The following discussion should be read in conjunction with "Selected Financial Data," and our Consolidated Financial Statements and the notes thereto.

At December 31, 2008, the Denny's brand consisted of 1,541 restaurants, 1,226 (80%) of which were franchised/licensed restaurants and 315 (20%) of which were company-owned and operated. Prior to the implementation of our Franchise Growth Initiative (FGI) in 2007, the Denny's brand consisted of 1,545 restaurants, 1,024 (66%) of which were franchised/licensed restaurants and 521 (34%) of which were company-owned and operated.

Revenues

Our revenues are derived primarily from two sources: the sale of food and beverages at our company-owned restaurants and the collection of royalties and fees from restaurants operated by our franchisees under the Denny's name.

In 2007, we began our Franchise Growth Initiative ("FGI"), a strategic initiative to increase franchise restaurant development through the sale of certain geographic clusters of company restaurants to both current and new franchisees. In 2008, as a result of FGI, we sold 79 restaurant operations and certain related real estate to 22 franchisees for net proceeds of $35.5 million. As of December 31, 2008, the total number of company restaurants sold since FGI began is 209.

The sale of company restaurants to franchisees has a significant impact on company restaurant sales and the collection of royalties and fees from restaurants operated by our franchisees. Specifically, revenues are impacted as follows:

• Company restaurant sales have decreased significantly and will continue to decrease as we sell restaurants under FGI. In general, we have sold restaurants with below-average sales volumes, which in turn should raise the average sales volume and average operating margin of its remaining company restaurant portfolio.

• The decline in company restaurant revenues is partially offset by increased royalty income derived from the growing franchise restaurant base. This royalty income is included as a component of franchise and license revenue. The resulting net loss in total revenue related to FGI is generally recovered by a decrease in depreciation and amortization from the sale of restaurant related assets to franchisees and a reduction in interest expense resulting from the use of FGI proceeds to reduce debt.

• Additionally, initial franchise fees, included as a component of franchise and license revenue, are generally recorded in the period in which a restaurant is sold to a franchisee. These initial fees are completely dependent on the number of restaurants sold during a particular period.

Certain franchisees purchasing company restaurants under FGI have also signed development agreements to build additional new franchise restaurants. In addition to franchise development agreements signed under FGI, we have negotiated development agreements outside of the FGI program under our Market Growth Incentive Plan ("MGIP"). The positive impact of these development programs is evident in the 31 new franchise restaurant openings in 2008, which was the most franchise openings since 2002 and a considerable increase from 18 franchise openings in 2007.

As a result of FGI and MGIP, we expect that the majority of new Denny's restaurants will be developed by our franchisees. Development of company-owned restaurants will focus on core markets, strategic locations and nontraditional opportunities. As a result of continued franchisee demand for Denny's restaurants and our desire to expand our base of franchise locations, we expect to continue our FGI and MGIP programs during 2009. However, the current economic environment and availability of credit to franchisees will impact the number of restaurants we are able to sell to franchisees and the number of restaurants our franchisees are able to develop.

In addition to the impacts of FGI, sales and customer traffic at both company-operated and franchised restaurants are affected by the success of our marketing campaigns, new product introductions and customer service, as well as external factors including competition, economic conditions affecting consumer spending, and changes in guest tastes and preferences.

Cost of Company Restaurant Sales

Our costs of company restaurant sales are exposed to volatility in two main areas: product costs and payroll and benefit costs.

Many of the products sold in our restaurants are affected by commodity pricing and are, therefore, subject to price volatility. This volatility is caused by factors that are fundamentally outside of our control and are often unpredictable. In general, we purchase food products based on market prices or we set firm prices in purchase agreements with our vendors. During 2008, our ability to lock in prices on several key commodities added to our favorable product costs in an environment in which many commodity prices were on the rise.

In addition, our continued success with menu management helped to further reduce product costs. Starting in the second quarter of 2008, our promotional activities focused on menu items with lower food costs that still provided a compelling value to our customers. Increased incident rates of menu items such as our signature Grand Slam® breakfast and a strong reception of new items like our Sizzlin' Skillets, our AllNighter menu and our new Pancake Puppies contributed to favorable product costs as a percentage of sales.

The volatility of payroll and benefit costs results primarily from changes in wage rates and increases in labor related expenses such as medical benefit costs and workers' compensation costs. A number of our employees are paid the minimum wage. Accordingly, substantial increases in the minimum wage increase our labor costs. Additionally, declines in guest counts and investments in store-level labor can cause payroll and benefit costs to increase as a percentage of sales.

Many of our costs vary based on sales and unit count. Certain costs such as occupancy and other operating expenses have fixed components that may not react as directly to changes in sales and unit count. However, as noted above, many of our below-average sales volume units are sold through FGI. As a result, cost of company restaurant sales as a percentage of sales have generally improved during 2008.

