UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
	OF 1934
For the fiscal year ended:August 31, 2006

~~For the fiscal year ended: August 31, 2005~~


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.

~~For the transition period from ________ to ________~~

~~Commission File Number 0-18859~~

~~SONIC CORP.~~

~~(Exact name of registrant as specified in its charter)~~

~~Delaware~~(Exact name of registrant as specified in its charter)

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

300 Johnny Bench Drive

Oklahoma 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)

Rights to Purchase Series A Junior Preferred 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 X . 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 X .

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file the reports), and (2) has been subject to the filing requirements for the past 90 days. Yes X . No .

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of ~~the~~ 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. [ ].X].

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

~~Yes~~Large accelerated filer X . No Accelerated filer ___. . Non-accelerated filer __.

~~Indicte~~Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the ~~Act.)~~

Act). Yes ~~__.~~. No X .

As of February 28, ~~2005,~~2006, the aggregate market value of the ~~57,680,867~~ 81,870,537shares of common stock of the Company held by non-affiliates of the Company equaled ~~$1,943,268,409,~~$1,725,285,116 based on the closing sales price for the common stock as reported for that date.

As of October ~~31, 2005,~~16, 2006, the Registrant had ~~57,995,684~~ 69,581,790shares 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, ~~2005.~~2006.

FORM 10-K OF SONIC CORP.

TABLE OF CONTENTS

		~~Page~~

PART I

Item 1.	Business	1

Item 1A.	Risk Factors	10

1Item 1B.	Unresolved Staff Comments	14

Item 2.	Properties	1014

Item 3.	Legal Proceedings	1014

Item 4.	Submission of Matters to a Vote of Security Holders	1015

Item 4A.	Executive Officers of the Company	1115

PART II

Item 5.	Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	1216

Item 6.	Selected Financial Data	1418

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1620

Item 7A.	Quantitative and Qualitative Disclosures About Market Risks	2832

Item 8.	Financial Statements and Supplementary Data	2933

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	2933

Item 9A.	Controls and Procedures	2933

Item 9B.	Other Information	3135

PART III

Item 10.	Directors and Executive Officers of the Company	31 35

Item 11.	Executive Compensation	31 35

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	31 35

Item 13.	Certain Relationships and Related Transactions	31 35

Item 14.	Principal Accounting Fees and Services	31 35

PART IV

Item 15.	Exhibits and Financial Statement Schedules	32 36

FORM 10-K

SONIC CORP.

PART I

Item 1. Business

General

Sonic Corp. (the “Company”) operates and franchises the largest chain of drive-in restaurants (“Sonic Drive-Ins”) in the United States. As of August 31, ~~2005,~~2006, the Company had ~~3,039~~3,188 Sonic Drive-Ins in operation, consisting of ~~574~~623 Partner Drive-Ins and ~~2,465~~2,565 Franchise Drive-Ins, principally in the southern two-thirds of the United States. ~~Partner Drive-Ins are those Sonic Drive-Ins owned and operated by either a limited liability company or a general partnership.~~ We own a majority interest, typically at least 60%, and the supervisor and manager of the drive-in own a minority interest in each Partner Drive-In, which are owned and operated as either a limited liability company or general partnership. Franchise Drive-Ins are owned and operated by our franchisees. At a typical Sonic Drive-In, a customer drives into one of 24 to 36 covered drive-in spaces, orders through an intercom speaker system, and has the food delivered by a carhop within an average of four minutes. Most Sonic Drive-Ins also include a drive-through lane and patio seating.

The Company has two operating subsidiaries, Sonic Industries Inc. and Sonic Restaurants, Inc. Sonic Industries Inc. serves as the franchisor of the Sonic Drive-In chain, as well as the administrative services center for the Company. Sonic Restaurants, Inc. develops and operates the Partner Drive-Ins. References to “Sonic,” the “Company,”~~“we,~~ “we,”~~“us,~~ “us,” and “our” in this report are references to Sonic Corp. and its subsidiaries and predecessors, unless the context indicates otherwise.

Our objective is to maintain our position as, or to become, a leading operator in terms of the number of quick-service restaurants within each of our core and developing markets. We have developed and are implementing a strategy designed to build the Sonic brand and to continue to achieve 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 Partner Drive-Ins and Franchise Drive-Ins within Sonic’s core and developing markets; (4) an owner/operator philosophy, in which managers have an equity interest in their ~~restaurant,~~restaurants, thereby providing an incentive for managers to operate restaurants profitably and efficiently; and (5) a commitment to strong franchisee relationships.

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.

Menu

Sonic Drive-Ins feature Sonic signature items, such as specialty soft 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.

~~All~~ Sonic Drive-Ins also offer a breakfast ~~menu. Items on the breakfast menu~~items that include sausage, ham, or bacon with egg and cheese Breakfast Toaster_®Bistro sandwiches, sausage and egg burritos, and specialty breakfast drinks. Sonic Drive-Ins typically are open from 7at least 7:00 a.m. to 11:00 p.m. and serve the full menu all day.

Restaurant Locations

As of August 31, ~~2005, 3,039~~2006, 3,188 Sonic Drive-Ins were in operation and located in 2933 states, principally in the southern two-thirds of the United States, and in Mexico. 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 levels, 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. A market may be located where it extends into more than one state, causing some states to have both core and developing markets. Our core markets contain approximately ~~71%~~76% of all Sonic Drive-Ins as of August 31, ~~2005.~~2006. Developing markets are located in the states indicated below and Mexico. The following table sets forth the number of Partner Drive-Ins and Franchise Drive-Ins by core and developing markets as of August 31, ~~2005:~~2006:

	Core Markets			Developing Markets			Total
States	Partner	Franchise	Total	Partner	Franchise	Total
Alabama	32	71	103		5	5	108
Arizona					93	93	93
Arkansas	29	157	186				186
California					34	34	34
Colorado	14	10	24	20	31	51	75
Delaware					1	1	1
Florida	18	4	22	11	72	83	105
Georgia	9	20	29		86	86	115
Idaho					16	16	16
Illinois		8	8		19	19	27
Indiana					14	14	14
Iowa					12	12	12
Kansas	40	95	135				135
Kentucky	4	42	46		23	23	69
Louisiana	23	132	155				155
Mississippi		123	123				123
Missouri	32	126	158	13	29	42	200
Nebraska				8	18	26	26
Nevada					18	18	18
New Mexico		71	71				71
North Carolina		1	1		88	88	89
Ohio					6	6	6
Oklahoma	79	186	265				265
Oregon					1	1	1
Pennsylvania					1	1	1
South Carolina	42	22	64		46	46	110
Tennessee		161	161	10		10	171
Texas	211	673	884		2	2	886
Utah				7	19	26	26
Virginia				21	20	41	41
Washington					1	1	1
West Virginia					1	1	1
Wyoming					5	5	5

Mexico					2	2	2
Total	533	1,902	2,435	90	663	753	3,188

Core Markets Developing Markets Total
States Partner Franchise Total Partner Franchise Total
Alabama 16 14 30 14 60 74 104
Arizona 87 87 87
Arkansas 30 150 180 180
California 28 28 28
Colorado 33 37 70 70
Florida 23 68 91 91
Georgia 9 95 104 104
Idaho 15 15 15
Illinois 8 8 3 19 22 30
Indiana 12 12 12
Iowa 12 12 12
Kansas 38 93 131 131
Kentucky 8 8 56 56 64
Louisiana 22 130 152 152
Mississippi 117 117 117
Missouri 41 134 175 19 19 194
Nebraska 6 17 23 23
Nevada 17 17 17
New Mexico 69 69 69
North Carolina 81 81 81
Ohio 6 6 6
Oklahoma 77 182 259 259
South Carolina 69 69 69
Tennessee 30 168 198 10 10 208
Texas 195 643 838 838
Utah 7 18 25 25
Virginia 20 19 39 39
West Virginia 1 1 1
Wyoming 5 5 5

Mexico 8 8 8
Total 449 1,716 2,165 125 749 874 3,039

Expansion

During fiscal year ~~2005,~~2006, we opened ~~175~~173 Sonic Drive-Ins, which consisted of 3735 Partner Drive-Ins and 138 Franchise Drive-Ins. During fiscal year ~~2006,~~2007, we anticipate approximately 180 to ~~190~~200 new Sonic Drive-In openings, including 150 to 160 openings by our franchisees. That expansion plan involves the opening of new Sonic Drive-Ins predominantly by franchisees under

existing area development agreements, single-store development by existing franchisees, and development by new franchisees. We believe that our existing core and developing markets, as well as newly-opened markets, offer a significant growth ~~opportunity~~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 ~~2006~~2007 necessarily will depend on various ~~factors. Those~~ factors, ~~include (among others)~~including those discussed under Item 1A. Risk Factors - Failure to successfully implement our growth strategy could reduce, or reduce the ~~availability~~growth of, ~~suitable sites, the cost~~our revenue and ~~availability~~net income, of construction resources, the negotiation of acceptable lease or purchase terms for new locations, local permitting and regulatory compliance, the financial resources of Sonic and its franchisees, and the general economic and business conditions to be faced in fiscal year 2006.this Form 10-K.

Our expansion strategy for ~~Partner~~Sonic Drive-Ins involves two principal components: (1) the building-out of existing core markets and (2) the further penetration of ~~current~~ developing markets. ~~The Company is~~We are always in the process of identifying new ~~developing~~ markets for the opening of both Partner Drive-Ins and Franchise Drive-Ins. In addition, we may consider the acquisition of other similar ~~concepts~~local or regional brands for conversion to Sonic Drive-Ins.

Restaurant Design and Construction

General. The typical Sonic Drive-In consists of a kitchen housed in a one-story building flanked by canopy-covered rows of 24 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-through service and patio seating area. We have ~~151~~174 Sonic Drive-Ins that provide an indoor seating area, 4644 of which are located in non-traditional areas such as shopping mall food courts, airports, and universities, and 1119 of which are located inadjacent to convenience stores.

Retrofit.In fiscal 2006, we completed the retrofit of over 100 Partner Drive-Ins and began implementing a program to retrofit all Sonic Drive-Ins over the next several years. The retrofit is a remodeling program which includes significant trade dress modifications to the drive-ins. In fiscal 2007, we expect to roll-out the retrofit program to approximately 150 additional Partner Drive-Ins and, in January 2007, will begin to extend the program to Franchise Drive-Ins. Franchisees will pay the cost of the retrofit for their drive-ins. We currently estimate the cost to make a standard retrofit at approximately $125,000 to $135,000 per drive-in. All new Sonic Drive-Ins being built in all markets will now feature the new retrofit changes.

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) ~~the~~ personal ~~manner~~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, ~~commercials,~~ 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 8 under ~~Company Operations-~~Franchise Program -Franchise Advisory Council.) Funding for our marketing plan has three components: (1) local advertising expenditures, (2) the System Marketing Fund, and (3) the Sonic Advertising ~~Fund, (2)~~Fund. Depending on the type of license agreement, each Sonic Drive-In must spend 2% to 3.25% of the drive-in’s gross revenues on local advertising, ~~expenditures,~~either directly or through participation in the local advertising cooperative. The members of each local advertising cooperative may elect and ~~(3)~~frequently do elect by majority vote to require the cooperative’s member drive-ins to contribute more than the minimum percentage of gross revenues to the advertising cooperative’s funds. For fiscal year 2006, drive-ins participating in cooperatives contributed an average of 4.09% of their Sonic Drive-In’s gross revenues to Sonic advertising cooperatives. As of August 31, 2006, 3,077 Sonic Drive-Ins (97% of the chain) participated in advertising cooperatives. The System Marketing Fund is funded out of the required local advertising funds by either redistributing 2.0% of each Sonic Drive-In’s gross revenues from the local advertising cooperatives to the System Marketing ~~Fund.~~Fund or, if no advertising cooperative has been formed, requiring the Sonic Drive-In to pay directly 2.0% of its gross revenues to the System Marketing Fund with a corresponding deduction in the amount the drive-in is required to spend on local

advertising. The System Marketing Fund complements local advertising efforts in attracting customers to Sonic Drive-Ins by promoting the message of the Sonic brand to an expanded audience. The primary focus of the System Marketing Fund is to purchase advertising on national cable and broadcast networks and other national media and sponsorship opportunities. The Sonic Advertising Fund is a national media production fund that we administer. Each Sonic Drive-In must contribute 0.375% to 0.75%, depending on the type of license agreement, of the Sonic Drive-In’s gross revenues to the Sonic Advertising Fund. Once a sufficient number of Sonic Drive-Ins have been opened in a market, we require the formation of advertising cooperatives among drive-in owners to pool and direct advertising expenditures in local markets. Each Sonic Drive-In must spend 2% to 3.25%, depending on the type of license agreement, of the drive-in’s gross revenues on local advertising, either directly (if the advertising cooperative for the drive-in’s market is not yet formed) or through participation in the local advertising cooperative. The members of each local advertising cooperative may elect and frequently do elect by majority vote to require the cooperative’s member drive-ins to contribute more than the minimum percentage of gross revenues to the advertising cooperative’s funds. For fiscal year 2005, drive-ins participating in cooperatives contributed an average of 4.1% of their Sonic Drive-In’s gross revenues to Sonic advertising cooperatives. As of August 31, 2005, 2,931 Sonic Drive-Ins (96% of the chain) participated in advertising cooperatives. The System Marketing Fund is funded out of the required local advertising expenditures by either redistributing 2.0% (1.0% prior to September 2004) of each Sonic Drive-In’s gross revenues from the local advertising cooperatives to the System Marketing Fund or, if no advertising cooperative has been formed, requiring the Sonic Drive-In to pay directly 2.0% of its gross revenues to the System Marketing Fund with a corresponding deduction in the amount the drive-in is required to spend on local advertising. The System Marketing Fund complements local advertising efforts in attracting customers to Sonic Drive-Ins by promoting the message of the Sonic brand to an expanded audience. The primary focus of the System Marketing Fund is to purchase advertising on national cable and broadcast networks and other national media and sponsorship opportunities.

The total amount spent on media (principally television) was approximately ~~$125~~$145 million for fiscal year ~~2005~~2006 and we expect media expenditures of approximately ~~$140~~$160 million for fiscal year ~~2006.~~2007.

Purchasing

We negotiate with suppliers for our primary food products (hamburger patties, dairy products, chicken products, hot dogs, french fries, tater tots, cooking oil, fountain syrup, produce, and other items) 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 ~~specifications that we establish.~~specifications. Suppliers manufacture several key products for Sonic under private label and sell them to authorized distributors for resale to Partner Drive-Ins and Franchise Drive-Ins.

We require our Partner Drive-Ins and Franchise Drive-Ins to purchase from approved distribution centers. By purchasing as a group, we have achieved cost savings, improved food quality and consistency, and helped decrease the volatility of food and supply costs for Sonic Drive-Ins. For fiscal year ~~2005,~~2006, the average cost of food and packaging for a Sonic Drive-In, as reported to us by our Partner Drive-Ins and Franchise Drive-Ins, equaled approximately ~~28%~~27% of net revenues.

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 ~~training in~~ 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 ~~provide~~require our drive-in managers and assistant managers to pass ServSafe training ~~in ServSafe to drive-in managers.~~programs. ServSafe is the most recognized food safety training certification in the restaurant industry.

