Edgar Filing: YUM BRANDS INC

Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)
[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 3, 2005

[ ]

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 1-13163

YUM! BRANDS, INC.

(Exact name of registrant as specified in its charter)

North Carolina		13-3951308
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1441 Gardiner Lane, Louisville, Kentucky		40213
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (502) 874-8300

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes × No

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

The number of shares outstanding of the Registrant’s Common Stock as of October 6, 2005 was 283,061,945 shares.

YUM! BRANDS, INC.

INDEX

	Page No.

Part I. Financial Information


Item 1 - Financial Statements

Condensed Consolidated Statements of Income - Quarters and Years to date ended September		3
3, 2005 and September 4, 2004

Condensed Consolidated Statements of Cash Flows - Years to date ended		4
September 3, 2005 and September 4, 2004

Condensed Consolidated Balance Sheets - September 3, 2005		5
and December 25, 2004

Notes to Condensed Consolidated Financial Statements		6

Item 2 - Management’s Discussion and Analysis of Financial Condition
and Results of Operations		23

Item 3 - Quantitative and Qualitative Disclosures about Market Risk		40

Item 4 - Controls and Procedures		41

Report of Independent Registered Public Accounting Firm		43

Part II. Other Information and Signatures

Item 1 - Legal Proceedings		44

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds		44

Item 6 - Exhibits		45

Signatures		46

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions, except per share data)

	Quarter				Year to date
	9/3/05		9/4/04		9/3/05		9/4/04
Revenues
Company sales	$ 1,975		$ 1,935		$ 5,687		$ 5,528
Franchise and license fees	268		244		763		698


Total revenues	2,243		2,179		6,450		6,226


Costs and expenses, net
Company restaurants
Food and paper	619		618		1,793		1,746
Payroll and employee benefits	499		497		1,486		1,470
Occupancy and other operating expenses	561		525		1,582		1,491


	1,679		1,640		4,861		4,707
General and administrative expenses	252		250		751		721
Franchise and license expenses	12		8		24		16
Facility actions	7		3		22		22
Other (income) expense	(27	)	(13	)	(66	)	(35	)
Wrench litigation (income) expense	(2	)	-		(2	)	-
AmeriServe and other charges (credits)	-		-		-		(14	)


Total costs and expenses, net	1,921		1,888		5,590		5,417


Operating Profit	322		291		860		809
Interest expense, net	28		29		86		96


Income Before Income Taxes	294		262		774		713

Income tax provision	80		77		212		208

Net Income	$ 214		$ 185		$ 562		$ 505


Basic Earnings Per Common Share	$ 0.75		$ 0.64		$ 1.95		$ 1.74


Diluted Earnings Per Common Share	$ 0.72		$ 0.61		$ 1.87		$ 1.66


Dividends Declared Per Common Share	$ -		$ -		$ 0.215		$ 0.10

See accompanying Notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)

	Year to date
	9/3/05		9/4/04
Cash Flows - Operating Activities
Net income	$ 562		$ 505
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	319		302
Facility actions	22		22
Other liabilities and deferred credits	25		(30	)
Deferred income taxes	(66	)	28
Other non-cash charges and credits, net	(16	)	22
Changes in operating working capital, excluding effects of acquisitions and
dispositions:
Accounts and notes receivable	(22	)	(12	)
Inventories	7		(5	)
Prepaid expenses and other current assets	70		(19	)
Accounts payable and other current liabilities	54		27
Income taxes payable	86		(49	)


Net change in operating working capital	195		(58	)


Net Cash Provided by Operating Activities	1,041		791


Cash Flows - Investing Activities
Capital spending	(362	)	(383	)
Proceeds from refranchising of restaurants	79		14
Acquisition of restaurants from franchisees	-		(38	)
Short-term investments	(32	)	(46	)
Sales of property, plant and equipment	25		32
Other, net	41		30


Net Cash Used in Investing Activities	(249	)	(391	)


Cash Flows - Financing Activities
Revolving Credit Facility activity
Three months or less, net	78		-
Repayments of long-term debt	(11	)	(9	)
Short-term borrowings-three months or less, net	(32	)	-
Repurchase shares of common stock	(678	)	(294	)
Employee stock option proceeds	113		127
Dividends paid on common shares	(91	)	(29	)


Net Cash Used in Financing Activities	(621	)	(205	)


Effect of Exchange Rates on Cash and Cash Equivalents	(4	)	-


Net Increase in Cash and Cash Equivalents	167		195
Net Increase in Cash and Cash Equivalents of Mainland China for December 2004
	34		-
Cash and Cash Equivalents - Beginning of Period	62		192


Cash and Cash Equivalents - End of Period	$ 263		$ 387

See accompanying Notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED BALANCE SHEETS
YUM! BRANDS, INC. AND SUBSIDIARIES
(in millions)

	9/3/05		12/25/04


ASSETS
Current Assets
Cash and cash equivalents	$ 263		$ 62
Short-term investments	89		54
Accounts and notes receivable, less allowance: $22 in 2005 and 2004	227		192
Inventories	74		76
Prepaid expenses and other current assets	81		142
Deferred income taxes	157		156
Advertising cooperative assets, restricted	76		65


Total Current Assets	967		747

Property, plant and equipment, net of accumulated depreciation and amortization
of $2,799 in 2005 and $2,618 in 2004	3,373		3,439
Goodwill	545		553
Intangible assets, net	337		347
Investments in unconsolidated affiliates	190		194
Other assets	462		416

Total Assets	$ 5,874		$ 5,696

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable and other current liabilities	$ 1,240		$ 1,189
Income taxes payable	136		111
Short-term borrowings	213		11
Advertising cooperative liabilities	76		65


Total Current Liabilities	1,665		1,376

Long-term debt	1,590		1,731
Other liabilities and deferred credits	1,019		994


Total Liabilities	4,274		4,101


Shareholders’ Equity
Preferred stock, no par value, 250 shares authorized; no shares issued	-		-
Common stock, no par value, 750 shares authorized; 284 shares and 290 shares
issued in 2005 and 2004, respectively	174		659
Retained earnings	1,573		1,067
Accumulated other comprehensive loss	(147	)	(131	)


Total Shareholders’ Equity	1,600		1,595


Total Liabilities and Shareholders’ Equity	$ 5,874		$ 5,696

See accompanying Notes to Condensed Consolidated Financial Statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(tabular amounts in millions, except per share data)

1. Financial Statement Presentation

We have prepared our accompanying unaudited Condensed Consolidated Financial Statements (“Financial Statements”) in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements. Therefore, we suggest that the accompanying Financial Statements be read in conjunction with the Consolidated Financial Statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended December 25, 2004 (“2004 Form 10-K”). Except as disclosed herein, there has been no material change in the information disclosed in the notes to our Consolidated Financial Statements included in the 2004 Form 10-K.

Our Financial Statements include YUM! Brands, Inc. and its wholly-owned subsidiaries (collectively referred to as “YUM” or the “Company”). The Financial Statements include the worldwide operations of KFC, Pizza Hut, Taco Bell, Long John Silver’s (“LJS”) and A&W All-American Food Restaurants (“A&W”) (collectively the “Concepts”). References to YUM throughout these notes to our Financial Statements are made using the first person notations of “we,” “us” or “our.”

In 2005, we began reporting information for our international business in two separate operating segments as a result of changes to our management reporting structure. The China Division includes mainland China (“China”), Thailand and KFC Taiwan, and the International Division includes the remainder of our international operations. While this reporting change did not impact our consolidated results, segment information for previous periods has been restated to be consistent with the current period presentation.

Beginning in 2005, we also changed the China business reporting calendar to more closely align the timing of the reporting of its results of operations with our U.S. business. Previously our China business, like the rest of our international businesses, closed one month (or one period for certain of our international businesses) earlier than YUM’s period end date to facilitate consolidated reporting. To maintain comparability of our consolidated results of operations, amounts related to our China business for December 2004 have not been reflected in our Condensed Consolidated Statements of Income and net income for the China business for the one month period ended December 31, 2004 was recognized as an adjustment directly to consolidated retained earnings in the year to date ended September 3, 2005. Our consolidated results of operations for the quarter and year to date ended September 3, 2005 include the results of operations of the China business for the months of June, 2005 through August, 2005 and January, 2005 through August, 2005, respectively, and the months to be included in future quarterly reporting periods will begin one month later than in previous years. Our consolidated results of operations for the quarter and year to date ended September 4, 2004 continue to include the results of operations of the China business for the months of May, 2004 through July, 2004 and December, 2003 through July, 2004, respectively, as previously reported.

For the month of December, 2004 the China business had revenues of $79 million and net income of $6 million. As mentioned previously, neither of these amounts is included in our Condensed Consolidated Statement of Income for the year to date ended September 3, 2005 and the net income figure was credited directly to retained earnings in the first quarter of 2005. Net income for the month of December, 2004 was negatively impacted by costs incurred in preparation of opening a significant number of new stores in early 2005 as well as increased advertising expense, all of which was recorded in December’s results of operations. Additionally, the net increase in cash for the China business in December, 2004 has been presented as a single line item on our Condensed Consolidated Statement of Cash Flows for the year to date ended September 3, 2005. The $34

million net increase in cash was primarily attributable to short-term borrowings for working capital purposes, a majority of which were repaid prior to the end of the China business’ first quarter.

Our preparation of the accompanying Financial Statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the Financial Statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates.

In our opinion, the accompanying Financial Statements include all normal and recurring adjustments considered necessary to present fairly, when read in conjunction with our 2004 Form 10-K, our financial position as of September 3, 2005, the results of our operations for the quarters and years to date ended September 3, 2005 and September 4, 2004 and cash flows for the years to date ended September 3, 2005 and September 4, 2004. Our results of operations for these interim periods are not necessarily indicative of the results to be expected for the full year.

Our significant interim accounting policies include the recognition of certain advertising and marketing costs, generally in proportion to revenue, and the recognition of income taxes using an estimated annual effective tax rate.

We have reclassified certain items in the accompanying Financial Statements and Notes to the Financial Statements in order to be comparable with the current classifications. These reclassifications had no effect on previously reported net income.

2. Stock-Based Employee Compensation

The Company accounts for its stock-based employee compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations (“APB 25”). No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share had the Company applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”) to stock-based employee compensation.

	Quarter				Year to date
	9/3/05		9/4/04		9/3/05		9/4/04
Net income, as reported	$ 214		$ 185		$ 562		$ 505
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects	(8	)	(7	)	(24	)	(25	)


Net income, pro forma	$ 206		$ 178		$ 538		$ 480


Basic Earnings per Common Share
As reported	$ 0.75		$ 0.64		$ 1.95		$ 1.74
Pro forma	0.72		0.61		1.87		1.65
Diluted Earnings per Common Share
As reported	$ 0.72		$ 0.61		$ 1.87		$ 1.66
Pro forma	0.69		0.59		1.79		1.58

3. Recently Adopted Accounting Pronouncements

In October 2004, the Financial Accounting Standards Board (“FASB”) ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue 04-1 “Accounting for Preexisting Relationships between the Parties to a Business Combination” (“EITF 04-1”). EITF 04-1 requires that a business combination between two parties that have a preexisting relationship be evaluated to determine if a settlement of that preexisting relationship exists. EITF 04-1 also requires that certain reacquired rights (including the rights to the acquirer’s trade name under a franchise agreement) be recognized as intangible assets apart from goodwill. However, if a contract giving rise to the reacquired rights includes terms that are favorable or unfavorable when compared to pricing for current market transactions for the same or similar items, EITF 04-1 requires that a settlement gain or loss should be measured as the lesser of a) the amount by which the contract is favorable or unfavorable to market terms from the perspective of the acquirer or b) the stated settlement provisions of the contract available to the counterparty to which the contract is unfavorable.

EITF 04-1 was effective prospectively for business combinations consummated in reporting periods beginning after October 13, 2004 (the fiscal year beginning December 26, 2004 for the Company). EITF 04-1 applies to acquisitions of restaurants we may make from our franchisees or licensees. We currently attempt to have our franchisees or licensees enter into standard franchise or license agreements for the applicable Concept and/or market when renewing or entering into a new agreement. However, in certain instances franchisees or licensees have existing agreements that possess terms, including royalty rates, that differ from our current standard agreements for the applicable Concept and/or market. We acquired no franchisee or licensee restaurants in the quarter and year to date ended September 3, 2005. However, if in the future we were to acquire restaurants from a franchisee or licensee with such an existing agreement, we would be required to record a settlement gain or loss at the date of acquisition. The amount and timing of any such gains or losses we might record is dependent upon the franchisees or licensees from which we might acquire restaurants and when the restaurants are acquired. Accordingly, any impact cannot be currently determined.

4. New Accounting Pronouncements Not Yet Adopted

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”), which replaces SFAS 123, supersedes APB 25 and related interpretations and amends SFAS No. 95, “Statement of Cash Flows.” The provisions of SFAS 123R are similar to those of SFAS 123, however, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements as compensation cost based on their fair value on the date of grant. Compensation cost will be recognized over the vesting period on a straight-line basis for the fair value of awards that actually vest.

We currently intend to adopt SFAS 123R using the modified retrospective application transition method effective September 4, 2005, the beginning of our fourth quarter. As permitted by SFAS 123R, we plan to apply the modified retrospective application transition method to the beginning of the fiscal year of adoption (our fiscal year 2005). As such, upon adoption of SFAS 123R the first three fiscal quarters of 2005 will be adjusted to recognize the compensation cost previously reported in the pro forma footnote disclosures under the provisions of SFAS 123. Compensation cost will be recognized subsequent to the date of adoption of SFAS 123R for all share-based payments granted, modified or settled after the date of adoption. Additionally, for any unvested awards that were granted prior to the date of adoption we will recognize compensation cost subsequent to the date of adoption using the same estimate of the grant-date fair value used to determine the pro forma disclosures under SFAS 123. We currently estimate the adoption of SFAS 123R will decrease diluted earnings per common share in the quarter and year to date ending December 31, 2005 by approximately $0.04 and $0.12, respectively.

Additionally, SFAS 123R requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow as required currently. This requirement will reduce cash flows from operating activities and increase cash flows from financing activities by a similar amount. We currently do not anticipate that the reclassification will significantly impact our net cash provided by operating activities.