Costs of Franchise and License Revenue

Our costs of franchise and license revenue include occupancy costs related to restaurants leased or subleased to franchisees and direct costs consisting primarily of payroll and benefit costs of franchise operations personnel. These costs are significantly affected by FGI. As units are sold to franchisees, Denny's generally leases or subleases the land and building to the franchisee. As a result, the occupancy costs related to these restaurants moves from costs of company restaurant sales to costs of franchise and license revenue to match the related occupancy income from franchisee lease payments.

Debt and Interest

Interest expense has a significant impact on our net income as a result of our indebtedness. However, during 2008 and 2007, we continued to reduce interest expense through a series of debt repayments using the proceeds generated from FGI transactions, sales of real estate and cash flow from operations. These repayments resulted in an overall debt reduction of more than $25 million during 2008 and $100 million in 2007.

We continue to take a conservative approach to our cash management. While we paid down more that $25 million in debt during 2008, we chose to maintain $21 million in cash at year end given the uncertain outlook for the economy and the capital markets. We will continue to balance our debt reduction goals and our commitment to maintain an ample liquidity cushion.

We are subject to the effects of interest rate volatility since approximately $126.7 million, or 42%, of our debt has variable interest rates. To minimize the interest rate volatility we participate in an interest rate swap on the first $100 million of floating rate debt. As of December 31, 2008, the swap effectively increases our ratio of fixed rate debt from approximately 58% of total debt to approximately 91% of total debt.

Statements of Operations

                                                           Fiscal Year Ended
                            December 31, 2008              December 26, 2007              December 27, 2006
                                                        (Dollars in thousands)
Revenue:
Company restaurant
sales                   $ 648,264            85.3 %    $ 844,621            89.9 %    $ 904,374            91.0 %
Franchise and license
revenue                   112,007            14.7 %       94,747            10.1 %       89,670             9.0 %
Total operating
revenue                   760,271           100.0 %      939,368           100.0 %      994,044           100.0 %

Costs of company
restaurant sales
(a):
Product costs             157,545            24.3 %      215,943            25.6 %      226,404            25.0 %
Payroll and benefits      271,933            41.9 %      355,710            42.1 %      372,292            41.2 %
Occupancy                  40,415             6.2 %       50,977             6.0 %       51,677             5.7 %
Other operating
expenses                  100,182            15.5 %      123,310            14.6 %      131,404            14.5 %
Total costs of
company restaurant
sales                     570,075            87.9 %      745,940            88.3 %      781,777            86.4 %

Costs of franchise
and license revenue
(a)                        34,933            31.2 %       28,005            29.6 %       27,910            31.1 %

General and
administrative
expenses                   60,970             8.0 %       67,374             7.2 %       66,426             6.7 %
Depreciation and
amortization               39,766             5.2 %       49,347             5.3 %       55,290             5.6 %
Operating gains,
losses and other
charges, net               (6,384 )          (0.8 %)     (31,082 )          (3.3 %)     (47,882 )          (4.8 %)
Total operating costs
and expenses              699,360            92.0 %      859,584            91.5 %      883,521            88.9 %
Operating income           60,911             8.0 %       79,784             8.5 %      110,523            11.1 %
Other expenses:
Interest expense,
net                        35,457             4.7 %       42,957             4.6 %       57,720             5.8 %
Other nonoperating
expense (income), net       9,190             1.2 %          668             0.1 %        8,029             0.8 %
Total other expenses,
net                        44,647             5.9 %       43,625             4.6 %       65,749             6.6 %
Net income before
income taxes and
cumulative
effect of change in
accounting principle       16,264             2.1 %       36,159             3.8 %       44,774             4.5 %
Provision for income
taxes                       1,602             0.2 %        4,808             0.5 %       14,668             1.5 %
Net income before
cumulative effect of
change in
accounting principle       14,662             1.9 %       31,351             3.3 %       30,106             3.0 %
Cumulative effect of
change in accounting
principle                       -               - %            -               - %          232             0.0 %
Net income              $  14,662             1.9 %    $  31,351             3.3 %    $  30,338             3.1 %

Other Data:
Company-owned average
unit sales              $   1,813                      $   1,716                      $   1,693
Franchise average
unit sales              $   1,490                      $   1,523                      $   1,481
Company-owned
equivalent units (b)          357                            492                            534
Franchise equivalent
units (b)                   1,186                          1,049                          1,027
Same-store sales
increase (decrease)
(company-
owned) (c)(d)                (1.4 %)                         0.3 %                          2.5 %
Guest check average
increase (d)                  5.9 %                          4.6 %                          4.4 %
Guest count decrease
(d)                          (6.9 %)                        (4.1 %)                        (1.8 %)
Same-store sales
increase (decrease)
(franchised
and licensed units)
(c)(d)                       (4.6 %)                         1.7 %                          3.6 %

(b) Equivalent units are calculated as the weighted average number of units outstanding during a defined time period.

