The following discussion and analysis should be read in conjunction with our Selected Financial Data, our Consolidated Financial Statements and our Risk Factors that are included elsewhere in this filing.

Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements, as a result of a number of factors including those factors set forth in Item 1A. of this Annual Report and other factors presented throughout this filing.

Nature of Business

AFC develops, operates, and franchises quick-service restaurants under the trade names Popeyesฎ Chicken & Biscuits and Popeyesฎ Louisiana Kitchen (collectively "Popeyes") in 44 states, the District of Columbia, Puerto Rico, Guam, and 25 foreign countries. Popeyes has two reportable business segments: franchise operations and company-operated restaurants. Financial information concerning these business segments can be found at Note 23 to our Consolidated Financial Statements.

Management Overview of 2008 Operating Results

Our fiscal year 2008 results and highlights include the following.

• We reported net income of $19.4 million, or diluted earnings per share of $0.76 (approximately $0.65 without the impact of other expenses (income), net which includes insurance recovery benefits and asset impairments).

• Total system-wide sales grew by 0.6%.

• Total domestic same-store sales decreased by 2.2% and international same-store sales increased by 4.1%, resulting in a global same-store sales decrease of 1.7%.

• Our global restaurant system grew by 17 net restaurants.

• We repurchased approximately 2.1 million shares of our common stock.

• We repaid $13.4 million, net in debt under our 2005 credit facility.

• We received $12.9 million in proceeds related to certain directors and officers liability insurance policies.

• We completed the re-franchising of 11 restaurants in our Atlanta market for cash proceeds of $3.5 million.

• We recorded $9.2 million in impairment charges associated with the re-franchising of company-operated restaurants in Atlanta, Georgia and Nashville, Tennessee. See further discussion under the heading entitled "Critical Accounting Policies and Significant Estimates" within this Item 2 and in Note 2 to our Consolidated Financial Statements.

• We invested $2.0 million in Popeyes' new national cable advertising strategy launched in support of new value, portability, and lunch and snack menu items. This investment resulted in the majority of our franchisees committing to contribute an additional 1.0% to the national ad fund. In 2009, we will continue to invest in national advertising to expand media reach.

2008 Same-Store Sales

During 2008, total domestic same-store sales decreased 2.2% resulting from a decrease in transaction counts, partially offset by an increase in check average. Domestic same-store sales decreased 2.1% for our domestic franchised restaurants and decreased 5.6% for our company-operated restaurants. We remain focused on increasing traffic by offering compelling value, distinctive Louisiana food, and an improved guest experience. For additional information on our business strategies, see the discussion of Our Business Strategy in Item 1 to this Form 10-K.

Within our international operations, same-store sales increased by 4.1% during fiscal 2008 due primarily to strong sales in the Middle East, Canada, Korea and Latin America, partially offset by negative performance in Mexico. Our international franchisees face similar economic conditions to the U.S. including higher commodity costs. They are responding with similar strategies: raising prices where necessary due to commodity costs and offering strong value in promotional events.

As it concerns our expected same-store sales results for 2009, see the discussion under the heading "Operating and Financial Outlook for 2009" later in this Item 7.

2008 Unit Growth

During 2008, our global restaurant system grew by 17 net restaurants. We opened 139 new franchised restaurants and 1 new company-operated restaurant. These openings during 2008 were offset by 117 permanent closures of franchised restaurants and 3 permanent closures of company-operated restaurants. In addition, our year-end restaurant count for 2008 includes 3 temporary closures (net of re-opened restaurants).

As it concerns our expected openings and closings for 2009, see the discussion under the heading "Operating and Financial Outlook for 2009" later in this Item 7.

Factors Affecting Comparability of Consolidated Results of Operations: 2008, 2007, and 2006,

For 2008, 2007, and 2006, the following items and events affect comparability of reported operating results:

• During the third quarter of 2005, the company-operated restaurants in the City of New Orleans were adversely affected by Hurricane Katrina. The timing of restaurant closures and re-openings resulted in: a decrease in company-operated restaurant sales of approximately $8.7 million in 2005 as compared to 2004; a decrease in company-operated restaurant sales of approximately $9.9 million in 2006 as compared to 2005; and an increase in company-operated restaurant sales of approximately $13.1 million in 2007 as compared to 2006.