General Operations

Management Information Systems. We utilize point-of-sale equipment in each of our Partner Drive-Ins and Franchise Drive-Ins. Certain financial and other information is polled on a daily basis from most Partner Drive-Ins and many Franchise Drive-Ins. We are continuing to develop software and hardware enhancements to our management information systems to facilitate improved communication and the exchange of information among the corporate office and Partner Drive-Ins and Franchise Drive-Ins. These enhancements primarily utilize an intranet designed for that purpose, which we refer to as PartnerNet.

Reporting. The license agreement requires all Sonic Drive-Ins to submit a profit and loss statement on or before the 20^th of each month. All Partner Drive-Ins and ~~1,182~~1,772 or ~~48%~~70% of Franchise Drive-Ins submit their data electronically. We expect to add more ~~Sonic~~Franchise Drive-Ins to electronic reporting which will reduce resources needed for manual processing of restaurant level data.

Hours of Operation. Sonic Drive-Ins typically operate seven days a week and are open from at least 7:00 a.m. to 11:00 p.m.

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 ~~five~~four to ~~six~~seven supervisors within their respective regions and report to either a regional vice president or a vice president of SRI. SRI’s three regional vice presidents and three vice presidents report to the president of SRI.

Ownership Program. The Sonic Drive-In 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 ~~profits~~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 ~~is incorporated herein by reference to~~can be found under Ownership Program, in Part II, Item 7, at page 2631 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%~~17% and the average percentage interest of a manager in a Partner Drive-In was 19% in fiscal year ~~2005.~~2006. 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 alone 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.

	2005			2004			2003			2002			2001			2006			2005			2004			2003			2002
Average Sales per Partner Drive-In
(in thousands)	$	957		$	886		$	799		$	791		$	772		$	980		$	957		$	886		$	799		$	791
Number of Partner Drive-Ins:
Total Open at Beginning of Year		539			497			452			393			312			574			539			497			452			393
Newly-Opened and Re-Opened		37			21			35			40			34			35			37			21			35			40
Purchased from Franchisees*		4			24			52			25			50			15			4			24			52			25
Sold to Franchisees*		(5	)		(3	)		(41	)		(5	)		(2	)		--			(5	)		(3	)		(41	)		(5	)
Closed		(1	)		0			(1	)		(1	)		(1	)		(1	)		(1	)		0			(1	)		(1	)

Total Open at Year End		574			539			497			452			393			623			574			539			497			452

_________________

*The relatively large number of drive-ins sold to franchisees in fiscal year 2003 and purchased from franchisees in fiscal years ~~2001 through~~2002, 2003, 2004 and 2006 represent transactions where a majority of Sonic Drive-Ins in a certain market were sold to or purchased from a multi-unit franchisee group. In most instances where we purchased Sonic Drive-Ins, the selling multi-unit franchisee groups continued to own and operate multiple Franchise Drive-Ins.

Franchise Program

General. As of August 31, ~~2005,~~2006, we had ~~2,465~~2,565 Franchise Drive-Ins operating in 2933 states and in Mexico. A large number of successful multi-unit franchisee groups have developed during the Sonic system’s 5253 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 138 Franchise Drive-Ins during fiscal year ~~2005~~2006 and we expect our franchisees to open approximately 150 to 160 Franchise Drive-Ins in fiscal ~~2006.~~2007. We consider our franchisees a vital part of our continued growth and believe our relationship with our franchisees is good.

Franchise Agreements. Each Sonic Drive-In, including each Partner Drive-In, operates under a franchise agreement that provides for payments to Sonic of an initial franchise fee and a royalty fee based on a graduated percentage of the gross revenues of the drive-in. Our current standard license agreement provides for aan initial franchise fee of $30,000 and an ascending royalty rate beginning at 1% of gross revenues and increasing to 5% as the level of gross revenues increases. For non-traditional drive-ins, which are those Sonic Drive-Ins located in venues such as shopping mall food courts, airports, and universities, the license agreement provides for a franchise fee of $15,000 and a graduated royalty rate from 1% to 5% of gross revenues. Approximately ~~97%~~96% of all Sonic Drive-Ins opening in fiscal year ~~2006~~2007 are expected to open under the current standard license agreement, with the remaining 3%4% expected to open in venues that would be included under the non-traditional license agreement. The current standard license agreement provides for a term of 20 years, with one 10-year renewal option. The term for a non-traditional Sonic Drive-In is typically 10 years, with two five-year renewal options. We have the right to terminate any franchise agreement for a variety of reasons, including a franchisee’s failure to make payments when due or failure to adhere to our policies and standards. Many state franchise laws affect our ability to terminate or refuse to renew a franchise.

As of August 31, ~~2005, 44%~~2006, 48% of all Sonic Drive-Ins were subject to the 1% to 5% graduated royalty rate, 49% were subject to a former version of the license agreement (no longer being issued) providing for a 1% to 4% graduated royalty rate, and 7% were subject to a former version of the license agreement (also no longer being issued) providing for a 1% to 3% graduated royalty rate. For fiscal year ~~2005,~~2006, Sonic’s average royalty rate equaled ~~3.56%~~3.59%. The license agreements for those Franchise Drive-Ins which currently operate under the 1% to 4% or 1% to 3% graduated royalty rate ~~begin expiring in fiscal year 2006 and will continue to~~ expire ~~through fiscal year 2023.~~at various times over the next 16 years. We expect that almost all the Franchise Drive-Ins currently operating under those expiring license agreements will renew their licenses pursuant to the terms of the then current license agreement. Those renewals of the expiring license agreements to the current form of the license agreement with the 1% to 5% graduated royalty rate will contribute to an increase in our royalty revenues.

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 ~~64%~~51% of the new Franchise Drive-Ins opened during fiscal year ~~2005~~2006 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. If the developer does not meet the minimum opening requirements, we have the right to terminate the area development agreement and grant a new area development agreement to other franchisees for the area previously covered by the terminated area development agreement.

During fiscal year ~~2005,~~2006, we entered into 5036 new area development agreements calling for the opening of ~~212~~128 Franchise Drive-Ins and amended 1410 existing area development agreements calling for the opening of an additional 4013 Franchise Drive-Ins, all during the next ~~seven~~five years. As of August 31, ~~2005,~~2006, we had a total of ~~163~~152 area development agreements in effect, calling for the development of ~~635~~576 additional Sonic Drive-Ins during the next ~~seven~~six years. We cannot give any assurance that our franchisees will achieve that number of new Franchise Drive-Ins for fiscal year ~~2006~~2007 or during the next ~~seven~~six years. Of the ~~205~~183 Franchise Drive-Ins scheduled to open during fiscal year ~~2005~~2006 under area development

agreements in place at the beginning of that fiscal year, 8894 or ~~43%~~51% opened during the period. During fiscal year ~~2005,~~2006, we terminated 2628 of the ~~157~~163 area development agreements existing at the beginning of the fiscal year. The terminated area development agreements called for the opening of 3228 Franchise Drive-Ins in fiscal year ~~2005~~2006 and an additional 3073 Franchise Drive-Ins in the next three fiscal years. All of these terminations were as a result of the franchisee failing to meet the development schedule under the area development agreement.

Our realization of the expected benefits under various existing and future area development agreements currently depends and will continue to depend upon the ability of the developers to open the minimum number of Sonic Drive-Ins within the time periods required by the agreements. The financial resources of the developers, as well as their experience in managing quick-service restaurant franchises, represent critical factors in the success of area development agreements. Although we grant area development agreements only to those developers whom we believe possess those qualities, we cannot give any assurances that the future performance by developers will result in the opening of the minimum number of Sonic Drive-Ins contemplated by the area development agreements or reach the compliance rate we have previously experienced.

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 ~~$3.8~~$2.7 million as of August 31, ~~2005.~~2006. 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 as described under Restaurant Design and Construction - Retrofit of Item 1 of this Form 10-K. 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. Since franchisees are not scheduled to begin the retrofit program until January 2007, they have not yet entered into any loan agreements with IFCC.

Franchisee Training. Each franchisee must have at least one ~~individual working~~ full time employee at the Sonic Drive-In who has completed the Sonic Management Development Program before opening or operating the Sonic Drive-In. The program consists of a minimum of 12 weeks of on-the-job training and one week of classroom development. The program emphasizes food safety, quality food preparation, ~~quick~~speed of service, cleanliness of Sonic Drive-Ins, management techniques and consistency of service. ~~Furthermore,~~We also require our management teams ~~receive~~to pass ServSafe training ~~in ServSafe,~~programs. ServeSafe is the most recognized food safety training certification in the restaurant industry.

Franchisee Support. In addition to training, advertising and food purchasing as a system, and marketing programs, we provide various other services to our franchisees. Those services include: (1) assistance with quality control through area field representatives, to ensure that each franchisee consistently delivers high quality food and service; (2) support of new franchisees with guidance and training in the opening of their first three Sonic Drive-Ins; and (3) assistance in selecting sites for new Sonic Drive-Ins using demographic data and studies of traffic patterns. Our field services organization consists of 17 field service consultants, 14 field marketing representatives, four regional marketing directors, ~~one marketing manager, one~~two senior marketing ~~director,~~directors, twoconsultants for new ~~franchise consultants,~~franchises, fiveregional vice presidents, all with responsibility for defined geographic areas, a onedirector of new franchise services, and twovice presidents of franchise finance. The field service consultants provide operational services and support for our franchisees, while the field marketing representatives assist the franchisees with the development of advertising cooperative and local market promotional activities. New franchise consultants support the successful integration of new franchisees into the Sonic system from training

through the first months following the opening of each of the franchisee’s first three Sonic Drive-Ins. One director, nine field trainers and four training consultants provide training to franchisees in such areas as shift management, customer service, time management, supervisory skills, and financial controls. We also have a vice president of franchise real estate and six real estate directors who assist the franchisees with the identification of trade areas for new Franchise Drive-Ins and the franchisees’ selection of sites for their Franchise Drive-Ins, subject to Sonic’s final approval of those sites. ~~Ten field trainers~~We also have a staff of six architect and ~~four training consultants provide training~~engineering personnel to ~~franchisees~~design, plan and permit new stores. A senior director of construction with two construction managers also assists in ~~such areas as shift management, customer service, time management, supervisory skills, and financial controls.~~

constructing new drive-ins.

Franchise Operations. Sonic’s franchisees operate all Franchise Drive-Ins in accordance with uniform operating standards and specifications. These standards pertain to the quality and preparation of menu items, selection of menu items, maintenance and cleanliness of premises, and employee responsibilities. We develop all standards and specifications with input from franchisees, and they are applied on a system-wide basis. Each franchisee has full discretion to determine the prices charged to its customers.

Franchise Advisory Council. We have established a Franchise Advisory Council which 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 18 members selected by Sonic. Currently we have six executive committee members who are selected at large. The remaining 12 members are regional members who represent four defined regions of the country and serve three-year terms. We have five Franchise Advisory Council task groups comprised of 5346 total members who serve two-year terms and lend support on individual key priorities.

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.

	2005			2004			2003			2002			2001			2006			2005			2004			2003			2002
Average Sales Per Franchise Drive-In (in thousands)	$	1,039		$	983		$	929		$	935		$	899
Average Sales Per Franchise
Drive-In (in thousands)																$	1,092		$	1,039		$	983		$	929		$	935
Number of Franchise Drive-Ins:
Total Open at Beginning of Year		2,346			2,209			2,081			1,966			1,863			2,465			2,346			2,209			2,081			1,966
New Franchise Drive-Ins		138			167			159			142			157			138			138			167			159			142
Sold to the Company*		(4	)		(24	)		(52	)		(25	)		(50	)		(15	)		(4	)		(24	)		(52	)		(25	)
Purchased from the Company*		5			3			41			5			2			--			5			3			41			5
Closed and Terminated,
Net of Re-openings		(20	)		(9	)		(20	)		(7	)		(6	)		(23	)		(20	)		(9	)		(20	)		(7	)
Total Open at Year End		2,465			2,346			2,209			2,081			1,966			2,565			2,465			2,346			2,209			2,081

_______________

* The relatively large number of drive-ins purchased from Sonic in fiscal year 2003 and sold to Sonic in fiscal years ~~2001 through~~2002, 2003, 2004 and 2006 represent transactions where a majority of Sonic Drive-Ins in a certain market were sold to or purchased from a multi-unit franchisee group. In most instances where Sonic purchased Sonic Drive-Ins, the selling multi-unit franchisee groups continued to own and operate multiple Franchise Drive-Ins.

Competition

We compete in the ~~quick-service~~ restaurant industry, a highly competitive industry in terms of price, service, restaurant location, and food quality. The ~~quick-service~~ 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 ~~climate of~~lower temperatures in the locations of a number of Partner Drive-Ins and Franchise ~~Drive-Ins.~~Drive-Ins, which reduces customer visits to our drive-ins.

Employees

As of August 31, ~~2005,~~2006, we had ~~330~~332 full-time corporate employees. This number does not include the approximately ~~19,000~~20,000 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 isare subject to a collective bargaining agreement. We believe that we have good labor relations with our employees.

Trademarks and Service Marks

Sonic owns numerous trademarks and service marks. We have registered many of those marks, including the “Sonic” logo and trademark, with the United States Patent and Trademark Office and the Mexican Institute of Industrial Property. Trademarks and service marks generally are valid as long as they are used or registered. We believe that our trademarks and service marks have significant value and play an important role in our marketing efforts.

Government Regulations

We must comply with regulations adopted by the Federal Trade Commission (the “FTC”) and with several state laws that regulate the offer and sale of franchises. We also must comply with a number of state laws that regulate certain substantive aspects of the franchisor-franchisee relationship. The FTC’s Trade Regulation Rule on Franchising (the “FTC Rule”) requires that we furnish prospective franchisees with a franchise offering circular containing information prescribed by the FTC Rule.

State laws that regulate the franchisor-franchisee relationship presently exist in a substantial number of states. Those laws regulate the franchise relationship, for example, by requiring the franchisor to deal with its franchisees in good faith, by prohibiting interference with the right of free association among franchisees, by regulating discrimination among franchisees with regard to charges, royalties, or fees, and by restricting the development of other restaurants within certain prescribed distances from existing franchised restaurants. Those laws also restrict a franchisor’s rights with regard to the termination of a franchise agreement (for example, by requiring “good cause” to exist as a basis for the termination), by requiring the franchisor to give advance notice and the opportunity to cure the default to the franchisee, and by requiring the franchisor to repurchase the franchisee’s inventory or provide other compensation upon termination. To date, those laws have not precluded us from seeking franchisees in any given area and have not had a significant effect on our operations.

Each Sonic Drive-In must comply with regulations adopted by federal agencies and with licensing and other regulations enforced by state and local health, sanitation, safety, fire, and other departments. Difficulties or failures in obtaining the required licenses or approvals can delay and sometimes prevent the opening of a new Sonic Drive-In.

Sonic Drive-Ins must comply with federal and state environmental regulations, but those regulations have not had a material effect on their operations. More stringent and varied requirements of local governmental bodies with respect to zoning, land use, and environmental factors can delay and sometimes prevent development of new Sonic Drive-Ins in particular locations.

Sonic and its franchisees must comply with laws and regulations governing labor, employment and wage and hour issues, such as minimum wage, overtime, family and medical leave, discrimination, and other working conditions. Many of the food service personnel in Sonic Drive-Ins receive compensation at rates related to federal, state, and local minimum wage laws and, accordingly, increases in applicable minimum wage laws will increase labor costs at those locations.