5. Earnings Per Common Share (“EPS”)

	Quarter		Year to date
	9/3/05	9/4/04	9/3/05	9/4/04
Net income	$ 214	$ 185	$ 562	$ 505


Basic EPS
Weighted-average common shares outstanding	285	291	288	290


Basic EPS	$ 0.75	$ 0.64	$ 1.95	$ 1.74


Diluted EPS
Weighted-average common shares outstanding	285	291	288	290
Shares assumed issued on exercise of dilutive share
equivalents	37	46	39	49
Shares assumed purchased with proceeds of dilutive
share equivalents	(24)	(32)	(26)	(34)


Shares applicable to diluted earnings	298	305	301	305


Diluted EPS	$ 0.72	$ 0.61	$ 1.87	$ 1.66

Unexercised employee stock options to purchase approximately 0.8 million and 0.4 million shares of our Common Stock for the quarter and year to date ended September 3, 2005, respectively, were not included in the computation of diluted EPS because their exercise prices were greater than the average market price of our Common Stock during the quarter and year to date ended September 3, 2005, respectively. Unexercised employee stock options to purchase approximately 0.7 million and 0.5 million shares of our Common Stock for the quarter and year to date ended September 4, 2004, respectively, were not included in the computation of diluted EPS because their exercise prices were greater than the average market price of our Common Stock during the quarter and year to date ended September 4, 2004, respectively.

During the year to date ended September 3, 2005, we have granted employee stock options to purchase approximately 4 million shares of our Common Stock at an exercise price equal to the average market price on the date of grant. The weighted-average exercise price of these options was approximately $46.

6. Comprehensive Income

Comprehensive income was as follows:

	Quarter		Year to date
	9/3/05	9/4/04	9/3/05		9/4/04

Net income	$ 214	$ 185	$ 562		$ 505
Foreign currency translation adjustment arising
during the period	(7)	16	(16)		11
Changes in fair value of derivatives, net of tax	-	-	1		(2)
Reclassification of derivative (gains) losses to net
income, net of tax	-	-	(1	)	2


Total comprehensive income	$ 207	$ 201	$ 546		$ 516

7. Items Affecting Comparability of Net Income

Facility actions

Facility actions consists of the following components:

Refranchising net (gains) losses;
Store closure costs;
Impairment of long-lived assets for stores we intend to close and stores we intend to continue to use in the business.

	Quarter ended September 3, 2005
	U.S.	International Division	China Division	Worldwide
Refranchising net (gains) losses	$ (10)	$ -	$ -	$ (10	)
Store closure costs	4	1	-	5
Store impairment charges (a)	9	3	-	12


Facility actions	$ 3	$ 4	$ -	$ 7

	Quarter ended September 4, 2004
	U.S.		International Division	China Division		Worldwide
Refranchising net (gains) losses	$ (3	)	$ 2	$ -		$ (1	)
Store closure costs (b)	(1	)	4	(1	)	2
Store impairment charges	1		-	1		2


Facility actions	$ (3	)	$ 6	$ -		$ 3

	Year to date ended September 3, 2005
	U.S.		International Division	China Division	Worldwide
Refranchising net (gains) losses	$ (22	)	$ 1	$ -	$ (21	)
Store closure costs	3		1	-	4
Store impairment charges	32		5	2	39


Facility actions	$ 13		$ 7	$ 2	$ 22

	Year to date ended September 4, 2004
	U.S.		International Division	China Division		Worldwide
Refranchising net (gains) losses	$ 4		$ 6	$ -		$ 10
Store closure costs(b)	(2	)	-	(1	)	(3	)
Store impairment charges	7		6	2		15


Facility actions	$ 9		$ 12	$ 1		$ 22

(a)

Store impairment charges in the quarter ended September 3, 2005 in the U.S. segment primarily resulted from decisions to close certain KFC and LJS restaurants.

(b)

The income in store closure costs is primarily the result of gains from the sale of properties on which we formerly operated restaurants or adjustments to previously recorded lease reserves as a result of changes in settlement and/or sublease estimates.

Mainland China Supplier Ingredient Issue

quarter ended September 3, 2005, we entered into an agreement with the supplier of the ingredient for partial recovery of our losses. As a result of the agreement, we recognized approximately $14 million in Other income (expense) in our Condensed Consolidated Statement of Income in the quarter ended September 3, 2005 related to this recovery. We expect to recognize an additional meaningful financial recovery from the same supplier in the quarter ending December 31, 2005.

Sale of an Investment in Unconsolidated Affiliate

During the second quarter of 2005, we sold our fifty percent interest in the entity that operated almost all KFCs and Pizza Huts in Poland and the Czech Republic to our then partner in the entity, principally for cash. Concurrent with the sale, our former partner completed an initial public offering (“IPO”) of the majority of the stock it then owned in the entity. Prior to the sale, we accounted for our investment in this entity using the equity method. Subsequent to the IPO, the new publicly held entity, in which YUM has no ownership interest, is a franchisee, as was the entity in which we previously held a fifty percent interest.

This transaction generated a one-time gain of approximately $17 million for YUM in the second quarter of 2005 as cash proceeds (net of expenses) of approximately $25 million from the sale of our interest in the entity exceeded our recorded investment in this unconsolidated affiliate. As with our equity income from investments in unconsolidated affiliates, the approximate $17 million gain was recorded in Other income (expense) in our Condensed Consolidated Statement of Income.

Income Tax Impact of Repatriating Qualified Foreign Earnings

foreign earnings of approximately $390 million in fiscal year 2005 which will be eligible for the Act’s dividends received deduction (for a total repatriation of qualified earnings of approximately $500 million). As a result of this determination, approximately $19 million of additional tax expense will be recognized in fiscal 2005, $5 million and $13 million of which were recognized in the quarter and year to date ended September 3, 2005, respectively. No additional amounts beyond the approximately $500 million as discussed above are eligible for the Act´s dividends received deduction.

LJS Trademark/Brand

As required by SFAS No. 142, “Goodwill and Other Intangible Assets” we evaluate the remaining useful life of our intangible assets each reporting period. During the first quarter of 2005 several factors occurred that caused us to reconsider our decision that the LJS trademark/brand, which was allocated $140 million in value upon acquisition, had an indefinite useful life. The primary factor was the Company´s decision to adjust development of certain multibrand combinations with LJS. While we and our franchisees continue to build new LJS stand alone units as well as multibrand units that include LJS, our decision to reallocate certain capital spending in the near term to other investment alternatives is considered an economic factor that may limit the useful life of the LJS trademark/brand. Accordingly, during the first quarter of 2005, we began to amortize the LJS trademark/brand over thirty years, the typical term of our multibrand franchise agreements including one renewal. We reviewed the LJS trademark/brand for impairment prior to beginning amortization and determined no impairment existed. Amortization expense of approximately $1 million and $3 million was recorded during the quarter and year to date ended September 3, 2005, respectively. Amortization expense in the fiscal year ending December 31, 2005 will total approximately $4 million.

Wrench Litigation

We recorded income of $2 million for the quarter and year to date ended September 3, 2005 from a settlement with an insurance carrier related to the legal judgment against Taco Bell Corp. on June 4, 2003. An insignificant amount of Wrench litigation (income) expense was recorded for the quarter and year to date ended September 4, 2004. See Note 14 for further discussion of Wrench litigation.

AmeriServe and Other Charges (Credits)

AmeriServe Food Distribution, Inc. (“AmeriServe”) was the primary distributor of food and paper supplies to our U.S. stores when it filed for protection under Chapter 11 of the U.S. Bankruptcy Code on January 31, 2000. A plan of reorganization for AmeriServe (the “POR”) was approved on November 28, 2000, which resulted in, among other things, the assumption of our distribution agreement, subject to certain amendments, by McLane Company, Inc. During the AmeriServe bankruptcy reorganization process, we took a number of actions to ensure continued supply to our system. Those actions resulted in significant expense for the Company, primarily recorded in 2000. Under the POR we are entitled to proceeds from certain residual assets, preference claims and other legal recoveries of the estate.

We classify expenses and recoveries related to AmeriServe, as well as certain other items, as AmeriServe and other charges (credits). The amounts recorded as AmeriServe and other charges (credits) were not significant for both the quarter and year to date ended September 3, 2005 and for the quarter ended September 4, 2004. Income of $14 million was recorded as AmeriServe and other charges (credits) for the year to date ended September 4, 2004. The amount primarily resulted from cash recoveries related to the AmeriServe bankruptcy reorganization process.

8. Other (Income) Expense

	Quarter				Year to date
	9/3/05		9/4/04		9/3/05		9/4/04

Gain upon sale of investment in unconsolidated affiliate	$ -		$ -		$ (17	)	$ -
Recovery from supplier(a)	(12	)	-		(12	)	-
Equity income from investments in unconsolidated affiliates	(16	)	(14	)	(39	)	(36	)
Foreign exchange net (gain) loss	1		1		2		1


Other (income) expense	$ (27	)	$ (13	)	$ (66	)	$ (35	)

(a)	Amount differs from the total recovery of $14 million recorded in the quarter ended September 3, 2005 (see Note 7) as $2 million was recognized through equity income from investments in unconsolidated affiliates.

Dividends received from unconsolidated affiliates were approximately $21 million and $25 million for the years to date ended September 3, 2005 and September 4, 2004, respectively.

9. Debt

Our primary bank credit agreement comprises a $1.0 billion senior unsecured Revolving Credit Facility (the “Credit Facility”) which matures in September 2009. The Credit Facility is unconditionally guaranteed by our principal domestic subsidiaries and contains financial covenants relating to maintenance of leverage and fixed charge coverage ratios. The Credit Facility also contains affirmative and negative covenants including, among other things, limitations on certain additional indebtedness, guarantees of indebtedness, level of cash dividends, aggregate non-U.S. investment and certain other transactions as defined in the agreement. We were in compliance with all debt covenants at September 3, 2005.

Under the terms of the Credit Facility, we may borrow up to the maximum borrowing limit, less outstanding letters of credit. At September 3, 2005, our unused Credit Facility totaled $710 million, net of outstanding letters of credit of $193 million. There were borrowings of $97 million outstanding under the Credit Facility at September 3, 2005. The interest rate for borrowings under the Credit Facility ranges from 0.35% to 1.625% over the London Interbank Offered Rate (“LIBOR”) or 0.00% to 0.20% over an Alternate Base Rate, which is the greater of the Prime Rate or the Federal Funds Effective Rate plus 0.50%. The exact spread over LIBOR or the Alternate Base Rate, as applicable, will depend upon our performance under specified financial criteria. Interest on any outstanding borrowings under the Credit Facility is payable at least quarterly.

Included in short-term borrowings at September 3, 2005 are $200 million in Senior Unsecured Notes with an April 2006 maturity date.

Interest expense on short-term borrowings and long-term debt was $34 million and $32 million for the quarters ended September 3, 2005 and September 4, 2004, respectively, and $100 million and $106 million for the years to date ended September 3, 2005 and September 4, 2004, respectively.

10. Reportable Operating Segments

As described in Note 1, in 2005 we began reporting information for our international business in two separate operating segments as a result of changes in our management reporting structure. The China Division includes mainland China, Thailand and KFC Taiwan, and the International Division includes the remainder of our international operations. Segment information for previous periods has been restated to reflect this reporting change.

	Quarter		Year to date
Revenues	9/3/05	9/4/04	9/3/05	9/4/04
United States	$ 1,393	$ 1,369	$ 4,113	$ 4,015
International Division	490	509	1,466	1,485
China Division(a)	360	301	871	726

	$ 2,243	$ 2,179	$ 6,450	$ 6,226

	Quarter				Year to date
Operating Profit	9/3/05		9/4/04		9/3/05		9/4/04
United States	$ 189		$ 196		$ 541		$ 567
International Division	89		79		273		241
China Division(b)	85		64		163		141
Unallocated and corporate expenses	(52	)	(48	)	(155	)	(140	)
Unallocated other income (expense) (c)	(1	)	(1	)	15		(4	)
Unallocated facility actions(d)	10		1		21		(10	)
Wrench litigation income (expense)(e)	2		-		2		-
AmeriServe and other (charges) credits(e)	-		-		-		14

Operating profit	322		291		860		809
Interest expense, net	(28	)	(29	)	(86	)	(96	)

Income before income taxes	$ 294		$ 262		$ 774		$ 713

Identifiable Assets	9/3/05	12/25/04

United States	$ 3,134	$ 3,316
International Division	1,595	1,441
China Division	769	613
Corporate(f)	376	326

	$ 5,874	$ 5,696

Long-Lived Assets(g)	9/3/05	12/25/04

United States	$ 2,812	$ 2,900
International Division	849	904
China Division	488	436
Corporate	106	99

	$ 4,255	$ 4,339

(a)

Includes revenues of approximately $294 million and $239 million in mainland China for the quarters ended September 3, 2005 and September 4, 2004, respectively. Includes revenues of approximately $693 million and $575 million in mainland China for the years to date ended September 3, 2005 and September 4, 2004, respectively.

(b)	Includes approximately $14 million of operating profit in the quarter and year to date ended September 3, 2005 related to an agreement with a supplier in mainland China for a partial recovery of certain losses. See Note 7 for a discussion of the mainland China supplier ingredient issue.

(c)	Includes a gain of approximately $17 million related to the sale of our 50% interest in our former unconsolidated affiliate in Poland and the Czech Republic in the year to date ended September 3, 2005.

(d)	Unallocated facility actions comprise refranchising gains (losses), which are not allocated to the U.S., International Division or China Division segments for performance reporting purposes.

(e)	See Note 7 for a discussion of AmeriServe and other (charges) credits and Wrench litigation income (expense).

(f)	Primarily includes deferred tax assets; property, plant and equipment, net, related to our office facilities; and fair value of derivative instruments.

(g)	Includes property, plant and equipment, net; goodwill; and intangible assets, net.

11. Pension and Postretirement Medical Benefits

Pension Benefits

We sponsor noncontributory defined benefit pension plans covering a majority of full-time U.S. salaried employees, certain U.S. hourly employees and certain international employees. The most significant of these plans, the YUM Retirement Plan (the “Plan”), is funded while benefits from the other plans are paid by the Company as incurred. During 2001, the plans covering our U.S. salaried employees were amended such that any salaried employee hired or rehired by us after September 30, 2001 is not eligible to participate in those plans. Benefits are based on years of service and earnings or stated amounts for each year of service.