• The Company's fiscal year ends on the last Sunday in December. The 2006 fiscal year consisted of 53 weeks. Fiscal years 2008 and 2007 both consisted of 52 weeks each. The 53rd week in 2006 increased sales by company-operated restaurants by approximately $1.2 million and increased franchise revenues by approximately $1.3 million.

• On May 1, 2006, the Company completed an acquisition of 13 franchised restaurants from a Popeyes franchisee in the Memphis and Nashville, Tennessee markets. The results of operations of the acquired restaurants are included in the consolidated financial statements since that date. The acquired units increased 2006 revenues by approximately $10.0 million (net of lost franchise revenues attributable to these restaurants) and increased 2007 revenues by approximately $5.3 million as compared to 2006 (net of lost franchise revenues attributable to these restaurants). Additional information concerning this acquisition can be found at Note 24 to our Consolidated Financial Statements.

• On September 6, 2008, the Company completed the re-franchising and sale of 11 company-operated restaurants in its Atlanta, Georgia market resulting in a decrease in 2008 revenues of approximately $4.0 million as compared to 2007.

• During 2004, we adopted Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, as revised in December 2003 ("FIN 46R") and began consolidating three franchisees that qualified for consolidation under FIN 46R. Since adoption of FIN 46R, due to changes in the ownership structure of these franchisees, our relationship to each of the franchisees has substantially changed, and they are no longer VIEs. During 2006, the consolidation of these franchisees increased sales by company-operated restaurants by approximately $1.2 million. Additional information with respect to these entities is discussed in Note 2 to our Consolidated Financial Statements.

• During 2008, 2007, and 2006, our income associated with litigation related proceeds was approximately $12.9 million, $0.9 million, and $0.3 million, respectively.

• During 2008, 2007, and 2006, impairments and disposals of fixed assets were approximately $9.5 million, $1.9 million, and $0.1 million, respectively.

• During 2006, our expenses (income), net associated with hurricane-related costs (other than impairments of long-lived assets) associated with Hurricane Katrina were approximately $0.7 million. During 2007, the Company also recognized approximately $4.8 million of income from insurance proceeds related to property damage and business interruption claims.

• Effective December 26, 2005, the Company adopted SFAS No. 123(R), Share-Based Payment ("SFAS 123R"), which requires the measurement and recognition of compensation cost at fair value for all share-based payments, including stock options and restricted stock awards. The Company adopted SFAS 123R using the modified prospective transition method and, as a result, did not retroactively adjust results from prior periods. For further discussion regarding SFAS 123R see the section entitled "Stock-Based Employee Compensation" in Note 2 to our Consolidated Financial Statements. The Company recorded $2.5 million, $1.7 million, and $3.4 million, in total stock compensation expense during 2008, 2007, and 2006, respectively.

• Net income includes discontinued operations which provided income of $0.2 million in 2006.

The following table presents selected revenues and expenses as a percentage of total revenues (or, in certain circumstances, as a percentage of a corresponding revenue line item).

                                                          2008         2007         2006

 Revenues:
 Sales by company-operated restaurants                       47   %       48   %       43   %
 Franchise revenues                                          51   %       49   %       54   %
 Rent and other revenues                                      2   %        3   %        3   %

 Total revenues                                             100   %      100   %      100   %
 Expenses:
 Restaurant employee, occupancy and other expenses(1)        53   %       51   %       52   %
 Restaurant food, beverages and packaging(1)                 35   %       34   %       33   %
 Rent and other occupancy expenses(2)                         1   %        1   %        2   %
 General and administrative expenses                         32   %       28   %       30   %
 Depreciation and amortization                                4   %        4   %        4   %
 Other expenses (income), net                                (3   )%      (2   )%      (1   )%

 Total expenses                                              76   %       73   %       70   %

 Operating profit                                            24   %       27   %       30   %
 Interest expense, net                                        5   %        5   %        8   %

 Income before income taxes and discontinued operations      19   %       22   %       22   %
 Income tax expense                                           7   %        8   %        7   %

 Income before discontinued operations                       12   %       14   %       15   %

 Discontinued operations, net of income taxes                 -            -            -

 Net income                                                  12   %       14   %       15   %

(1) Expressed as a percentage of sales by company-operated restaurants.

(2) The Company reclassified rent and other occupancy expenses associated with properties leased or subleased to franchisees and other third parties from "General and administrative expenses" to "Rent and other occupancy expenses" in its Consolidated Statements of Operations. Previously reported results have been reclassified to conform to the current year's presentation.

Comparisons of Fiscal Years 2008 and 2007

Sales by Company-Operated Restaurants

Sales by company-operated restaurants were $78.3 million in 2008, a $1.7 million decrease from 2007. The decrease was primarily due to:

• a $4.2 million decrease due to the re-franchising and sale on September 8, 2008 of 11 company-operated restaurants in our Atlanta, Georgia market, and

• a $4.0 million decrease due to a 5.6% decrease in same-store sales in fiscal 2008 as compared to fiscal 2007,

partially offset by:

• a $3.5 million increase due to the opening of new company-operated restaurants and the acquisition of one restaurant during the second quarter of 2007 which was previously owned by a franchisee, and

• a net $3.0 million increase due primarily to the timing and duration of temporary restaurant closures during both 2008 and 2007.

Franchise Revenues

Franchise revenues have three basic components: (1) ongoing royalty payments that are determined based on a percentage of franchisee sales; (2) franchise fees associated with new restaurant openings; and (3) development fees associated with the opening of new franchised restaurants in a given market. Royalty revenues are the largest component of franchise revenues, constituting more than 90% of franchise revenues.

Franchise revenues were $84.6 million in 2008, a $1.8 million increase from 2007. The increase in revenue was primarily due to a net $3.1 million increase in royalties and fees, primarily from new franchised restaurants and termination fees realized during 2008, partially offset a 2.1% decrease in domestic franchise same-store sales.

Rent and Other Revenues

Rent and other revenues are primarily composed of rental income associated with properties leased or subleased to franchisees and is recognized on the straight-line basis over the lease term. Rent and other revenues were $3.9 million in 2008, a $0.6 million decrease from 2007, primarily as a result of a reduction in the number of leased or subleased properties.

Restaurant Employee, Occupancy and Other Expenses

Restaurant employee, occupancy and other expenses were $41.4 million in 2008, a $0.7 million increase from 2007. Restaurant employee, occupancy and other expenses were approximately 53% and 51% of sales from company-operated restaurants in 2008 and 2007, respectively. The 2% increase as a percent of sales resulted primarily from 1) a 1% increase in restaurant management personnel costs due primarily to manager positions which were unfilled during 2007; 2) a 0.5% increase in utilities costs; and 3) a 0.5% increase in insurance costs and other net operating expenses.

Restaurant Food, Beverages and Packaging

Restaurant food, beverages and packaging expenses were $27.1 million in 2008, a $0.2 million decrease from 2007. Restaurant food, beverages and packaging expenses were approximately 35% and 34% of sales from company-operated restaurants in 2008 and 2007, respectively, increasing primarily due to higher costs during 2008 for poultry, wheat, shortening and other commodities.

Rent and Other Occupancy Expenses

Rent and other occupancy expenses were $2.4 million in 2008, a $0.1 million increase from 2007.

General and Administrative Expenses

General and administrative expenses were $53.9 million in 2008, a $6.7 million increase from 2007. The increase was primarily due to:

• a $2.4 million increase due to marketing and menu initiatives including national cable advertising, new menu board development, product research and other marketing related costs,

• a $1.5 million increase in international expenses including salary and personnel related costs, travel and other net general and administrative costs,

• a $1.0 million increase due to higher domestic salary, employee relocation and other personnel related costs,

• a $0.8 million increase in stock-based compensation expense, and

• a $1.0 million increase in travel, business conference expenses and other net general and administrative costs.

General and administrative expenses were approximately 32% and 28% of total revenues in 2008 and 2007, respectively. General and administrative expenses were approximately 3.1% and 2.7% of system-wide sales in 2008 and 2007, respectively.

Depreciation and Amortization

Depreciation and amortization was $6.3 million in 2008, a $0.6 million decrease from 2007. The decrease was principally due to the reclassification of certain company-operated assets as "Assets held for sale", resulting in the discontinuation of depreciation on these assets, and the related sale of the 11 company-operated restaurants in our Atlanta, Georgia market.

