and
equipment was $6,461 at August 31, 2008.  As of August 31, 2008, the
Company had drive-ins under construction with costs to complete which aggregated
$14,127.




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8.  Accrued
Liabilities





Accrued
liabilities consist of the following at August 31, 2008 and 2007:





2008
                
                
                2007Wages
      and other employee benefits
                
                $
                7,685
                
                
                $
                8,178Taxes,
      other than income taxes
                
                
                16,004
                
                
                
                15,296Accrued
      interest
                
                
                1,121
                
                
                
                1,122Minority
      interest in consolidated drive-ins
                
                
                2,123
                
                
                
                3,690Obligation
      to acquire treasury stock
                
                
                –
                
                
                
                14,432Unredeemed
      gift cards and gift certificates
                
                
                6,283
                
                
                
                5,997Other
                
                
                12,984
                
                
                
                6,992$
                46,200
                
                
                $
                55,707





9.  Long-Term
Debt





Long-term
debt consists of the following at August 31, 2008 and 2007:





2008
                  
                  
                  20075.7%
      Class A-2 senior notes, due December 2031
                  
                  $
                  573,300
                  
                  
                  $
                  593,440Class
      A-1 senior variable funding notes
                  
                  
                  185,000
                  
                  
                  
                  116,000Other
                  
                  
                  1,122
                  
                  
                  
                  1,303759,422
                  
                  
                  
                  710,743Less
      long-term debt due within one year
                  
                  
                  38,469
                  
                  
                  
                  20,306Long-term
      debt due after one year
                  
                  $
                  720,953
                  
                  
                  $
                  690,437





Maturities
of long-term debt for each of the five years after August 31, 2008 are $38,469
in 2009, $55,170 in 2010, $73,454 in 2011, $93,442 in 2012, and $498,887
thereafter.





In
October 2006, the Company refinanced its senior unsecured notes and line of
credit and funded a tender offer to repurchase shares of its common stock with
proceeds from a senior secured credit facility until the Class A-2 senior notes
were financed in December 2006.  Loan origination costs associated
with this debt totaled $4,631 and the unamortized loan origination costs of
$4,544 were expensed as debt extinguishment costs when the financing was closed
in December 2006.





In
December 2006, various subsidiaries of the Company issued $600,000 of Class A-2
senior notes in a private transaction.  The proceeds were used to
refinance the outstanding balance under the senior secured credit facility,
along with costs associated with the transaction.  The Class A-2 notes
are the first issuance under a facility that will allow Sonic to issue
additional series of notes in the future subject to certain
conditions.  These notes have a fixed interest rate of 5.7%, subject
to upward adjustment after the expected six-year repayment term.  Loan
origination costs associated with this debt totaled $24,369, and the unamortized
balance is categorized as debt origination costs, net, on the Consolidated
Balance Sheet as of August 31, 2008.  Amortization of these loan costs
and the hedge loss discussed below produces an overall weighted average interest
cost of 6.8%.  The Class A-2 notes have an expected life of six years,
with a legal final repayment date in December 2031.  If the debt
extends beyond the expected life, rapid amortization and cash trapping
provisions of the debt agreements will be triggered which will cause the
remaining principal balance to be given higher priority of payment from the
secured sources.  The Company anticipates paying the debt in full
based on the expected life.





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In
connection with issuance of the Class A-2 notes, various subsidiaries of the
Company also completed a securitized financing facility of Class A-1 senior
variable funding notes.  This facility allows for the issuance of up
to $200,000 of notes and certain other credit instruments, including letters of
credit.  Considering the $185,000 outstanding at August 31, 2008 and
$325 in outstanding letters of credit, $14,675 was unused and available under
the Class A-1 notes.  The effective interest rate on the outstanding
balance for the Class A-1 notes at August 31, 2008 and 2007 was 3.69% and 6.44%,
respectively. There is a commitment fee on the unused portion of the Class A-1
notes of 0.5%.  Subsequent to August 31, 2008, a lender who committed
to advance one-half of the funds for the Class A-1 notes, filed for Chapter 11
bankruptcy on September 15, 2008.  At that time, the unused and
available balance under these notes was $24,675.  As a result, the
remaining balance of the lender’s commitment of $12,500 may no longer be
available, depending on how the commitment is ultimately resolved in the
bankruptcy proceedings.





The Class
A-1 and Class A-2 senior notes were issued by special purpose, bankruptcy
remote, indirect subsidiaries of the Company that hold substantially all of
Sonic’s franchising assets and Partner Drive-In real estate used in operation of
the Company’s existing business.  As of August 31, 2008, total assets
for these combined indirect subsidiaries were approximately $468,000, including
receivables for royalties, Partner Drive-In real estate, intangible assets, loan
origination costs and restricted cash balances of $26,126.  The Class
A-1 and Class A-2 notes are secured by Sonic’s franchise royalty payments,
certain lease and other payments and fees and, as a result, the repayment of
these notes is expected to be made solely from the income derived from these
indirect subsidiaries’ assets.  Sonic Industries LLC, which is the
subsidiary that acts as franchisor, has guaranteed the obligations of the
co-issuers and pledged substantially all of its assets to secure such
obligations.