Postretirement Medical Benefits

Our postretirement plan provides health care benefits, principally to U.S. salaried retirees and their dependents. This plan includes retiree cost sharing provisions. During 2001, the plan was amended such that any salaried employee hired or rehired by us after September 30, 2001 is not eligible to participate in this plan. Employees hired prior to September 30, 2001 are eligible for benefits if they meet age and service requirements and qualify for retirement benefits.

Components of Net Periodic Benefit Cost

	Pension Benefits				Pension Benefits
	Quarter				Year to date
	9/3/05		9/4/04		9/3/05		9/4/04

Service cost	$ 8		$ 7		$ 23		$ 22
Interest cost	9		9		29		27
Expected return on plan assets	(10	)	(9	)	(31	)	(28	)
Amortization of prior service cost	1		1		3		3
Recognized actuarial loss	5		4		15		13

Net periodic benefit cost	$ 13		$ 12		$ 39		$ 37

	Other Postretirement		Other Postretirement
	Benefits		Benefits
	Quarter		Year to date
	9/3/05	9/4/04	9/3/05	9/4/04

Service cost	$ 1	$ 1	$ 2	$ 2
Interest cost	1	1	3	3
Expected return on plan assets	-	-	-	-
Amortization of prior service cost	-	-	-	-
Recognized actuarial loss	-	-	1	1

Net periodic benefit cost	$ 2	$ 2	$ 6	$ 6

Contributions

As disclosed in our 2004 Form 10-K, we are not required to make contributions to the Plan in 2005. No contributions have been made to the Plan during the year to date ended September 3, 2005. However, on September 15, 2005 we elected to make a discretionary contribution to the Plan in the amount of $55 million. No further contributions to the Plan are expected in 2005.

12. Share Repurchase Program

In May 2005, our Board of Directors authorized a share repurchase program. This program authorized us to repurchase, through May 2006, up to $500 million (excluding applicable transaction fees) of our outstanding Common Stock. During the year to date ended September 3, 2005, we repurchased approximately 3.1 million shares for approximately $152 million at an average price per share of approximately $50 under this program. At September 3, 2005, approximately $348 million remained available for repurchases under this program. Based on market conditions and other factors, additional repurchases may be made from time to time in the open market or through privately negotiated transactions at the discretion of the Company.

In January 2005, our Board of Directors authorized a share repurchase program. This program authorized us to repurchase, through January 2006, up to $500 million (excluding applicable transaction fees) of our outstanding Common Stock. During the year to date ended September 3, 2005, we repurchased approximately 10 million shares for approximately $500 million at an average price per share of approximately $50 under this program. This program was completed during the third quarter of 2005.

In May 2004, our Board of Directors authorized a share repurchase program. This program authorized us to repurchase, through November 2005, up to $300 million (excluding applicable transaction fees) of our outstanding Common Stock. During the year to date ended September 3, 2005, we repurchased approximately 500,000 shares for approximately $25 million at an average price per share of $47 under this program. This program was completed during the first quarter of 2005.

During the fourth quarter of 2004, we entered into an accelerated share repurchase program (the “Program”). In connection with the Program, a third-party investment bank borrowed approximately 5.4 million shares of our Common Stock from shareholders. We then repurchased those shares at their then market value of $46.58 from the investment bank for approximately $250 million. The repurchase was made pursuant to the share repurchase program authorized by our Board of Directors in May 2004. Simultaneously, we entered into a forward contract with the investment bank that was indexed to the number of shares repurchased. Under the terms of the forward contract, we were required to pay or entitled to receive a price adjustment based on the difference between the weighted average price of our Common Stock during the duration of the Program and the initial purchase price of $46.58 per share. The Program was completed during the first quarter of 2005. We made a cash payment of approximately $3 million to the investment bank to settle the forward contract in full. This payment was recognized as an adjustment to Common Stock and is included in repurchases as described above.

In November 2003, our Board of Directors authorized a share repurchase program. This program authorized us to repurchase, through May 21, 2005, up to $300 million (excluding applicable transaction fees) of our outstanding Common Stock. This share repurchase program was completed in 2004. During the year to date ended September 4, 2004, we repurchased approximately 8.1 million shares for approximately $294 million at an average price per share of approximately $36 under this program.

13. Supplemental Cash Flow Data

	Year to date
	9/3/05	9/4/04
Cash Paid for:
Interest	$ 85	$ 100
Income taxes	125	231
Significant Non-cash Investing and Financing Activities:
Capital lease obligations incurred to acquire assets	$ 3	$ 10

14. Guarantees, Commitments and Contingencies

Lease Guarantees and Contingencies

As a result of (a) assigning our interest in obligations under real estate leases as a condition to the refranchising of certain Company restaurants; (b) contributing certain Company restaurants to unconsolidated affiliates; and (c) guaranteeing certain other leases, we are frequently contingently liable on lease agreements. These leases have varying terms, the latest of which expires in 2031. As of September 3, 2005 and December 25, 2004, the potential amount of undiscounted payments we could be required to make in the event of non-payment by the primary lessee was $370 million and $365 million, respectively. The present value of these potential payments discounted at our pre-tax cost of debt at September 3, 2005 was $313 million. Our franchisees are the primary lessees under the vast majority of these leases. We generally have cross-default provisions with these franchisees that would put them in default of their franchise agreement in the event of non-payment under the lease. We believe these cross-default provisions significantly reduce the risk that we will be required to make payments under these leases. Accordingly, the liability recorded for our exposure under such leases at September 3, 2005 and December 25, 2004, was not material.

Guarantees Supporting Financial Arrangements of Franchisees, Unconsolidated Affiliates and Other Third Parties

We had provided approximately $16 million of partial guarantees of two loan franchisee pools related primarily to the Company’s historical refranchising programs and, to a lesser extent, franchisee development of new restaurants, at both September 3, 2005 and December 25, 2004. In support of these guarantees, we posted a letter of credit of $4 million. We also provided a standby letter of credit of $18 million under which we could potentially be required to fund a portion of one of the franchisee loan pools. The total loans outstanding under these loan pools were approximately $83 million at September 3, 2005.

Any funding under the guarantees or letters of credit would be secured by the franchisee loans and any related collateral. We believe that we have appropriately provided for our estimated probable exposures under these contingent liabilities. These provisions were primarily charged to refranchising loss (gain). New loans have not been added to either loan pool in the year to date ended September 3, 2005.

We had guaranteed certain lines of credit and loans of unconsolidated affiliates totaling $34 million at December 25, 2004. There were no such guarantees outstanding at September 3, 2005. Our unconsolidated affiliates had total revenues of approximately $1.2 billion for the year to date ended September 3, 2005, and assets and debt of approximately $840 million and $14 million, respectively, at September 3, 2005.

We have also guaranteed certain lines of credit, loans and letters of credit of third parties totaling $2 million and $9 million at September 3, 2005 and December 25, 2004, respectively. If all such lines of credit and letters

of credit were fully drawn down, the maximum contingent liability under these arrangements would be approximately $3 million and $26 million as of September 3, 2005 and December 25, 2004, respectively.

We have varying levels of recourse provisions and collateral that mitigate the risk of loss related to our guarantees of these financial arrangements of our unconsolidated affiliates and other third parties. Accordingly, our recorded liability as of September 3, 2005 and December 25, 2004 is not significant.

Insurance Programs

We are self-insured for a substantial portion of our current and prior years’ coverage including workers’ compensation, employment practices liability, general liability, automobile liability and property losses (collectively, “property and casualty losses”). To mitigate the cost of our exposures for certain property and casualty losses, we make annual decisions to self-insure the risks of loss up to defined maximum per occurrence retentions on a line by line basis or to combine certain lines of coverage into one loss pool with a single self-insured aggregate retention. The Company then purchases insurance coverage, up to a certain limit, for losses that exceed the self-insurance per occurrence or aggregate retention. The insurers’ maximum aggregate loss limits are significantly above our actuarially determined probable losses; therefore, we believe the likelihood of losses exceeding the insurers’ maximum aggregate loss limits is remote.

In the U.S. and in certain other countries, we are also self-insured for healthcare claims for eligible participating employees subject to certain deductibles and limitations. We have accounted for our retained liabilities for property and casualty losses and healthcare claims, including reported and incurred but not reported claims, based on information provided by independent actuaries.

Due to the inherent volatility of actuarially determined property and casualty loss estimates, it is reasonably possible that we could experience changes in estimated losses which could be material to our growth in quarterly and annual net income. We believe that we have recorded our reserves for property and casualty losses at a level which has substantially mitigated the potential negative impact of adverse developments and/or volatility.

Change of Control Severance Agreements

The Company has severance agreements with certain key executives (the “Agreements”) that are renewable on an annual basis. These Agreements are triggered by a termination, under certain conditions, of the executive’s employment following a change in control of the Company, as defined in the Agreements. If triggered, the affected executives would generally receive twice the amount of both their annual base salary and their annual incentive at the higher of target for the current year or actual for the preceding year, a proportionate bonus at the higher of target or actual performance earned through the date of termination, outplacement services and a tax gross-up for any excise taxes. These Agreements have a three-year term and automatically renew each January 1 for another three-year term unless the Company elects not to renew the Agreements. If these Agreements had been triggered as of September 3, 2005, payments of approximately $35 million would have been made. In the event of a change of control, rabbi trusts would be established and used to provide payouts under existing deferred and incentive compensation plans.

Litigation

We are subject to various claims and contingencies related to lawsuits, taxes, environmental and other matters arising out of the normal course of business. We provide reserves for such claims and contingencies when payment is probable and estimable in accordance with SFAS No. 5 “Accounting for Contingencies”.

On August 13, 2003, a class action lawsuit against Pizza Hut, Inc., entitled Coldiron v. Pizza Hut, Inc., was filed in the United States District Court, Central District of California. Plaintiff alleges that she and other current and former Pizza Hut Restaurant General Managers (“RGM's”) were improperly classified as exempt employees under the U.S. Fair Labor Standards Act (“FLSA”). There is also a pendent state law claim, alleging that current and former RGM’s in California were misclassified under that state’s law. Plaintiff seeks unpaid overtime wages and penalties. On May 5, 2004, the District Court granted conditional certification of a nationwide class of RGM’s under the FLSA claim, providing notice to prospective class members and an opportunity to join the class. Approximately 12 percent of the eligible class members have elected to join the litigation. However, currently only 88 of the individuals who elected to join the litigation are plaintiffs (as a number of plaintiffs were stricken by the District Court as described below). Once class certification discovery is completed, Pizza Hut intends to challenge the propriety of conditional class certification. On July 20, 2004, the District Court granted summary judgment on Ms. Coldiron’s individual FLSA claim. Pizza Hut believes that the District Court’s summary judgment ruling in favor of Ms. Coldiron is clearly erroneous under well-established legal precedent. Ms. Coldiron also filed a motion to certify an additional class of current and former California RGM’s under California state law, a motion for summary judgment on her individual state law claims and a motion requesting that the District Court enter summary judgment on the damages that FLSA class members would be due upon successful prosecution of the class-wide litigation. Pizza Hut opposed all three motions. On April 1, 2005, the District Court issued an order granting Ms. Coldiron’s motion to certify a California state law class. On April 15, 2005, Pizza Hut filed a petition for review of that order by the United States Court of Appeals for the Ninth Circuit. On May 5, 2005, the District Court sua sponte filed an order extending the opt-in cut-off date in the FLSA action until September 1, 2005. On May 13, 2005, the District Court sua sponte amended its April 1, 2005 order to identify the California class claims and appoint class counsel. On May 27, 2005, Pizza Hut filed a petition for review of the amended order by the Ninth Circuit. On July 15, 2005, the Ninth Circuit granted review of the Rule 23 class certification orders and briefing of the appeal is expected to be completed in December. On June 30, 2005, the District Court granted Pizza Hut’s motion to strike all FLSA class members who joined the litigation after July 15, 2004. The effect of this order is to reduce the number of FLSA class members to only approximately 88 (or approximately 2.5% of the eligible class members).

We continue to believe that Pizza Hut has properly classified its RGM’s as exempt under the FLSA and California law and accordingly intend to vigorously defend against all claims in this lawsuit. However, in view of the inherent uncertainties of litigation, the outcome of this case, and any potential litigation loss from the outcome of the case, cannot be predicted at this time.

On December 17, 2002, Taco Bell was named as the defendant in a class action lawsuit filed in the United States District Court for the Northern District of California entitled Moeller, et al. v. Taco Bell Corp. On August 4, 2003, plaintiffs filed an amended complaint that alleges, among other things, that Taco Bell has discriminated against the class of people who use wheelchairs or scooters for mobility by failing to make its approximately 220 company-owned restaurants in California (the “California Restaurants”) accessible to the class. Plaintiffs contend that queue rails and other architectural and structural elements of the Taco Bell restaurants relating to the path of travel and use of the facilities by persons with mobility-related disabilities (including parking spaces, ramps, counters, restroom facilities and seating) do not comply with the U.S. Americans with Disabilities Act (the “ADA”), the Unruh Civil Rights Act (the “Unruh Act”), and the California Disabled Persons Act (the “CDPA”). Plaintiffs have requested: (a) an injunction from the District Court ordering Taco Bell to comply with the ADA and its implementing regulations; (b) that the District Court declare Taco Bell in violation of the ADA, the Unruh Act, and the CDPA; and (c) monetary relief under the Unruh Act or CDPA. Plaintiffs, on behalf of the class, are seeking the minimum statutory damages per offense of either $4,000 under the Unruh Act or $1,000 under the CDPA for each aggrieved member of the class. Plaintiffs contend that there may be in excess of 100,000 individuals in the class. For themselves, the four

named plaintiffs have claimed aggregate minimum statutory damages of no less than $16,000, but are expected to claim greater amounts based on the number of Taco Bell outlets they visited at which they claim to have suffered discrimination.

On February 23, 2004, the District Court granted Plaintiffs’ motion for class certification. The District Court certified a Rule 23(b)(2) mandatory injunctive relief class of all individuals with disabilities who use wheelchairs or electric scooters for mobility who, at any time on or after December 17, 2001, were denied, or are currently being denied, on the basis of disability, the full and equal enjoyment of the California Restaurants. The class includes claims for injunctive relief and minimum statutory damages.