(c) Same-store sales include sales from restaurants that were open the same period in the prior year. For purposes of calculating same-store sales, the 53rd week of 2008 was compared to the 1st week of 2008.

(d) Prior year amounts have not been restated for 2008 comparable units.

2008 Compared with 2007

Unit Activity

                                                                 2008          2007
Company-owned restaurants, beginning of period                       394           521
Units opened                                                           3             5
Units acquired from franchisees                                        -             1
Units sold to franchisees                                            (79 )        (130 )
Units closed                                                          (3 )          (3 )
End of period                                                        315           394

Franchised and licensed restaurants, beginning of period           1,152         1,024
Units opened                                                          31            18
Units acquired by Company                                              -            (1 )
Units purchased from Company                                          79           130
Units closed                                                         (36 )         (19 )
End of period                                                      1,226         1,152

Total company-owned, franchised and licensed restaurants,
end of period                                                      1,541         1,546

Company Restaurant Operations

During the year ended December 31, 2008, we incurred a 1.4% decrease in same-store sales, comprised of a 5.9% increase in guest check average and a 6.9% decrease in guest counts. Company restaurant sales decreased $196.4 million, or 23.2%, primarily resulting from a 135 equivalent unit decrease in company-owned restaurants. The decrease in equivalent units primarily resulted from the sale of company-owned restaurants to franchisees as part of our Franchise Growth Initiative.

Total costs of company restaurant sales as a percentage of company restaurant sales decreased to 87.9% from 88.3%. Product costs decreased to 24.3% from 25.6% due to favorable shifts in menu mix. Payroll and benefits costs decreased to 41.9% from 42.1% primarily as a result of a decrease in management labor and restaurant staffing related to improved scheduling (0.8%), partially offset by the impact of unfavorable workers' compensation claims development (0.3%) and higher incentive compensation (0.2%). Occupancy costs increased slightly to 6.2% from 6.0% primarily due to base rent increases. Other operating expenses were comprised of the following amounts and percentages of company restaurant sales:

                                                    Fiscal Year Ended
                                      December 31, 2008          December 26, 2007
                                                 (Dollars in thousands)
        Utilities                   $    33,160        5.1 %   $    40,898        4.8 %
        Repairs and maintenance          14,592        2.3 %        18,300        2.2 %
        Marketing                        23,243        3.6 %        27,469        3.3 %
        Legal                             2,283        0.4 %         3,621        0.4 %
        Other direct costs               26,904        4.2 %        33,022        3.9 %
        Other operating expenses    $   100,182       15.5 %   $   123,310       14.6 %

The increase in utilities expense as a percentage of company restaurant sales is primarily the result of higher natural gas costs. The increase in marketing expense as a percentage of company restaurant sales results from incremental advertising expenses during the fourth quarter of 2008. The overall decrease in other operating expenses primarily results from the sale of company-owned restaurants to franchisees.

Franchise Operations

Franchise and license revenue and costs of franchise and license revenue were
comprised of the following amounts and percentages of franchise and license
revenue for the periods indicated:

                                                           Fiscal Year Ended
                                             December 31, 2008          December 26, 2007
                                                        (Dollars in thousands)
 Royalties                                 $   70,081        62.6 %   $   63,127        66.6 %
 Initial and other fees                         4,949         4.4 %        6,349         6.7 %
 Occupancy revenue                             36,977        33.0 %       25,271        26.7 %
 Franchise and license revenue                112,007       100.0 %       94,747       100.0 %

 Occupancy costs                               28,451        25.4 %       20,225        21.4 %
 Other direct costs                             6,482         5.8 %        7,780         8.2 %
 Costs of franchise and license revenue    $   34,933        31.2 %   $   28,005        29.6 %

Costs of franchise and license revenue increased by $6.9 million, or 24.7%. The increase in occupancy costs of $8.2 million, or 40.7%, is primarily the result of the sale of company-owned restaurants to franchisees. Other direct costs benefited by $1.3 million, or 16.7%, primarily as a result of the reorganization of the field management structure that occurred in the third quarter of 2007. As a percentage of franchise and license revenue, costs of franchise and license revenue increased to 31.2% for the year ended December 31, 2008 from 29.6% for the year ended December 26, 2007.

Other Operating Costs and Expenses

Other operating costs and expenses such as general and administrative expenses
and depreciation and amortization expense relate to both company and franchise
operations.

General and administrative expenses are comprised of the following:

                                                                  Fiscal Year Ended
                                                      December 31, 2008       December 26, 2007
                                                                   (In thousands)
Share-based compensation                             $             4,117     $             4,774
General and administrative expenses                               56,853                  62,600
Total general and administrative expenses            $            60,970     $            67,374

The decrease in share-based compensation expense is primarily due to the adjustment of the liability classified restricted stock units to fair value as of December 31, 2008. The $5.7 million decrease in general and administrative expenses is primarily due to a reorganization to support our ongoing transition to a franchise-focused business model.