Available Information

We maintain an internet website with the address of http://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 internet 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, trichinosis or salmonella, and injuries caused by food tampering have in the past severely injured the reputations of participants in the restaurant segment and could in the future affect us. 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, we could also be forced to temporarily close some 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 reputation, 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 as to price, service, location, personnel, dietary trends, and quality of food, and is often affected by changes in consumer tastes, 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. We anticipate intense competition will continue to focus on pricing. 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.

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

The food service industry is affected by consumer preferences and perceptions. If prevailing health or dietary preferences and perceptions cause consumers to avoid these products offered by Sonic Drive-Ins in favor of alternative or healthier 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, whose actions are outside of our control.

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 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;
	•		seasonal effects on demand for Sonic’s products;
	•		unexpected slowdowns in new drive-in development efforts;
	•		changes in competitive and economic conditions generally;
	•		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.

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, 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 depends on various factors, including:

	•		competition from other restaurants in current and future markets;
	•		the degree of saturation in existing markets;
	•		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 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 October 13, 2006, we completed a previously announced tender offer and repurchased 15,918,131 shares, or approximately 19%, of our outstanding common stock, for a total cost of $366.1 million. The shares were repurchased with borrowings under a new term loan facility. As of October 13, 2006, we had approximately $486 million of total long-term debt, comprised entirely of a balance outstandingonour term loan facility. We may in the future repurchase shares of our common stock, which may be funded by additional debt. Our increased leverage and debt service obligations 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 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.

Our new revolving credit facility contains, and any 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.

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 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 depend 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 laws (including applicable minimum wage requirements, overtime, working and safety conditions and citizenship requirements), federal and state laws prohibiting discrimination and other laws regulating the design and operation of facilities, such as the Americans with Disabilities Act of 1990. 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 wages, 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 expect 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, we cannot assure you that there will not 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.

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 food service 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.

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.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties

Of the ~~574~~623 Partner Drive-Ins operating as of August 31, ~~2005,~~2006, we operated ~~237~~249 of them on property leased from third-parties and ~~337~~374 of them on property we own. The leases expire on dates ranging from 2006 to ~~2024,~~2025, 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.

We moved our corporate headquarters to a new building in the Bricktown district of downtown Oklahoma City in November 2003 and have a 15-year lease to occupy approximately 78,000 square feet in the new building. 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

On September 13, 2005, Sonic Industries Inc. (“Sonic Industries”) filed a declaratory judgment action against AeroComm, Inc., in the United States District Court for the Western District of Oklahoma in Oklahoma City, Oklahoma, in a case titled, Sonic Industries Inc. v. AeroComm, Inc. (Case No.: CIV-05-1065-R). Sonic Industries seeks the Court's declaration that Sonic Industries has not violated antitrust laws and that AeroComm has no protected rights in Sonic Industries’ pay-at-your-stall (PAYS) credit card system. AeroComm was the primary supplier of PAYS radio components until AeroComm unilaterally terminated its relationship with Sonic Industries. On October 24, 2005, AeroComm filed counterclaims against Sonic Industries alleging that Sonic Industries interfered with AeroComm’s business relationships and opportunities with another PAYS supplier, provided proprietary information to the company that replaced AeroComm, and violated antitrust laws by restricting the ability of another PAYS supplier to use AeroComm for non-Sonic applications. The counterclaim seeks unspecified compensatory and other damages and injunctive relief. On February 27, 2006, AeroComm notified Sonic Industries that it was specifically seeking compensatory damages for lost profits and lost valuation. The Company believes that AeroComm's claims are without merit and will vigorously defend against them. While acknowledging the uncertainties of litigation, the Company does not believe that AeroComm’s claims will have a material adverse effect on the Company’s business or financial condition.

The Company is involved in various other 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.~~Company:

Name	Age	Position	Executive Officer Since

J. Clifford Hudson	5051	Chairman of the Board of Directors, Chief Executive Officer and President	June 1985

W. Scott McLain	4344	Executive Vice President of Sonic Corp. and President of Sonic Industries Inc.	April 1996

Michael A. Perry	4748	President of Sonic Restaurants, Inc.	August 2003

Ronald L. Matlock	5455	Senior Vice President, General Counsel and Secretary	April 1996

Stephen C. Vaughan	3940	Vice President, ~~and~~ Chief Financial Officer and Treasurer	January 1996

V. Todd Townsend	4142	Vice President and Chief Marketing Officer	August 2005

Carolyn C. Cummins	4748	Vice President of Compliance	April 2004

Terry D. Harryman	4041	Controller	January 1999

~~Renee G. Shaffer~~	44	~~Treasurer~~	~~April 2005~~

Business Experience

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

J. Clifford Hudson has served as the Company’s Chairman of the Board and Chief Executive Officer since January 2000. Mr. Hudson served as Chief Executive Officer and President of the Company from April 1995 to January 2000 and reassumed the position of President in November 2004. He has served in various other offices with the Company since 1984. Mr. Hudson has served as a Director of the Company since 1993. He served as Chairman of the Board of Securities Investor Protection Corporation, the federally-chartered organization which serves as the insurer of customer accounts with brokerage firms, from 1994 to 2001.

W. Scott McLain has served as Executive Vice President of the Company and President and Director of Sonic Industries Inc. since September 2004. 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 served as the Company’s Vice President of Finance and Chief Financial Officer from August 1997 until January 2000.

Michael A. Perry has served as President and Director of Sonic Restaurants, Inc. since September 2004. He served as Senior Vice President of Operations and Director of Sonic Restaurants, Inc. from August 2003 until September 2004. Mr. Perry served as Vice President of Franchise Services of Sonic Industries Inc. from September 1998 until August 2003.

Ronald L. Matlock has served as the Company’s Senior Vice President, General Counsel and Secretary since January 2000. Mr. Matlock served as the Company’s Vice President, General Counsel and Secretary from April 1996 until January

2000. Mr. Matlock has also served as a Director of Sonic Restaurants, Inc. and as a Director of Sonic Industries Inc. since April 1996.

Stephen C. Vaughan has served as Vice President and Chief Financial Officer of the Company since November ~~2004.~~2004 and as Treasurer of the Company since September 2006. 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 and served as Vice President of Planning and Analysis from January 1999 until November 2001. He joined the Company in 1992.

V. Todd Townsend has served as Vice President and Chief Marketing Officer of the Company since joining the Company in August 2005. Mr. Townsend served as Vice President of Marketing for Yahoo! Inc. from 2004 until joining the Company in 2005. Mr. Townsend served as Assistant Vice President of Marketing for Sprint Corp. from 2001 until 2003 and as Senior Director of Marketing for Sprint Corp. from 2000 until 2001.

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

Terry D. Harryman has served as the Company’s Controller since January 1999. Mr. Harryman has also served as the Controller of Sonic Restaurants, Inc. and Sonic Industries Inc. since January 2002. He served as Assistant Treasurer of Sonic Restaurants, Inc. and Sonic Industries Inc. from October 1996 until January 2002.

Renee G. Shaffer has served as the Treasurer of the Company since joining the Company in April 2005. Ms. Shaffer served as an Assistant Vice President of Information Systems of Hobby Lobby Stores, Inc. from December 2003 until December 2004 and the Director of Information Systems of Hobby Lobby Stores, Inc. from January 2001 until December 2003. She worked as a certified public accountant providing financial and accounting services from 1998 until January 2001.

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. Share amounts set forth below and elsewhere in this report have been adjusted to reflect the results of the ~~May 2004~~April 2006 three-for-two stock split.

Fiscal Year Ended August 31, 2006	High	Low	Fiscal Year Ended August 31, 2005	High	Low
First Quarter	$19.940	$17.987	First Quarter	$19.987	$14.934
Second Quarter	$21.727	$18.327	Second Quarter	$22.580	$19.447
Third Quarter	$23.480	$20.827	Third Quarter	$23.647	$20.534
Fourth Quarter	$22.400	$19.070	Fourth Quarter	$22.547	$19.447

Quarter Ended
High
Low

Quarter Ended
High
Low
November 30, 2004 $29.980 $22.400 November 30, 2003 $20.587 $16.260
February 28, 2005 $33.870 $29.170 February 29, 2004 $23.247 $19.673
May 31, 2005 $35.470 $30.800 May 31, 2004 $24.313 $20.233
August 31, 2005 $33.970 $29.170 August 31, 2004 $23.500 $21.100

Stockholders

As of October ~~31, 2005,~~16, 2006, the Company had ~~601~~624 record holders of its common stock.

1216

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, acquisition of Franchise Drive-Ins, ~~and~~ repurchases of the Company’s common ~~stock.~~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.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information about the Company’s equity compensation plans as of August 31, ~~2005.~~2006.

Equity Compensation Plan Information

	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Plan category	(a)	(b)	(c)	(a)	(b)	(c)

Equity compensation plans approved by security holders	5,216,919	$14.87	918,058
Equity compensation plans not approved by security holders	-0-	-0-	-0-	7,230,188	$11.98	6,051,382
Equity compensation plans not approved by security holders				-0-	-0-	-0-

Issuer Purchases of Equity Securities

Shares repurchased during the fourth quarter of fiscal ~~2005~~2006 are as ~~follows (in thousands, except share and per share amounts):~~follows:

Period
Total
Number of
Shares
Purchased

(a)

Average
Price Paid
per
Share

(b)

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or Programs ⁽¹⁾

(c)

Maximum Dollar
Value that May
Yet Be Purchased
Under the Program

(d)
June 1, 2005 through June 30, 2005

228,700

$31.49

228,700

$122,800

July 1, 2005 through July 31, 2005

498,900

$30.31

498,900

$107,676

August 1, 2005 through August 31, 2005

    -0-

$ 0.00

    -0-

$107,676

      Total

727,600

$30.68

727,600

Period	Total Number of Shares Purchased (a)	Average Price Paid per Share (b)	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽¹⁾ (c)	Maximum Dollar Value that May Yet Be Purchased Under the Program (d)
June 1, 2006 through June 30, 2006	132,800	$21.36	132,800	$89,412,723
July 1, 2006 through July 31, 2006	--	--	--	$89,412,723
August 1, 2006 through August 31, 2006	--	--	--	$89,412,723
Total	132,800	$21.36	132,800

(1) All of the shares purchased during the fourth quarter of fiscal ~~2005~~2006 were purchased as part of the Company’s share repurchase program which was first publicly announced on April 14, 1997. In April ~~2005,~~2006, the Company’s Board of Directors approved an increase in the share repurchase authorization from ~~$60,000~~$34,581,097 to ~~$150,000~~$110,000,000 and extended the program to August 31, ~~2006.~~2007.

1317

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.

[The Remainder of this Page Intentionally Left Blank]

1418

Selected Financial Data

(In thousands, except per share data)

Year ended August 31,

2005
2004 2003 2002 2001

Income Statement Data:

Partner Drive-In sales
$
525,988
$ 449,585 $ 371,518 $ 330,707 $ 267,463
Franchise Drive-Ins:
Franchise royalties
88,027
77,518 66,431 61,392 54,220
Franchise fees
4,311
4,958 4,674 4,020 4,408
Other
4,740
4,385 4,017 4,043 4,547
Total revenues
623,066
536,446 446,640 400,162 330,638
Cost of Partner Drive-In sales
421,906
358,859 291,764 257,057 207,782
Selling, general and administrative
40,746
38,270 35,426 33,444 30,602
Depreciation and amortization
35,821
32,528 29,223 26,078 23,855
Provision for impairment of long-lived assets
387

675

727

1,261

792

Total expenses
498,860
430,332 357,140 317,840 263,031
Income from operations
124,206
106,114 89,500 82,322 67,607
Net interest expense
5,785
6,378 6,216 6,319 5,525
Income before income taxes
$
118,421
$ 99,736 $ 83,284 $ 76,003 $ 62,082
Net income
$
75,381
$ 63,015 $ 52,261 $ 47,692 $ 38,956

Income per share ⁽¹⁾:

Basic
$
1.26
$ 1.06 $ 0.89 $ 0.79 $ 0.65
Diluted
$
1.21
$ 1.02 $ 0.86 $ 0.75 $ 0.62
Weighted average shares used in calculation ⁽¹⁾:

Basic
59,995
59,314 58,465 60,234 59,774
Diluted
62,431
61,654 60,910 63,310 62,598

Balance Sheet Data:

Working capital (deficit)
$
(30,093
)
$ (14,537 ) $ (2,875 ) $ (12,942 ) $ (3,335 )
Property, equipment and capital leases, net
422,825
376,315 345,551 305,286 273,198
Total assets ��
563,316
518,633 486,119 405,356 358,000
Obligations under capital leases (including current portion)
38,525

40,531

27,929

12,938

13,688

Long-term debt (including current portion)
60,195
82,169 139,587 109,375 109,168
Stockholders’ equity
384,539
334,762 265,398 230,670 200,719
Cash dividends declared per common share

–

–

–

–

–

	Year ended August 31,
	2006		2005⁽¹⁾		2004⁽¹⁾		2003⁽¹⁾		2002⁽¹⁾

Income Statement Data:
Partner Drive-In sales	$	585,832	$	525,988	$	449,585	$	371,518	$	330,707
Franchise Drive-Ins:
Franchise royalties		98,163		88,027		77,518		66,431		61,392
Franchise fees		4,747		4,311		4,958		4,674		4,020
Other		4,520		4,740		4,385		4,017		4,043
Total revenues		693,262		623,066		536,446		446,640		400,162
Cost of Partner Drive-In sales		468,627		421,906		358,859		291,764		257,057
Selling, general and administrative		52,048		47,503		44,765		41,061		38,246
Depreciation and amortization		40,696		35,821		32,528		29,223		26,078
Provision for impairment of long-lived assets		264		387		675		727		1,261
Total expenses		561,635		505,617		436,827		362,775		322,642
Income from operations		131,627		117,449		99,619		83,865		77,520
Net interest expense		7,578		5,785		6,378		6,216		6,319
Income before income taxes	$	124,049	$	111,664	$	93,241	$	77,649	$	71,201
Net income	$	78,705	$	70,443	$	58,031	$	47,801	$	43,864

Income per share ⁽²⁾:
Basic	$	0.91	$	0.78	$	0.65	$	0.55	$	0.49
Diluted	$	0.88	$	0.75	$	0.63	$	0.52	$	0.46
Weighted average shares used in calculation ⁽²⁾:
Basic		86,260		89,992		88,970		87,698		90,350
Diluted		89,239		93,647		92,481		91,365		94,965

Balance Sheet Data:
Working capital (deficit)	$	(35,585	)	$	(30,093	)	$	(14,537	)	$	(2,875	)	$	(12,942	)
Property, equipment and capital leases, net		477,054			422,825			376,315			345,551			305,286
Total assets		638,018			563,316			518,633			486,119			405,356
Obligations under capital leases (including current portion)		36,625			38,525			40,531			27,929			12,938
Long-term debt (including current portion)		122,399			60,195			82,169			139,587			109,375
Stockholders’ equity		391,693			387,917			337,900			267,733			232,236
Cash dividends declared per common share		─			─			─			─			─

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

~~(1)~~(2) Adjusted for ~~a 3-for-2~~three-for-two stock ~~split~~splits in 2006, 2004 and ~~2002~~2002.