Pursuant to the parties’ agreement, on or about August 31, 2004, the District Court ordered that the trial of this action be bifurcated so that stage one will resolve Plaintiffs’ claims for equitable relief and stage two will resolve Plaintiffs’ claims for damages. The parties are currently proceeding with the equitable relief stage of this action. During this stage, Taco Bell filed a motion to partially decertify the class to exclude from the Rule 23(b)(2) class claims for monetary damages. The District Court denied the motion. Plaintiffs filed their own motion for partial summary judgment as to liability relating to a subset of the California Restaurants. The District Court denied that motion as well.

Taco Bell has denied liability and intends to vigorously defend against all claims in this lawsuit. Although this lawsuit is at an early stage in the proceedings, it is likely that certain of the California Restaurants will be determined to be not fully compliant with accessibility laws and that Taco Bell will be required to take certain steps to make those restaurants fully compliant. However, at this time, it is not possible to estimate with reasonable certainty the potential costs to bring any non compliant California Restaurants into compliance with applicable state and federal disability access laws. Nor is it possible at this time to reasonably estimate the probability or amount of liability for monetary damages on a class wide basis to Taco Bell.

On December 19, 2003, a demand for arbitration was filed with the American Arbitration Association (“AAA”) pursuant to the AAA Supplementary Rules for Class Arbitrations (“AAA Class Rules”) on behalf of former LJS managers Erin Cole and Nick Kaufman, who reside in South Carolina (the “Cole Arbitration”). Claimants in the Cole Arbitration demand a class arbitration on claims that deductions from the salaries of RGMs and Assistant Restaurant General Managers (“ARGMs”) violate regulations issued pursuant to the FLSA, and thus the RGMs and ARGMs should be treated as the equivalent of hourly employees who are eligible under the FLSA for overtime for any hours worked over forty. The complaint in the Cole Arbitration subsequently was amended to add an additional allegation of deductions in violation of the FLSA salary basis test, and to add Victoria McWhorter, another LJS former manager, as an additional claimant. LJS has denied the claims and it is LJS's position that the claims of Cole, Kaufman, and McWhorter should be individually arbitrated.

On June 15, 2004, the arbitrator in the Cole Arbitration issued a clause construction award, ruling that the LJS Dispute Resolution Program (“DRP”) does not preclude class arbitration. LJS moved to vacate the clause construction award in the United States District Court for the District of South Carolina. On September 15, 2005, the federal court in South Carolina ruled that it did not have jurisdiction to hear LJS's motion to vacate. LJS has filed a motion for reconsideration of that ruling, which is pending. On September 19, 2005, the arbitrator also issued a class determination award, certifying a class of LJS's RGMs and ARGMs employed between December 17, 1998, and August 22, 2004, on FLSA claims, to proceed on an opt-out basis under the AAA Class Rules. That class determination award has been stayed for ninety days effective as of September 19, 2005 to permit LJS to file a motion to vacate the class determination award. LJS intends to file a motion to vacate the class determination award.

LJS believes that the DRP provides for individual arbitrations. LJS also believes that if the Cole Arbitration proceeds on a class basis, (i) the proceedings must be governed by the opt-in collective action structure of the FLSA, (ii) a class should not be certified under the applicable provisions of the FLSA, (iii) each individual should not be able to recover for more than two years (and a maximum three years) prior to the date they file a consent to join the arbitration and (iv) any class should be confined to South Carolina. In view of the novelties of proceeding under the AAA Class Rules and the inherent uncertainties of litigation, the outcome of the arbitration and the appeals of the arbitrator's decisions cannot be predicted at this time.

On January 16, 1998, a lawsuit against Taco Bell Corp., entitled Wrench LLC, Joseph Shields and Thomas Rinks v. Taco Bell Corp. (“Wrench”) was filed in the United States District Court for the Western District of Michigan. The lawsuit alleged that Taco Bell Corp. misappropriated certain ideas and concepts used in its advertising featuring a Chihuahua. The plaintiffs sought to recover monetary damages under several theories, including breach of implied-in-fact contract, idea misappropriation, conversion and unfair competition. On June 10, 1999, the District Court granted summary judgment in favor of Taco Bell Corp. Plaintiffs filed an appeal with the U.S. Court of Appeals for the Sixth Circuit and oral arguments were held on September 20, 2000. On July 6, 2001, the Sixth Circuit Court of Appeals reversed the District Court’s judgment in favor of Taco Bell Corp. and remanded the case to the District Court. Taco Bell Corp. unsuccessfully petitioned the Sixth Circuit Court of Appeals for rehearing en banc, and its petition for writ of certiorari to the United States Supreme Court was denied on January 21, 2002. The case was returned to District Court for trial which began on May 14, 2003 and on June 4, 2003 the jury awarded $30 million to the plaintiffs. Subsequently, the plaintiffs’ moved to amend the judgment to include pre-judgment interest and post-judgment interest and Taco Bell filed its post-trial motion for judgment as a matter of law or a new trial. On September 9, 2003, the District Court denied Taco Bell’s motion and granted the plaintiff’s motion to amend the judgment.

In view of the jury verdict and subsequent District Court ruling, we recorded a charge of $42 million in 2003. We appealed the verdict to the Sixth Circuit Court of Appeals and interest continued to accrue during the appeal process. Prior to a ruling from the Sixth Circuit Court of Appeals, we settled this matter with the Wrench plaintiffs on January 15, 2005. Concurrent with the settlement with the plaintiffs, we also settled the matter with certain of our insurance carriers. As a result of these settlements, reversals of previously recorded expense of $14 million were recorded in the year ended December 25, 2004. We paid the settlement amount to the plaintiffs and received the insurance recovery during the first quarter of 2005. During the third quarter of 2005, we entered into a settlement agreement with another insurance carrier and as a result income of $2 million was recorded in the quarter.

We intend to seek additional recoveries from our other insurance carriers during the periods in question. We have also filed suit against Taco Bell’s former advertising agency in the United States District Court for the Central District of California seeking reimbursement for the settlement amount as well as any costs that we have incurred in defending this matter. The District Court has issued a minute order granting defendant’s motion for summary judgment but has requested submissions from the defendant for its review before issuing a final order. We believe that a grant by the District Court of this summary judgment motion would be erroneous under the law. We will evaluate our options once a final order has been issued. Any additional recoveries will be recorded as they are realized.

Obligations to PepsiCo, Inc. After Spin-off

In connection with our October 6, 1997 spin-off from PepsiCo, Inc. (“PepsiCo”) (the “Spin-off”), we entered into separation and other related agreements (the “Separation Agreements”) governing the Spin-off and our subsequent relationship with PepsiCo. These agreements provide certain indemnities to PepsiCo.

Under the terms of these agreements, we have indemnified PepsiCo for any costs or losses it incurs with respect to all letters of credit, guarantees and contingent liabilities relating to our businesses under which PepsiCo remains liable. As of September 3, 2005, PepsiCo remains liable for approximately $29 million on a nominal basis related to these contingencies. This obligation ends at the time PepsiCo is released, terminated or replaced by a qualified letter of credit. We have not been required to make any payments under this indemnity.

Under the Separation Agreements, PepsiCo maintains full control and absolute discretion with regard to any combined or consolidated tax filings for periods through October 6, 1997. PepsiCo also maintains full control and absolute discretion regarding any common tax audit issues. Although PepsiCo has contractually agreed to, in good faith, use its best efforts to settle all joint interests in any common tax audit issue on a basis consistent with prior practice, there can be no assurance that determinations made by PepsiCo would be the same as we would reach, acting on our own behalf. Through September 3, 2005, there have not been any determinations made by PepsiCo where we would have reached a different determination.

2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction and Overview

YUM! Brands, Inc. and Subsidiaries (collectively referred to as “YUM” or the “Company”) comprises the worldwide operations of KFC, Pizza Hut, Taco Bell, Long John Silver’s (“LJS”) and A&W All-American Food Restaurants (“A&W”) (collectively “the Concepts”) and is the world’s largest quick service restaurant (“QSR”) company based on the number of system units. YUM is the second largest QSR company outside the U.S. with 13,419 units. Our business consists of three operating segments: United States, the International Division and the China Division. The China Division includes mainland China (“China”), Thailand and KFC Taiwan and the International Division includes the remainder of our international operations.

Through its Concepts, YUM develops, operates, franchises and licenses a system of both traditional and non-traditional QSR restaurants. Traditional units feature dine-in, carryout and, in some instances, drive-thru or delivery services. Non-traditional units, which are typically licensed outlets, include express units and kiosks which have a more limited menu and operate in non-traditional locations like malls, airports, gasoline service stations, convenience stores, stadiums, amusement parks and colleges, where a full-scale traditional outlet would not be practical or efficient.

The retail food industry, in which the Company competes, is made up of supermarkets, supercenters, warehouse stores, convenience stores, coffee shops, snack bars, delicatessens and restaurants (including the QSR segment), and is intensely competitive with respect to food quality, price, service, convenience, location and concept. The industry is often affected by changes in consumer tastes; national, regional or local economic conditions; currency fluctuations; demographic trends; traffic patterns; the type, number and location of competing food retailers and products; and disposable purchasing power. Each of the Concepts competes with international, national and regional restaurant chains as well as locally-owned restaurants, not only for customers, but also for management and hourly personnel, suitable real estate sites and qualified franchisees.

The Company’s key strategies are:

Building dominant restaurant brands in mainland China
Driving profitable international expansion
Improving restaurant operations
Multibranding category-leading brands

The Company is focused on five long-term measures identified as essential to our growth and progress. These five measures and related key performance indicators are as follows:

China Division and International Division expansion
     China Division and International Division system sales growth (local currency)
     Number of new China Division and International Division restaurant openings
     Net China Division and International Division unit growth

Multibrand innovation and expansion
     Number of multibrand restaurant locations
     Number of multibrand units added
     Number of franchise multibrand units added

Portfolio of category-leading U.S. brands

23

U.S. blended same store sales growth
U.S. system sales growth

Global franchise fees
New restaurant openings by franchisees
Franchise fee growth

Strong cash generation and returns
     Cash generated from all sources
     Cash generated from all sources after capital spending
     Restaurant margins

Our progress against these measures is discussed throughout the Management’s Discussion and Analysis (“MD&A”).

Throughout the MD&A, the Company provides the percentage change excluding the impact of foreign currency translation. These amounts are derived by translating current year results at prior year average exchange rates. We believe the elimination of the foreign currency translation impact provides better year-to-year comparability without the distortion of foreign currency fluctuations.

The following MD&A should be read in conjunction with the unaudited Condensed Consolidated Financial Statements (“Financial Statements”), the Cautionary Statements and our annual report on Form 10-K for the fiscal year ended December 25, 2004 (“2004 Form 10-K”).

All Note references herein refer to the accompanying Notes to the Financial Statements. Tabular amounts are displayed in millions except per share and unit count amounts, or as otherwise specifically identified.

Significant Known Events, Trends or Uncertainties Expected to Impact 2005 Comparisons with 2004

The following factors impacted comparability of operating performance for the quarter and/or year to date ended September 3, 2005 or could impact comparisons for the remainder of 2005. Certain of these factors were previously discussed in our 2004 Form 10-K.

New Accounting Pronouncements Not Yet Adopted

Upon the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”), we will be required to recognize compensation cost in the financial statements for all share-based payments to our employees, including grants of stock options, based on the fair value of the share-based awards on the date of grant. Compensation cost will be recognized over the vesting period on a straight-line basis for the fair value of awards that actually vest.

We currently intend to adopt SFAS 123R using the modified retrospective application transition method effective September 4, 2005, the beginning of our fourth quarter. As permitted by SFAS 123R, we plan to apply the modified retrospective application transition method to the beginning of the fiscal year of adoption (our fiscal year 2005). As such, the first three fiscal quarters of 2005 will be adjusted to recognize the compensation cost previously reported in the pro forma footnote disclosures under the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Compensation cost will be recognized subsequent to the date of adoption of SFAS 123R for all share-based payments granted, modified or settled after the date of adoption. Additionally, for any unvested awards that were granted prior to the date of

adoption, we will recognize cost subsequent to the date of adoption using the same estimate of the grant-date fair value used to determine the pro forma disclosures under SFAS 123. We currently estimate the adoption of SFAS 123R will decrease diluted earnings per common share in the quarter and year to date ending December 31, 2005 by approximately $0.04 per share and $0.12 per share, respectively.

See Note 4.

International Reporting Changes

Beginning in 2005, we also changed the China business reporting calendar to more closely align the timing of the reporting of its results of operations with our U.S. business. Previously our China business, like the rest of our international businesses, closed one month (or one period for certain of our international businesses) earlier than YUM’s period end date to facilitate consolidated reporting. To maintain comparability of our consolidated results of operations, amounts related to our China business for December 2004 have not been reflected in our Condensed Consolidated Statements of Income and net income of the China business of $6 million for the one month period ending December 31, 2004 was recognized as an adjustment directly to consolidated retained earnings in the year to date ended September 3, 2005. Our consolidated results of operations for the quarter and year to date ended September 3, 2005 include the results of operations of the China business for the months of June, 2005 through August, 2005 and January, 2005 through August, 2005, respectively, and the months to be included in future quarterly reporting periods will begin one month later than in previous years. Our consolidated results of operations for the quarter and year to date ended September 4, 2004 continue to include the results of operations of the China business for the months of May, 2004 through July, 2004 and December, 2003 through July, 2004, respectively, as previously reported.

See Note 1.

Mainland China Supplier Ingredient Issue

Our KFC business in mainland China was negatively impacted by the interruption of product offerings and negative publicity associated with a supplier ingredient issue experienced in late March, 2005. During the quarter ended September 3, 2005, we entered into an agreement with the supplier of the ingredient for a partial recovery of our losses. As a result of the agreement, we recognized approximately $14 million in Other income (expense) in our Condensed Consolidated Statement of Income in the quarter ended September 3, 2005 related to this recovery. We expect to recognize an additional meaningful financial recovery from the same supplier in the quarter ending December 31, 2005.

We currently expect full year China Division system sales growth of at least 15%, revenue growth in the range of 17%, and operating profit growth of approximately 10% for the full year, all excluding the impact of foreign currency translation.

Hurricane Katrina

During the quarter ended September 3, 2005, Hurricane Katrina caused significant damage to several company and franchised stores. This storm resulted in approximately $3.0 million of one-time costs being recorded in the quarter from property damage and asset write-offs related to company restaurants. Additionally, during mid-September 2005, Hurricane Rita caused further damage to company and franchised stores, though to a lesser extent than Hurricane Katrina. The impact of these hurricanes on energy prices and lost profits from closed restaurants is expected to adversely impact fourth quarter operating profits by $4 to $6 million. We do not expect insurance recoveries, if any, related to the hurricanes to be significant.