Depreciation and amortization is comprised of the following:

                                                                  Fiscal Year Ended
                                                      December 31, 2008       December 26,  2007
                                                                    (In thousands)
Depreciation of property and equipment               $            30,609     $             37,994
Amortization of capital lease assets                               3,420                    4,703
Amortization of intangible assets                                  5,737                    6,650
Total depreciation and amortization                  $            39,766     $             49,347

The overall decrease in depreciation and amortization expense is due to the sale of company-owned restaurants to franchisees during fiscal 2007 and 2008.

Operating gains, losses and other charges, net are comprised of the following:

                                                                  Fiscal Year Ended
                                                      December 31, 2008       December 26, 2007
                                                                   (In thousands)
Gains on sales of assets and other, net              $           (18,701 )   $           (39,028 )
Restructuring charges and exit costs                               9,022                   6,870
Impairment charges                                                 3,295                   1,076
Operating gains, losses and other charges, net       $            (6,384 )   $           (31,082 )

During the year ended December 31, 2008, we recognized $15.2 million of gains on the sale of 79 restaurant operations to 22 franchisees for net proceeds of $35.5 million (which includes notes receivable of $2.7 million) compared to $32.8 million of gains on the sale of 130 restaurant operations to 30 franchisees for net proceeds of $73.2 million during the prior year. The remaining gains for the two periods resulted from the sale of real estate related to closed restaurants and restaurants leased to franchisees as well as the recognition of deferred gains.

Restructuring charges and exit costs are comprised of the following:

                                                                  Fiscal Year Ended
                                                      December 31, 2008       December 26, 2007
                                                                   (In thousands)
Exit costs                                           $             3,435     $             1,665
Severance and other restructuring charges                          5,587                   5,205
Total restructuring and exist costs                  $             9,022     $             6,870

Exit costs for the year ended December 31, 2008 increased by $1.8 million, resulting primarily from changes in sublease assumptions related to closed stores. Severance and other restructuring charges for the year ended December 31, 2008 increased by $0.4 million. The $5.6 million of severance and other restructuring charges for the year ended December 31, 2008 resulted primarily from a reorganization to support our ongoing transition to a franchise-focused business model. The reorganization led to the elimination of approximately 70 positions. The $5.2 million of severance and other restructuring charges for the year ended December 26, 2007 resulted primarily from the reorganization of our field management structure, which led to the elimination of 80 to 90 out-of-restaurant operational positions. Of these eliminations, approximately 30 employees were reassigned to other positions within the Company.

Operating income was $60.9 million during 2008 compared with $79.8 million during 2007.

Interest expense, net is comprised of the following:

                                                                  Fiscal Year Ended
                                                      December 31, 2008       December 26, 2007
                                                                   (In thousands)
Interest on senior notes                             $            17,740     $            17,452
Interest on credit facilities                                      9,278                  16,296
Interest on capital lease liabilities                              3,804                   3,868
Letters of credit and other fees                                   2,019                   2,280
Interest income                                                   (1,289 )                (1,372 )
Total cash interest                                               31,552                  38,524
Amortization of deferred financing costs                           1,100                   1,177
Interest accretion on other liabilities                            2,805                   3,256
Total interest expense, net                          $            35,457     $            42,957

The decrease in interest expense resulted primarily from the repayment of $25.9 million and $100.3 million on the credit facilities during the years ended December 31, 2008 and December 26, 2007, respectively. The decrease from fiscal 2007 is partially offset by a 53rd week of interest in 2008.

Other nonoperating expenses, net were $9.2 million for the year ended December 31, 2008 compared with $0.7 million for the year ended December 26, 2007. Of the 2008 amount, approximately $5.4 million resulted from the discontinuance of hedge accounting related to our interest rate swap. The $5.4 million of expense is comprised of a $4.2 million change in the fair value of the swap and $1.2 million of amortization of losses included in accumulated other comprehensive income. The remainder of the increase in other nonoperating expenses relates primarily to losses on investments included in our deferred compensation plan.

The provision for income taxes was $1.6 million compared with $4.8 million for the years ended December 31, 2008 and December 26, 2007, respectively. The provision for income taxes for the year ended December 31, 2008 included the recognition of $0.7 million of current tax benefits. This item resulted from the enactment of certain federal laws that benefited us during the third quarter of 2008. The year ended December 26, 2007 included the recognition of $0.3 million of current tax benefits and a $0.6 million reduction to the valuation allowance. These items resulted from the enactment of certain federal and state laws that benefited us during the second quarter of 2007. We have provided valuation . . .