1519

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-ins in the United States. As of August 31, ~~2005,~~2006, the Sonic system was comprised of ~~3,039~~3,188 drive-ins, of which ~~19%~~20% or ~~574~~623 were Partner Drive-Ins and ~~81%~~80% or ~~2,465~~2,565 were Franchise Drive-Ins. Sonic Drive-Ins feature ~~Sonic~~ signature menu items such as specialty soft 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.~~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. To a lesser extent, we also receive income from the selling and leasing of signs and real estate, as well as from minority ownership interests in a few Franchise Drive-Ins.

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. Business performance was strong during fiscal year ~~2005~~2006 as net income increased ~~19.6%~~11.7% and earnings per share increased ~~18.6%~~17.3% to ~~$1.21~~$0.88 per diluted ~~share.~~share from $0.75 per diluted share in the year-earlier period, which is adjusted for the retrospective adoption of SFAS 123R for expensing stock-based compensation.

~~The Sonic brand achieved several milestones during fiscal year 2005, including:~~

·	~~Surpassing the $1.0 million mark in system-wide average unit volumes;~~

·	~~Opening of the 3,000~~^th ~~Sonic Drive-In; and~~

·	~~Our 19~~^th ~~consecutive year of higher system-wide same-store sales.~~

We continue to experience considerable momentum in our business fueled by strong growth in same-store sales that ~~despite some pressure on store-level operating costs during the year,~~ led to a ~~significant~~strong increase in system-wide drive-in level average ~~profit per store. The~~profits. In turn, the rise in store-level profits, ~~in turn,~~which have grown handsomely over the last three years, helped produce a solid number of new drive-in openings by franchisees. We believe these results reflect our multi-layered growth strategy that features the following components:

•

Solid same-store sales growth;

·	~~Increased franchising income stemming from solid same-store sales growth and our unique ascending royalty rate;~~

· •

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

·	•		Increased franchising income stemming from franchisee new unit growth, solid same-store sales growth and our unique ascending royalty rate;
	•		Operating leverage at both the drive-in level and the corporate level; and

•

The use of excess operating cash flow and issuance of new debt for franchise acquisitions and share repurchases.

Looking forward, these strategies are expected to continue to positively impact our business. We expect revenue growth of between 13% and 15% for fiscal year 2006, based upon same-store sales growth in the target range of 2% to 4%. This increase in revenues includes the expected benefit from 15 Franchise Drive-Ins which were acquired by the Company effective September 1, 2005.

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,
	2006			2005			2004
Percentage increase in sales		10.7	%		12.4	%		13.1	%

System-wide drive-ins in operation ⁽¹⁾:
Total at beginning of period		3,039			2,885			2,706
Opened		173			175			188
Closed (net of re-openings)		(24	)		(21	)		(9	)
Total at end of period		3,188			3,039			2,885

Core markets ⁽²⁾		2,435			2,165			2,059
Developing markets ⁽²⁾		753			874			826
All markets		3,188			3,039			2,885

1620

System-Wide Performance ($ in thousands)
System-Wide Performance (cont’d) ($ in thousands)										System-Wide Performance (cont’d) ($ in thousands)

	Year Ended August 31,										Year Ended August 31,
	2005			2004			2003

Percentage increase in sales		12.4	%		13.1	%		7.0	%

System-wide drive-ins in operation:
Total at beginning of period		2,885			2,706			2,533
Opened		175			188			194
Closed (net of re-openings)		(21	)		(9	)		(21	)
Total at end of period		3,039			2,885			2,706

Core markets		2,165			2,059			1,977
Developing markets		874			826			729
All markets		3,039			2,885			2,706
											2006			2005			2004
Average sales per drive-in:
Core markets	$	1,059		$	1,004		$	947			$	1,105		$	1,059		$	1,004
Developing markets		934			861			802				954			934			861
All markets		1,023			964			907				1,070			1,023			964

Change in same-store sales ⁽¹⁾:
Change in same-store sales ⁽³⁾:
Core markets		5.6	%		6.4	%		0.5	%			5.3	%		5.6	%		6.4	%
Developing markets		7.4			6.8			(1.2	)			1.5			7.4			6.8
All markets		6.0			6.5			0.3				4.5			6.0			6.5

(1) Represents percentage change for drive-ins open for a minimum of 15 months.
(1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, management changes, 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.										(1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, management changes, 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.

·	~~Growth in brand awareness through increased media spending and greater use of network cable advertising;~~

· •	~~Strong promotions and new product news focused on quality and expanded choices for our customers;~~

·	Continued growth of our business in non-traditional day parts including the morning, afternoon, and evening day ~~parts, which saw solid increases in sales; and~~parts;

·	•	Use of technology to reach customers and improve the customer ~~experience.~~experience;
	•	Monthly promotions and new product news focused on quality and expanded choice for our customers; and
	•	Growth in brand awareness through increased media spending and greater use of network cable advertising.

~~During~~Looking forward, these strategies are expected to continue to positively impact our business. We expect revenue growth of between 11% and 13% for fiscal year 2007, based upon targeted same-store sales growth in the range of 2% to 4%.

We continue to promote the expansion of our business in non-traditional day parts (morning, afternoon, and evening), which resulted in positive growth during fiscal year 2006 compared to fiscal year 2005 ~~our total system-wide media expenditures were approximately $125 million as compared~~for each of these non-traditional day parts. We believe we have continuing opportunity to ~~$110 million in~~grow these day parts throughout fiscal year ~~2004,~~2007.

Implementation of the PAYS program, which ~~we believe continues to increase overall brand awareness and strengthen our share~~began in the fall of ~~voice relative to our competitors. We have also shifted more~~2003, was completed in the remainder of our ~~marketing dollars to our system-wide marketing fund efforts, which are largely used for network cable television advertising, growing this area~~Partner Drive-Ins during the second quarter of ~~our advertising from approximately $32 million in fiscal year 2004 to approximately $60 million in~~ fiscal year 2005. ~~We believe increased network cable advertising provides several benefits including~~Under the ~~ability~~PAYS program, a credit card terminal is added to ~~more effectively target~~each drive-in stall to facilitate credit and ~~better reach the cable audience, which has now surpassed broadcast networks~~debit card transactions. Rollout to Franchise Drive-Ins began in ~~terms of viewership. In addition, national cable advertising also allows us to bring additional depth to our media~~February 2005 and ~~expand our message beyond our traditional emphasis on a single monthly promotion. Looking forward, we expect system-wide media expenditures~~is expected to be ~~approximately $140 million~~substantially complete system-wide by the end of calendar year 2006. Approximately 80% of Franchise Drive-Ins and over 83% of drive-ins system-wide now have the PAYS system in ~~fiscal 2006. The system-wide marketing fund portion will again represent approximately one-half of total media expenditures for fiscal 2006.~~

During fiscal year ~~2004, continued through fiscal year 2005. Every day part, including lunch and dinner, showed positive growth during~~2006, our total system-wide media expenditures were approximately $145 million as compared to $125 million in fiscal year 2005, ~~compared to fiscal year 2004, and~~which we believe ~~we have continuing opportunity~~continues to ~~grow~~increase overall brand awareness and strengthen our ~~non-traditional day parts like afternoon and evening throughout fiscal year 2006.~~

~~Another milestone reached during fiscal year 2005 was the opening of Sonic’s 3,000~~^th ~~drive-in. We~~Sonic opened ~~175~~173 new drive-ins during fiscal year ~~2005,~~2006, consisting of 3735 Partner Drive-Ins and 138 Franchise Drive-Ins, down slightly from ~~188~~175 drive-in openings during fiscal year ~~2004 (21~~2005 (37 Partner Drive-Ins and ~~167~~138 Franchise Drive-Ins). Looking forward, the Company expects to open 180 to ~~190~~200 new drive-ins during fiscal year ~~2006,~~2007, including 150 to 160 by franchisees.

Results of Operations

Revenues
(in thousands)
								Percent
					Increase/			Increase/
Year Ended August 31,	2006		2005		(Decrease)			(Decrease)
Revenues:
Partner Drive-In sales	$	585,832	$	525,988	$	59,844			11.4	%
Franchise revenues:
Franchise royalties		98,163		88,027		10,136			11.5
Franchise fees		4,747		4,311		436			10.1
Other		4,520		4,740		(220	)		(4.6	)
Total revenues	$	693,262	$	623,066	$	70,196			11.3

								Percent
					Increase/			Increase/
Year Ended August 31,	2005		2004		(Decrease)			(Decrease)
Revenues:
Partner Drive-In sales	$	525,988	$	449,585	$	76,403			17.0	%
Franchise revenues:
Franchise royalties		88,027		77,518		10,509			13.6
Franchise fees		4,311		4,958		(647	)		(13.0	)
Other		4,740		4,385		355			8.1
Total revenues	$	623,066	$	536,446	$	86,620			16.1

Revenues

(in thousands)

Percent

Increase/

Increase/

Year Ended August 31,

2005

2004

(Decrease)

(Decrease)

Revenues:
Partner Drive-In sales
$
525,988
$ 449,585
$
76,403
17.0 %
Franchise revenues:
Franchise royalties
88,027
77,518 10,509 13.6
Franchise fees
4,311
4,958
(647
)
(13.0 )
Other
4,740
4,385
355
8.1
Total revenues
$
623,066
$ 536,446
$
86,620
16.1

Year Ended August 31,

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)

Partner Drive-In Sales

($ in thousands)

Partner Drive-In Sales

($ in thousands)

Year Ended August 31,

Change in same-store sales ⁽¹⁾⁽²⁾

(1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, management changes, 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.

The increases in Partner Drive-In sales result from newly constructed and acquired drive-ins and same-store sales increases in existing drive-ins, offset by the loss of sales for sold and closed drive-ins.

Change in Partner Drive-In Sales ($ in thousands)	Change in Partner Drive-In Sales ($ in thousands)							Change in Partner Drive-In Sales ($ in thousands)

		Year Ended August 31,							Year Ended August 31,
		2005			2004				2006			2005
Increase from addition of newly constructed drive-ins ⁽¹⁾		$	28,184		$	23,099			$	33,332		$	28,184
Increase from acquisition of drive-ins ⁽²⁾			19,831			38,378				19,549			19,831
Increase from same-store sales			31,109			28,561				9,754			31,109
Decrease from drive-ins sold or closed ⁽³⁾			(2,721	)		(11,971	)			(2,791	)		(2,721	)
Net increase in Partner Drive-In sales		$	76,403		$	78,067			$	59,844		$	76,403

(1) Represents the increase for 72 and 58 drive-ins opened since the beginning of the prior fiscal year as of August 31, 2006 and 2005, respectively.								(1) Represents the increase for 72 and 58 drive-ins opened since the beginning of the prior fiscal year as of August 31, 2006 and 2005, respectively.
(2) Represents the increase for 19 and 28 drive-ins acquired since the beginning of the prior fiscal year as of August 31, 2006 and 2005, respectively.								(2) Represents the increase for 19 and 28 drive-ins acquired since the beginning of the prior fiscal year as of August 31, 2006 and 2005, respectively.
(3) Represents the decrease for 7 and 9 drive-ins sold or closed since the beginning of the prior fiscal year as of August 31, 2006 and 2005, respectively.								(3) Represents the decrease for 7 and 9 drive-ins sold or closed since the beginning of the prior fiscal year as of August 31, 2006 and 2005, respectively.


~~(1) Represents the increase for 58 and 55 drive-ins opened since the beginning of the prior fiscal year as of August 31, 2005 and 2004, respectively.~~
~~(2) Represents the increase for 28 and 77 drive-ins acquired since the beginning of the prior fiscal year as of August 31, 2005 and 2004, respectively.~~
~~(3) Represents the decrease for 9 and 45 drive-ins sold or closed since the beginning of the prior fiscal year as of August 31, 2005 and 2004, respectively.~~

The following table reflects the growth in franchise ~~revenues~~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 ~~performance~~health of our ~~Franchise Drive-Ins.~~franchisees.

Franchise Information

($ in thousands)

Franchise Information

($ in thousands)

Franchise Information

($ in thousands)

Year Ended August 31,

Franchise fees and royalties ⁽¹⁾

Change in same-store sales ⁽²⁾

(1) See Revenue Recognition Related to Franchise Fees and Royalties in the Critical Accounting Policies and Estimates section of MD&A.

(2) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, management changes, 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 ~~income, which consists of franchise~~ royalties ~~and franchise fees,~~ increased ~~12.0%~~11.5% to ~~$92.3~~$98.2 million in fiscal year 2006, compared to $88.0 million in fiscal year 2005. Of the $10.2 million increase, approximately $6.1 million resulted from Franchise Drive-Ins’ same-store sales growth of 5.1% in fiscal year 2006, combined with an increase in the effective royalty rate to 3.59% during fiscal year 2006 compared to 3.56% during fiscal year 2005. Each of our license agreements contains an ascending royalty rate whereby royalties, as a percentage of sales, increase as sales increase. The balance of the increase was attributable to growth in the number of Franchise Drive-Ins over the prior period.

Franchise royalties increased 13.6% to $88.0 million in fiscal year 2005, compared to $77.5 million in fiscal year 2004. Of the $10.5 million increase, approximately $6.3 million resulted from Franchise Drive-Ins’ same-store sales growth of 5.8% in fiscal year 2005, combined with an increase in the effective royalty rate to 3.56% during fiscal year 2005 compared to 3.49% during fiscal year 2004. Each of our license agreements contains an ascending royalty rate whereby royalties, as a percentage of sales, increase as sales increase. The balance of the increase was attributable to growth in the number of Franchise Drive-Ins over the prior period.

Franchise ~~royalties~~fees increased ~~16.7%~~10.1% to $77.5 million in fiscal year 2004, compared to $66.4 million in fiscal year 2003. Of the $11.1 million increase, approximately $6.7 million resulted from Franchise Drive-Ins’ same-store sales growth of 6.2% in fiscal year 2004, combined with an increase in the effective royalty rate to 3.49% during fiscal year 2004 compared to 3.34% during fiscal year 2003. The balance of the increase was attributable to growth in the number of Franchise Drive-Ins over the prior period.

Looking forward, there has been a strong ~~rise~~increase in per store profits over the last ~~24 months that~~three years. Historically, strong growth in sales and profits has ~~positively impacted~~been a good indicator of increased franchise openings in the ~~pipeline for future franchise development. This is evidenced by 163~~following years. As of August 31, 2006, we had 152 area development agreements ~~at the end of fiscal year 2005~~ representing approximately ~~635~~576 planned Franchise Drive-In openings over the next few years, compared to ~~157~~163 such agreements at August 31, ~~2004~~2005 which represented approximately ~~570~~635 planned Franchise Drive-In openings. While the number of agreements and commitments has declined, we believe that the termination of several non-performing agreements over the past year has improved the quality of our franchise

~~Twenty~~Twenty-three Franchise Drive-Ins were closed during fiscal year ~~2005,~~2006, which was an increase from the ~~nine~~20 Franchise Drive-Ins closed during fiscal year ~~2004.~~2005. Most of the closings in fiscal year 2006 were the result of low sales and were spread across a broad range of markets and franchise groups. Fifteen of the fiscal year 2005 closings ~~occurred during the second quarter and~~ related primarily to two weaker franchise operators in two different markets. We do not believe that these drive-in closings are indicative of the Sonic brand’s success. We have taken steps to require stronger financial qualifications of new franchisees, which we believe will significantly mitigate this type of risk. In addition, we expect that some of these drive-ins may re-open under new franchisee ownership.

We anticipate 150 to 160 store openings by franchisees during fiscal year ~~2006.~~2007. Substantially all of these new drive-ins will open under our newest form of license agreement, which contains a higher average royalty rate and initial opening fee. As a result of these new Franchise Drive-In openings and the continued benefit of the ascending royalty rate, we expect approximately $9 to $10 million in incremental franchise fees and royalties in fiscal year ~~2006.~~2007.

Operating Margins

Year Ended August 31,

Costs and Expenses ⁽¹⁾:

Minority interest in earnings of

Food and packaging costs decreased by 0.3 percentage points during fiscal year 2006 compared to fiscal year 2005 following a decrease of 0.1 percentage points during fiscal year 2005 compared to fiscal year ~~2004 following an increase of 0.3 percentage points during~~2004. The improvement for fiscal year ~~2004 compared~~2006 relates primarily to ~~fiscal year 2003. In the early part of the year, we experienced significant, year-over-year increases~~lower dairy costs and a favorable shift in ~~several commodities including beef, dairy,~~product mix to drinks and ~~tomatoes. They were offset by~~ice cream, which have more favorable margins than other menu ~~price increases of approximately 1% in December 2004 and 1.5% in May 2005, as well as abatement of price pressures for these items, particularly dairy, in the latter part of the year.~~items. Looking forward, we anticipate that ~~slightly lower year-over-year costs for beef, as well as lower costs for other items~~a benign commodity cost environment will result in ~~lower~~flat to slightly favorable food and packaging costs, as a percentage of sales, on a year-over-year basis in fiscal year ~~2006. This favorable outlook may be negatively impacted if energy prices remain high throughout the year.~~2007.

Labor costs ~~increased~~decreased by 0.3 percentage points during fiscal year 2006 compared to fiscal year 2005 after an increase of 0.1 percentage points during fiscal year 2005 compared to fiscal year ~~2004 after an increase of 0.6 percentage points during~~2004. The improvement for fiscal year ~~2004 compared to fiscal year 2003.~~2006 is primarily a result of leverage from higher sales volumes. The slight increase for fiscal year 2005 resulted from staffing increases at the assistant manager level, as well as higher labor costs related to opening newly constructed stores as higher staffing levels were required for pre-opening training and through the initial opening period. ~~The 2004 increase was primarily a result of significant payments made under the sales-based incentive program for drive-~~

~~in management as well as higher staffing levels reflecting successful ongoing efforts to reduce turnover at Partner Drive-~~I~~ns.~~

~~Looking forward, the~~The average wage rate has increased only slightly inover the ~~last two quarters of fiscal year 2005, although the increase has not been significant~~past year. Looking forward, wage increases are expected to date. We plan to continue making significant payments under our sales incentive program, as we believe it has been a major driver of strong sales performance at Partner Drive-Ins. These increases, however, should be leveraged by higher volumes. As a result, we expect labor costs to be ~~flat to~~ slightly favorable, as a percentage of sales, on a year-over-year basis, in fiscal year ~~2006.~~2007.

Minority interest, which reflects our store-level partners’ pro-rata share of earnings ~~from~~through our partnership program, increased by ~~$1.6~~$3.7 million during fiscal year ~~2005,~~2006, reflecting the increase in average ~~profit per store.~~store-level profits. During fiscal year ~~2004,~~2005, minority interest increased ~~$5.5~~$1.6 million, also reflecting the increase in average

profit per store. ~~Overall, we~~We continue to view the partnership program as an integral part of our culture at Sonic and a large factor in the success of our business, and we are pleased that profit distributions to our partners increased during fiscal year ~~2005.~~2006. Since we expect our average store level profits to continue to grow in fiscal year ~~2006,~~2007, we ~~would~~ expect minority interest to continue to increase in dollar ~~terms but stay relatively flat as a percentage of sales.~~terms.

Other operating expenses increased by 0.2 percentage points during fiscal year 2006 after an increase of 0.7 percentage points during fiscal year 2005. ~~Costs~~Leverage from higher sales partially offset increased utility costs resulting from higher energy prices in fiscal year 2006. The increase in fiscal year 2005 resulted primarily ~~as a result of~~from credit card charges associated with the increase in credit card transactions stemming from the success of the PAYS program, as well as increased repairs and maintenance expenses resulting from a greater focus on the physical appearance of our drive-ins, both inside and outside. Utility costs also increased toward the end of fiscal year 2005 as a result of increased energy prices. During fiscal year 2004, other operating expenses decreased by 0.1 percentage points as the leverage of operating at higher unit volumes more than offset increased costs.drive-ins. Looking forward, we expect cost increases in many of the items listed above, particularly utility costs, to carry over into fiscal year 2006. Our expectations for other operating costs will continue to depend upon future swings in energy costs, but we generally expect that the cost increases will result in other operating expenses ~~increasing 0.25~~ to ~~0.50 percentage points,~~be flat to slightly favorable in fiscal year ~~2006.~~2007, as we lap over the higher costs from a year ago.

To summarize, we are expecting overall restaurant-level margins to be ~~relatively flat~~slightly favorable during fiscal year ~~2006~~2007 on a year-over-year ~~basis, depending upon the variability in energy costs.~~basis.

Financial Position

During fiscal year ~~2005,~~2006, current assets increased ~~1.9%~~20.6% to ~~$35.2~~$42.5 million compared to ~~$34.6~~$35.2 million as of the end of fiscal year ~~2004.~~2005. Cash balances increased by $3.2 million as a result of positive operating cash flows and current notes receivable from franchisees increased by approximately $2.5 million related to short term financing for certain franchisee capital projects. Net property, equipment and capital leases increased by ~~12.4%~~$54.2 million as a result of capital ~~expenditures. The~~expenditures and the Tennessee and Kentucky acquisition. Goodwill increased by $8.5 million and other intangibles increased by $4.3 million as a result of the Tennessee and Kentucky acquisition. These increases combined with the increase in current assets ~~and net property, equipment and capital leases were partially offset by decreases~~resulted in ~~notes receivable, resulting from early repayment by franchisees, to produce an 8.6%~~a 13.3% increase in total assets to ~~$563.3~~$638.0 million as of the end of fiscal year ~~2005.~~2006.

Total current liabilities increased ~~$16.2~~$12.8 million or ~~33.0%~~19.5% during fiscal year ~~2005~~2006 as a result of ~~increases~~a temporary increase in ~~income taxes~~accounts payable and ~~trade payables.~~accrued liabilities, which was partially offset by a reduction in tax liabilities due to the timing of tax payments. The ~~non-current~~noncurrent portion of long-term debt ~~decreased $22.7~~increased $61.2 million or ~~28.9%~~109.5% as a result of ~~repayment~~advances on the Company’s line of ~~debt using cash generated from operating activities.~~credit to fund portions of the share repurchases, capital expenditures and the Tennessee and Kentucky acquisition. Overall, total liabilities ~~decreased $5.1~~increased $70.9 million or ~~2.8%~~40.4% as a result of the items discussed above.

Stockholders’ equity increased ~~$49.8~~$3.8 million or ~~14.9%~~1.0% during fiscal year ~~2005~~2006 primarily resulting from earnings during the period of ~~$75.4~~$78.7 million, along with $18.8 million for stock option-related and other activity, offset by treasury stock repurchases during the period of ~~$42.3~~$93.7 million. ~~Proceeds and the related tax benefit from the exercise of stock options accounted for the balance of the increase.~~ At the end of fiscal year ~~2005,~~2006, our debt-to-total capital ratio stood at ~~20.4%~~28.9%, ~~down~~up from ~~26.8%~~20.3% at the end of fiscal year ~~2004.~~2005. For the ~~twelve~~12 months ended August 31, ~~2005,~~2006, return on average ~~stockholders'~~stockholders’ equity was ~~21.0%~~20.2% and return on average assets was ~~13.9%~~13.1%.

Liquidity and Sources of Capital

Interest Rate. Interest on loans under the new senior secured credit facility will be payable at per annum rates equal to (1) in the case of the revolving credit facility, initially, LIBOR plus 175 basis points and adjusting over time based upon Sonic's leverage ratio and (2) in the case of the term loan facility, initially, LIBOR plus 200 basis points and adjusting over time based upon Sonic's credit ratings with Moody's Investors Service Inc. As discussed below, we expect to refinance this facility with an ~~additional 1.4~~alternative facility that is expected to bear interest at a lower rate.

Commitment Fees. We will pay a commitment fee on the unused portion of the revolving credit facility, starting at 0.375% and adjusting over time based upon our leverage ratio.

Conditions to Funding. Our ability to reserve funds from the revolving credit facility is conditioned upon various customary representations and warranties being true at the time of the borrowing, and upon no event of default existing or resulting from the receipt of such finds.

Security Interests. We and all of our domestic subsidiaries have granted the lenders under the new senior secured credit facility valid and perfected first priority (subject to certain exceptions) liens and security interests in (1) all present and future shares of capital stock (or other ownership profit interests) in each of our present and future subsidiaries (subject to certain limitations), (2) all present and future property and assets, real and personal and (3) all proceeds and products of the property and assets described in clauses (1) and (2).

Covenants and Events of Default. The credit agreement governing the new senior secured credit facilities contains certain affirmative covenants, certain negative covenants, certain financial covenants, certain conditions and events of default that are customarily required for similar financings. Such

negative covenants include limitations on liens, consolidations and mergers, indebtedness, capital expenditures, asset dispositions, sale-leaseback transactions, stock repurchases, transactions with affiliates and other restrictions and limitations. Furthermore, the credit agreement requires us to maintain compliance with certain financial covenants such as a leverage ratio and fixed charge coverage ratio. Although management does not anticipate an event of default, if such an event occurred, the unpaid amounts outstanding could become immediately due and payable.

We plan capital expenditures of approximately $75 to $80 million in fiscal year ~~2006,~~2007, excluding potential acquisitions and share repurchases. These capital expenditures primarily relate to the development of additional Partner Drive-Ins, ~~stall additions, relocations~~retrofit of ~~older drive-ins, store equipment~~existing Partner Drive-Ins and ~~point-of-sale system upgrades, and enhancements to existing financial and operating information systems.~~other drive-in level expenditures. We expect to fund these capital expenditures through cash flow from operations and borrowings under our ~~existing line of credit.~~new senior secured credit facility.

As of August 31, ~~2005,~~2006, our total cash balance of ~~$6.4~~$9.6 million reflected the impact of the cash generated from operating activities, borrowing activity, and capital expenditures mentioned above. We believe that existing cash and funds generated from operations, as well as borrowings under the ~~line of~~new senior secured credit facility, will meet our needs for the foreseeable future.

Known Trends, Events, Demands, Commitments and Uncertainties

Looking forward, the tender offer and related increase in debt and decrease in shares outstanding will impact a number of trends, including interest expense, cash used for financing activities and earnings per share. As a result of the increase in debt, interest expense is expected to increase to at least $32 million or more depending on the level of share repurchases and acquisitions of Franchise Drive-Ins. Sonic is currently pursuing refinancing the senior credit facilities with a securitized financing arrangement. Although we currently expect to successfully complete the securitization, if we are unable to do so or are delayed in completing it, nonrefundable fees associated with the securitization of approximately $1 to $2 million would be expensed immediately rather than amortized over the life of the securitization. Weighted shares outstanding for calculating diluted earnings per share are expected to decrease to approximately 81 million shares for the first fiscal quarter of 2007 and to approximately 75 million for fiscal year 2007, but may vary significantly, depending upon the level of future share repurchases. The decrease in shares outstanding will impact the resulting earnings per share calculations.

Off-Balance Sheet Arrangements

The Company has obligations for guarantees on certain franchisee loans and lease agreements. See Note 15 of the Notes to Consolidated Financial Statements for additional information about these guarantees. The Company has no other material off-balance sheet ~~financings.~~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, ~~2005~~2006 are summarized in the following table:

~~Payments Due by Period~~

Payments Due by Period

Contractual Obligations

Operating leases 154,782 9,722 19,056 18,515 107,489
Total
$
273,937

$
18,943

$
38,039

$
70,261

$
146,694

Impact of Inflation

Though increases in labor, food or other operating costs could adversely affect our operations, we do not believe that inflation has had a material effect on income during the past several years.

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.

The ~~investments made by~~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 ~~each partnership or limited liability company are accounted for as minority interests~~earnings of Partner Drive-Ins in the ~~financial statements.~~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, primarily upon 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 ~~net book value~~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 acquired by the Company in a Partner Drive-In is recorded as an investment in partnership, which results in a reduction in the minority interest liability on the Consolidated Balance Sheet. If the purchase pricethat 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 ~~results in~~is recorded as a ~~decrease~~reduction in purchased goodwill. Any subsequent sale of the minority interest to another minority partner is recorded as a pro-rata reduction of goodwill, ~~and investment,~~ and 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 FAS 142, “Goodwill and Other Intangible Assets.”

We estimate the fair value of options granted using the Black-Scholes option pricing model along with the assumptions shown in Note 12 to the financial statements. 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 for the first nine months of 2006 could have been materially different. Furthermore, if different assumptions are used in future periods, stock-based compensation expense could be materially impacted in the future.

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.

~~We are~~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 ~~interest rates on debt and notes receivable, as well as 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. The major risks from interest rate derivatives include changes in the interest rates affecting the fair value of the instruments, potential increases in interest expense due to market increases in floating rates and the creditworthiness of the counterparties in such transactions.

The Company entered into an interest rate swap in February 2006, which was designated as a cash flow hedge to modify a portion of the variable rate line of credit to a fixed rate obligation, thereby reducing the exposure to market rate fluctuations. Subsequent to repayment of the line of credit, this interest rate swap was terminated, resulting in an immaterial gain being recognized immediately to income in the first quarter of fiscal year 2007.

In August 2006, the Company entered into a forward starting swap agreement, which was designated as a cash flow hedge of the variability in the cash outflows of interest payments on the securitized financing that is anticipated to be completed by December 31, 2006. The swap has a notional principal amount of $400 million. The gross fair value of the forward starting swap as of August 31, 2006 was a liability of $0.8 million. A 1% increase or decrease in the benchmark rate is estimated to result in approximately a $.2 million increase or decrease, respectively, in the gross fair value of the forward starting swap.

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 and any commodity price aberrations are generally short term in nature.

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.

Management's Report on Internal Control over Financial Reporting

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

Sonic Corp.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Sonic Corp. maintained effective internal control over financial reporting as of August 31, ~~2005,~~2006, 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. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

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

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

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

In our opinion, management’s assessment that Sonic Corp. maintained effective internal control over financial reporting as of August 31, ~~2005,~~2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Sonic Corp. maintained, in all material respects, effective internal control over financial reporting as of August 31, ~~2005,~~2006, 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, ~~2005~~2006 and ~~2004,~~2005, and the related consolidated statements of income, retained earnings, and cash flows for each of the three years in the period ended August 31, ~~2005~~2006 of Sonic Corp. and our report dated ~~November 10, 2005~~October 27, 2006 expressed an unqualified opinion thereon.

Item 9B. Other Information

No information was required to be disclosed in a Form 8-K during the Company’s fourth quarter of its ~~2005~~2006 fiscal year which was not reported.

PART III

Item 10. Directors and Executive Officers of the Company

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, ~~2005~~2006 (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.”

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 caption “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”

Item 13. Certain Relationships and Related Transactions

The information required by this item is incorporated by reference from the Proxy Statement under the caption “Certain Relationships and Related Transactions.”

Item 14. Principal Accounting Fees and Services

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

3135

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:

Financial Statement Schedules

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

		Pages

Schedule II - -	Valuation and Qualifying Accounts	~~F-30~~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.

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.~~33-37158 filed on October 3, 1990.

3.02.~~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.~~

~~3.03.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.~~

~~3.04.Rights Agreement, which the Company hereby incorporates by reference from Exhibit 99.1 to the Company’s Form 8-K filed on June 17, 1997.~~

~~3.05.First Amendment to Rights Agreement dated January 28, 2003, which the Company hereby incorporates by reference from Exhibit 99.1 to the Company’s Form 8-K filed January 29, 2003.~~

~~3.06.Second Amendment to Rights Agreement dated January 7, 2005, which the Company hereby incorporates by reference from Exhibit 4 to the Company’s Form 8-K filed January 7, 2005.~~

~~3.07.~~ 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.

~~3.08.~~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 as filed with the Delaware Secretary of State on January 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.Rights Agreement, which the Company hereby incorporates by reference from Exhibit 99.1 to the Company’s Form 8-K filed on June 17, 1997.

4.02.First Amendment to Rights Agreement dated January 28, 2003, which the Company hereby incorporates by reference from Exhibit 99.1 to the Company’s Form 8-K filed January 29, 2003.

4.03.Second Amendment to Rights Agreement dated January 7, 2005, which the Company hereby incorporates by reference from Exhibit 4 to the Company’s Form 8-K filed January 7, 2005.

4.04. 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.

~~4.02.~~4.05. Specimen Certificate for Rights, which the Company hereby incorporates by reference from Exhibit 99.1 to the Company’s Form 8-K filed on June 17, 1997.

10.01. Form of 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.~~33-37158 filed on October 3, 1990.

10.02. Form of 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.~~33-37158 filed on October 3, 1990.

10.03. Form of 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 Sonic’s Form 10-K for the fiscal year ended August 31, 1994.

10.04. Form of 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 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 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 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.

10.08. Form of Sonic Industries Inc. 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.

10.09. Form of Sonic Industries 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.

10.10. 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.

3337

10.11. 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.^*

10.12. 1991 Sonic Corp. Stock Purchase Plan, which the Company hereby incorporates by reference from Exhibit 10.6 to the Company’s Form S-1 Registration Statement No. 33-37158.^*

10.13. 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.^*

10.14. 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.^*

10.15. 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.^*

10.16. 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.^*

10.17. 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.^*

10.18. 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.^*

10.19. Employment Agreement with Ronald L. Matlock dated August 20, 1996, which the Company hereby incorporates by reference from Exhibit 10.20 to the Company’s Form 10-K for the fiscal year ended August 31, 2002.^*

10.20. 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.^*

10.21. 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.^*

10.22. 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.^*

10.23. 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.^*

10.24. 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.^*

10.25. Employment Agreement with ~~Renee G. Shaffer dated April 7, 2005.~~ ^*

~~10.26.Employment Agreement with~~ V. Todd Townsend dated August 18, ~~2005.~~ ^*

~~10.27.Consulting Agreement with Pattye L. Moore dated September 10, 2004,~~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, ~~2004.~~2005. ^*

~~10.28.~~10.26. Credit Agreement with Bank of America, N.A., dated April 23, 2003 which the Company hereby incorporates by reference from Exhibit 10.27 to the Company’s Form 10-K for the fiscal year ended August 31, 2004.

~~10.34.~~Form of 6.87% Senior Notes, Series B, due August 10, 2011, which the Company hereby incorporates by reference from Exhibit No. 10.36 to the Company’s Form 10-K for the fiscal year ended August 31, 2001.^*

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.

The Board of Directors and Stockholders of

We have audited the accompanying consolidated balance sheets of Sonic Corp. as of August 31, ~~2005~~2006 and ~~2004~~2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended August 31, ~~2005.~~2006. 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, ~~2005~~2006 and ~~2004,~~2005, and the consolidated results of ~~its~~their operations and ~~its~~their cash flows for each of the three years in the period ended August 31, ~~2005,~~2006, 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.

As discussed in Note 1 and Note 12 to the accompanying consolidated financial statements, in fiscal year 2006, Sonic Corp. adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment.”

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, ~~2005,~~2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated ~~November 10, 2005,~~October 27, 2006, expressed an unqualified opinion thereon.

	ERNST & YOUNG LLP

Oklahoma City, Oklahoma
~~November 10, 2005~~ October 27, 2006

Sonic Corp.

Consolidated Balance Sheets

	August 31,
	2006		2005*
	(In Thousands)

Assets
Current assets:
Cash and cash equivalents	$	9,597	$	6,431
Accounts and notes receivable, net		21,271		18,801
Net investment in direct financing leases		1,287		1,174
Inventories		4,200		3,760
Deferred income taxes		307		821
Prepaid expenses and other		5,848		4,262
Total current assets		42,510		35,249



Notes receivable, net		5,182		3,138

Net investment in direct financing leases		3,815		5,033

Property, equipment and capital leases, net		477,054		422,825

Goodwill, net		96,949		88,471

Trademarks, trade names and other intangibles, net		10,746		6,434

Other assets, net		1,762		2,166
Total assets	$	638,018	$	563,316

August 31,

2005

2004

(In Thousands)

Assets

Current assets:
Cash and cash equivalents
$
6,431
$ 7,993
Accounts and notes receivable, net
18,801
18,087
Net investment in direct financing leases
1,174
1,054
Inventories
3,760
3,551
Deferred income taxes
821
798
Prepaid expenses and other
4,262
3,100
Total current assets
35,249
34,583

Notes receivable, net
3,138
5,459

Net investment in direct financing leases
5,033
6,107

Property, equipment and capital leases, net
422,825
376,315

Goodwill, net
88,471
87,420

Trademarks, trade names and other intangibles, net
6,434
6,450

Other assets, net
2,166
2,299
Total assets
$
563,316
$ 518,633

F-2

Sonic Corp.

Consolidated Balance Sheets (continued)

	August 31,
	2006			2005*
	(In Thousands)

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	23,438		$	14,117
Deposits from franchisees		2,553			3,157
Accrued liabilities		33,874			26,367
Income taxes payable		10,673			15,174
Obligations under capital leases and long-term debt due within one year		7,557			6,527
Total current liabilities		78,095			65,342

Obligations under capital leases due after one year		34,295			36,259
Long-term debt due after one year		117,172			55,934
Other noncurrent liabilities		12,504			10,078
Deferred income taxes		4,259			7,786
Commitments and contingencies (Notes 6, 7, 14, and 15)

Stockholders’ equity:
Preferred stock, par value $.01; 1,000,000 shares authorized; none outstanding		─			─
Common stock, par value $.01; 245,000,000 shares authorized; shares issued 114,988,369 in 2006 and 113,649,009 in 2005		1,150			1,136
Paid-in capital		173,802			153,776
Retained earnings		476,694			397,989
Accumulated other comprehensive income		(484	)		─
		651,162			552,901
Treasury stock, at cost; 29,506,003 shares in 2006 and 24,676,380 shares in 2005		(259,469	)		(164,984	)
Total stockholders’ equity		391,693			387,917
Total liabilities and stockholders’ equity	$	638,018		$	563,316

August 31,

2005

2004

(In Thousands)

Liabilities and stockholders’ equity

Current liabilities:
Accounts payable
$
14,117
$ 9,783
Deposits from franchisees
3,157
2,867
Accrued liabilities
26,367
23,733
Income taxes payable
15,174
6,731
Obligations under capital leases and long-term debt due within one year
6,527
6,006
Total current liabilities
65,342
49,120

Obligations under capital leases due after one year
36,259
38,020
Long-term debt due after one year
55,934
78,674
Other noncurrent liabilities
10,078
8,231
Deferred income taxes
11,164
9,826
Commitments and contingencies (Notes 6, 7, 14, and 15)

Stockholders’ equity:
Preferred stock, par value $.01; 1,000,000 shares authorized; none outstanding – –
Common stock, par value $.01; 100,000,000 shares authorized; shares issued
75,766,006 in 2005 and 74,617,554 in 2004
758

746

Paid-in capital
121,982
105,012
Retained earnings
426,783
351,402

549,523
457,160
Treasury stock, at cost; 16,450,920 shares in 2005 and 15,098,687 shares in
2004
(164,984
)

(122,398
)
Total stockholders’ equity
384,539
334,762
Total liabilities and stockholders’ equity
$
563,316
$ 518,633

* Adjusted to include the impact of stock-based compensation expense and the three-for-two stock split in April 2006; see Note 1 and Note 12 for additional information.

See accompanying notes.

F-3

Sonic Corp.

Consolidated Statements of Income

	Year ended August 31,
	2006			2005*			2004*
	(In Thousands, Except Per Share Data)
Revenues:
Partner Drive-In sales	$	585,832		$	525,988		$	449,585
Franchise Drive-Ins:
Franchise royalties		98,163			88,027			77,518
Franchise fees		4,747			4,311			4,958
Other		4,520			4,740			4,385
		693,262			623,066			536,446
Costs and expenses:
Partner Drive-Ins:
Food and packaging		151,724			137,845			118,073
Payroll and other employee benefits		175,610			159,478			135,880
Minority interest in earnings of Partner Drive-Ins		25,234			21,574			19,947
Other operating expenses, exclusive of depreciation and amortization included below		116,059			103,009			84,959
		468,627			421,906			358,859

Selling, general and administrative		52,048			47,503			44,765
Depreciation and amortization		40,696			35,821			32,528
Provision for impairment of long-lived assets		264			387			675
		561,635			505,617			436,827
Income from operations		131,627			117,449			99,619

Interest expense		8,853			6,418			7,684
Interest income		(1,275	)		(633	)		(1,306	)
Net interest expense		7,578			5,785			6,378
Income before income taxes		124,049			111,664			93,241
Provision for income taxes		45,344			41,221			35,210
Net income	$	78,705		$	70,443		$	58,031

Basic income per share	$	0.91		$	0.78		$	0.65

Diluted income per share	$	0.88		$	0.75		$	0.63

Year ended August 31,

2005

2004

2003

(In Thousands, Except Per Share Data)

Revenues:
Partner Drive-In sales
$
525,988
$ 449,585 $ 371,518
Franchise Drive-Ins:
Franchise royalties
88,027
77,518 66,431
Franchise fees
4,311
4,958 4,674
Other
4,740
4,385 4,017

623,066
536,446 446,640
Costs and expenses:
Partner Drive-Ins:
Food and packaging
137,845
118,073 96,568
Payroll and other employee benefits
159,478
135,880 110,009
Minority interest in earnings of Partner Drive-Ins
21,574
19,947 14,398
Other operating expenses
103,009
84,959 70,789

421,906
358,859 291,764

Selling, general and administrative
40,746
38,270 35,426
Depreciation and amortization
35,821
32,528 29,223
Provision for impairment of long-lived assets and other
387
675 727

498,860
430,332 357,140
Income from operations
124,206
106,114 89,500

Interest expense
6,418
7,684 7,464
Interest income
(633
)
(1,306 ) (1,248 )
Net interest expense
5,785
6,378 6,216
Income before income taxes
118,421
99,736 83,284
Provision for income taxes
43,040
36,721 31,023
Net income
$
75,381
$ 63,015 $ 52,261

Basic income per share
$
1.26
$ 1.06 $ .89

Diluted income per share
$
1.21
$ 1.02 $ .86

* Adjusted to include the impact of stock-based compensation expense and the three-for-two stock split in April 2006; see Note 1 and Note 12 for additional information.

See accompanying notes.

F-4

Sonic Corp.

Consolidated Statements of Stockholders’ Equity

	Common Stock Shares Amount				Paid-in Capital*			Retained Earnings*		Accumulated Other Comprehensive Income			Treasury Stock Shares Amount
	(In Thousands)

Balance at August 31, 2003		49,181	$	492	$	116,753		$	269,515	$	-			9,964	$	(119,027	)
Exercise of common stock options		592		6		5,608			-		-			-		-
Stock-based compensation expense		-		-		6,495			-		-			-		-
Tax benefit related to exercise of employee stock options		-		-		3,398			-		-			-		-
Purchase of treasury stock		-		-		-			-		-			148		(3,371	)
Three-for-two stock split		24,845		248		(248	)		-		-			4,987		-
Net income		-		-		-			58,031		-			-		-
Balance at August 31, 2004		74,618		746		132,006			327,546		-			15,099		(122,398	)

Exercise of common stock options		1,148		12		10,796			-		-			-		-
Stock-based compensation expense		-		-		6,757			-		-			-		-
Tax benefit related to exercise of employee stock options		-		-		4,595			-		-			-		-
Purchase of treasury stock		-		-		-			-		-			1,352		(42,586	)
Net income		-		-		-			70,443		-			-		-
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	)

Common Stock

Paid-in

Retained

Treasury Stock

Shares

Amount

Capital

Earnings

Shares

Amount

(In Thousands)

Balance at August 31, 2002 48,478 $ 485 $ 86,563 $ 236,126 8,737 $ (92,504 )

Exercise of common stock options 703 7 5,671 – – –
Tax benefit related to exercise of
employee stock options
–

–

3,312

–

–

–

Purchase of treasury stock – – – – 1,227 (26,523 )
Net income – – – 52,261 – –
Balance at August 31, 2003 49,181 492 95,546 288,387 9,964 (119,027 )

Exercise of common stock options 592 6 5,608 – – –
Tax benefit related to exercise of
employee stock options
–

–

4,106

–

–

–

Purchase of treasury stock – – – – 148 (3,371 )
Three-for-two stock split 24,845 248 (248 ) – 4,987 –
Net income – – – 63,015 – –
Balance at August 31, 2004 74,618 746 105,012 351,402 15,099 (122,398 )

Exercise of common stock options
1,148

12

10,796

–

–

–

Tax benefit related to exercise of
employee stock options
–

–

6,174

–

–

–

Purchase of treasury stock
–

–

–

–

1,352

(42,586
)
Net income
–

–

–

75,381

–

–

Balance at August 31, 2005
75,766

$
758

$
121,982

$
426,783

16,451

$
(164,984
)

* Prior years adjusted to include the impact of stock-based compensation expense; see Note 1 for additional information.

See accompanying notes.

F-5

Sonic Corp.