Extra Week in 2005

Our fiscal calendar results in a fifty-third week every five or six years. Fiscal year 2005 includes a fifty-third week in the fourth quarter for the majority of our U.S. businesses as well as our international businesses that report on a period, as opposed to a monthly, basis. In the U.S., we anticipate permanently accelerating the timing of the KFC business closing by one week in December 2005, and thus, there will be no fifty-third week benefit for this business in 2005. We estimate the fifty-third week will increase revenues and operating profit in 2005 by approximately $80 million and $15 million, respectively. While the impact of the fifty-third week adds a potential incremental benefit of $0.04 to diluted earnings per share, we believe this benefit will be offset by expense associated with asset actions.

Sale of Puerto Rico Business

Our Puerto Rico business was sold on October 4, 2004 for an amount approximating its then carrying value. As a result of the sale, company sales and restaurant profit decreased $45 million and $8 million, respectively, franchise fees increased $3 million and general and administrative expenses decreased $2 million for the quarter ended September 3, 2005 as compared to the quarter ended September 4, 2004. Company sales and restaurant profit decreased $132 million and $24 million, respectively, franchise fees increased $8 million and general and administrative expenses decreased $7 million for the year to date ended September 3, 2005 as compared to the year to date ended September 4, 2004.

Sale of an Investment in Unconsolidated Affiliate

During the second quarter of 2005, we sold our fifty percent interest in the entity that operated almost all KFCs and Pizza Huts in Poland and the Czech Republic to our then partner in the entity, principally for cash. Concurrent with the sale, our former partner completed an initial public offering (“IPO”) of the majority of the stock it then owned in the entity. Prior to the sale, we accounted for our investment in this entity using the equity method. Subsequent to the IPO, the new publicly held entity, in which YUM has no ownership interest, is a franchisee as was the entity in which we previously held a fifty percent interest.

in unconsolidated affiliates, the approximate $17 million gain was recorded in Other income (expense) in our Condensed Consolidated Statements of Income.

The transaction is not expected to have a significant impact on the Company’s future results of operations.

Income Tax Impact of Repatriating Qualified Foreign Earnings

The American Jobs Creation Act of 2004 (the “Act”), which became law on October 22, 2004, allows a dividends received deduction of 85% of repatriated qualified foreign earnings in fiscal year 2005. We recorded $6 million in income tax expense during the quarter ended December 25, 2004 as a result of our then determination to repatriate approximately $110 million in 2005 which will be eligible for the Act’s dividends received deduction. In accordance with FASB Staff Position 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provisions within the American Jobs Creation Act of 2004,” we continued to evaluate in 2005 whether we would repatriate other undistributed earnings from foreign investments as a result of the Act. During the second quarter of 2005, we determined that we would repatriate additional qualified foreign earnings of approximately $390 million in fiscal year 2005 which will be eligible for the Act’s dividends received deduction (for a total repatriation of qualified earnings of approximately $500 million). As a result of this determination, approximately $19 million of additional tax expense will be recognized in fiscal 2005, $5 million and $13 million of which were recognized in the quarter and year to date ended September 3, 2005, respectively. No additional amounts beyond the approximately $500 million as discussed above are eligible for the Act’s dividends received deduction.

Pension Plan Funded Status

Certain of our employees are covered under noncontributory defined benefit pension plans. The most significant of these plans was amended in 2001 such that salaried employees hired or rehired after September 30, 2001 are not eligible to participate. As disclosed in our 2004 Form 10-K, as of our September 30, 2004 measurement date these plans had a projected benefit obligation (“PBO”) of $700 million and a fair value of plan assets of $518 million. We currently estimate that increases to plan assets as a result of stock market gains since September 30, 2004 as well as a $55 million pension plan contribution we made subsequent to September 3, 2005 but prior to our September 30, 2005 measurement date will offset current years benefits earned by covered employees and interest on benefits previously earned.

Thus, any significant change in our pension plan funded status at September 30, 2005 versus September 30, 2004 would primarily be the result of any change in the discount rate we use to measure our PBO. Due to the relatively long time frame over which benefits are expected to be paid, our PBO is highly sensitive to changes in discount rates. A 10 basis point decrease in the discount rate from the 6.15% used at September 30, 2004 would increase our PBO at September 30, 2005, holding all other variables and assumptions constant, by approximately $14 million. While we have not yet determined the discount rate we will use to measure our PBO as of our September 30, 2005 measurement date, we believe that it will decrease and estimate that the change in our funded status will range from a slight improvement to a decline of approximately $35 million.

We do not believe the remaining underfunded status of the pension plan will materially affect our results of operations, financial position or cash flows and have incorporated the estimated future impact into our financial projections and plans.

Store Portfolio Strategy

From time to time we sell Company restaurants to existing and new franchisees where geographic synergies can be obtained or where their expertise can generally be leveraged to improve our overall operating performance,

while retaining Company ownership of key U.S. and international markets. Such refranchisings reduce our reported revenues and restaurant profits and increase the importance of system sales growth as a key performance measure.

The following table summarizes our refranchising activities:

	Quarter				Year to date
	9/3/05		9/4/04		9/3/05		9/4/04

Number of units refranchised	64		18		205		32
Refranchising proceeds, pre-tax	$ 38		$ 6		$ 79		$ 14
Refranchising net (gains) losses, pre-tax	$ (10	)	$ (1	)	$ (21	)	$ 10

In addition to our refranchising program, from time to time we close restaurants that are poor performing, we relocate restaurants to a new site within the same trade area or we consolidate two or more of our existing units into a single unit (collectively “store closures”).

The following table summarizes Company store closure activities:

	Quarter		Year to date
	9/3/05	9/4/04	9/3/05	9/4/04

Number of units closed	80	45	167	230
Store closure costs	$ 5	$ 2	$ 4	$ (3	)

The income in store closure costs for the year to date ended September 4, 2004 is primarily the result of gains from the sale of properties on which we previously operated restaurants or adjustments to previously reported lease reserves as a result of changes in settlement and/or sublease estimates.

The impact on operating profit arising from refranchising and Company store closures is the net of (a) the estimated reductions in restaurant profit, which reflects the decrease in Company sales, and general and administrative expenses and (b) the estimated increase in franchise fees from the stores refranchised. The amounts presented below reflect the estimated impact from stores that were operated by us for all or some portion of the comparable period in 2004 and were no longer operated by us as of September 3, 2005. The amounts do not include results from new restaurants that we opened in connection with a relocation of an existing unit or any incremental impact upon consolidation of two or more of our existing units into a single unit.

The following table summarizes the estimated impact on revenue of refranchising and Company store closures:

	Quarter Ended 9/3/05
	U.S.		International Division		China Division		Worldwide
Decreased sales	$ (60	)	$ (84	)	$ (2	)	$ (146	)
Increased franchise fees	2		4		-		6


Decreased in total revenues	$ (58	)	$ (80	)	$ (2	)	$ (140	)


	U.S.		International Division		China Division		Worldwide
Decreased sales	$ (150	)	$ (201	)	$ (9	)	$ (360	)
Increased franchise fees	5		10		-		15

Decrease in total revenues	$ (145	)	$ (191	)	$ (9	)	$ (345	)

The following table summarizes the estimated impact on operating profit of refranchising and Company store closures:


	U.S.		International Division		China Division	Worldwide
Decreased restaurant profit	$ (6	)	$ (10	)	$ -	$ (16	)
Increased franchise fees	2		4		-	6
Decreased general and
administrative expenses	1		2		-	3


Decrease in operating profit	$ (3	)	$ (4	)	$ -	$ (7	)


	U.S.		International Division		China Division		Worldwide
Decreased restaurant profit	$ (14	)	$ (27	)	$ (1	)	$ (42	)
Increased franchise fees	5		10		-		15
Decreased general and
administrative expenses	1		7		-		8


Decrease in operating profit	$ (8	)	$ (10	)	$ (1	)	$ (19	)

Results of Operations

	Quarter						Year to date
	9/3/05		9/4/04		% B/(W)		9/3/05		9/4/04		% B/(W)
Company sales	$1,975		$1,935		2		$5,687		$5,528		3
Franchise and license fees	268		244		10		763		698		9

Revenues	$2,243		$2,179		3		$6,450		$6,226		4

Company restaurant profit	$ 296		$ 295		-		$ 826		$ 821		1

% of Company sales	14.9	%	15.2	%	(0.3)	ppts.	14.5	%	14.8	%	(0.3)	ppts.

Operating profit	$ 322		$ 291		11		$ 860		$ 809		6
Interest expense, net	28		29		(2	)	86		96		10
Income tax provision	80		77		(3	)	212		208		(2	)

Net income	$ 214		$ 185		16		$ 562		$ 505		11


Diluted earnings per share(a)	$ 0.72		$ 0.61		18		$ 1.87		$ 1.66		13

(a)	See Note 5 for the number of shares used in this calculation.

Restaurant Unit Activity

Worldwide	Company		Unconsolidated Affiliates		Franchisees		Total Excluding Licensees
Beginning of year	7,759		1,664		21,859		31,282
New builds	269		88		517		874
Acquisitions	-		-		-		-
Refranchising	(205	)	(128	)	331		(2	)
Closures	(167	)	(29	)	(433	)	(629	)
Other	(15	)	-		27		12

End of quarter	7,641		1,595		22,301		31,537

% of Total	24	%	5	%	71	%	100	%

The above totals exclude 2,371 and 2,345 licensed units at September 3, 2005 and December 25, 2004, respectively.

United States	Company		Unconsolidated Affiliates	Franchisees		Total Excluding Licensees
Beginning of year	4,989		-	13,482		18,471
New builds	58		-	161		219
Acquisitions	-		-	-		-
Refranchising	(128	)	-	126		(2	)
Closures	(127	)	-	(244	)	(371	)
Other	(10	)	-	5		(5	)

End of quarter	4,782		-	13,530		18,312

% of Total	26	%	-	74	%	100	%

The above totals exclude 2,177 and 2,139 licensed units at September 3, 2005 and December 25, 2004, respectively.

International Division	Company		Unconsolidated Affiliates		Franchisees		Total Excluding Licensees
Beginning of year	1,504		1,204		8,179		10,887
New builds	27		28		348		403
Acquisitions	-		-		-		-
Refranchising	(77	)	(128	)	205		-
Closures	(24	)	(24	)	(189	)	(237	)
Other	(5	)	-		18		13

End of quarter	1,425		1,080		8,561		11,066

% of Total	13	%	10	%	77	%	100 %

The above totals exclude 194 and 206 licensed units at September 3, 2005 and December 25, 2004, respectively.

China Division	Company		Unconsolidated Affiliates		Franchisees		Total Excluding Licensees
Beginning of year	1,266		460		198		1,924
New builds	184		60		8		252
Acquisitions	-		-		-		-
Refranchising	-		-		-		-
Closures	(16	)	(5	)	-		(21	)
Other	-		-		4		4

End of quarter	1,434		515		210		2,159

% of Total	66	%	24	%	10	%	100	%

Beginning of the year balances have been adjusted to include December activity in mainland China due to the change in its reporting calendar. The net change was an addition of 16, 2, 1 and 19 units for company, unconsolidated affiliates, franchisees and total excluding licensees, respectively. There are no licensed units in the China Division.

Multibrand restaurants are included in the totals above. Multibrand conversions increase the sales and points of distribution for the second brand added to a restaurant but do not result in an additional unit count. Similarly, a new multibrand restaurant, while increasing sales and points of distribution for two brands, results in just one additional unit count. Franchise unit counts below include both franchisee and unconsolidated affiliate multibrand units. Following are multibrand restaurant totals at September 3, 2005 and December 25, 2004:

9/3/05	Company	Franchise	Total
United States	1,581	1,337	2,918
International Division	20	169	189

Worldwide	1,601	1,506	3,107

12/25/04	Company	Franchise	Total
United States	1,391	1,250	2,641
International Division	25	155	180
China Division	3	-	3

Worldwide	1,419	1,405	2,824

For the year to date ended September 3, 2005, Company and franchise multibrand unit gross additions were 226 and 106, respectively.

System Sales Growth

Quarter	Increase				Increase excluding currency translation
	9/3/05		9/4/04		9/3/05		9/4/04
United States	4	%	4	%	N/	A	N/	A
International Division	7	%	14	%	4	%	9	%
China Division	18	%	32	%	17	%	31	%
Worldwide	6	%	9	%	5	%	7	%

System sales growth includes the results of all restaurants regardless of ownership, including Company-owned, franchise, unconsolidated affiliate and license restaurants. Sales of franchise, unconsolidated affiliate and license restaurants generate franchise and license fees for the Company (typically at a rate of 4% to 6% of sales). Franchise, unconsolidated affiliate and license restaurants sales are not included in Company sales on the Consolidated Statements of Income; however, the franchise and license fees are included in the Company’s revenues. We believe system sales growth is useful to investors as a significant indicator of the overall strength of our business as it incorporates all of our revenue drivers, Company and franchise same store sales as well as net unit development.

Worldwide system sales growth was driven by new unit development and same store sales growth, partially offset by store closures.

U.S. system sales growth was driven by same store sales growth and new unit development, partially offset by store closures.

International Division system sales growth was driven by new unit development partially offset by store closures.

China Division system sales growth was driven by new unit development, partially offset by the impact of same store sales declines driven by the mainland China supplier ingredient issue.

Year to date	Increase				Increase excluding currency translation
	9/3/05		9/4/04		9/3/05		9/4/04
United States	4	%	4	%	N/	A	N/	A
International Division	10	%	15	%	6	%	7	%
China Division	17	%	27	%	16	%	26	%
Worldwide	7	%	8	%	5	%	6	%

Worldwide system sales growth was driven by new unit development and same store sales growth, partially offset by store closures.

U.S. system sales growth was driven by same store sales growth and new unit development, partially offset by store closures.

International Division system sales growth was driven by new unit development and same store sales growth, partially offset by store closures.

China Division system sales growth was driven by new unit development, partially offset by the impact of same store sales declines driven by the mainland China supplier ingredient issue.