Other Expenses (Income), Net

Other expenses (income), net was $4.6 million of income in 2008 as compared to $2.7 million of income in 2007.

The income in 2008 resulted primarily from $12.9 million in recoveries from directors and officers insurance claims, $0.9 million in gain on the sale of assets and $0.5 million from in insurance recoveries related to property damages, partially offset by $9.5 million in impairments and disposals of fixed assets, including $0.6 million in goodwill impairment and $2.4 million in impairment of re-acquired franchise rights.

The income in 2007 resulted primarily from $4.8 million in insurance recoveries related to property damage and business interruption claims and $0.9 million in litigation related proceeds, partially offset by $1.9 million in impairments and disposals of fixed assets and $0.8 million of costs related to restaurant closures.

See Note 16 to our Consolidated Financial Statements for a description of other expenses (income), net for 2008 and 2007.

Operating Profit

On a consolidated basis, operating profit was $40.3 million in 2008, a $5.3 million decrease when compared to 2007. Fluctuations in the various components of revenue and expense giving rise to this change are discussed above. The following is a general discussion of the fluctuations in operating profit by business segment.

During the fourth quarter 2008, the Company changed the basis in which it measures reportable segment profit or loss in order to improve the alignment between its strategy to re-franchise its company-operated restaurants and the basis management uses to allocate resources and assess performance. Operating profit for each reportable segment includes operating results directly allocable to each segment plus a 5% inter-company royalty charge from franchise operations to company-operated restaurants. Previously reported results have been reclassified to conform to current year's presentation.

                                                                                                    As a
(Dollars in millions)                                   2008        2007        Fluctuation       Percent


Franchise operations                                   $ 38.9      $ 45.1      $        (6.2 )       (13.7 )%
Company-operated restaurants                              3.1         4.7               (1.6 )       (34.0 )%

Operating profit before unallocated expenses             42.0        49.8               (7.8 )       (15.7 )%
Less unallocated expenses:
Depreciation and amortization                             6.3         6.9                0.6           4.3 %
Other expenses (income), net                             (4.6 )      (2.7 )              1.9          34.0 %

Total                                                  $ 40.3      $ 45.6      $        (5.3 )       (11.6 )%

The $6.2 million decrease in operating profit associated with our franchise operations was principally due to higher costs primarily for domestic franchise operations support and field training, salary and other personnel related costs; marketing and menu initiatives including national cable advertising, new menu board development, product research and other marketing related activities; stock-based compensation expense; and an increase in travel, business conference expenses and other net general and administrative costs partially offset by higher net operating profit from international franchising activities and gains on the sale of real estate assets.

The $1.6 million decrease in operating profit associated with our company-operated restaurants was principally due to the re-franchising and sale of 11 company-operated restaurants in our Atlanta, Georgia market, a decrease in same-store sales in fiscal 2008 as compared to fiscal 2007, and increases in operating expense.

Fluctuations in Depreciation and amortization and Other expenses (income), net are discussed above.

Interest Expense, Net

Interest expense, net was $8.1 million in 2008, a $0.6 million decrease from 2007 resulting primarily from lower average debt balances and lower average interest rates on debt as compared to 2007.

Income Tax Expense

In 2008, we had an income tax expense associated with our continuing operations of $12.8 million compared to $13.8 million in 2007. Our effective tax rate for 2008 was 39.8% compared to 37.4% for 2007 (see a reconciliation of these effective rates in Note 18 to our Consolidated Financial Statements). The prior year's effective tax rate benefited from the reversal of tax reserves due to the expiration of the statute of limitation. Had the statute not expired during the prior year, the effective tax rate for fiscal 2007 would have been 38.5%. The effective tax rate for 2008 was unfavorably impacted by 0.7% associated with the impairment of non-deductible goodwill. Other differences between the effective tax rate and the statutory tax rate are principally attributable to estimated tax reserves, other permanent differences and inter-period allocations.

Comparisons of Fiscal Years 2007 and 2006

Sales by Company-Operated Restaurants

Sales by company-operated restaurants were $80.0 million in 2007, a $14.8 million increase from 2006. The increase was primarily due to:

• a $13.1 million increase due to the reopening of 14 of our New Orleans restaurants throughout 2006 and 2007 closed as a result of Hurricane Katrina,

• a $5.6 million increase due to the full year's operations of 13 restaurants acquired on May 1, 2006, in the Memphis and Nashville, Tennessee markets which were previously owned by a franchisee, and

• a $3.9 million increase due to the opening of new company-operated restaurants,

partially offset by:

• a $5.2 million decrease in same-store sales in fiscal 2007 as compared to fiscal 2006,

• a $1.2 million decrease attributable to a 53rd week in fiscal year 2006 (fiscal 2007 consisted of 52 weeks), and

• a $1.2 million decrease due to the termination of a VIE relationship (as described in Note 2 to the Consolidated Financial Statements) in the second quarter of 2006.

The remaining fluctuation was due to various factors, including restaurant openings, restaurant transfers, and the timing and duration of temporary restaurant closings, in both 2007 and 2006.

Franchise Revenues

Franchise revenues were $82.8 million in 2007, a $0.2 million increase from 2006. The increase in revenue was primarily due to: (1) a $1.5 million net increase in royalties and fees due principally to a net increase in franchised restaurants partially offset by a 1.8% decrease in same-store sales, and (2) a decrease of approximately $1.3 million in royalties associated with the 53rd week in fiscal year 2006. Fiscal year 2007 consisted of 52 weeks.

Rent and Other Revenues

Rent and other revenues were $4.5 million in 2007, a $0.7 million decrease from 2006, primarily as a result of a reduction in the number of leased or subleased properties.

Restaurant Employee, Occupancy and Other Expenses

Restaurant employee, occupancy and other expenses were $40.7 million in 2007, a $7.0 million increase from 2006. The increase was principally attributable to the increase in sales from company-operated restaurants (discussed above). Restaurant employee, occupancy and other expenses were approximately 51% and 52% of sales from company-operated restaurants in 2007 and 2006, respectively.

Restaurant Food, Beverages and Packaging

Restaurant food, beverages and packaging expenses were $27.3 million in 2007, a $6.0 million increase from 2006. The increase was principally attributable to the increase in sales from company-operated restaurants (discussed above). Restaurant food, beverages and packaging expenses were approximately 34% and 33% of sales from company-operated restaurants in 2007 and 2006, respectively.

Rent and Other Occupancy Expenses

Rent and other occupancy expenses were $2.3 million in 2007, a $0.4 million decrease from 2006.

General and Administrative Expenses

General and administrative expenses were $47.2 million in 2007, a $1.8 million increase from 2006. The increase was primarily due to:

• $1.9 million of higher salary and other personnel related costs, including severance payments in 2007,

• $0.9 million of higher professional costs (primarily for marketing related services partially offset by lower net legal (including settlements) and IT related costs), and

• $0.7 million of higher bad debt expense,

partially offset by:

• $1.7 million of lower stock-based employee compensation expense.

General and administrative expenses were approximately 28% of total revenues in 2007, compared to approximately 30% in 2006.

Depreciation and Amortization

Depreciation and amortization was $6.9 million in 2007, a $0.5 million increase from 2006. The increase was principally due to depreciation and intangible amortization related to the 2006 acquisition of the 13 restaurants in the Memphis and Nashville, Tennessee markets which were previously owned by a franchisee.

Other Expenses (Income), Net

Other expenses (income), net was $2.7 million of income in 2007 as compared to $1.8 million of income in 2006. The $0.9 million increase in income was primarily due to:

• $4.8 million of higher income recognized from insurance proceeds related to property damage and business interruption claims,

• $0.7 million of lower (non-impairment related) hurricane related costs, and

• $0.6 million of higher net litigation related proceeds,

partially offset by:

• $2.0 million of lower net gains on sale of assets,

• $1.8 million of higher charges for impairments and disposals of fixed assets,

• $0.8 million of higher costs associated with restaurant closures, and

• $0.6 million of other expenses.

See Note 16 to our Consolidated Financial Statements for a description of other expenses (income), net for 2007 and 2006.

Operating Profit

On a consolidated basis, operating profit was $45.6 million in 2007, a $0.3 million improvement when compared to 2006. Fluctuations in the various components of revenue and expense giving rise to this change are discussed above. The following is a general discussion of the fluctuations in operating profit by business segment.

During the fourth quarter 2008, the Company changed the basis in which it measures reportable segment profit or loss in order to improve the alignment . . .