The
third-party insurance company that provides credit enhancements in the form of
financial guaranties of our Class A-1 and Class A-2 note payments is
AA/Aa3 rated by Standard & Poor’s and Moody’s, respectively. 
However, Moody’s has placed the insurer under review for a possible downgrade.
 We are unable to determine the impact a downgrade would have on our
insurer’s financial condition.  However, if the insurance company were
to become the subject of insolvency or similar proceedings, our lenders would
not be required to fund our Class A-1 variable funding notes.  In addition,
an event of default would occur if: (i) the insurance company were to become the
subject of insolvency or similar proceedings and (ii) the insurance policy were
not continued or sold to a third party (who would assume the insurance company’s
obligations under the policy), but instead were terminated or canceled as a
result of those proceedings. In an event of default, all unpaid amounts under
the Class A-1 and Class A-2 notes could become immediately due and
payable only at the direction or consent of holders with a majority of the
outstanding principal. While no assurance can be provided, if this were to
occur, we believe that we could negotiate mutually acceptable terms with our
lenders or obtain alternate funding.




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Although
the Company does not guarantee the Class A-1 and Class A-2 notes, the Company
has agreed to cause the performance of certain obligations of its subsidiaries,
principally related to the servicing of the assets included as collateral for
the notes and certain indemnity obligations.





In August
2006, the Company entered into a forward starting swap agreement with a
financial institution to hedge part of the exposure to changing interest rates
until new financing was closed in December 2006.  The forward starting
swap was designated as a cash flow hedge, and was subsequently settled in
conjunction with the closing of the Class A-2 notes, as planned.  The
loss resulting from settlement of $5,640 ($3,483, net of tax) was recorded in
accumulated other comprehensive income and is being amortized to interest
expense over the expected term of the Class A-2 notes.  Amortization
of this loss during fiscal year 2008 and 2007 totaled $1,063 ($657, net of tax)
and $753 ($465, net of tax) in interest expense, respectively.  Over
the next 12 months, the Company expects to amortize $1,012 ($625, net of tax) to
interest expense for this loss.  During fiscal year 2007, an
ineffective portion of the hedge of $275 ($170, net of tax) was recognized in
debt extinguishment and other costs on the Consolidated Income
Statement.  The cash flows resulting from these hedge transactions are
included in cash flows from operating activities on the Consolidated Statement
of Cash Flows.





The
following table presents the components of comprehensive income for the years
ended August 31, 2008, 2007 and 2006:





2008
                
                
                2007
                
                
                2006Net
      Income
                
                $
                60,319
                
                
                $
                64,192
                
                
                $
                78,705Decrease
      (increase) in deferred hedging loss, net of tax
                
                
                657
                
                
                
                (2,364
                )
                
                
                (484
                )Total
      comprehensive income
                
                $
                60,976
                
                
                $
                61,828
                
                
                $
                78,221








10. 
Other Noncurrent Liabilities





Other
noncurrent liabilities consist of the following at August 31, 2008 and
2007:





2008
                
                
                2007Minority
      interests in consolidated drive-ins
                
                $
                3,097
                
                
                $
                3,789Deferred
      area development fees
                
                
                6,993
                
                
                
                6,227Other
                
                
                7,993
                
                
                
                7,196$
                18,083
                
                
                $
                17,212




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11.  Income
Taxes





The
Company’s income before the provision for income taxes is classified by source
as domestic income.





The
components of the provision for income taxes consist of the following for the
years ended August 31:





2008
                  
                  
                  2007
                  
                  
                  2006Current:Federal
                  
                  $
                  21,881
                  
                  
                  $
                  31,369
                  
                  
                  $
                  42,629State
                  
                  
                  5,730
                  
                  
                  
                  3,859
                  
                  
                  
                  4,16327,611
                  
                  
                  
                  35,228
                  
                  
                  
                  46,792Deferred:Federal
                  
                  
                  7,259
                  
                  
                  
                  1,272
                  
                  
                  
                  (1,127
                  )State
                  
                  
                  1,092
                  
                  
                  
                  191
                  
                  
                  
                  (321
                  )8,351
                  
                  
                  
                  1,463
                  
                  
                  
                  (1,448
                  )Provision
      for income taxes
                  
                  $
                  35,962
                  
                  
                  $
                  36,691
                  
                  
                  $
                  45,344





The
provision for income taxes differs from the amount computed by applying the
statutory federal income tax rate due to the following for the years ended
August 31:





2008
                
                
                2007
                
                
                2006Amount
      computed by applying a tax rate of 35%
                
                $
                33,698
                
                
                $
                35,309
                
                
                $
                43,417State
      income taxes (net of federal income tax benefit)
                
                
                4,434
                
                
                
                2,726
                
                
                
                2,767Employment
      related and other tax credits, net
                
                
                (1,732
                )
                
                
                (1,443
                )
                
                
                (1,014
                )Other
                
                
                (438
                )
                
                
                99
                
                
                
                174Provision
      for income taxes
                
                $
                35,962
                
                
                $
                36,691
                
                
                $
                45,344




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Deferred
tax assets and liabilities consist of the following at August 31, 2008 and
2007:





2008
                      
                      
                      2007Current
      deferred tax assets (liabilities):Allowance
      for doubtful accounts and notes receivable
                      
                      $
                      274
                      
                      
                      $
                      176Property,
      equipment and capital leases
                      
                      
                      200
                      
                      
                      
                      197Accrued
      litigation costs
                      
                      
                      309
                      
                      
                      
                      371Prepaid
      expenses
                      
                      
                      (551
                      )
                      
                      
                      (424
                      )Deferred
      income from franchisees
                      
                      
                      (282
                      )
                      
                      
                      79Deferred
      income from affiliated technology fund
                      
                      
                      250
                      
                      
                      
                      118Current
      deferred tax assets, net
                      
                      $
                      200
                      
                      
                      $
                      517Noncurrent
      deferred tax assets (liabilities):Net
      investment in direct financing leases including differences related to
      capitalization and amortization
                      
                      $
                      (3,062
                      )
                      
                      $
                      (2,458
                      )Investment
      in partnerships, including differences in capitalization,depreciation and direct financing leases
                      
                      
                      (17,504
                      )
                      
                      
                      (13,466
                      )Capital
      loss carryover
                      
                      
                      1,419
                      
                      
                      
                      1,695State
      net operating losses
                      
                      
                      4,411
                      
                      
                      
                      3,319Property,
      equipment and capital leases
                      
                      
                      (9,429
                      )
                      
                      
                      (2,720
                      )Allowance
      for doubtful accounts and notes receivable
                      
                      
                      –
                      
                      
                      
                      97Deferred
      income from affiliated franchise fees
                      
                      
                      2,167
                      
                      
                      
                      1,976Accrued
      liabilities
                      
                      
                      219
                      
                      
                      
                      241Intangibles
      and other assets
                      
                      
                      166
                      
                      
                      
                      117Deferred
      income from franchisees
                      
                      
                      2,751
                      
                      
                      
                      798Stock
      compensation
                      
                      
                      7,569
                      
                      
                      
                      5,544Loss
      on cash flow hedge
                      
                      
                      1,357
                      
                      
                      
                      1,765Other
                      
                      
                      –
                      
                      
                      
                      (2
                      )(9,936
                      )
                      
                      
                      (3,094
                      )Valuation
      allowance
                      
                      
                      (4,411
                      )
                      
                      
                      (3,319
                      )Noncurrent
      deferred tax liabilities, net
                      
                      $
                      (14,347
                      )
                      
                      $
                      (6,413
                      )Deferred
      tax assets and (liabilities):Deferred
      tax assets (net of valuation allowance)
                      
                      $
                      16,681
                      
                      
                      $
                      13,174Deferred
      tax liabilities
                      
                      
                      (30,828
                      )
                      
                      
                      (19,070
                      )Net
      deferred tax liabilities
                      
                      $
                      (14,147
                      )
                      
                      $
                      (5,896
                      )




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State net
operating loss carryforwards expire generally beginning in
2010.  Management does not believe the Company will be able to realize
the state net operating loss carryforwards and therefore has provided a
valuation allowance of $4.4 million and $3.3 million as of August 31, 2008 and
August 31, 2007, respectively.





The
Company has capital loss carryovers of approximately $3.7 million which expire
beginning in fiscal year 2011.  Management believes the Company will
realize these carryovers before they expire.





On
September 1, 2007, the Company adopted the provisions of FASB Interpretation No.
48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB
Statement No. 109” (“FIN 48”).  FIN 48 prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return.  As a result of implementing FIN 48, the Company recognized a
$1,249 increase in its liability for uncertain tax positions, which was
accounted for as an adjustment to the beginning balance of accumulated retained
earnings.  As of August 31, 2008 the Company has approximately $5,383 of
unrecognized tax benefits, including approximately $1,788 of interest and
penalty.  The liability for unrecognized tax benefits decreased by
$1,846 for the year, exclusive of the reclass of $1,182 of uncertain positions
from current taxes payable to the FIN 48 liability.  The majority of
the change resulted from a settlement of a state audit which decreased the
unrecognized tax benefit by $2,465.  The Company recognizes estimated
interest and penalties as a component of its income tax expense, net of federal
benefit.  For the year ended August 31, 2008, the favorable
settlements of estimated interest and penalties resulted in a benefit
of $629 and $203, respectively.  The entire balance of
unrecognized tax benefits, if recognized, would favorably impact the effective
tax rate.  A reconciliation of the beginning and ending amount of the
unrecognized tax benefits follows:





2008Opening
      balance upon adoption at September 1, 2007
                  
                  $
                  6,048Reclassification
      of uncertain positions from current taxes payable
                  
                  
                  1,182Additions
      based on tax positions related to the current year
                  
                  
                  456Additions
      for tax positions of prior years
                  
                  
                  460Reductions
      for tax positions of prior years
                  
                  
                  (85
                  )Reductions
      for settlements
                  
                  
                  (2,465
                  )Reductions
      due to statute expiration
                  
                  
                  (213
                  )Balance
      at August 31, 2008
                  
                  $
                  5,383





The
Company or one of its subsidiaries is subject to U.S. federal income tax and
income tax in multiple U.S. state jurisdictions.  With some exceptions, the
Company is no longer subject to federal or state income tax examinations by tax
authorities for periods before fiscal year 2004 for federal and fiscal year 2000
for state jurisdictions.  The Company is currently undergoing examinations
or appeals by various state authorities.  The Company anticipates that the
finalization of these examinations or appeals, combined with the expiration of
applicable statute of limitations and the additional accrual of interest related
to unrecognized benefits on various return positions taken in years still open
for examination should result in a change to the liability for unrecognized tax
benefits during the next 12 months ranging from an increase of $250 to $700,
depending on the timing and terms of the examination resolutions.





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12.  Stockholders’
Equity





On April
6, 2006, the Company’s Board of Directors authorized a three-for-two stock split
in the form of a stock dividend.  A total of 38,219 shares of common
stock were issued in connection with the split, and an aggregate amount equal to
the par value of the common stock issued of $382 was reclassified from paid-in
capital to common stock.





Stock
Purchase Plan





The
Company has an employee stock purchase plan for all full-time regular
employees.  Employees are eligible to purchase shares of common stock
each year through a payroll deduction not in excess of the lesser of 10% of
compensation or $25. The aggregate amount of stock that employees may purchase
under this plan is limited to 1,139 shares. The purchase price will be between
85% and 100% of the stock’s fair market value and will be determined by the
Company’s Board of Directors.





Stock-Based
Compensation





The Sonic
Corp. 2006 Long-Term Incentive Plan (the “2006 Plan”) provides flexibility to
award various forms of equity compensation, such as stock options, stock
appreciation rights, performance shares, restricted stock and other stock-based
awards.  At August 31, 2008, 3,368 shares were available for grant
under the 2006 Plan.  The Company has historically granted only stock
options with an exercise price equal to the market price of the Company’s stock
at the date of grant, a contractual term of seven to ten years, and a vesting
period of three years.  The Company’s policy is to recognize
compensation cost for these options on a straight-line basis over the requisite
service period for the entire award.  Additionally, the Company’s
policy is to issue new shares of common stock to satisfy stock option
exercises.





The
Company measures the compensation cost associated with share-based payments by
estimating the fair value of stock options as of the grant date using the
Black-Scholes option pricing model.  The Company believes that the
valuation technique and the approach utilized to develop the underlying
assumptions are appropriate in calculating the fair values of the Company’s
stock options granted during 2008, 2007 and 2006.  Estimates of fair
value are not intended to predict actual future events or the value ultimately
realized by the employees who receive equity awards.





The per
share weighted average fair value of stock options granted during 2008, 2007 and
2006 was $6.10, $7.10 and $7.90, respectively.  In addition to the
exercise and grant date prices of the awards, certain weighted average
assumptions that were used to estimate the fair value of stock option grants in
the respective periods are listed in the table below:





2008
                2007
                2006Expected
      term (years)
                4.5
                4.5
                4.5Expected
      volatility
                28%
                28%
                34%Risk-free
      interest rate
                3.1%
                4.6%
                4.7%Expected
      dividend yield
                0%
                0%
                0%





The
Company estimates expected volatility based on historical daily price changes of
the Company’s common stock for a period equal to the current expected term of
the options.  The risk-free interest rate is based on the United
States treasury yields in effect at the time of grant corresponding with the
expected term of the options.  The expected option term is the number
of years the Company estimates that options will be outstanding prior to
exercise considering vesting schedules and our historical exercise
patterns.





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SFAS 123R
requires the cash flows resulting from the tax benefits for tax deductions in
excess of the compensation expense recorded for those options (excess tax
benefits) to be classified as financing cash flows.  These excess tax
benefits were $2,033, $4,117 and $4,645 for the years ended August 31, 2008,
2007 and 2006, respectively, and are classified as a financing cash inflow in
the Company’s Consolidated Statements of Cash Flows.  The proceeds
from exercises of stock options are also classified as cash flows from financing
activities and totaled $5,796, $7,732 and $7,194 for each of the years ended
August 31, 2008, 2007 and 2006, respectively.





A summary
of stock option activity under the Company’s share-based compensation plans for
the year ended August 31, 2008 is presented in the following table:





Options
                  
                  
                  Weighted
      Average Exercise Price
                  
                  
                  Weighted
      Average Remaining Contractual Life (Yrs.)
                  
                  
                  Aggregate
      Intrinsic ValueOutstanding-beginning
      of year
                  
                  
                  7,123
                  
                  
                  $
                  14.53Granted
                  
                  
                  1,822
                  
                  
                  
                  21.43Exercised
                  
                  
                  (822
                  )
                  
                  
                  7.64Forfeited
      or expired
                  
                  
                  (361
                  )
                  
                  
                  22.42Outstanding
      August 31, 2008
                  
                  
                  7,762
                  
                  
                  $
                  16.51
                  
                  
                  
                  4.71
                  
                  
                  $
                  15,860Exercisable
      August 31, 2008
                  
                  
                  5,133
                  
                  
                  $
                  13.86
                  
                  
                  
                  4.04
                  
                  
                  $
                  15,860





The total
intrinsic value of options exercised during the years ended August 31, 2008,
2007 and 2006 was $10,992, $19,408 and $19,567, respectively.  At
August 31, 2008, total remaining unrecognized compensation cost related to
unvested stock-based arrangements was $13,352 and is expected to be recognized
over a weighted average period of 1.7 years.





Stock
Repurchase Program





During
fiscal year 2007, the Board authorized a “modified Dutch auction” tender offer
that resulted in the repurchase of 15,918 shares of common stock at a purchase
price of $23.00 per share for a total purchase price of $366,117 in October
2006.  Costs incurred in relation to the tender offer totaled $1,205
and are included in treasury stock, resulting in an average cost of $23.08 per
share for the tender offer shares.  Subsequent to the tender offer,
the Board authorized the continuation of the stock repurchase
program.  On January 31, 2007, the Board of Directors approved an
increase in the stock repurchase program from $10,705 to $100,000, followed by
an additional authorization on August 2, 2007 of $75,000 and extension of the
program through August 31, 2008.  Pursuant to this program, the
Company acquired 1,498 and 9,574 shares for a total cost of $32,196 and $211,135
during fiscal year 2008 and 2007, respectively. The remaining $10,375 authorized
for repurchase expired August 31, 2008.





Accumulated
Other Comprehensive Income





In August
2006, the Company entered into a forward starting swap agreement with a
financial institution to hedge part of the interest rate risk associated with
the pending securitized debt transaction.  The forward starting swap
was designated as a cash flow hedge, and was subsequently settled in conjunction
with the closing of the Class A-2 notes, as planned.  The loss
resulting from settlement was recorded net of tax in accumulated other
comprehensive income and is being amortized to interest expense over the
expected term of the debt.  See Note 9 for additional
information.





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13.
Segment Information




FASB
Statement No. 131, “Disclosures about Segments of an Enterprise and Related
Information” (“SFAS 131”) establishes annual and interim reporting standards for
an enterprise’s operating segments.  Operating segments are generally
defined as components of an enterprise about which separate discrete financial
information is available as the basis for management to allocate resources and
assess performance.





Prior to
the second quarter of fiscal year 2008, the Company reported financial
information as one business segment operating in the quick-service restaurant
industry.  Based on internal reporting and management structure, the
Company has determined that it has two reportable segments: Partner Drive-Ins
and Franchise Operations.  The Partner Drive-Ins segment consists of
the drive-in operations in which the Company owns a majority interest and
derives its revenues from operating drive-in restaurants.  The
Franchise Operations segment consists of franchising activities and derives its
revenues from royalties and initial franchise fees received from
franchisees.  The accounting policies of the segments are described in
the Summary of Significant Accounting Policies.  Segment information
for total assets and capital expenditures is not presented as such information
is not used in measuring segment performance or allocating resources between
segments.





The
following table presents the revenues and income from operations for each
reportable segment, along with reconciliation to reported revenue and income
from operations:





2008
                
                
                2007
                
                
                2006Revenues:Partner
      Drive-Ins
                
                $
                671,151
                
                
                $
                646,915
                
                
                $
                585,832Franchise
      Operations
                
                
                127,111
                
                
                
                115,626
                
                
                
                102,910Unallocated
      revenues
                
                
                6,451
                
                
                
                7,928
                
                
                
                4,520$
                804,713
                
                
                $
                770,469
                
                
                $
                693,262Income
      from Operations:Partner
      Drive-Ins
                
                $
                123,049
                
                
                $
                126,739
                
                
                $
                117,205Franchise
      Operations
                
                
                127,111
                
                
                
                115,626
                
                
                
                102,910Unallocated
      revenues
                
                
                6,451
                
                
                
                7,928
                
                
                
                4,520Unallocated
      expenses:Selling,
      general and administrative
                
                
                (61,179
                )
                
                
                (58,736
                )
                
                
                (52,048
                )Depreciation
      and amortization
                
                
                (50,653
                )
                
                
                (45,103
                )
                
                
                (40,696
                )Provision
      for impairment of long-lived assets
                
                
                (571
                )
                
                
                (1,165
                )
                
                
                (264
                )$
                144,208
                
                
                $
                145,289
                
                
                $
                131,627





14.  Net
Revenue Incentive Plan





The
Company has a Net Revenue Incentive Plan (the “Incentive Plan”), as amended,
which applies to certain members of management and is at all times discretionary
with the Company’s Board of Directors.  If certain predetermined
earnings goals are met, the Incentive Plan provides that a predetermined
percentage of the employee’s salary may be paid in the form of a
bonus.  The Company recognized as expense incentive bonuses of $1,324,
$2,943, and $3,247 during fiscal years 2008, 2007 and 2006,
respectively.




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15.  Employment
Agreements





The
Company has employment contracts with its Chairman and Chief Executive Officer
and several members of its senior management. These contracts provide for use of
Company automobiles or related allowances, medical, life and disability
insurance, annual base salaries, as well as an incentive bonus.  These
contracts also contain provisions for payments in the event of the termination
of employment and provide for payments aggregating $9,263 at August 31, 2008 due
to loss of employment in the event of a change in control (as defined in the
contracts).





16.
 Contingencies





The
Company is involved in various legal proceedings and has certain unresolved
claims pending.  Based on the information currently available,
management believes that all claims currently pending are either covered by
insurance or would not have a material adverse effect on the Company’s business
or financial condition.





The
Company initiated a new agreement with Irwin Franchise Capital Corporation
(“Irwin”) in September 2006, pursuant to which existing Sonic franchisees may
qualify with Irwin to finance drive-in retrofit projects.  The
agreement provides that Sonic will guarantee at least $250 of such financing,
limited to 5% of the aggregate amount of loans, not to exceed
$2,500.  As of August 31, 2008, the total amount guaranteed under the
Irwin agreement was $695.  The agreement provides for release of
Sonic’s guarantee on individual loans under the program that meet certain
payment history criteria at the mid-point of each loans’
term.  Existing loans under the program have terms through
2015.  In the event of default by a franchisee, the Company is
obligated to pay Irwin the outstanding balances, plus limited interest and
charges up to Sonic’s guarantee limitation.  Irwin is obligated to
pursue collections as if Sonic’s guarantee were not in place, therefore,
providing recourse with the franchisee under the notes.  The Company
is not aware of any defaults under this program.  The Company’s
liability for this guarantee, which is based on fair value, is $271 as of August
31, 2008.





The
Company has an agreement with GE Capital Franchise Finance Corporation (“GEC”),
pursuant to which GEC made loans to existing Sonic franchisees who met certain
underwriting criteria set by GEC.  Under the terms of the agreement
with GEC, the Company provided a guarantee of 10% of the outstanding balance of
loans from GEC to the Sonic franchisees, limited to a maximum amount of
$5,000.  As of August 31, 2008, the total amount guaranteed under the
GEC agreement was $1,532.  The Company ceased guaranteeing new loans
under the program during fiscal year 2002 and has not been required to make any
payments under its agreement with GEC.   Existing loans under
guarantee will expire through 2013.  In the event of default by a
franchisee, the Company has the option to fulfill the franchisee’s obligations
under the note or to become the note holder, which would provide an avenue of
recourse with the franchisee under the notes.  Based on the ending
date for this program, no liability is required for these
guarantees.





The
Company has obligations under various lease agreements with third-party lessors
related to the real estate for Partner Drive-Ins that were sold to
franchisees.  Under these agreements, the Company remains secondarily
liable for the lease payments for which it was responsible as the original
lessee.  As of August 31, 2008, the amount remaining under guaranteed
lease obligations for which no liability has been provided totaled
$5,071.  In addition, capital lease obligations totaling $1,012 are
still reflected as liabilities as of August 31, 2008 for properties sold to
franchisees.  At this time, the Company has no reason to anticipate
any default under the foregoing leases.





Effective
November 30, 2005, the Company extended a note purchase agreement to a bank that
serves to guarantee the repayment of a franchisee loan and also benefits the
franchisee with a lower financing rate.  In the event of default by
the franchisee, the Company would purchase the franchisee loan from the bank,
thereby becoming the note holder and providing an avenue of recourse with the
franchisee.  As of August 31, 2008, the balance of the loan was
$1,135, and an immaterial liability has been provided for the fair value of this
guarantee.





F -
29
 Table of Contents











17.  Selected
QuarterlyFinancial Data (Unaudited)





First
      Quarter
                                
                                
                                Second
      Quarter
                                
                                
                                Third
      Quarter
                                
                                
                                Fourth
      Quarter
                                
                                
                                Full
      Year2008
                                
                                
                                2007
                                
                                
                                2008
                                
                                
                                2007
                                
                                
                                2008
                                
                                
                                2007
                                
                                
                                2008
                                
                                
                                2007
                                
                                
                                2008
                                
                                
                                2007Income
      statement data:Partner
      Drive-In sales
                                
                                $
                                159,285
                                
                                
                                $
                                146,419
                                
                                
                                $
                                147,139
                                
                                
                                $
                                137,007
                                
                                
                                $
                                178,338
                                
                                
                                $
                                175,027
                                
                                
                                $
                                186,389
                                
                                
                                $
                                188,462
                                
                                
                                $
                                671,151
                                
                                
                                $
                                646,915Other
                                
                                
                                30,896
                                
                                
                                
                                28,371
                                
                                
                                
                                27,482
                                
                                
                                
                                24,445
                                
                                
                                
                                34,660
                                
                                
                                
                                34,894
                                
                                
                                
                                40,524
                                
                                
                                
                                35,844
                                
                                
                                
                                133,562
                                
                                
                                
                                123,554Total
      revenues
                                
                                
                                190,181
                                
                                
                                
                                174,790
                                
                                
                                
                                174,621
                                
                                
                                
                                161,452
                                
                                
                                
                                212,998
                                
                                
                                
                                209,921
                                
                                
                                
                                226,913
                                
                                
                                
                                224,306
                                
                                
                                
                                804,713
                                
                                
                                
                                770,469Partner
      Drive-In operating expenses
                                
                                
                                129,174
                                
                                
                                
                                119,480
                                
                                
                                
                                119,497
                                
                                
                                
                                112,050
                                
                                
                                
                                144,514
                                
                                
                                
                                139,402
                                
                                
                                
                                154,917
                                
                                
                                
                                149,244
                                
                                
                                
                                548,102
                                
                                
                                
                                520,176Selling,
      general and administrative
                                
                                
                                14,914
                                
                                
                                
                                14,033
                                
                                
                                
                                15,540
                                
                                
                                
                                14,401
                                
                                
                                
                                15,716
                                
                                
                                
                                15,236
                                
                                
                                
                                15,009
                                
                                
                                
                                15,066
                                
                                
                                
                                61,179
                                
                                
                                
                                58,736Other
                                
                                
                                12,206
                                
                                
                                
                                10,758
                                
                                
                                
                                12,793
                                
                                
                                
                                11,099
                                
                                
                                
                                13,044
                                
                                
                                
                                11,967
                                
                                
                                
                                13,181
                                
                                
                                
                                12,444
                                
                                
                                
                                51,224
                                
                                
                                
                                46,268Total
      expenses
                                
                                
                                156,294
                                
                                
                                
                                144,271
                                
                                
                                
                                147,830
                                
                                
                                
                                137,550
                                
                                
                                
                                173,274
                                
                                
                                
                                166,605
                                
                                
                                
                                183,107
                                
                                
                                
                                176,754
                                
                                
                                
                                660,505
                                
                                
                                
                                625,180Income
      from operations
                                
                                
                                33,887
                                
                                
                                
                                30,519
                                
                                
                                
                                26,791
                                
                                
                                
                                23,902
                                
                                
                                
                                39,724
                                
                                
                                
                                43,316
                                
                                
                                
                                43,806
                                
                                
                                
                                47,552
                                
                                
                                
                                144,208
                                
                                
                                
                                145,289Debt
      extinguishment and other costs
                                
                                
                                ─
                                
                                
                                
                                1,258
                                
                                
                                
                                ─
                                
                                
                                
                                4,818
                                
                                
                                
                                ─
                                
                                
                                ─
                                
                                
                                
                                ─
                                
                                
                                ─
                                
                                
                                
                                ─
                                
                                
                                
                                6,076Interest
      expense, net
                                
                                
                                11,980
                                
                                
                                
                                5,759
                                
                                
                                
                                12,214
                                
                                
                                
                                10,304
                                
                                
                                
                                11,968
                                
                                
                                
                                10,921
                                
                                
                                
                                11,765
                                
                                
                                
                                11,346
                                
                                
                                
                                47,927
                                
                                
                                
                                38,330Income
      before income taxes
                                
                                
                                21,907
                                
                                
                                
                                23,502
                                
                                
                                
                                14,577
                                
                                
                                
                                8,780
                                
                                
                                
                                27,756
                                
                                
                                
                                32,395
                                
                                
                                
                                32,041
                                
                                
                                
                                36,206
                                
                                
                                
                                96,281
                                
                                
                                
                                100,883Provision
      for income taxes
                                
                                
                                8,324
                                
                                
                                
                                8,216
                                
                                
                                
                                5,324
                                
                                
                                
                                2,555
                                
                                
                                
                                10,517
                                
                                
                                
                                11,747
                                
                                
                                
                                11,797
                                
                                
                                
                                14,173
                                
                                
                                
                                35,962
                                
                                
                                
                                36,691Net
      income
                                
                                $
                                13,583
                                
                                
                                $
                                15,286
                                
                                
                                $
                                9,253
                                
                                
                                $
                                6,225
                                
                                
                                $
                                17,239
                                
                                
                                $
                                20,648
                                
                                
                                $
                                20,244
                                
                                
                                $
                                22,033
                                
                                
                                $
                                60,319
                                
                                
                                $
                                64,192Net
      income per share:Basic
                                
                                $
                                0.22
                                
                                
                                $
                                0.20
                                
                                
                                $
                                0.15
                                
                                
                                $
                                0.09
                                
                                
                                $
                                0.29
                                
                                
                                $
                                0.32
                                
                                
                                $
                                0.34
                                
                                
                                $
                                0.35
                                
                                
                                $
                                1.00
                                
                                
                                $
                                0.94Diluted
                                
                                $
                                0.22
                                
                                
                                $
                                0.19
                                
                                
                                $
                                0.15
                                
                                
                                $
                                0.09
                                
                                
                                $
                                0.28
                                
                                
                                $
                                0.31
                                
                                
                                $
                                0.33
                                
                                
                                $
                                0.34
                                
                                
                                $
                                0.97
                                
                                
                                $
                                0.91Weighted
      average shares outstanding:Basic
                                
                                
                                60,772
                                
                                
                                
                                76,606
                                
                                
                                
                                60,303
                                
                                
                                
                                67,325
                                
                                
                                
                                60,167
                                
                                
                                
                                64,985
                                
                                
                                
                                60,370
                                
                                
                                
                                63,162
                                
                                
                                
                                60,403
                                
                                
                                
                                68,019Diluted
                                
                                
                                63,065
                                
                                
                                
                                79,489
                                
                                
                                
                                62,384
                                
                                
                                
                                70,026
                                
                                
                                
                                62,023
                                
                                
                                
                                67,408
                                
                                
                                
                                61,609
                                
                                
                                
                                65,445
                                
                                
                                
                                62,270
                                
                                
                                
                                70,592




F -
30
 Table of Contents










18.  Fair
Values of Financial Instruments





The
following discussion of fair values is not indicative of the overall fair value
of the Company’s consolidated balance sheet since the provisions of SFAS No.
107, “Disclosures About Fair Value of Financial Instruments,” do not apply to
all assets, including intangibles.





The
following methods and assumptions were used by the Company in estimating its
fair values of financial instruments:





Cash and cash
equivalents—Carrying value approximates fair value due to the short
duration to maturity.





Notes receivable—For variable
rate loans with no significant change in credit risk since the loan origination,
fair values approximate carrying amounts.  Fair values for fixed-rate
loans are esti­mated using discounted cash flow analysis, using interest
rates that would currently be offered for loans with similar terms to borrowers
of similar credit quality and/or the same remaining maturities.





As of
August 31, 2008 and 2007, carrying values approximate their estimated fair
values.





Borrowed funds—Fair values for
fixed rate borrowings are estimated using a discounted cash flow analysis that
applies interest rates currently being offered on borrowings as similar as
available in terms of amounts and terms to those currently
outstanding.  There are few leveraged loan transactions occurring in
the current market.  The rate spread used in our discounted cash flow
analysis was from transactions with lower ratings; thus, we believe the rate
assumed is conservatively high.





The
carrying amounts, including accrued interest, and estimated fair values of the
Company’s fixed-rate borrowings at August 31, 2008 were $574,193 and $517,315,
respectively, and at August 31, 2007 were $594,364 and $591,668, respectively.
Carrying values for variable-rate borrowings approxi­mate their fair
values.




F -
31
 Table of Contents




Sonic Corp.





Schedule
II – Valuation and Qualifying Accounts





Description
                  
                  Balance
      at Beginning of Year
                  
                  
                  Additions
      Charged to Costs and Expenses
                  
                  
                  Amounts
      Written Off Against the Allowance
                  
                  
                  (Transfer)
                    Recoveries
                  
                  
                  Balance
                    at
      End
                    of
      Year(In
      Thousands)Allowance
      for doubtful accounts and notes receivableYear
      ended:August
      31, 2008
                  
                  
                  711
                  
                  
                  
                  337
                  
                  
                  
                  335
                  
                  
                  
                  4
                  
                  
                  
                  717August
      31, 2007
                  
                  
                  635
                  
                  
                  
                  269
                  
                  
                  
                  235
                  
                  
                  
                  42
                  
                  
                  
                  711August
      31, 2006
                  
                  
                  507
                  
                  
                  
                  (5
                  )
                  
                  
                  86
                  
                  
                  
                  219
                  
                  
                  
                  635Accrued
      carrying costs for drive-in closings and disposalsYear
      ended:August
      31, 2008
                  
                  
                  91
                  
                  
                  
                  –
                  
                  
                  
                  47
                  
                  
                  
                  –
                  
                  
                  
                  44August
      31, 2007
                  
                  
                  113
                  
                  
                  
                  –
                  
                  
                  
                  22
                  
                  
                  
                  –
                  
                  
                  
                  91August
      31, 2006
                  
                  
                  162
                  
                  
                  
                  –
                  
                  
                  
                  49
                  
                  
                  
                  –
                  
                  
                  
                  113




F -
32
 Table of Contents





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the registrant has caused the undersigned, duly-authorized, to
sign this report on its behalf on this 28th day of October, 
2008.





Sonic
      Corp.By:
                  /s/  J. Clifford
      HudsonJ.
      Clifford HudsonChairman
      and Chief Executive
Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
undersigned have signed this report on behalf of the registrant, in the
capacities and as of the dates indicated.





Signature
                                      Title
                                      
                                      Date/s/  J. Clifford
      Hudson
                                        J.
      Clifford Hudson,
                                        Principal
      Executive Officer
                                      Chairman
      of the Board of Directors and Chief Executive Officer
                                      
                                      October
      28, 2008/s/ Stephen C. Vaughan
                                        Stephen
      C. Vaughan,
                                        Principal
      Financial Officer
                                      Executive
      Vice President and Chief Financial Officer
                                      
                                      October
      28, 2008/s/ Terry D. Harryman
                                        Terry
      D. Harryman,
                                        Principal
      Accounting Officer
                                      Vice
      President and Controller
                                      
                                      October
      28, 2008/s/ Leonard Lieberman
                                        Leonard
      Lieberman
                                      Director
                                      
                                      October
      28, 2008/s/ Michael J. Maples
                                        Michael
      J. Maples
                                      Director
                                      
                                      October
      28, 2008/s/
      Federico F.Peña
                                        Federico
      F. Peña
                                      Director
                                      
                                      October
      28, 2008/s/ J. Larry Nichols
                                        J.
      Larry Nichols
                                      Director
                                      
                                      October
      28, 2008/s/ H. E. Rainbolt
                                        H.E.
      Rainbolt
                                      Director
                                      
                                      October
      28, 2008/s/  Frank E.
      Richardson
                                        Frank
      E. Richardson
                                      Director
                                      
                                      October
      28, 2008/s/ Robert M. Rosenberg
                                        Robert
      M. Rosenberg
                                      Director
                                      
                                      October
      28,
2008










EXHIBIT
INDEX





Exhibit Number and
Description





10.17.
            1991
      Sonic Corp. Stock Purchase Plan, amended and restated effective April 2,
      2008


10.26.
            Employment
      Agreement with E. Edward Saroch dated August 14,
  2008


21.01.
            Subsidiaries
      of the Company


23.01.
            Consent
      of Independent Registered Public Accounting
Firm


31.01.
            Certification
      of Chief Executive Officer pursuant to S.E.C. Rule
  13a-14


31.02.
            Certification
      of Chief Financial Officer pursuant to S.E.C. Rule
  13a-14


32.01.
            Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section
    1350


32.02.
            Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section
    1350