Revenues

	9/3/05	9/4/04	(Decrease)		translation
Quarter	Amount		% Increase/		% Increase/ (Decrease) excluding currency
Company sales
United States	$1,239	$1,225	1		NA
International Division	387	420	(8	)	(12	)
China Division	349	290	20		18

Worldwide	1,975	1,935	2		1

Franchise and license fees
United States	154	144	7		NA
International Division	103	89	16		13
China Division	11	11	11		10

Worldwide	268	244	10		9

Total revenues
United States	1,393	1,369	2		NA
International Division	490	509	(4	)	(8	)
China Division	360	301	20		18

Worldwide	$2,243	$2,179	3		2

The increase in Worldwide Company sales was driven by new unit development and same store sales growth, partially offset by refranchising and store closures.

The increase in Worldwide franchise and license fees was driven by new unit development, refranchising, and same store sales growth, partially offset by store closures.

The increase in U.S. Company sales was driven by same store sales growth and new unit development, partially offset by refranchising and store closures.

U.S. same store sales include only Company restaurants that have been open one year or more. U.S. blended same store sales include KFC, Pizza Hut and Taco Bell Company-owned restaurants only. U.S. same store sales for Long John Silver’s and A&W restaurants are not included. Following are the same store sales growth results by brand:

	Quarter ended 9/3/05
	Same Store Sales		Transactions		Average Guest Check
KFC	6	%	6	%	-
Pizza Hut	(3	)%	(7	)%	4	%
Taco Bell	8	%	5	%	3	%

U.S. blended Company same store sales increased 4% due to increases in transactions and average guest check.

The increase in U.S. franchise and license fees was driven by same store sales growth, new unit development and refranchising, partially offset by store closures.

The decrease in International Division Company sales was driven by refranchising (primarily our Puerto Rico business) and store closures, partially offset by new unit development and same store sales growth.

The increase in International Division franchise and license fees was driven by new unit development and refranchising (primarily our Puerto Rico business).

The increase in China Division Company sales was driven by new unit development, partially offset by the impact of same store sales declines driven by the mainland China supplier ingredient issue.

China Division franchise and license fees were basically flat. Increases due to new unit development were largely offset by the impact of same store sales declines driven by the mainland China supplier ingredient issue.

Year to date	Amount		% Increase/		% Increase/ (Decrease) excluding currency
	9/3/05	9/4/04	(Decrease)		translation
Company sales
United States	$3,678	$3,599	2		NA
International Division	1,165	1,229	(5	)	(10	)
China Division	844	700	20		19

Worldwide	5,687	5,528	3		2

Franchise and license fees
United States	435	416	4		NA
International Division	301	256	17		13
China Division	27	26	12		12

Worldwide	763	698	9		8

Total revenues
United States	4,113	4,015	2		NA
International Division	1,466	1,485	(1	)	(6	)
China Division	871	726	20		19

Worldwide	$6,450	$6,226	4		2

The increase in Worldwide Company sales was driven by new unit development and same store sales growth, partially offset by refranchising and store closures.

The increase in Worldwide franchise and license fees was driven by new unit development, same store sales growth and refranchising, partially offset by store closures.

The increase in U.S. Company sales was driven by same store sales growth and new unit development, partially offset by refranchising and store closures. Following are the same store sales growth results by brand:

	Year to date ended 9/3/05
	Same Store Sales		Transactions		Average Guest Check
KFC	6	%	6	%	-
Pizza Hut	1	%	(3	)%	4	%
Taco Bell	6	%	3	%	3	%

U.S. blended Company same store sales increased 4% due to increases in transactions and average guest check.

The increase in U.S. franchise and license fees was driven by same store sales growth, new unit development and refranchising, partially offset by store closures.

The increase in International Division franchise and license fees was driven by new unit development and refranchising (primarily our Puerto Rico business).

The increase in China Division Company sales was driven by new unit development, partially offset by the impact of same store sales declines driven by the mainland China supplier ingredient issue.

The increase in China Division franchise and license fees was primarily driven by new unit development, partially offset by the impact of same store sales declines driven by the mainland China supplier ingredient issue.

Company Restaurant Margins

Quarter ended 9/3/05	United States		International Division		China Division		Worldwide

Company sales	100.0	%	100.0	%	100.0	%	100.0	%
Food and paper	29.6		33.1		35.4		31.3
Payroll and employee benefits	29.6		23.7		12.0		25.4
Occupancy and other operating
expenses	26.8		30.5		32.0		28.4

Company restaurant margin	14.0	%	12.7	%	20.6	%	14.9	%

Quarter ended 9/4/04	United States		International Division		China Division		Worldwide

Company sales	100.0	%	100.0	%	100.0	%	100.0	%
Food and paper	30.3		33.8		36.4		31.9
Payroll and employee benefits	29.9		23.5		11.1		25.7
Occupancy and other operating
expenses	25.7		29.2		30.3		27.2

Company restaurant margin	14.1	%	13.5	%	22.2	%	15.2	%

The decrease in U.S. restaurant margins as a percentage of sales was driven by higher occupancy and other costs, partially offset by the impact of same store sales growth on restaurant margin. Higher occupancy and other costs were driven by increases in advertising costs, depreciation and amortization expense, utility costs and asset write-offs resulting from Hurricane Katrina.

The decrease in International Division restaurant margins as a percentage of sales included a 61 basis point unfavorable impact of refranchising our restaurants in Puerto Rico. Also contributing to the decrease were higher labor costs and higher occupancy and other costs. These decreases were partially offset by the impact of same store sales growth on restaurant margin.

The decrease in China Division restaurant margins as a percentage of sales was driven by the impact on restaurant margin of same store sales declines and lower margins associated with new units during the initial periods of operation. The decrease was partially offset by lower food and paper costs (principally due to supply chain savings initiatives).

Year to date ended 9/3/05	United States		International Division		China Division		Worldwide

Company sales	100.0	%	100.0	%	100.0	%	100.0	%
Food and paper	30.0		33.0		36.0		31.5
Payroll and employee benefits	29.9		23.9		12.8		26.2
Occupancy and other operating
expenses	26.1		30.2		32.0		27.8

Company restaurant margin	14.0	%	12.9	%	19.2	%	14.5	%

Year to date ended 9/4/04	United States		International Division		China Division		Worldwide

Company sales	100.0	%	100.0	%	100.0	%	100.0	%
Food and paper	29.7		33.9		37.3		31.6
Payroll and employee benefits	30.5		23.7		11.2		26.6
Occupancy and other operating
expenses	25.5		29.1		30.9		27.0

Company restaurant margin	14.3	%	13.3	%	20.6	%	14.8	%

The decrease in U.S. restaurant margins as a percentage of sales was driven by higher occupancy and other costs and higher food and paper costs, partially offset by the impact of same store sales growth on restaurant margin. Higher occupancy and other costs were driven by increases in advertising costs, utility costs and depreciation and amortization expense. Higher food and paper costs were driven by increased commodity costs (principally meats).

The decrease in International Division restaurant margins as a percentage of sales included a 62 basis point unfavorable impact of refranchising our restaurants in Puerto Rico. Also contributing to the decrease were higher occupancy and other costs and higher labor costs. These decreases were partially offset by the impact of same store sales growth on restaurant margin.

The decrease in China Division restaurant margins as a percentage of sales was driven by the impact on restaurant margin of same store sales declines, the lower margins associated with new units during the initial

periods of operation and higher labor costs. The decrease was partially offset by the impact on restaurant margin of lower food and paper costs (principally due to supply chain savings initiatives).

Worldwide General and Administrative Expenses

General and administrative expenses increased $2 million or 1% in the quarter and $30 million or 4% year to date, including a 1% unfavorable impact from foreign currency translation for both periods. The quarter and year to date increases were driven by higher litigation related costs, including charges of $6 million and $16 million, respectively, for the potential resolution of certain legal matters as well as higher compensation related costs, including amounts associated with investments in strategic initiatives in China and other international growth markets. Higher charitable contributions also contributed to the year to date increase. Such increases were partially offset in both the quarter and year to date by the effect of lapping certain prior year reserve increases related to potential development sites and surplus facilities and reductions associated with operating restaurants which were refranchised in 2004 (primarily the Puerto Rico business).

Worldwide Franchise and License Expenses

Franchise and license expenses increased $4 million or 43% for the quarter and $8 million or 44% year to date. The quarter and year to date increases were driven by higher provisions for doubtful franchise and license fee receivables and certain franchisee support costs.

Worldwide Other (Income) Expense

	Quarter				Year to date
	9/3/05		9/4/04		9/3/05		9/4/04
Gain upon sale of investment in unconsolidated affiliate	$ -		$ -		$ (17	)	$ -
Recovery from supplier	(12	)	-		(12	)	-
Equity income from investments in unconsolidated affiliates	(16	)	(14	)	(39	)	(36	)
Foreign exchange net (gain) loss	1		1		2		1

Other (income) expense	$ (27	)	$ (13	)	$ (66	)	$ (35	)

Other income was positively impacted in the quarter and year to date ended September 3, 2005 by a $14 million financial recovery ($2 million of which was recognized through equity income from investments in unconsolidated affiliates) from a supplier related to an ingredient issue in mainland China (see Note 7). Other income was also positively impacted in the year to date ended September 3, 2005 by a $17 million gain associated with the sale of our investment in our Poland/Czech Republic unconsolidated affiliate during the second quarter of 2005.

Worldwide Facility Actions

We recorded a net loss from facility actions of $7 million and $3 million for the quarters ended September 3, 2005 and September 4, 2004, respectively. We recorded a net loss from facility actions of $22 million for both the years to date ended September 3, 2005 and September 4, 2004. See the Store Portfolio Strategy section for more detail of our refranchising and closure activities and Note 7 for a summary of the components of facility actions by reportable operating segment.

Operating Profit

	Quarter						Year to date
	9/3/05		9/4/04		% B/(W)		9/3/05		9/4/04		% B/(W)
United States	$ 189		$ 196		(4	)	$ 541		$ 567		(5	)
International Division	89		79		12		273		241		14
China Division	85		64		32		163		141		15
Unallocated and corporate expenses	(52	)	(48	)	(7	)	(155	)	(140	)	(10	)
Unallocated other income (expense)	(1	)	(1	)	NM		15		(4	)	NM
Unallocated facility actions	10		1		NM		21		(10	)	NM
Wrench litigation	2		-		NM		2		-		NM
AmeriServe and other (charges)
credits	-		-		NM		-		14		NM

Operating profit	$ 322		$ 291		11		$ 860		$ 809		6

Unallocated and corporate expenses comprise general and administrative expenses and unallocated facility actions comprise refranchising gains (losses), neither of which are allocated to the U.S., International Division or China Division segments for performance reporting purposes. Unallocated other income (expense) in the year to date ended September 3, 2005 primarily comprises the $17 million gain on the sale of our investment in our Poland/Czech Republic unconsolidated affiliate which we did not allocate to the International Division for performance reporting purposes.

Quarter

The decrease in U.S. operating profit was primarily driven by higher facility actions expense associated with store closures, partially offset by the impact of same store sales growth on franchise and license fees. The impact of same store sales growth on restaurant profit was largely offset by higher occupancy and other costs.

Excluding the favorable impact from foreign currency translation, International Division operating profit increased 9%. The increase in International Division operating profit was driven by lower general and administrative costs and the impact of new unit development on franchise and license fees. The increase was partially offset by the impact on operating profit of refranchising our restaurants in Puerto Rico. The impact of same store sales growth on restaurant profit was largely offset by higher labor costs and higher occupancy and other costs.

Excluding the favorable impact from foreign currency translation, China Division operating profit increased 31%. The increase in China Division operating profit was driven by a financial recovery from a supplier (see Note 7) and the impact on restaurant profit of new unit development and lower food and paper costs (principally due to supply chain savings initiatives), partially offset by same store sales declines.

Year to date

The decrease in U.S. operating profit was primarily driven by higher facility actions expense and higher general and administrative expense, partially offset by the impact of same store sales growth on franchise and license fees. The impact of same store sales growth on restaurant profit was largely offset by higher occupancy and other costs and higher food and paper costs.

Excluding the favorable impact from foreign currency translation, International Division operating profit increased 9%. The increase in International Division operating profit was driven by the impact of new unit development on franchise and license fees and restaurant profit and the impact of same store sales growth on franchise and license fees. The increase was partially offset by the impact on operating profit of refranchising our restaurants in Puerto Rico. The impact of same store sales growth on restaurant profit was largely offset by higher occupancy and other costs and higher labor costs.

Excluding the favorable impact from foreign currency translation, China Division operating profit increased 14%. The increase in China Division operating profit was driven by the impact on restaurant profit of new unit development and a financial recovery from a supplier (see Note 7). These increases were partially offset by increased general and administrative expense and the impact on restaurant profit of same store sales declines.

Interest Expense, Net

	Quarter						Year to date
	9/3/05		9/4/04		% B/(W)		9/3/05		9/4/04		% B/(W)
Interest expense	$ 34		$ 32		(10)	%	$ 100		$ 106		5	%
Interest income	(6	)	(3	)	85	%	(14	)	(10	)	44	%

Interest expense, net	$ 28		$ 29		(2)	%	$ 86		$ 96		10	%

Interest expense increased $2 million or 10% in the quarter and decreased $6 million or 5% year to date. The changes were primarily attributable to fluctuations in our average interest rates for each of the respective periods.

Income Taxes

	Quarter				Year to date
	9/3/05		9/4/04		9/3/05		9/4/04
Income taxes	$ 80		$ 77		$ 212		$ 208
Tax rate	27.1	%	29.4	%	27.3	%	29.2	%

Our tax rate for the quarter and year to date was favorably impacted by the recognition of certain foreign tax credits that we were able to substantiate during 2005 as well as the impact of year over year valuation allowance adjustments, including the lapping of valuation allowances established in the prior year. The tax rate for the quarter and year to date was unfavorably impacted by tax provided on foreign earnings we now expect to repatriate in 2005.

Consolidated Cash Flows

Net cash provided by operating activities was $1,041 million compared to $791 million in 2004. The increase was primarily driven by lower income tax payments in 2005.

Net cash used in investing activities was $249 million versus $391 million in 2004. The decrease was driven by higher proceeds from the refranchising of restaurants, lower cash used in the acquisition of restaurants from franchisees and proceeds from the sale of our investment in our Poland/Czech Republic unconsolidated affiliate in 2005.