Consolidated Statements of Cash Flows

Year ended August 31,

Cash flows from operating activities

Adjustments to reconcile net income to net
cash provided by operating activities:

Cash flows from investing activities

Consolidated Statements of Cash Flows (continued)

	Year ended August 31,
	2006			2005*			2004*
	(In Thousands)

Cash flows from financing activities
Proceeds from borrowings	$	274,763		$	127,415		$	76,421
Payments on long-term debt		(206,806	)		(149,390	)		(141,978	)
Purchases of treasury stock		(93,689	)		(42,324	)		(3,067	)
Payments on capital lease obligations		(2,444	)		(2,139	)		(1,839	)
Exercises of stock options		7,194			10,546			5,310
Excess tax benefit from exercise of employee stock options		4,645			4,595			3,398
Net cash used in financing activities		(16,337	)		(51,297	)		(61,755	)
Net increase (decrease) in cash and cash equivalents		3,166			(1,562	)		(5,217	)

Cash and cash equivalents at beginning of the year		6,431			7,993			13,210
Cash and cash equivalents at end of the year	$	9,597		$	6,431		$	7,993

Supplemental cash flow information
Cash paid during the year for:
Interest (net of amounts capitalized of $733, $604 and $338, respectively)	$	8,769		$	7,144		$	7,739
Income taxes (net of refunds)		48,225			27,377			29,869
Additions to capital lease obligations		4,958			877			16,098
Accounts and notes receivable and decrease in capital lease
obligations from property and equipment sales		6,514			1,063			1,656
Stock options exercised by stock swap		787			250			298
Store acquisitions financed through long-term notes		-			-			8,139

Year ended August 31,

Cash flows from financing activities

Net increase (decrease) in cash and cash equivalents

Supplemental cash flow information

* Prior years adjusted to include the impact of stock-based compensation expense and the three-for-two stock split in April 2006; see Note 1 and Note 12 for additional information.

Sonic Corp.

Notes to Consolidated Financial Statements

August 31, 2006, 2005 ~~2004~~ and ~~2003~~2004

(In Thousands, Except Per Share Data)

1. Summary of Significant Accounting Policies

Sonic Corp. (the “Company”) operates and franchises a chain of quick-service drive-ins in the United States and Mexico. 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 purchases 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. On May 1, 2003, the Company acquired 51 existing drive-ins located in the San Antonio, Texas market from its franchisees for cash consideration of approximately $34.6 million, prior to post closing adjustments. The acquisitions were accounted for under the purchase method of accounting. The Company also entered into long-term lease agreements on each of the acquired drive-ins, which have future minimum rental payments aggregating $3.5 million annually. The following condensed balance sheet reflects the amount assigned to each major asset and liability category as of the acquisition date:

As of May 1, 2003

Current assets
$
322

Property and equipment 7,250
Goodwill
26,995

Total assets acquired
$
34,567

Year ended August 31, 2003

Revenues
$
475,052

Net income
$
53,235

Net income per share:
Basic
$
.91

Diluted
$
.87

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 ~~2005~~2006 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 that mature in three months or less from date of purchase.

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 ~~are~~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. Calculating the present value of future cash flows is typically not required. Rather, because drive-in buildings are typically single-purpose assets, the

~~Assets held for disposal~~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. ~~During the period in which assets are being held for disposal, depreciation and amortization of such assets are not recognized.~~

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”. Intangible assets with lives restricted by contractual, legal, or other means are amortized over their useful lives. Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. SFAS No. 142 requires a two-step process for testing impairment. First, the fair value of each reporting unit is compared to its carrying value to determine whether an indication of impairment exists. If an 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.

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 1520 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 ~~was previously~~is financed by ~~the Company. The Company outsourced the financing of partner notes to a~~ third ~~party in the fourth fiscal quarter of 2004.~~parties. Supervisors and managers are neither employees of the Company nor of the drive-in in which they have an ownership interest.

The ~~investments made by~~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 ~~each partnership or limited liability company are accounted for as minority interests~~earnings of Partner Drive-Ins in the ~~financial statements.~~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, primarily upon the drive-in’s financial performance for the preceding 12 months, and is intended to approximate the fair value of a minority interest in the drive-in.

Revenue Recognition, Franchise Fees and Royalties

Revenue from Partner Drive-In sales is recognized when food and beverage products are sold.

Initial franchise fees are nonrefundable and 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. Area development fees are nonrefundable and are recognized in income on a pro rata basis when the conditions for revenue recognition under the individual 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.

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 promotion of the Company’s products are included in other operating expenses and are expensed as incurred. Such costs amounted to $30,948, $28,216, ~~$23,664,~~ and ~~$19,665~~$23,664 for fiscal years 2006, 2005 and 2004, ~~and 2003,~~ 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 Advertising 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 Advertising 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

The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations in accounting for its stock options because the alternative fair value accounting provided for under FASB Statement No. 123, “Accounting for Stock-Based Compensation,” requires the use of option valuation models that were not developed for use in valuing such stock options. Under APB 25, because the exercise price of the Company’s stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.

Year of
Grant
Risk-Free
Interest Rate
Expected
Dividend Yield
Expected
Volatility
Expected Life
(years)
2005 4.0% 0.0% 41.1% 5.1
2004 3.8 0.0 45.6 5.8
2003 3.2 0.0 46.3 5.7

2005

2004

2003

Net income, as reported

$
75,381

$
63,015

$
52,261

Less stock-based compensation expense using the fair value
method, net of related tax effects

(4,938
)

(4,984
)

(4,460
)
Pro forma net income
$
70,443
$ 58,031 $ 47,801

Net income per share:
Basic:
As reported
$
1.26
$ 1.06 $ .89
Pro forma
$
1.17
$ .98 $ .82
Diluted:
As reported
$
1.21
$ 1.02 $ .86
Pro forma
$
1.13
$ .94 $ .79

The following table shows total stock-based compensation expense and the ~~modified-retrospective application.~~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:

	2006			2005			2004

Selling, general and administrative	$	7,187		$	6,757		$	6,495
Income tax benefit		(2,266	)		(1,819	)		(1,511	)
Net stock-based compensation expense	$	4,921		$	4,938		$	4,984
Impact on net income per share:
Basic	$	.06		$	.05		$	.06
Diluted	$	.06		$	.05		$	.05

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.

As a result of adopting SFAS 123R retrospectively, financial statements for the prior periods presented in this Form 10-K have been adjusted to reflect the fair value method of expensing stock options. The ~~Company is also evaluating which valuation model is most appropriate.~~following table details the impact of retrospective application on previously reported results for the years ended August 31:

	2005						2004
	Adjusted			As Previously Reported			Adjusted			As Previously Reported
Income Statement items:
Income from operations	$	117,449		$	124,206		$	99,619		$	106,114
Income before income taxes		111,664			118,421			93,241			99,736
Net income		70,443			75,381			58,031			63,015

Net income per share - basic	$	.78		$	.84		$	.65		$	.71
Net income per share - diluted		.75			.80			.63			.68

Cash Flow items:
Net cash provided by operating activities	$	127,685		$	132,280		$	103,260		$	106,658
Net cash used in financing activities		(51,297	)		(55,892	)		(61,755	)		(65,153	)


Balance Sheet items:
Deferred income taxes	$	7,786		$	11,164
Paid-in capital		153,776			121,982
Retained earnings		397,989			426,783
Total stockholders’ equity		387,917			384,539
Total liabilities and stockholders’ equity		563,316			563,316

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.

New Accounting Pronouncements

In May 2005, the FASB issued ~~Statement of Financial Accounting Standards~~SFAS No. 154, “Accounting Changes and Error Corrections - ~~A Replacement~~a replacement of APB Opinion No. 20 and ~~FASB Statement~~SFAS No. 3,3.” ~~which~~SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle and a change required by an accounting pronouncement when the pronouncement does not include specific transition provisions. SFAS No. 154 requires retrospective application ~~to prior periods’ financial statements for~~of changes inas if the new accounting principle ~~unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. If such~~

In June 2006, the EITF reached consensus on EITF 06-3, “Disclosure Requirements for Taxes Assessed by a Government Authority on Revenue-Producing Transactions.” EITF 06-3 requires disclosure of a company’s accounting policy with respect to presentation of taxes collected on a revenue producing transaction between a seller and a customer. For taxes that are reported on a gross basis (included in revenues and costs), EITF 06-3 also requires disclosure of the amount of taxes included in the financial ~~condition.~~statements. EITF 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006, which will be our third fiscal quarter beginning March 1, 2007. The Company does not expect the adoption of EITF 06-3 to have a material impact on the Company’s consolidated financial statements.

In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement 109,” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS 109, “Accounting for Income Taxes.” 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. FIN 48 is effective for fiscal years beginning after December 15, 2006, which will be our fiscal year beginning September 1, 2007. The Company is currently evaluating the impact of adopting FIN 48.

On ~~October 6, 2005,~~September 13, 2006, the ~~FASB~~Securities and Exchange Commission (“SEC”) issued ~~FASB~~ Staff ~~Position~~Accounting Bulletin No. ~~FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period”~~108 (“~~FSP 13-1”~~SAB 108”), which ~~requires rental costs associated with ground~~provides interpretive guidance on how the effects of the carryover or ~~building operating leases that are incurred during~~reversal of prior year misstatements should be considered in quantifying a ~~construction period be recognized as rental expense. FSP 13-1~~current year misstatement. SAB 108 is effective for the first reporting period beginning after December 15, 2005 (the Company’s fiscal quarter beginning March 1, 2006), and retrospective application is permitted but not required. The Company has historically capitalized ground operating leases during construction periods, with such capitalization totaling $177 for fiscal year ~~2005. The Company~~ending after November 15, 2006, which will ~~expense ground operating leases during construction periods~~be our fiscal year beginning September 1, ~~2005.~~2007. The ~~impact~~adoption of this ~~change~~statement is not expected to behave a material toimpact on the Company’s ~~consolidated~~financial position or results of ~~operations~~operations.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial ~~condition.~~statements upon adoption.

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:

~~See Note 12 for information regarding shares available for grant under~~*Adjusted to include the ~~2001 Sonic Corp. Stock Option Plan~~impact of stock-based compensation expense and the ~~2001 Sonic Corp. Directors’ Stock Option Plan.~~three-for-two stock split in April 2006

3. Impairment of Long-Lived Assets

Operating Margins	Operating Margins										Operating Margins

		Year Ended August 31,										Year Ended August 31,
		2005			2004			2003				2006			2005			2004
Costs and Expenses ⁽¹⁾:
Partner Drive-Ins:
Food and packaging			26.2	%		26.3	%		26.0	%			25.9	%		26.2	%		26.3	%
Payroll and other employee benefits			30.3			30.2			29.6				30.0			30.3			30.2
Minority interest in earnings of Partner Drive-Ins			4.1			4.4			3.9				4.3			4.1			4.4
Other operating expenses			19.6			18.9			19.0				19.8			19.6			18.9
Total Partner Drive-In cost of operations			80.2	%		79.8	%		78.5	%			80.0	%		80.2	%		79.8	%

(1) As a percentage of Partner Drive-In sales.

Payments Due by Period												Payments Due by Period
(In Thousands)	(In Thousands)											(In Thousands)

		Total		Less than		1 - 3		3 - 5		More than			Total		Less than		1 - 3		3 - 5		More than
				1 Year		Years		Years		5 Years					1 Year		Years		Years		5 Years
Contractual Obligations
Long-term debt		$	60,195	$	4,261	$	9,461	$	42,199	$	4,274		$	122,399	$	5,227	$	13,860	$	13,851	$	89,461
Capital leases			58,960		4,960		9,522		9,547		34,931			54,437		4,891		9,597		9,507		30,442
Operating leases														168,707		10,513		20,792		20,187		117,215
Total													$	345,543	$	20,631	$	44,249	$	43,545	$	237,118

	Year ended August 31,									Year ended August 31,
	2005			2004			2003			2006			2005*			2004*
	(In Thousands)									(In Thousands)
Cash flows from operating activities
Net income	$	75,381		$	63,015		$	52,261		$	78,705		$	70,443		$	58,031
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		35,435			32,060			28,542			40,356			35,435			32,060
Amortization		386			468			681			340			386			468
(Gains) losses on dispositions of assets		(1,115	)		(868	)		(1,149	)
Amortization of franchise and development fees		(4,130	)		(4,839	)		(4,675	)
Franchise and development fees collected		6,015			4,974			4,791
Provision for deferred income taxes		1,315			3,509			1,277
Gain on dispositions of assets, net											(422	)		(1,115	)		(868	)
Stock-based compensation expense											7,188			6,757			6,495
(Credit) provision for deferred income taxes											(2,713	)		1,075			2,706
Provision for impairment of long-lived assets		387			675			727			264			387			675
Tax benefit related to exercise of employee stock options		6,174			4,106			3,312
Excess tax benefit from exercise of employee stock options											(4,645	)		(4,595	)		(3,398	)
Other		500			145			(141	)		625			500			145
(Increase) decrease in operating assets:
Increase in operating assets:
Accounts and notes receivable		(2,481	)		(737	)		(3,291	)		(2,275	)		(2,481	)		(737	)
Inventories and prepaid expenses		(1,371	)		(1,691	)		1,666			(2,267	)		(1,371	)		(1,691	)
Increase (decrease) in operating liabilities:
Increase in operating liabilities:
Accounts payable		3,962			2,567			1,098			2,821			5,847			2,702
Accrued and other liabilities		11,822			3,274			5,112			9,496			16,417			6,672
Total adjustments		56,899			43,643			37,950			48,768			57,242			45,229
Net cash provided by operating activities		132,280			106,658			90,211			127,473			127,685			103,260

Cash flows from investing activities
Purchases of property and equipment		(85,905	)		(57,728	)		(54,417	)		(86,863	)		(85,905	)		(57,728	)
Acquisition of businesses, net of cash received		(820	)		(8,518	)		(35,557	)		(14,601	)		(820	)		(8,518	)
Acquisition of real estate, net of cash received											(12,125	)		─			─
Investments in direct financing leases		(320	)		(539	)		(654	)		(237	)		(320	)		(539	)
Collections on direct financing leases		1,266			1,124			1,074			1,342			1,266			1,124
Proceeds from dispositions of assets		8,882			18,505			9,151			5,271			8,882			18,505
(Increase) decrease in intangibles and other assets		(1,053	)		434			(4,395	)		(757	)		(1,053	)		434
Net cash used in investing activities		(77,950	)		(46,722	)		(84,798	)		(107,970	)		(77,950	)		(46,722	)

Quarter Ended	High	Low	Quarter Ended	High	Low
November 30, 2004	$29.980	$22.400	November 30, 2003	$20.587	$16.260
February 28, 2005	$33.870	$29.170	February 29, 2004	$23.247	$19.673
May 31, 2005	$35.470	$30.800	May 31, 2004	$24.313	$20.233
August 31, 2005	$33.970	$29.170	August 31, 2004	$23.500	$21.100

Period	Total Number of Shares Purchased (a)	Average Price Paid per Share (b)	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽¹⁾ (c)	Maximum Dollar Value that May Yet Be Purchased Under the Program (d)
June 1, 2005 through June 30, 2005	228,700	$31.49	228,700	$122,800
July 1, 2005 through July 31, 2005	498,900	$30.31	498,900	$107,676
August 1, 2005 through August 31, 2005	-0-	$ 0.00	-0-	$107,676
Total	727,600	$30.68	727,600

	Year ended August 31,
	2005		2004		2003		2002		2001

Income Statement Data:
Partner Drive-In sales	$	525,988	$	449,585	$	371,518	$	330,707	$	267,463
Franchise Drive-Ins:
Franchise royalties		88,027		77,518		66,431		61,392		54,220
Franchise fees		4,311		4,958		4,674		4,020		4,408
Other		4,740		4,385		4,017		4,043		4,547
Total revenues		623,066		536,446		446,640		400,162		330,638
Cost of Partner Drive-In sales		421,906		358,859		291,764		257,057		207,782
Selling, general and administrative		40,746		38,270		35,426		33,444		30,602
Depreciation and amortization		35,821		32,528		29,223		26,078		23,855
Provision for impairment of long-lived assets		387		675		727		1,261		792
Total expenses		498,860		430,332		357,140		317,840		263,031
Income from operations		124,206		106,114		89,500		82,322		67,607
Net interest expense		5,785		6,378		6,216		6,319		5,525
Income before income taxes	$	118,421	$	99,736	$	83,284	$	76,003	$	62,082
Net income	$	75,381	$	63,015	$	52,261	$	47,692	$	38,956

Income per share ⁽¹⁾:
Basic	$	1.26	$	1.06	$	0.89	$	0.79	$	0.65
Diluted	$	1.21	$	1.02	$	0.86	$	0.75	$	0.62
Weighted average shares used in calculation ⁽¹⁾:
Basic		59,995		59,314		58,465		60,234		59,774
Diluted		62,431		61,654		60,910		63,310		62,598

Balance Sheet Data:
Working capital (deficit)	$	(30,093	)	$	(14,537	)	$	(2,875	)	$	(12,942	)	$	(3,335	)
Property, equipment and capital leases, net		422,825			376,315			345,551			305,286			273,198
Total assets	��	563,316			518,633			486,119			405,356			358,000
Obligations under capital leases (including current portion)		38,525			40,531			27,929			12,938			13,688
Long-term debt (including current portion)		60,195			82,169			139,587			109,375			109,168
Stockholders’ equity		384,539			334,762			265,398			230,670			200,719
Cash dividends declared per common share		–			–			–			–			–

Partner Drive-In Sales ($ in thousands)	Partner Drive-In Sales ($ in thousands)										Partner Drive-In Sales ($ in thousands)

		Year Ended August 31,										Year Ended August 31,
		2005			2004			2003				2006			2005			2004
Partner Drive-In sales		$	525,988		$	449,585		$	371,518			$	585,832		$	525,988		$	449,585
Percentage increase			17.0	%		21.0	%		12.3	%			11.4	%		17.0	%		21.0	%

Partner Drive-Ins in operation:
Partner Drive-Ins in operation ⁽¹⁾:
Total at beginning of period			539			497			452				574			539			497
Opened			37			21			35				35			37			21
Acquired from (sold to) franchisees, net			(1	)		21			11				15			(1	)		21
Closed			(1	)		-			(1	)			(1	)		(1	)		-
Total at end of period			574			539			497				623			574			539

Average sales per Partner Drive-In		$	957		$	886		$	799			$	980		$	957		$	886
Percentage increase			8.0	%		10.9	%		1.0	%			2.4	%		8.0	%		10.9	%

Change in same-store sales ⁽¹⁾⁽²⁾			7.4	%		7.8	%		(0.3	%)			1.9	%		7.4	%		7.8	%

(1) Represents percentage change for drive-ins open for a minimum of 15 months.
(1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, management changes, 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.											(1) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, management changes, 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.

Franchise Information ($ in thousands)	Franchise Information ($ in thousands)										Franchise Information ($ in thousands)

		Year Ended August 31,										Year Ended August 31,
		2005			2004			2003				2006			2005			2004
Franchise fees and royalties ⁽¹⁾		$	92,338		$	82,476		$	71,105			$	102,910		$	92,338		$	82,476
Percentage increase			12.0	%		16.0	%		8.7	%			11.4	%		12.0	%		16.0	%

Franchise Drive-Ins in operation:
Franchise Drive-Ins in operation ⁽²⁾:
Total at beginning of period			2,346			2,209			2,081				2,465			2,346			2,209
Opened			138			167			159				138			138			167
Acquired from (sold to) Company, net			1			(21	)		(11	)			(15	)		1			(21	)
Closed			(20	)		(9	)		(20	)			(23	)		(20	)		(9	)
Total at end of period			2,465			2,346			2,209				2,565			2,465			2,346

Franchise Drive-In sales		$	2,474,133		$	2,219,340		$	1,988,842			$	2,735,802		$	2,474,133		$	2,219,340
Percentage increase			11.5	%		11.6	%		6.1	%			10.6	%		11.5	%		11.6	%

Effective royalty rate			3.56	%		3.49	%		3.34	%			3.59	%		3.56	%		3.49	%

Average sales per Franchise Drive-In		$	1,039		$	983		$	929			$	1,092		$	1,039		$	983

Change in same-store sales ⁽²⁾			5.8	%		6.2	%		0.4	%
Change in same-store sales ⁽³⁾													5.1	%		5.8	%		6.2	%

(1) See Revenue Recognition Related to Franchise Fees and Royalties in the Critical Accounting Policies and Estimates section of MD&A.	(1) See Revenue Recognition Related to Franchise Fees and Royalties in the Critical Accounting Policies and Estimates section of MD&A.										(1) See Revenue Recognition Related to Franchise Fees and Royalties in the Critical Accounting Policies and Estimates section of MD&A.
(2) Represents percentage change for drive-ins open for a minimum of 15 months.
(2) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, management changes, 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.											(2) Drive-ins that are temporarily closed for various reasons (repairs, remodeling, management changes, 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.

Operating leases			154,782			9,722			19,056			18,515			107,489
Total		$	273,937		$	18,943		$	38,039		$	70,261		$	146,694

	Pages

Report of Independent Registered Public Accounting Firm	F-1
Consolidated Balance Sheets at August 31, ~~2005~~2006 and ~~2004~~2005	F-2
Consolidated Statements of Income for each of the three years
in the period ended August 31, ~~2005~~2006	F-4
Consolidated Statements of Stockholders’ Equity for each of the three years
in the period ended August 31, ~~2005~~2006	F-5
Consolidated Statements of Cash Flows for each of the three years
in the period ended August 31, ~~2005~~2006	F-6
Notes to Consolidated Financial Statements	F-8

As of May 1, 2003
Current assets	$	322
Property and equipment		7,250
Goodwill		26,995
Total assets acquired	$	34,567

Year ended August 31, 2003
Revenues	$	475,052

Net income	$	53,235

Net income per share:
Basic	$	.91
Diluted	$	.87

Year of Grant	Risk-Free Interest Rate	Expected Dividend Yield	Expected Volatility	Expected Life (years)
2005	4.0%	0.0%	41.1%	5.1
2004	3.8	0.0	45.6	5.8
2003	3.2	0.0	46.3	5.7

2010		543		679
2011		543		442
Thereafter		2,960		732
		5,755		6,827
Less unearned income		-		1,725
	$	5,755	$	5,102

	2006		2005

Borrowings under line of credit ^(A)	$	101,150	$	30,150
Senior unsecured notes ^(B)		19,857		24,428
Other		1,392		5,617
		122,399		60,195
Less long-term debt due within one year^(C)		5,227		4,261
Long-term debt due after one year	$	117,172	$	55,934

	2005		2004

Senior unsecured notes ^(A)	$	─	$	30,000
Borrowings under line of credit ^(B)		30,150		14,075
Senior unsecured notes ^(C)		24,428		29,000
Other		5,617		9,094
		60,195		82,169
Less long-term debt due within one year		4,261		3,495
Long-term debt due after one year	$	55,934	$	78,674

Net Income	$	78,705
Unrealized gains on interest rate swap agreement, net of tax		(484	)
Total comprehensive income	$	78,221

	Options Outstanding						Options Exercisable
Range of Exercise Prices	Number Outstanding as of 8/31/2005		Weighted Average Remaining Contractual Life (Yrs.)		Weighted Average Exercise Price		Number Exercisable as of 8/31/2005		Weighted Average Exercise Price
$ 2.99 to $ 5.36		872,536		1.28	$	3.85		872,536	$	3.85
$ 5.72 to $ 8.59		1,066,398		3.68	$	7.77		1,066,398	$	7.77
$ 9.06 to $16.13		891,167		5.67	$	11.88		866,189	$	11.77
$16.45 to $19.54		1,029,665		7.30	$	18.39		812,746	$	18.56
$20.39 to $31.61		877,711		8.87	$	23.77		207,408	$	21.42
$31.71 to $32.48		479,442		9.57	$	32.37		1,680	$	32.48
$ 2.99 to $32.48		5,216,919		5.75	$	14.87		3,826,957	$	10.82

	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Yrs.)		Aggregate Intrinsic Value
Outstanding-beginning of year		7,826		$	9.91
Granted		965			22.08
Exercised		(1,339	)		5.97
Forfeited or expired		(221	)		19.13
Outstanding August 31, 2006		7,230		$	11.98		5.42	$	72,656
Exercisable August 31, 2006		5,415		$	9.10		4.64	$	69,445

	First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Full Year				First Quarter				Second Quarter				Third Quarter				Fourth Quarter				Full Year
	2005		2004		2005		2004		2005		2004		2005		2004		2005		2004		2006		2005*		2006		2005*		2006		2005*		2006		2005*		2006		2005*
Income statement data:
Partner Drive-In sales	$	120,211	$	99,745	$	112,655	$	94,105	$	141,797	$	121,630	$	151,325	$	134,105	$	525,988	$	449,585	$	135,422	$	120,211	$	126,376	$	112,655	$	156,921	$	141,797	$	167,113	$	151,325	$	585,832	$	525,988
Other		22,016		18,963		19,958		17,490		25,856		24,312		29,248		26,096		97,078		86,861		24,378		22,016		22,572		19,958		29,548		25,856		30,932		29,248		107,430		97,078
Total revenues		142,227		118,708		132,613		111,595		167,653		145,942		180,573		160,201		623,066		536,446		159,800		142,227		148,948		132,613		186,469		167,653		198,045		180,573		693,262		623,066

Partner Drive-In operating expenses		97,784		79,852		91,682		76,320		111,691		95,723		120,749		106,964		421,906		358,859		110,125		97,784		102,615		91,682		123,755		111,691		132,132		120,749		468,627		421,906
Selling, general and administrative		9,493		9,121		10,060		9,083		10,209		9,914		10,984		10,152		40,746		38,270		12,196		10,833		13,214		11,785		13,293		12,096		13,345		12,789		52,048		47,503
Other		8,406		7,823		9,257		8,840		9,051		8,285		9,494		8,255		36,208		33,203		9,897		8,406		9,997		9,257		10,361		9,051		10,705		9,494		40,960		36,208
Total expenses		115,683		96,796		110,999		94,243		130,951		113,922		141,227		125,371		498,860		430,332		132,218		117,023		125,826		112,724		147,409		132,838		156,182		143,032		561,635		505,617
Income from operations		26,544		21,912		21,614		17,352		36,702		32,020		39,346		34,830		124,206		106,114		27,582		25,204		23,122		19,889		39,060		34,815		41,863		37,541		131,627		117,449

Interest expense, net		1,605		1,579		1,532		1,679		1,292		1,586		1,356		1,534		5,785		6,378		1,307		1,605		2,096		1,532		2,215		1,292		1,960		1,356		7,578		5,785
Income before income taxes		24,939		20,333		20,082		15,673		35,410		30,434		37,990		33,296		118,421		99,736		26,275		23,599		21,026		18,357		36,845		33,523		39,903		36,185		124,049		111,664
Provision for income taxes		8,939		7,574		7,487		5,838		12,664		11,337		13,950		11,972		43,040		36,721		9,845		8,485		8,122		7,084		13,011		12,248		14,366		13,404		45,344		41,221
Net income	$	16,000	$	12,759	$	12,595	$	9,835	$	22,746	$	19,097	$	24,040	$	21,324	$	75,381	$	63,015	$	16,430	$	15,114	$	12,904	$	11,273	$	23,834	$	21,275	$	25,537	$	22,781	$	78,705	$	70,443
Net income per share:
Basic	$	.27	$	.22	$	.21	$	.17	$	.38	$	.32	$	.40	$	.36	$	1.26	$	1.06	$	0.19	$	0.17	$	0.15	$	0.12	$	0.28	$	0.24	$	0.30	$	0.26	$	0.91	$	0.78
Diluted	$	.26	$	.21	$	.20	$	.16	$	.36	$	.31	$	.39	$	.34	$	1.21	$	1.02	$	0.18	$	0.16	$	0.14	$	0.12	$	0.27	$	0.23	$	0.29	$	0.25	$	0.88	$	0.75
Weighted average shares outstanding:
Basic		60,010		58,908		60,263		59,237		60,197		59,512		59,509		59,598		59,995		59,314		87,415		90,015		86,227		90,394		85,993		90,296		85,405		89,264		86,260		89,992
Diluted		62,386		61,194		62,788		61,689		62,716		61,832		61,836		61,902		62,431		61,654		90,521		93,578		89,261		94,182		89,007		94,074		88,168		92,755		89,239		93,647

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 receivable
Year ended:
August 31, 2005		526		414		542		109		507
August 31, 2004		1,157		351		982		–		526
August 31, 2003		1,993		177		1,013		–		1,157

Accrued carrying costs for drive-in closings and disposals
Year ended:
August 31, 2005		198		–		36		–		162
August 31, 2004		774		–		576		–		198
August 31, 2003		946		145		317		–		774

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 receivable
Year ended:
August 31, 2006		507		(5	)		86		219		635
August 31, 2005		526		414			542		109		507
August 31, 2004		1,157		351			982		-		526

Accrued carrying costs for drive-in closings and disposals
Year ended:
August 31, 2006		162		-			49		-		113
August 31, 2005		198		-			36		-		162
August 31, 2004		774		-			576		-		198

	Sonic Corp.

	By:	/s/ J. Clifford Hudson
		J. Clifford Hudson
		Chairman, Chief Executive Officer and President


Signature	Title	Date

/s/ J. Clifford Hudson	Chairman of the Board of Directors, Chief Executive Officer	~~November 11, 2005~~October 30, 2006
J. Clifford Hudson, Principal Executive Officer	~~Executive Officer~~ and President

/s/ Stephen C. Vaughan	Vice President, ~~and~~ Chief Financial Officer and Treasurer	~~November 11, 2005~~ October 30, 2006
Stephen C. Vaughan, Principal Financial Officer

/s/ Terry D. Harryman	Controller	~~November 11, 2005~~ October 30, 2006
Terry D. Harryman, Principal Accounting Officer

/s/ ~~Margaret M. Blair~~	~~Director~~	~~November 11, 2005~~
~~Margaret M. Blair~~

~~/s/~~ Leonard Lieberman	Director	~~November 11, 2005~~ October 30, 2006
Leonard Lieberman

/s/ Michael J. Maples	Director	~~November 11, 2005~~ October 30, 2006
Michael J. Maples

~~/s/ Pattye L. Moore~~	~~Director~~	~~November 11, 2005~~
~~Pattye L. Moore~~

/s/ Federico F. Peña	Director	~~November 11, 2005~~ October 30, 2006
Federico F. Peña

/s/ H. E. Rainbolt	Director	~~November 11, 2005~~ October 30, 2006
H.E. Rainbolt

/s/ Frank E. Richardson	Director	~~November 11, 2005~~ October 30, 2006
Frank E. Richardson

/s/ Robert M. Rosenberg	Director	~~November 11, 2005~~ October 30, 2006
Robert M. Rosenberg

~~Exhibit Number and Description~~

~~10.25.~~	~~Employment Agreement with Renee G. Shaffer dated April 7, 2005~~^*
~~10.26.~~	~~Employment Agreement with V. Todd Townsend dated August 18, 2005~~^*
~~10.29.~~	~~First Amendment to Credit Agreement with Bank of America, N.A., dated July 28, 2005~~
~~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~~