Net cash used in financing activities was $621 million versus $205 million in 2004. The increase was driven by higher share repurchases and dividend payments in 2005.

Liquidity and Capital Resources

Operating in the QSR industry allows us to generate substantial cash flows from the operations of our company stores and from our franchise operations, which require a limited YUM investment. In each of the last three fiscal years, net cash provided by operating activities has exceeded $1 billion. These cash flows have allowed us to fund our discretionary spending, while at the same time reducing our long-term debt balances. We expect these levels of net cash provided by operating activities to continue in the foreseeable future. Our discretionary spending includes capital spending for new restaurants, acquisitions of restaurants from franchisees, repurchases of shares of our common stock and dividends paid to our shareholders. Though a decline in revenues could adversely impact our cash flows from operations, we believe our operating cash flows, our ability to reduce discretionary spending, and our borrowing capacity will allow us to meet our cash requirements in 2005 and beyond.

During the quarter and year to date ended September 3, 2005, we paid cash dividends of $33 million and $91 million, respectively. Additionally, on September 15, 2005, our Board of Directors approved a cash dividend of $0.115 per share of common stock to be distributed on November 4, 2005 to shareholders of record at the close of business on October 14, 2005. The Company is targeting an annual payout ratio of 15% to 20% of net income.

Amounts outstanding under Senior Unsecured Notes were $1.5 billion at September 3, 2005. Included in short-term borrowings at September 3, 2005 are $200 million in Senior Unsecured Notes with an April 2006 maturity date. The remaining $1.4 billion in Senior Unsecured Notes comprise the majority of our long-term debt.

We estimate that in 2005 capital spending, including acquisitions of our restaurants from franchisees, will be approximately $650 million. We also estimate that in 2005 refranchising proceeds, prior to taxes, will be approximately $100 million, employee stock options proceeds, prior to taxes, will be approximately $170 million and sales of property, plant and equipment will be approximately $80 million. In May 2005, the Board of Directors authorized a new share repurchase program for up to $500 million of the Company’s outstanding common stock (excluding applicable transaction fees) to be purchased through May 2006. At September 3, 2005 we had remaining capacity to repurchase up to $348 million of our outstanding common stock (excluding applicable transaction fees) under this program.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to financial market risks associated with interest rates, foreign currency exchange rates and commodity prices. In the normal course of business and in accordance with our policies, we manage these risks through a variety of strategies, which may include the use of derivative financial and commodity instruments to hedge our underlying exposures. We do not use derivative instruments for trading purposes, and we have procedures in place to monitor and control their use.

Interest Rate Risk

We have a market risk exposure to changes in interest rates, principally in the United States. We attempt to minimize this risk and lower our overall borrowing costs through the utilization of derivative financial instruments, primarily interest rate swaps. These swaps are entered into with financial institutions and have reset dates and critical terms that match those of the underlying debt. Accordingly, any change in market value associated with interest rate swaps is offset by the opposite market impact on the related debt.

At September 3, 2005 and December 25, 2004, a hypothetical 100 basis point increase in short-term interest rates would result, over the following twelve-month period, in a reduction of approximately $8 million and $6 million, respectively, in annual income before income taxes. The estimated reductions are based upon our current level of variable rate debt and assume no changes in the volume or composition of debt. In addition, the fair value of our derivative financial instruments at September 3, 2005 and December 25, 2004 would decrease approximately $44 million and $51 million, respectively. The fair value of our Senior Unsecured Notes at September 3, 2005 and December 25, 2004 would decrease approximately $67 million and $76 million, respectively. Fair value was determined by discounting the projected cash flows.

Foreign Currency Exchange Rate Risk

International Division and China Division operating profit together constitute approximately 45% of our year to date operating profit, excluding unallocated and corporate expenses. In addition, the Company’s net asset exposure (defined as foreign currency assets less foreign currency liabilities) totaled approximately $1.6 billion as of September 3, 2005. Operating in international markets exposes the Company to movements in foreign currency exchange rates. The Company’s primary exposures result from our operations in Asia-Pacific, the Americas and Europe. Changes in foreign currency exchange rates would impact the translation of our investments in foreign operations, the fair value of our foreign currency denominated financial instruments and our reported foreign currency denominated earnings and cash flows. For the year to date ended September 3, 2005, operating profit would have decreased $49 million if all foreign currencies had uniformly weakened 10% relative to the U.S. dollar. The estimated reduction assumes no changes in sales volumes or local currency sales or input prices.

We attempt to minimize the exposure related to our investments in foreign operations by financing those investments with local currency debt when practical and holding cash in local currencies when possible. In addition, we attempt to minimize the exposure related to foreign currency denominated financial instruments by purchasing goods and services from third parties in local currencies when practical. Consequently, foreign currency denominated financial instruments consist primarily of intercompany short-term receivables and payables. At times, we utilize forward contracts to reduce our exposure related to these short-term receivables and payables. The notional amount and maturity dates of these contracts match those of the underlying receivables or payables such that our foreign currency exchange risk related to these instruments is eliminated.

Commodity Price Risk

We are subject to volatility in food costs as a result of market risk associated with commodity prices. Our ability to recover increased costs through higher pricing is, at times, limited by the competitive environment in which we operate. We manage our exposure to this risk primarily through pricing agreements as well as, on a limited basis, commodity future and option contracts. Commodity future and option contracts entered into by the Company that were outstanding at September 3, 2005 and December 25, 2004, did not significantly impact our financial position, results of operations or cash flows.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on the evaluation, performed under the supervision and with the participation of the Company’s management, including the Chairman, Chief Executive Officer and President (the “CEO”) and the Chief Financial Officer (the “CFO”), the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by the report.

Changes in Internal Control

There were no significant changes with respect to the Company’s internal control over financial reporting or in other factors that materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the quarter ended September 3, 2005.

Cautionary Statements

From time to time, in both written reports and oral statements, we present “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The statements include those identified by such words as “may,” “will,” “expect,” “project,” “anticipate,” “believe,” “plan” and other similar terminology. These “forward-looking statements” reflect our current expectations regarding future events and operating and financial performance and are based upon data available at the time of the statements. Actual results involve risks and uncertainties, including both those specific to the Company and those specific to the industry, and could differ materially from expectations. Accordingly, you are cautioned not to place undue reliance on forward-looking statements.

Company risks and uncertainties include, but are not limited to, potentially substantial tax contingencies related to the Spin-off, which, if they occur, require us to indemnify PepsiCo, Inc.; changes in effective tax rates; our debt leverage and the attendant potential restriction on our ability to borrow in the future; potential unfavorable variances between estimated and actual liabilities; our ability to secure distribution of products and equipment to our restaurants on favorable economic terms and our ability to ensure adequate supply of restaurant products and equipment in our stores; unexpected disruptions in our supply chain; effects and outcomes of any pending or future legal claims involving the Company; the effectiveness of operating initiatives and marketing, advertising and promotional efforts; our ability to continue to recruit and motivate qualified restaurant personnel; the ongoing financial viability of our franchisees and licensees; the success of our refranchising strategy; the success of our strategies for international development and operations; volatility of actuarially determined losses and loss estimates; and adoption of new or changes in accounting policies and practices including pronouncements promulgated by standard setting bodies.

Industry risks and uncertainties include, but are not limited to, business, economic and political conditions in the countries and territories where we operate, including effects of war and terrorist activities; new legislation and governmental regulations or changes in laws and regulations and the consequent impact on our business; new product and concept development by us and/or our food industry competitors; changes in commodity, labor, and other operating costs; changes in competition in the food industry; publicity which may impact our business and/or industry; severe weather conditions; volatility of commodity costs; increases in minimum wage and other operating costs; availability and cost of land and construction; consumer preferences or perceptions concerning the products of the Company and/or our competitors, spending patterns and demographic trends; political or economic instability in local markets and changes in currency exchange and interest rates; and the impact that any widespread illness or general health concern may have on our business and/or the economy of the countries in which we operate.

Report of Independent Registered Public Accounting Firm

The Board of Directors

YUM! Brands, Inc.:

We have reviewed the accompanying Condensed Consolidated Balance Sheet of YUM! Brands, Inc. and Subsidiaries (“YUM”) as of September 3, 2005 and the related Condensed Consolidated Statements of Income for the twelve and thirty-six weeks ended September 3, 2005 and September 4, 2004 and the Condensed Consolidated Statements of Cash Flows for the thirty-six weeks ended September 3, 2005 and September 4, 2004. These interim condensed consolidated financial statements are the responsibility of YUM’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying interim condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheet of YUM as of December 25, 2004, and the related Consolidated Statements of Income, Cash Flows and Shareholders’ Equity and Comprehensive Income for the year then ended not presented herein; and in our report dated February 28, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying Condensed Consolidated Balance Sheet as of December 25, 2004, is fairly presented, in all material respects, in relation to the Consolidated Balance Sheet from which it has been derived.

KPMG LLP

Louisville, Kentucky

October 10, 2005

PART II – Other Information and Signatures

Item 1. Legal Proceedings

Information regarding legal proceedings is incorporated by reference from Note 14 to the Company’s Condensed Consolidated Financial Statements set forth in Part I of this report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information as of September 3, 2005 with respect to shares of Common Stock repurchased by the Company during the quarter then ended:

Fiscal Periods	Total number of shares purchased	Average price paid per share	Total number of shares purchased as part of publicly announced plans or programs	Approximate dollar value of shares that may yet be purchased under the plans or programs
Period 7
6/12/05 – 7/9/05	1,250,400	52.53	1,250,400	470,395,001

Period 8
7/10/05 – 8/6/05	731,500	51.13	731,500	432,995,275

Period 9
8/7/05 – 9/3/05	1,755,700	48.64	1,755,700	347,601,265

Total	3,737,600	50.43	3,737,600	347,601,265

In January 2005, our Board of Directors authorized a share repurchase program. This program authorized us to repurchase, through January 2006, up to $500 million (excluding applicable transaction fees) of our outstanding Common Stock. For the quarter ended September 3, 2005, approximately 700,000 shares were repurchased under this program. This program was completed during the quarter.

Item 6. Exhibits


(a)	Exhibit Index

	EXHIBITS

	Exhibit 3.1	Restated Articles of Incorporation of YUM! Brands, Inc.

	Exhibit 15	Letter from KPMG LLP regarding Unaudited Interim Financial Information (Independent Accountants’ Acknowledgement).

	Exhibit 31.1	Certification of the Chairman, Chief Executive Officer and President pursuant to Rule 13a-14(a) of Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	Exhibit 31.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	Exhibit 32.1	Certification of the Chairman, Chief Executive Officer and President pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	Exhibit 32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, duly authorized officer of the registrant.

YUM! BRANDS, INC.

(Registrant)

Date:	October 10, 2005
		/s/ Ted F. Knopf
		Senior Vice President of Finance
		and Corporate Controller
		(Principal Accounting Officer)

Exhibit 31.1

CERTIFICATION

I, David C. Novak, certify that:

1.	I have reviewed this report on Form 10-Q of YUM! Brands, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report.

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 10, 2005	/s/ David C. Novak
	David C. Novak
	Chairman, Chief Executive Officer and President

Exhibit 31.2

CERTIFICATION

I, Richard T. Carucci, certify that:

1.	I have reviewed this report on Form 10-Q of YUM! Brands, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant, as of, and for, the periods presented in this report.

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c)	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)	disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a)	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 10, 2005	/s/ Richard T. Carucci
	Richard T. Carucci
	Chief Financial Officer

Exhibit 32.1

CERTIFICATION OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of YUM! Brands, Inc. (the “Company”) on Form 10-Q for the quarter ended September 3, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Periodic Report”), I, David C. Novak, Chairman, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

the Periodic Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	Date: October 10, 2005
			/s/ David C. Novak
			Chairman, Chief Executive Officer and President

A signed original of this written statement required by Section 906 has been provided to YUM! Brands, Inc. and will be retained by YUM! Brands, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of YUM! Brands, Inc. (the “Company”) on Form 10-Q for the quarter ended September 3, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Periodic Report”), I, Richard T. Carucci, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

the Periodic Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	Date: October 10, 2005
			/s/ Richard T. Carucci
			Chief Financial Officer

Exhibit 15

Independent Accountants’ Acknowledgment

The Board of Directors

YUM! Brands, Inc.:

We hereby acknowledge our awareness of the use of our report dated October 10, 2005 included within the Quarterly Report on Form 10-Q of YUM! Brands, Inc. for the twelve and thirty-six weeks ended September 3, 2005, and incorporated by reference in the following Registration Statements:

Description	Registration Statement Number

Forms S-3 and S-3/A
YUM! Direct Stock Purchase Program		333-46242
$2,000,000,000 Debt Securities		333-42969

Form S-8s
Restaurant Deferred Compensation Plan		333-36877, 333-32050
Executive Income Deferral Program		333-36955
YUM! Long-Term Incentive Plan		333-36895, 333-85073, 333-32046, 333-109299
SharePower Stock Option Plan		333-36961
YUM! Brands 401(k) Plan		333-36893, 333-32048, 333-109300
YUM! Brands, Inc. Restaurant General Manager
Stock Option Plan		333-64547
YUM! Brands, Inc. Long Term Incentive Plan		333-32052

Pursuant to Rule 436(c) of the Securities Act of 1933, such report is not considered a part of a registration statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of the Act.

KPMG LLP

Louisville, Kentucky

October 10, 2005

Exhibit 3.1

RESTATED ARTICLES OF INCORPORATION

YUM! Brands, Inc.

FIRST: The name of the corporation is YUM! Brands, Inc., hereinafter referred to as the “Corporation.”

SECOND: The Corporation shall have authority to issue 1,000,000,000 shares, without par value, of which 750,000,000 shall be Common Shares, and of which 250,000,000 shares shall be Preferred Shares, with the following powers, preferences and rights, and qualifications, limitations and restrictions.

(a)

Except as otherwise provided by law, each Common Share shall have one vote, and, except as otherwise provided in respect of any series of Preferred Shares hereafter classified or reclassified, the exclusive voting power for all purposes shall be vested in the holders of the Common Shares. In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Common Shares shall be entitled, after payment or provision for payment of the debts and other liabilities of the Corporation and the amount to which the holders of any series of Preferred Shares hereafter classified or reclassified having a preference on distribution in the liquidation, dissolution or winding up of the Corporation shall be entitled, to share ratably in the remaining net assets of the Corporation.

(b)

The Board of Directors is authorized, subject to limitations prescribed by the North Carolina Business Corporation Act (“NCBCA”) and these Articles of Incorporation, to adopt and file from time to time articles of amendment that authorize the issuance of Preferred Shares which may be divided into two or more series with such preferences, limitations, and relative rights as the Board of Directors may determine; provided, however, that no holder of any Preferred Share shall be authorized or entitled to receive upon the involuntary liquidation of the Corporation an amount in excess of $100.00 per Preferred Share.

(c)

Series A Junior Participating Preferred Stock. A series of Preferred Shares of the Corporation is hereby created, and the designation and amount thereof and the voting powers, preferences and relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations or restrictions thereof are as follows:

Designation and Amount. The shares of such series shall be designated as “Series A Junior Participating Preferred Stock” and the number of shares constituting such series shall be 750,000.

Dividends and Distributions.

(A)

Subject to the prior and superior rights of the holders of any Preferred Shares ranking prior and superior to the shares of Series A Junior Participating Preferred Stock with respect to dividends, the holders of shares of Series A Junior Participating Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of January, April, July and October in each year (each such date being referred to herein as a “Quarterly Dividend Payment Date”), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $10.00 or (b) subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in Common Shares or a subdivision of the outstanding Common Shares (by reclassification or otherwise), declared on the Common Shares of the Corporation since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. In the event the Corporation shall at any time after July 21, 1998 (the “Rights Declaration Date”) (i) declare any dividend on Common Shares payable in Common Shares,(ii) subdivide the outstanding Common Shares, or (iii) combine the outstanding Common Shares into a smaller number of shares, then in each such case the amount to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event.

(B)

The Corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in Paragraph (A) above immediately after it declares a dividend or distribution on the Common Shares (other than a dividend payable in Common Shares); provided that, in the event no dividend or distribution shall have been declared on the Common Shares during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $10.00 per share on the Series A Junior

Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date.

(C)

Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof.

Voting Rights. The holders of shares of Series A Junior Participating Preferred Stock shall have the following voting rights:

(A)

Subject to the provision for adjustment hereinafter set forth, each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Shares payable in Common Shares, (ii) subdivide the outstanding Common Shares, or (iii) combine the outstanding Common Shares into a smaller number of shares, then in each such case the number of votes per share to which holders of shares of Series A Junior Participating Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event.

(B)

Except as otherwise provided herein or by law, the holders of shares of Series A Junior Participating Preferred Stock and the holders of Common Shares shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation.

(C)

(i)

If at any time dividends on any Series A Junior Participating Preferred Stock shall be in arrears in an amount equal to six (6) quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a "default period") which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Junior Participating Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Preferred Shares (including holders of the Series A Junior Participating Preferred Stock) with dividends in arrears in an amount equal to six (6) quarterly dividends thereon, voting as a class, irrespective of series, shall have the right to elect two (2) directors.

(ii)

During any default period, such voting right of the holders of Series A Junior Participating Preferred Stock may be exercised initially at a special meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any annual meeting of shareholders, and thereafter at annual meetings of shareholders, provided that neither such voting right nor the right of the holders of any other series of Preferred Shares, if any, to increase, in certain cases, the authorized number of directors shall be exercised unless the holders of ten percent (10%) in number of Preferred Shares outstanding shall be present in person or by proxy. The absence of a quorum of the holders of Common Shares shall not affect the exercise by the holders of Preferred Shares of such voting right. At any meeting at which the holders of Preferred Shares shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two (2) directors or, if such right is exercised at an annual meeting, to elect two (2) directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Shares shall have the right to make such increase in the number of directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Shares shall have exercised their right to elect directors in any default period and during the continuance of such period, the

number of directors shall not be increased or decreased except by vote of the holders of Preferred Shares as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series A Junior Participating Preferred Stock.

(iii)

Unless the holders of Preferred Shares shall, during an existing default period, have previously exercised their right to elect directors, the Board of Directors may order, or any shareholder or shareholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Shares outstanding, irrespective of series, may request, the calling of a special meeting of the holders of Preferred Shares, which meeting shall thereupon be called by the President, a Vice-President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Shares are entitled to vote pursuant to this Paragraph (C)(iii) shall be given to each holder of record of Preferred Shares by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any shareholder or shareholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Shares outstanding. Notwithstanding the provisions of this Paragraph (C)(iii), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of the shareholders.

(iv)

In any default period, the holders of Common Shares, and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of directors until the holders of Preferred Shares shall have exercised their right to elect two (2) directors voting as a class, after the exercise of which right (x) the directors so elected by the holders of Preferred Shares shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in Paragraph (C)(ii) of this Section 3) be filled by vote of a majority of the remaining directors theretofore elected by the holders of the class of stock which elected the director whose office shall have become vacant. References in this Paragraph (C) to directors elected by the holders of a particular class of stock shall include directors elected by such directors to

fill vacancies as provided in clause (y) of the foregoing sentence.

(v)

Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Shares as a class to elect directors shall cease, (y) the term of any directors elected by the holders of Preferred Shares as a class shall terminate, and (z) the number of directors shall be such number as may be provided for in the Restated Articles of Incorporation or By-laws of the Corporation (the “By-laws”) irrespective of any increase made pursuant to the provisions of Paragraph (C)(ii) of this Section 3 (such number being subject, however, to change thereafter in any manner provided by law or in the Restated Articles of Incorporation or By-laws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining directors.

(D)

Except as set forth herein, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Shares as set forth herein) for taking any corporate action.

Certain Restrictions.

(A)

Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not

(i)

declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock;

(ii)

declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;

(iii)

redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Junior Participating Preferred Stock; or

(iv)

purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.

(B)

The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under Paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner.

Reacquired Shares. Any shares of Series A Junior Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued Preferred Shares and may be reissued as part of a new series of Preferred Shares to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein.

Liquidation, Dissolution or Winding Up.

(A)

Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received an amount equal to $1,000 per share of Series A Participating Preferred Stock, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of

such payment (the “Series A Liquidation Preference”). Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Junior Participating Preferred Stock unless, prior thereto, the holders of Common Shares shall have received an amount per share (the “Common Adjustment”) equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 1,000 (as appropriately adjusted as set forth in subparagraph (C) below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Shares) (such number in clause (ii), the “Adjustment Number”). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding shares of Series A Junior Participating Preferred Stock and Common Shares, respectively, holders of Series A Junior Participating Preferred Stock and holders of Common Shares shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Shares and Common Shares, on a per share basis, respectively.

(B)

In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of Preferred Shares, if any, which rank on a parity with the Series A Junior Participating Preferred Stock, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Shares.

(C)

In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Shares payable in Common Shares, (ii) subdivide the outstanding Common Shares, or (iii) combine the outstanding Common Shares into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event.

(D)

Notwithstanding the other provisions of this Section 6, no holder of shares of Series A Junior Participating Preferred Stock shall be authorized or entitled to receive upon the

involuntary liquidation of the Corporation an amount in excess of $100.00 per share.

Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the Common Shares are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each Common Share is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Share payable in Common Shares, (ii) subdivide the outstanding Common Shares, or (iii) combine the outstanding Common Shares into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Junior Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of Common Shares outstanding immediately after such event and the denominator of which is the number of Common Shares that were outstanding immediately prior to such event.

No Redemption. The shares of Series A Junior Participating Preferred Stock shall not be redeemable.

Ranking. The Series A Junior Participating Preferred Stock shall rank junior to all other series of the Corporation’s Preferred Shares, if any, as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise.

10.

Amendment. At any time when any shares of Series A Junior Participating Preferred Stock are outstanding, the Restated Articles of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class.

11.

Fractional Shares. Series A Junior Participating Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder’s fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock.

THIRD: The address of the registered office of the Corporation in the State of North Carolina is 225 Hillsborough Street, Raleigh, Wake County, North Carolina 27603; and the name of its initial registered agent at such address is CT Corporation System.

FOURTH: No holder of any share of the Corporation, whether now or hereinafter authorized, shall have any preemptive right to subscribe for or to purchase any shares or other securities of the Corporation, nor have any right to cumulate his votes for the election of Directors. At all meetings of the Shareholders of the Corporation, a quorum being present, all matters (other than the election of Directors) shall be decided by the vote of the holders of a majority of the stock of the Corporation, present in person or by proxy, and entitled to vote thereat.

FIFTH: The following provisions are intended for the management of the business and for the regulation of the affairs of the Corporation, and it is expressly provided that the same are intended to be in furtherance and not in limitation of the powers conferred by statute:

(a)

The Board of Directors shall have the exclusive power and authority to direct management of the business and affairs of the Corporation and shall exercise all corporate powers, and possess all authority, necessary or appropriate to carry out the intent of this provision, and which are customarily exercised by the board of directors of a public company. In furtherance of the foregoing, but without limitation, the Board of Directors shall have the exclusive power and authority to: (a) elect all executive officers of the Corporation as the Board may deem necessary or desirable from time to time, to serve at the pleasure of the Board; (b) fix the compensation of such officers; (c) fix the compensation of Directors; and (d) determine the time and place of all meetings of the Board of Directors and Shareholders of the Corporation. A scheduled meeting of Shareholders may be postponed by the Board of Directors by public notice given at or prior to the time of the meeting.

(b)

The number of Directors constituting the Board of Directors shall not be less than three nor more than fifteen, as may be fixed from time to time by resolution duly adopted by the Board of Directors. Each director shall be elected to serve a term of one year, with each director’s term to expire at the annual meeting next following the director’s election as a Director. Notwithstanding the expiration of the term of a Director, the Director shall continue to hold office until a successor shall be elected and qualified.

(c)

A vacancy occurring on the Board of Directors, including, without limitation, a vacancy resulting from an increase in the number of Directors or from the failure by Shareholders of the Corporation to elect the full authorized number of Directors, may only be filled by a majority of the remaining Directors or by the sole remaining Director in office. In the event of the death, resignation, retirement, removal or disqualification of a Director during his elected term of office, his successor shall serve until the next Shareholders’ meeting at which Directors are elected.

(d)

The Board of Directors may adopt, amend or repeal the Corporation’s Bylaws, in whole or in part, including amendment or repeal of any Bylaw adopted by the Shareholders of the Corporation.

(e)

The Corporation may in its Bylaws confer upon Directors powers additional to the foregoing and the powers and authorities conferred upon them by statute.

(f)

The Corporation reserves the right to amend, alter, change, or repeal any provision herein contained, in the manner now or hereafter prescribed by law, and all the rights conferred upon Shareholders hereunder are granted, and are to be held and enjoyed, subject to such rights of amendment, alteration, change or repeal.

(g)

The only qualifications for Directors of the Corporation shall be those set forth in these Articles of Incorporation. Directors need not be residents of the State of North Carolina or Shareholders of the Corporation.

(h)

The Board of Directors may create and make appointments to one or more committees of the Board comprised exclusively of Directors who will serve at the pleasure of the Board and who may have and exercise such powers of the Board in directing the management of the business and affairs of the Corporation as the Board may delegate, in its sole discretion, consistent with the provisions of the NCBCA and these Articles of Incorporation. The Board of Directors may not delegate its authority over the expenditure of funds of the Corporation except to a committee of the Board and except to one or more officers of the Corporation elected by the Board. No committee comprised of persons other than members of the Board of Directors shall possess or exercise any authority in the management of the business and affairs of the Corporation.

SIXTH:

(a)

The Corporation shall, to the fullest extent from time to time permitted by law, indemnify its Directors and officers against all liabilities and expenses in any suit or proceedings, whether civil, criminal, administrative or investigative, and whether or not brought by or on behalf of the Corporation, including all appeals therefrom, arising out of their status as such or their activities in any of the foregoing capacities, unless the activities of the person to be indemnified were at the time taken known or believed by such Director or officer to be clearly in conflict with the best interests of the Corporation. The Corporation shall likewise and to the same extent indemnify any person who, at the request of the Corporation, is or was serving as a Director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or as a trustee or administrator under any employee benefit plan.

(b)

The right to be indemnified hereunder shall include, without limitation, the right of a Director or officer to be paid expenses in advance of the final disposition of any proceedings upon receipt of an undertaking to repay

such amount unless it shall ultimately be determined that he or she is entitled to be indemnified hereunder.

(c)

A person entitled to indemnification hereunder shall also be paid reasonable costs, expenses and attorneys’ fees (including expenses) in connection with the enforcement of rights to the indemnification granted hereunder.

(d)

The foregoing rights of indemnification shall not be exclusive of any other rights to which those seeking indemnification may be entitled and shall not be limited by the provisions of Section 55-8-51 of the NCBCA or any successor statute.

(e)

The Board of Directors may take such action as it deems necessary or desirable to carry out these indemnification provisions, including adopting procedures for determining and enforcing the rights guaranteed hereunder, and the Board of Directors is expressly empowered to adopt, approve and amend from time to time such Bylaws, resolutions or contracts implementing such provisions or such further indemnification arrangement as may be permitted by law.

(f)

Neither the amendment or repeal of this Article, nor the adoption of any provision of these Articles of these Articles of Incorporation inconsistent with this Article, shall eliminate or reduce any right to indemnification afforded by this Article to any person with respect to their status or any activities in their official capacities prior to such amendment, repeal or adoption.

SEVENTH: To the full extent from time to time permitted by law, no person who is serving or who has served as a Director of the Corporation shall be personally liable in any action for monetary damages for breach of any duty as a Director, whether such action is brought by or in the right of the Corporation or otherwise. Neither the amendment or repeal of this Article, nor the adoption of any provision of these Articles of Incorporation inconsistent with this Article, shall eliminate or reduce the protection afforded by this Article to a Director of the Corporation with respect to any matter which occurred, or in any cause of action, suit or claim which but for this Article would have accrued or arisen, prior to such amendment, repeal or adoption.

EIGHTH: The provisions of Article 9A of the NCBCA shall not be applicable to the Corporation.

NINTH: Except as may be otherwise determined by the Board of Directors, the Shareholders of the Corporation shall have access as a matter of right only to the books and records of the Corporation as may be required to be made available to qualified shareholders by the NCBCA.

TENTH: To the extent that there ever may be inconsistency between these Articles of Incorporation and the Bylaws of the Corporation as may be adopted or amended from time to time, the Articles of Incorporation shall always control.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

YUM! BRANDS, INC.

(Exact name of registrant as specified in its charter)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION