UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)

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

For the fiscal year ended                  December 31, 2006
                          ------------------------------------------------------

                                       OR

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

For the transition period from                         to
                               -----------------------    ----------------------

Commission File Number:              000-17962
                        --------------------------------------------------------


                         Applebee's International, Inc.
              ----------------------------------------------------
             (Exact name of registrant as specified in its charter)

            Delaware                                     43-1461763
---------------------------------           ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

                4551 W. 107th Street, Overland Park, Kansas 66207
 -------------------------------------------------------------------------------
              (Address of principal executive offices and zip code)

                                 (913) 967-4000
              ----------------------------------------------------
              (Registrant's telephone number, including area code)

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

                              Title of Each Class
                              -------------------
                     Common Stock, par value $.01 per share

                   Name of Each Exchange on Which Registered
                   -----------------------------------------
                          The NASDAQ Stock Market LLC

           Securities registered pursuant to Section 12(g) of the Act:
                                      None


Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act.

                        Yes      X        No
                            -----------     -----------

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Act.

                        Yes               No     X
                           ------------     -----------

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                        Yes      X        No
                           ------------     -----------

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|

                                       1
<Page>

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer  X    Accelerated filer       Non-accelerated filer
                       -----                   -----                       -----


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

                        Yes               No     X
                           ------------     -----------

The aggregate market value of the voting and non-voting common stock equity held
by  non-affiliates  of the  registrant as of the last business day of the second
fiscal quarter ended June 25, 2006 was $1,453,104,313  based on the closing sale
price on June 23, 2006.

The number of shares of the registrant's common stock outstanding as of February
23, 2007 was 74,321,615.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy  Statement for the 2007 Annual  Stockholder's  Meeting are
incorporated into Part III hereof.





                                       2
<PAGE>

                         APPLEBEE'S INTERNATIONAL, INC.
                                    FORM 10-K
                       FISCAL YEAR ENDED DECEMBER 31, 2006
                                      INDEX
<TABLE>
<CAPTION>
                                                                                                              Page
<S>             <C>                                                                                            <C>
PART I

Item 1.         Business................................................................................        4

Item 1A.        Risk Factors............................................................................       13

Item 1B.        Unresolved Staff Comments...............................................................       18

Item 2.         Properties..............................................................................       19

Item 3.         Legal Proceedings.......................................................................       21

Item 4.         Submission of Matters to a Vote of Security Holders.....................................       21

PART II

Item 5.         Market for Registrant's Common Equity, Related Stockholder Matters
                      and Issuer Purchases of Equity Securities.........................................       22

Item 6.         Selected Financial Data.................................................................       25

Item 7.         Management's Discussion and Analysis of
                      Financial Condition and Results of Operations.....................................       26

Item 7A.        Quantitative and Qualitative Disclosures about Market Risk..............................       40

Item 8.         Financial Statements and Supplementary Data.............................................       40

Item 9.         Changes in and Disagreements with Accountants
                      on Accounting and Financial Disclosure............................................       40

Item 9A.        Controls and Procedures.................................................................       40

Item 9B.        Other Information.......................................................................       43

PART III

Item 10.        Directors, Executive Officers and Corporate Governance..................................       44

Item 11.        Executive Compensation..................................................................       44

Item 12.        Security Ownership of Certain Beneficial Owners and Management and
                      Related Stockholder Matters.......................................................       44

Item 13.        Certain Relationships and Related Transactions, and Director Independence...............       44

Item 14.        Principal Accounting Fees and Services..................................................       45

PART IV

Item 15.        Exhibits, Financial Statement Schedules.................................................       46

Signatures..............................................................................................       47
</TABLE>

                                       3
<PAGE>

                                     PART I

Introductory Note

References  to  "Applebee's,"  "we,"  "us,"  and  "our"  in  this  document  are
references  to  Applebee's  International,  Inc.  and its  subsidiaries  and any
predecessor companies of Applebee's International, Inc.

On February 13,  2007,  we  announced  that our Board of Directors  has formed a
committee  of  independent  directors  to  explore  strategic  alternatives  for
enhancing  shareholder value,  including a possible  recapitalization or sale of
the company.  There is no assurance that the process will result in any specific
transaction. However, the implementation of certain strategic alternatives could
affect our current plans and strategies,  and any forward-looking  statements in
this document are qualified by reference to the committee's ongoing analysis.

Item 1. Business

General

We develop,  franchise and operate  restaurants  in the bar and grill segment of
the casual  dining  industry  under the name  "Applebee's  Neighborhood  Grill &
Bar(R)."  With over 1,900  system-wide  restaurants  as of  December  31,  2006,
Applebee's  Neighborhood Grill & Bar is the largest casual dining concept in the
world,  in terms of  number  of  restaurants  and  market  share(1).  Applebee's
International,  Inc. maintains an Internet website address at www.applebees.com.
We make  available  free of charge through our website our annual report on Form
10-K,  quarterly  reports on Form  10-Q,  current  reports on Form 8-K,  and all
amendments to those reports as soon as they are reasonably available after these
materials  are  electronically  filed with or  furnished to the  Securities  and
Exchange Commission ("SEC").

We opened our first restaurant in 1986. We initially  developed and operated six
restaurants as a franchisee of the Applebee's Neighborhood Grill & Bar Division,
an  indirect  subsidiary  of  W.R.  Grace  & Co.  In  March  1988,  we  acquired
substantially all the assets of our franchisor.  When we acquired the Applebee's
Division,  it operated 13  restaurants  and had 10  franchisees,  including  us,
operating 41 franchise restaurants.

As of December 31, 2006,  there were 1,930 Applebee's  restaurants.  Franchisees
operated 1,409 of these restaurants and 521 restaurants were company-owned.  The
restaurants were located in 49 states, 16 countries outside of the United States
and one U.S. territory.  During 2006, 143 new restaurants were opened, including
108 franchise restaurants and 35 company restaurants.

We continue to expect that the Applebee's  system will  ultimately  encompass at
least 3,000  restaurants  in the United  States as well as the  potential for at
least 1,000 restaurants internationally.

Our current  operating  strategy is to focus on increasing  comparable sales and
average unit volumes in existing  restaurants by improving the  fundamentals  of
the Applebee's  concept and placing less emphasis on new restaurant  development
for  company-owned  markets than in the past. As part of this  strategy,  we are
concentrating  on leveraging  our value  position and  broadening  our appeal to
guests through an improved menu and consumer messaging.


(1) Source: Nation's Restaurant News, "Special Report: Top 100," June 26, 2006.

                                       4
<PAGE>

Fiscal 2006  contained 53 weeks.  Fiscal 2005 and 2004 each  contained 52 weeks.
The following table sets forth certain unaudited financial information and other
restaurant data relating to company and franchise restaurants, as reported to us
by franchisees:

<TABLE>
<CAPTION>
                                                                            Fiscal Year Ended
                                                           ------------------------------------------------------
                                                              December 31,      December 25,       December 26,
                                                                  2006              2005               2004
                                                           -----------------  ----------------  -----------------
   <S>                                                     <C>                <C>               <C>
   Number of restaurants:
        Company:
            Beginning of year............................            486               424                383
            Restaurant openings..........................             35                52                 32
            Restaurant closings..........................             (4)               (1)                (1)
            Restaurants acquired from franchisees........              4                11                 10
                                                           -----------------  ----------------  -----------------
            End of year..................................            521               486                424
                                                           -----------------  ----------------  -----------------
        Franchise:
            Beginning of year............................          1,318             1,247              1,202
            Restaurant openings..........................            108                92                 77
            Restaurant closings..........................            (13)              (10)               (22)
            Restaurants acquired by franchisor...........             (4)              (11)               (10)
                                                           -----------------  ----------------  -----------------
            End of year..................................          1,409             1,318              1,247
                                                           -----------------  ----------------  -----------------
        Total:
            Beginning of year............................          1,804             1,671              1,585
            Restaurant openings..........................            143               144                109
            Restaurant closings..........................            (17)              (11)               (23)
                                                           -----------------  ----------------  -----------------
            End of year..................................          1,930             1,804              1,671
                                                           =================  ================  =================

   Weighted average weekly sales per restaurant:
            Company.....................................    $     44,637       $    45,552       $     46,536
            Domestic franchise..........................    $     49,521       $    49,564       $     48,143
            Domestic total..............................    $     48,134       $    48,462       $     47,737
   Change in comparable restaurant sales(1):
            Company.....................................           (1.0)%            (0.9)%               3.8%
            Domestic franchise..........................           (0.5)%             2.6 %               5.0%
            Domestic total..............................           (0.6)%             1.7 %               4.7%
   Total operating revenues (in thousands):
            Company restaurant sales(2).................    $  1,196,258       $ 1,082,641       $    976,798
            Franchise royalties and fees(3).............         139,855           128,813            121,221
            Other franchise income(4)...................           1,808             5,196             13,615
                                                           -----------------  ----------------  -----------------
            Total.......................................    $  1,337,921       $ 1,216,650       $  1,111,634
                                                           =================  ================  =================

<FN>
(1) When computing comparable restaurant sales, restaurants open for at least 18
months are compared from period to period.
(2) Our 2006 fiscal year included 53 weeks while fiscal years 2005 and 2004 each
included 52 weeks. The 53rd week in 2006 contributed  $24,312, in thousands,  to
company restaurant sales.
(3) Franchise royalties are generally 4% of each franchise restaurant's reported
monthly gross sales.  Reported  unaudited  franchise  sales, in thousands,  were
$3,498,967,  $3,223,505 and $3,001,287 in 2006, 2005 and 2004, respectively. The
53rd week in 2006 contributed  approximately $73,500, in thousands,  to reported
franchise sales and approximately $2,900, in thousands,  to franchise royalties.
Franchise fees typically are $35,000 for each restaurant opened.
(4)  Other  franchise  income  includes   insurance   premiums  from  franchisee
participation in our captive insurance program in 2005 and 2004 and revenue from
information  technology products and services provided to certain franchisees in
all periods.

</FN>
</TABLE>

                                       5
<PAGE>

The Applebee's System

Concept.  Each  Applebee's  restaurant is designed as an  attractive,  friendly,
neighborhood establishment featuring  moderately-priced food and beverage items,
table service and a comfortable  atmosphere.  Our  restaurants  appeal to a wide
range of customers  including  young adults,  senior  citizens and families with
children.

Since 2002, we have offered our customers the  convenience of carry-out  service
featuring our Carside To Go program. This program, offered at both company-owned
and franchise  restaurants,  focuses on  convenience by allowing the customer to
place their order by telephone,  park in designated spots at our restaurants and
have servers  deliver the order to their  vehicle.  During  2006,  Carside To Go
accounted for 9.7% of company-owned restaurant sales.

We have developed certain specifications for the design of our restaurants.  Our
restaurants are primarily located in free-standing  buildings, end caps of strip
shopping centers,  and shopping center malls. Each of our restaurants  generally
has a bar and many restaurants offer patio seating.  The decor, which frequently
highlights  local  history and  personalities,  gives each  restaurant a unique,
neighborhood identity,  which is an important aspect of the Applebee's brand. In
addition,  we generally  require that each  restaurant be remodeled every six to
seven  years to embody the design  elements  of the  current  prototype.  We are
continually  evaluating our  restaurant  design to ensure that we keep our brand
fresh and appealing to our guests.

Menu.  Each  restaurant  offers a  diverse  menu of  moderately-priced  food and
beverage items  consisting of traditional  favorites and signature  dishes.  The
restaurants feature a broad selection of entrees, including beef, chicken, pork,
seafood  and  pasta  items  prepared  in a  variety  of  cuisines,  as  well  as
appetizers, salads, sandwiches, specialty drinks and desserts. Substantially all
restaurants offer beer, wine, liquor and premium specialty drinks.  During 2006,
alcoholic beverages accounted for 12.5% of company-owned restaurant sales.

In 2006, we began implementation of new initiatives to broaden the appeal of our
brand.  These  initiatives  included  advertising that targets both the frequent
casual dining guest and those seeking value,  beverage and late-night  programs,
as well as the introduction of 20 new or improved menu items,  including several
which were developed in partnership with celebrity chef Tyler Florence.

During  2004,  we entered into a five-year  exclusive  strategic  alliance  with
Weight Watchers  International,  Inc. to offer Weight  Watchers(R)  branded menu
alternatives  to our guests.  As part of our exclusive  arrangement  with Weight
Watchers,  we and our franchisees pay a percentage royalty on the total domestic
sales of Weight Watchers menu items.

Restaurant  Operations.  We stipulate operating standards and specifications for
our  company-owned  and franchise  restaurants.  These standards  pertain to the
quality,  preparation  and selection of menu items,  maintenance and handling of
food, maintenance and cleanliness of premises and service procedures.

Training. We have comprehensive  training programs for restaurant associates and
managers. Restaurant associates and managers complete a training and orientation
process by certified training  personnel upon hire. In addition,  associates and
managers  receive  ongoing  training  to  further  develop  their job skills and
knowledge.

Franchise  and company  restaurant  managers  also have access to the Lloyd Hill
Applebee's   Leadership   Institute   which  offers   learning  and  development
opportunities.  Programs and services include training,  leadership  assessments
and life coaching.

                                       6
<PAGE>

Marketing.  We have  historically  concentrated  our  advertising  and marketing
efforts primarily on food-specific promotions, Weight Watchers(R), Carside To Go
and Applebee's branded messaging. Our marketing includes national,  regional and
local expenditures, utilizing primarily television, radio, direct mail and print
media, as well as alternative  channels such as the Internet,  product placement
and the use of  third-party  retailers  to  market  our  gift  cards.  In  2006,
approximately  4.1% of company  restaurant  sales was  allocated  for  marketing
purposes.  This amount includes  contributions  to the national  marketing pool,
which  develops and funds the specific  national  promotions,  including  Weight
Watchers and Carside To Go. We focus the remainder of our marketing expenditures
on local marketing in areas with company-owned restaurants.

Information  Technology.  We believe  technology  can assist us in achieving our
operational  goals. Our restaurant  systems,  including  point-of-sale and food,
kitchen  and  labor  management   systems,   are  tightly  integrated  with  our
above-store data warehousing and decision  support  platforms.  This integration
provides  management  with a  timely,  accurate  and  comprehensive  view of our
business performance.

Supply  Chain.  Maintaining  high  food  quality,  system-wide  consistency  and
availability  is the central  focus of our supply  chain  program.  We establish
quality  standards for products used in the restaurants,  and we maintain a list
of approved  suppliers and  distributors  from which we and our franchisees must
select.  We  periodically  review  the  quality  of the  products  served in our
domestic restaurants in an effort to ensure compliance with these standards.  We
have negotiated  purchasing agreements with most of our approved suppliers which
result in volume  discounts  for us and our  franchisees.  Due to  cultural  and
regulatory  differences,  we may have  different  requirements  for  restaurants
opened outside of the United States.

Food Safety and Quality  Assurance.  We are committed to providing our customers
with products  that meet or exceed  regulatory  and industry  standards for food
safety as well as our high quality standards.  Our quality assurance  department
establishes  and  monitors  our food safety  programs  in domestic  restaurants,
including   restaurant,   supplier  and  distributor  audits,  food  safety  and
sanitation monitoring, and product testing.

Company Restaurants

Company Restaurant Openings.  Our strategy is to cluster restaurants in targeted
markets to increase  consumer  awareness and convenience and enabling us to take
advantage  of  operational,   distribution  and  advertising  efficiencies.  Our
development experience indicates that when we open multiple restaurants within a
particular market, our market share increases.

We believe our  effectiveness  as a  franchisor  is  enhanced by owning  company
restaurants.  Operating company restaurants allows us to develop,  implement and
optimize  restaurant  initiatives and standards  before  introducing them to the
entire  system.  We  continually  evaluate  the mix of  company  restaurants  to
franchise  restaurants and when it is consistent with our long-term  strategies,
we will re-franchise or acquire restaurants.


                                       7
<PAGE>

We opened 35 new company  restaurants  in 2006.  The  following  table shows the
areas where our company restaurants were located as of December 31, 2006:

<TABLE>
<CAPTION>
                                                Area
               -----------------------------------------------------------------------
               <S>                                                                                <C>
               New England (includes Maine, Massachusetts, New Hampshire,
                 New York, Rhode Island and Vermont)..................................            77
               Minneapolis/St. Paul, Minnesota........................................            67
               Detroit/Southern Michigan..............................................            67
               Texas  ................................................................            60
               Virginia...............................................................            59
               St. Louis, Missouri/Illinois...........................................            58
               Kansas City, Missouri/Kansas...........................................            34
               Washington, D.C. (Maryland, Virginia)..................................            31
               San Diego/Southern California..........................................            24
               Las Vegas/Reno, Nevada.................................................            16
               Central Missouri/Kansas/Arkansas.......................................            12
               Albuquerque, New Mexico................................................             8
               Memphis, Tennessee.....................................................             8
                                                                                      -------------------
                                                                                                 521
                                                                                      ===================
</TABLE>

Restaurant  Operations.  The  staff  for a typical  restaurant  consists  of one
general manager, one kitchen manager, two or three managers and approximately 60
hourly associates.  Generally,  managers of company-owned  restaurants receive a
salary and may receive a performance bonus based on financial performance, guest
satisfaction  and  associate  retention  measures.  As of December 31, 2006,  we
employed  three  Regional  Vice  Presidents  of  Operations,   15  Directors  of
Operations and 85 Area  Directors.  The Area  Directors'  duties include regular
restaurant  visits and inspections  which ensure the ongoing  maintenance of our
standards of quality,  service,  cleanliness,  value and courtesy.  We also have
corporate  personnel that support  operations with functions such as accounting,
human resources, information technology, marketing and training.

The Applebee's Franchise System

Franchise  Territory and  Restaurant  Openings.  We currently  have 75 franchise
groups,  including 31  international  franchisees.  We have  generally  selected
franchisees  that  are  experienced  multi-unit  restaurant  operators  who have
operated  other  restaurant   concepts.   Our  franchisees   operate  Applebee's
restaurants in 43 states, 16 countries outside of the United States and one U.S.
territory.  We have assigned development rights to the vast majority of domestic
territories  in all states  except  Hawaii or have  designated  them for company
development.

As of December 31, 2006,  there were 1,409  franchise  restaurants.  Franchisees
opened 77 restaurants  in 2004, 92  restaurants in 2005, and 108  restaurants in
2006.

Development  of  Restaurants.  We  make  available  to  franchisees  the  design
specifications for a typical restaurant,  and we retain the right to prohibit or
modify the use of any set of plans. Each franchisee is responsible for selecting
the site for each restaurant within their territory.  We may assist  franchisees
in selecting  appropriate  sites,  and any  selection  made by a  franchisee  is
subject  to our  approval.  We also  conduct a physical  inspection,  review any
proposed lease or purchase  agreement and make available  demographic  and other
studies.

                                       8
<PAGE>

Domestic Franchise Arrangements.  Generally, franchise arrangements consist of a
development agreement and separate franchise agreements.  Development agreements
grant the  exclusive  right to develop a number of  restaurants  in a designated
geographical area. The term of a domestic development  agreement is generally 20
years.  The  development  agreements  contain  provisions  which  allow  for the
continued  development  of the  Applebee's  concept and  support  our  long-term
expectation of at least 3,000 restaurants in the United States.

The franchisee enters into a separate  franchise  agreement for the operation of
each  restaurant.  Our standard  franchise  agreement has a term of 20 years and
permits  renewal for up to an  additional 20 years upon payment of an additional
franchise fee. For each restaurant developed, our standard franchise arrangement
requires an initial  franchisee  fee of $35,000 and a royalty fee equal to 4% of
the restaurant's  monthly net sales. We have executed agreements with a majority
of our franchisees for restaurants opened before January 1, 2000, which maintain
the existing  royalty  rate of 4% and extend the initial  term of the  franchise
agreements until 2020. The terms, royalties and advertising fees under a limited
number of franchise  agreements  and the  remaining  franchise  fees under older
development agreements vary from the currently offered arrangements.

Marketing.  We currently  require  domestic  franchisees to contribute  2.75% of
their gross  sales to the  national  marketing  pool and to spend at least 1% of
their gross  sales on local  marketing  and  promotional  activities.  Under our
current franchise agreements,  we have the ability to increase the amount of the
required  combined  contribution  to the national  marketing pool and the amount
required to be spent on local marketing and promotional  activities to a maximum
of 5% of gross sales.

Training and Support. We provide ongoing advice and assistance to franchisees in
connection with the operation and management of each restaurant through training
sessions,  meetings,  seminars,  on-premises  visits  and by  written  or  other
material.  We  also  assist  franchisees  on  request  with  business  planning,
restaurant development, technology and human resource efforts.

Operations  Quality  Control.  We  continuously   monitor  franchise  restaurant
operations, principally through our full-time Franchise Area Directors (30 as of
December  31,  2006)  and our  Directors  of  Franchise  Operations  (five as of
December 31, 2006). Company and third-party  representatives make both scheduled
and unannounced inspections of restaurants to ensure that only approved products
are in use and that our prescribed operations practices and procedures are being
followed.  During 2006, these  representatives  made an average of two visits to
each of our franchise  restaurants during which they conducted an inspection and
consultation  in the  restaurant.  We have the right to  terminate  a  franchise
agreement  if a  franchisee  does not  operate  and  maintain  a  restaurant  in
accordance with our requirements.

Franchise  Business  Council.  We maintain a Franchise  Business  Council  which
provides us with input about  operations,  marketing,  product  development  and
other  aspects  of  restaurant  operations  for the  purpose  of  improving  the
franchise  system.  As of December  31, 2006,  the  Franchise  Business  Council
consisted  of seven  franchisee  representatives  and two  members of our senior
management  team.  One  franchisee   representative   is  a  permanent   member.
Franchisees  elect  the  franchisee   representatives  annually.  The  Franchise
Business  Council is also responsible for the appointment of members to advisory
committees related to marketing,  supply chain,  information technology and food
development.

Franchise  Financing.  Although  financing  is the  sole  responsibility  of the
franchisee,  we  make  available  to  franchisees  information  about  financial
institutions  interested in financing the costs of  restaurant  development  for
qualified franchisees.  None of these financial institutions is our affiliate or
agent,  and we have no control  over the terms or  conditions  of any  financing
arrangement offered by these financial institutions.

In 2004,  we  arranged  for a  third-party  financing  company  to provide up to
$250,000,000  to  qualified  franchisees  for loans to fund  development  of new
restaurants  through  October 2007,  subject to our approval.  We will provide a
limited  guarantee of 10% of certain loans advanced under this program.  We will
be released  from our guarantee if certain  operating  results are met after the
restaurant has been open for at least two years. As of December 31, 2006,  there
were loans outstanding to five franchisees for  approximately  $65,800,000 under
this program.

                                       9
<PAGE>

International Development

International Franchise  Arrangements.  We continue to pursue franchising of the
Applebee's  concept  as the  primary  method of  international  expansion.  This
strategy  includes  seeking  qualified  franchisees  with the  resources to open
multiple  restaurants  in each  territory  and those  familiar with the specific
local  business   environment.   We  currently  are  focusing  on  international
franchising   primarily   in   Canada,    Central   and   South   America,   the
Mediterranean/Middle  East  and  Mexico.  We  currently  have  31  international
franchisees.  These franchisees operated 89 restaurants as of December 31, 2006.
The  success of further  international  expansion  will  depend on,  among other
things,  local  acceptance of the Applebee's  concept and our ability to attract
qualified franchisees and operating personnel.  Our franchisees must comply with
the regulatory requirements of the local jurisdictions.

We work closely with our international  franchisees to develop and implement the
Applebee's system outside the United States,  recognizing  commercial,  cultural
and dietary  diversity.  These local issues  involve the need to be flexible and
pragmatic  on all elements of the system,  including  menu,  restaurant  design,
restaurant operations, training, marketing, purchasing and financing.

Employees

As of December 31, 2006,  we employed  approximately  32,600 full and  part-time
associates.  Of those,  approximately 680 were corporate  personnel,  2,120 were
restaurant  managers  or  managers  in  training  and 29,800  were  employed  in
non-management  full and part-time  restaurant  positions.  Of the 680 corporate
associates,  approximately 240 were in management positions and 440 were general
office associates, including part-time associates.

We consider our  associate  relations to be good.  Most  associates,  other than
restaurant  management and corporate personnel,  are paid on an hourly basis. We
strive to provide working conditions and wages that compare favorably with those
of our  competition.  We have never  experienced  a work  stoppage  due to labor
difficulty,  and our  associates  are not  covered  by a  collective  bargaining
agreement.

Service Marks

We own the rights to the "Applebee's  Neighborhood  Grill & Bar(R)" service mark
and certain  variations thereof and to other service marks used in our system in
the United States and in various  foreign  countries.  We are aware of names and
marks  similar to our  service  marks used by third  parties in certain  limited
geographical  areas. We intend to protect our service marks by appropriate legal
action when necessary.


                                       10
<PAGE>

Executive and Other Senior Officers of the Registrant

Our executive and other senior officers as of February 23, 2007 are shown below.
<TABLE>
<CAPTION>
                 Name                 Age                Position
                 ----                 ---                --------
    <S>                               <C>    <C>
    David L. Goebel.................. 56     Chief Executive Officer and President, and Member of the Board of
                                                Directors
    Steven K. Lumpkin................ 52     Executive Vice President, Chief Financial Officer and Treasurer, and
                                                Member of the Board of Directors
    Carin L. Stutz................... 50     Executive Vice President of Operations
    Stanley M. Sword................. 45     Executive Vice President and Chief People Officer
    George S. Williams............... 54     Executive Vice President and Chief Marketing Officer
    Rohan St. George................. 47     President of International Division
    Philip R. Crimmins............... 55     Senior Vice President of Development
    Michael Czinege.................. 53     Senior Vice President and Chief Information Officer
    Kurt Hankins..................... 47     Senior Vice President of Menu Development and Innovation
    David R. Parsley................. 60     Senior Vice President of Supply Chain Management
    Carol A. DiRaimo................. 45     Vice President of Investor Relations
    Beverly O. Elving................ 53     Vice President and Controller
    Rebecca R. Tilden................ 51     Vice President, General Counsel and Secretary
</TABLE>

David L. Goebel was  employed  by  Applebee's  in  February  2001 as Senior Vice
President of Franchise  Operations  and was promoted to Executive Vice President
of  Operations in December  2002.  In January  2004,  Mr. Goebel was promoted to
Chief  Operating  Officer.  In January  2005,  he was also named  President.  In
January  2006,  Mr.  Goebel was named to the Board of  Directors  and he assumed
additional responsibilities including serving as principal executive officer. In
September 2006, Mr. Goebel was named Chief Executive  Officer.  Prior to joining
Applebee's,  Mr. Goebel headed a management company that provided consulting and
strategic  planning  services to various  businesses from April 1998 to February
2001. Prior to 1998, he was a franchise  principal with an early developer group
of the Boston Market  concept.  Mr. Goebel's  business  experience also includes
positions  as Vice  President  of  Business  Development  for  Rent-a-Center  (a
subsidiary  of Thorn,  EMI) and Vice  President of  Operations  for Ground Round
restaurants.

Steven K. Lumpkin was employed by  Applebee's  in May 1995 as Vice  President of
Administration.  In January  1996,  he was promoted to Senior Vice  President of
Administration.  In  November  1997,  he assumed  the  position  of Senior  Vice
President of Strategic Development and in January 1998 was promoted to Executive
Vice President of Strategic Development.  He was named Chief Development Officer
in March  2001.  In March  2002,  Mr.  Lumpkin  assumed  the  position  of Chief
Financial Officer and Treasurer.  In January 2004, he was appointed to the Board
of  Directors.  Prior to  joining  Applebee's,  Mr.  Lumpkin  was a Senior  Vice
President of a division of the Olsten  Corporation,  Kimberly Quality Care, from
July 1993 until January 1995. From June 1990 until July 1993, Mr. Lumpkin was an
Executive  Vice  President  and a member of the board of  directors  of Kimberly
Quality  Care.  From January 1978 until June 1990,  Mr.  Lumpkin was employed by
Price  Waterhouse  LLP, where he served as a management  consulting  partner and
certified public accountant.

Carin L. Stutz was  employed  by  Applebee's  in  November  1999 as Senior  Vice
President of Company Operations.  In January 2005, she was promoted to Executive
Vice  President  of  Operations.  Prior to  joining  Applebee's,  Ms.  Stutz was
Division Vice  President with Wendy's  International  from July 1994 to November
1999. From 1993 to 1994, she was Regional Operations Vice President for Sodexho,
USA.  From 1990 to 1993,  Ms. Stutz was employed by  Nutri/System,  Inc. as Vice
President of Corporate Operations.  Prior to 1990, Ms. Stutz was employed for 12
years with Wendy's International.

                                       11
<PAGE>

Stanley M. Sword was employed by  Applebee's  in August 2005 as  Executive  Vice
President and Chief People Officer.  Prior to joining Applebee's,  Mr. Sword was
employed for seven years as an executive with Cerner  Corporation.  He was hired
in August  1998 as Senior Vice  President  and Chief  People  Officer and became
President of Cerner's  Great Lakes region in August 2003.  Prior to Cerner,  Mr.
Sword spent five years with AT&T including  three years as the Vice President of
Organization Development of NCR Corporation and two years as a client partner in
the  outsourcing  practice of AT&T  Solutions.  Prior to joining AT&T, Mr. Sword
spent 10 years with Andersen Consulting, a division of Arthur Andersen & Co., in
a variety of roles within their systems integration practice.

George S. Williams was employed by Applebee's in February 2007 as Executive Vice
President and Chief Marketing Officer.  From 2002 until joining Applebee's,  Mr.
Williams  was an  independent  marketing  consultant  and  founder  of  Williams
Enterprises.  From 1997 to 2002, Mr.  Williams was Senior Vice President of U.S.
Marketing  for  Blockbuster,  Inc. Mr.  Williams  spent seven years in corporate
brand marketing positions with Pearle Vision,  Inc., where he was Vice President
of Field Marketing and Sales, Long John Silver's, where he was Vice President of
Advertising  and  Promotions,  and Days Inns of America Inc.,  where he was Vice
President of Marketing.  Mr.  Williams also has 12 years of  advertising  agency
experience with Marc U.S.A.

Rohan M. St.  George was employed by Applebee's in November 2004 as President of
the International  Division.  Prior to joining Applebee's,  Mr. St. George was a
managing   director   for  Yum!   Restaurants   International   which   included
responsibility for Puerto Rico, the U.S. Virgin Islands and Venezuela. From 1998
to 2003, he was Vice President of Global  Operations for KFC, Pizza Hut and Taco
Bell.  Prior to 1998,  Mr. St. George had 14 years  operations  experience  with
Pizza Hut and KFC in various management positions.

Philip R. Crimmins was employed by  Applebee's in August 2002 as Vice  President
of Operations Excellence. In September 2003, Mr. Crimmins was promoted to Senior
Vice President of Development.  Prior to joining Applebee's,  he was employed by
Pizza  Hut,  Inc.  for 27 years,  most  recently  as Vice  President  of Service
Strategies.  While at Pizza Hut, Inc., Mr. Crimmins held several other positions
of increasing responsibility,  including senior leadership positions in research
and development, concept development,  customer satisfaction, field training and
restaurant operations.

Michael  Czinege  was  employed  by  Applebee's  in April  2004 as  Senior  Vice
President  and Chief  Information  Officer.  Prior to  joining  Applebee's,  Mr.
Czinege was Executive Vice  President of North American  operations for Celerant
Consulting.  From 1996 to 2004, he was a partner and later Vice President of Cap
Gemini  Ernst & Young,  one of the  world's  leading  providers  of  consulting,
technology  and  outsourcing  services.  Mr. Czinege has nearly three decades of
industry and consulting  experience in manufacturing and supply chain management
operations, business planning, sales and marketing, and information systems.

Kurt  Hankins was  employed by  Applebee's  in August 2001 as Vice  President of
Research and  Development.  In December 2003, Mr. Hankins was promoted to Senior
Vice President of Menu Development and Innovation.  Prior to joining Applebee's,
he served as Vice  President of Food and Beverage for Darden  Restaurants,  Inc.
from July 1999  through July 2001.  From August 1994 to July 1999,  he served as
Director of Food Research and Development for Darden Restaurants,  Inc. Prior to
his employment with Darden Restaurants,  Inc., he held various positions in food
and beverage research and development within the restaurant industry.

David R.  Parsley  was  employed  by  Applebee's  in April  2000 as Senior  Vice
President of Purchasing and Distribution. In January 2003, Mr. Parsley was named
Senior Vice President of Supply Chain Management.  Prior to joining  Applebee's,
Mr. Parsley held several positions with Prandium,  Inc.,  operator of El Torito,
Chi-Chi's and Koo Koo Roo,  from  November 1996 to April 2000,  most recently as
Senior Vice President of Quality and Supply Chain  Management.  He has also held
purchasing   positions  with  The  Panda   Management   Company,   Carl  Karcher
Enterprises, Proficient Food Company, Inc. and Baxter Healthcare Corporation.

                                       12
<PAGE>

Carol A.  DiRaimo was  employed by  Applebee's  in  November  1993 as  Associate
Director of  Financial  Planning and  Reporting  and was promoted to Director in
1995.  She was named  Director of Treasury  and  Corporate  Analysis in 1998 and
Director of Investor  Relations  and Corporate  Analysis in April 2000.  She was
promoted to  Executive  Director of Investor  Relations in January 2003 and Vice
President of Investor  Relations in February 2004. Prior to joining  Applebee's,
she was employed by  Gilbert/Robinson,  Inc. from May 1989 to November 1993. Ms.
DiRaimo, a certified public accountant,  was also employed by Deloitte Haskins &
Sells for six years.

Beverly  O.  Elving was  employed  by  Applebee's  in June 1998 as  Director  of
Corporate  Accounting.  In  September  2002,  Ms.  Elving was  promoted  to Vice
President of  Accounting.  In February  2005,  she was named Vice  President and
Controller.  Prior to joining  Applebee's,  she was Chief Financial Officer from
1996 to 1998  for  Integrated  Medical  Resources,  a  publicly-held  management
services  company.  From 1990 to 1996,  Ms.  Elving was  employed by the Federal
Deposit Insurance  Corporation as Director of Financial Operations and was later
promoted to Vice President of Financial  Operations & Accounting.  Ms. Elving, a
certified public accountant, was also employed by Arthur Andersen & Co. for five
years.

Rebecca R. Tilden was employed by  Applebee's  in November  2003 and became Vice
President and General Counsel in January 2004. Prior to joining Applebee's,  Ms.
Tilden was an independent  consultant  specializing in corporate  compliance and
ethics  issues.   From  1987  to  2000,  Ms.  Tilden  was  employed  by  Aventis
Pharmaceuticals,  Inc. in various  positions of  increasing  responsibility  and
served most recently as Vice President, Assistant General Counsel and Secretary.

Item 1A. Risk Factors

Our business and operations are subject to a number of risks and  uncertainties.
Listed below are  important  factors  that could cause actual  results to differ
materially   from  our   historical   results  and  from  those   projected   in
forward-looking statements contained in this report or in other filings with the
SEC.

We  and  our  franchisees  may  not  be  successful  in  operating   restaurants
profitably,  generating positive operating cash flows and generating  acceptable
returns on invested capital.

Our financial  success depends on our ability and the ability of our franchisees
to  operate  restaurants  profitably,  to  generate  positive  cash flows and to
generate  acceptable returns on invested capital.  The returns and profitability
of our restaurants may be negatively  impacted by a number of factors.  The most
significant are:

    o Declines in comparable store sales growth rates due to:
        o failing to consistently provide high quality products and innovate new
          products  to  retain  the  existing  customer  base  and  attract  new
          customers;
        o competitive intrusion in a market;
        o opening new  restaurants  that may  cannibalize  the sales of existing
          restaurants; and
        o less than effective national and local marketing.
    o Negative trends in operating expenses such as:
        o increases in food costs including rising commodity costs;
        o increases in labor costs including increases in minimum wage and other
          employment  laws,  immigration  reform,  increases  due to tight labor
          market conditions, health care and workers compensation costs; and
        o increases in other operating costs including utilities,  lease-related
          expenses and credit card processing fees.

                                       13
<PAGE>

    o Our inability to open new restaurants at acceptable sales volumes.
    o Our  inability  to increase  menu  pricing to offset  increased  operating
      expenses.
    o Negative  trends in other  expenses such as interest rates and the cost of
      construction  materials  that will  affect  our  ability to  maintain  and
      refurbish existing stores.
    o Our ability to manage a large number of  restaurants  that may be impacted
      by  unanticipated  changes in executive  management,  and  availability of
      qualified restaurant management, staff and other personnel.
    o Our  ability  to operate  effectively  in new  and/or  highly  competitive
      geographic  regions or local  markets in which we have  limited  operating
      experience.
    o Our ability to manage a large  number of  restaurants  in many  geographic
      areas with a standardized operational and marketing approach.

Our profitability could be adversely impacted by economic, demographic and other
changes that impact guest traffic.

Our business is affected by changes in consumer tastes and by national, regional
and local economic conditions,  demographic trends and traffic patterns near our
restaurants.  We can also be  adversely  affected by  publicity  resulting  from
actual or alleged food  quality,  illness,  injury or other  health  concerns or
operating issues related to restaurant operations or from food suppliers.

Our  profitability  depends  upon  maintaining  and  growing  the  value  of the
Applebee's brand.

Our  business is  dependent  upon guest  perceptions  of the  Applebee's  brand.
Management  believes it must preserve and grow the value of the Applebee's brand
to be  successful  in the  future.  Brand  value  is  based  upon  actual  guest
experiences  as well as consumer  perceptions  regarding a variety of subjective
qualities, and can be damaged by isolated business incidents that erode consumer
trust, particularly if the incidents receive considerable publicity or result in
litigation.

Increased competition for locations,  customers and staff could adversely impact
our profitability.

Competition in the casual dining segment of the restaurant  industry is expected
to remain intense with respect to price, service, location, concept and the type
and quality of food.  There is also intense  competition  for real estate sites,
qualified  management  personnel and hourly  restaurant  staff.  Our competitors
include  national,  regional and local chains,  as well as local  owner-operated
restaurants.  There are a number of well-established  competitors, some of which
have been in existence for a longer period than us and may be better established
in the markets where our restaurants are or may be located.

Our future leverage could have an effect on our operations.

Our Board of Directors is reviewing  various  strategic  alternatives to enhance
shareholder  value.  While no decision as to any particular course of action has
been made, some of the  alternatives  under review could lead us to increase our
debt.  Increased leverage and debt service  obligations could have the following
consequences:

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

                                       14
<PAGE>

    o We may be required to dedicate a  substantial  portion of our cash flow to
      the payment of  interest or  principal  on our  indebtedness,  which could
      reduce the amount of funds available for operations and thus place us at a
      competitive disadvantage as compared with competitors that are less highly
      leveraged.
    o From time to time, we may engage in various capital  markets,  bank credit
      and other financing activities to meet our cash requirements.  We may have
      difficulty  obtaining  additional  financing  at  economically  acceptable
      interest rates.
    o Our  new  revolving  credit  facility   contains,   and  any  future  debt
      obligations may contain,  certain negative covenants including limitations
      on liens, consolidations and mergers, indebtedness,  capital expenditures,
      asset  dispositions,  sale-leaseback  transactions,  dividends  and  stock
      repurchases.

We and our franchisees may not be successful in opening additional restaurants.

Our  continued  growth  depends,  in part, on our ability and the ability of our
franchisees to open additional restaurants. The opening of new restaurants, both
by us and our  franchisees,  depends on a number of  factors,  many of which are
beyond our  control  or the  control of our  franchisees.  The most  significant
factors are:

    o the cost and availability of suitable restaurant locations;
    o acceptable leasing or financial terms;
    o the availability of capital to finance growth;
    o cost-effective and timely construction of restaurants (construction can be
      delayed due to,  among other  reasons,  labor  disputes,  local zoning and
      licensing matters and weather conditions); and
    o securing required governmental permits and licenses.

Substantial  increases in capital  expenditure costs may adversely impact future
growth.

Our capital expenditures are primarily related to the development or acquisition
of  additional   restaurants,   maintenance   and   refurbishment   of  existing
restaurants, and expansion of information technology systems and other corporate
infrastructure.  The costs related to restaurant  development,  maintenance  and
refurbishment  include purchases and leases of land, buildings,  equipment,  and
repairs  and  maintenance.  The  labor  and  material  costs  expended  vary  by
geographical  location and are subject to general price increases.  There can be
no  assurance  that  future  capital  expenditure  costs will not  increase.  In
addition,  capital  expenditures  will be  required to  maintain  and  refurbish
restaurants  as  they  age.  There  can be no  assurance  that  we  will  remain
profitable in these  restaurants even after  maintenance and  refurbishment  has
been completed.

Our continued growth is, in part,  dependent upon our ability to find and retain
qualified   franchisees  and  for  those  franchisees  to  operate   restaurants
profitably in compliance with our standards,  build new restaurants and plan for
succession.

Although we have established criteria to evaluate prospective franchisees, there
can be no  assurance  that our  existing  or  future  franchisees  will have the
business  abilities  or  access  to  financial   resources   necessary  to  open
restaurants or that they will successfully  develop or operate these restaurants
in their franchise areas in a manner consistent with our standards.

We  intend  to  continue  our  efforts  to  franchise   restaurants  in  certain
international  territories.  The  ability  of  franchisees  to open and  operate
restaurants  outside of the United  States is subject to the same factors as are
applicable to opening domestic  restaurants  described above, as well as factors
related to additional  legal,  regulatory,  cultural  acceptability and building
design issues  involved in  international  locations.  There can be no assurance
that we will be able to attract  qualified  franchisees or that such franchisees
will be able to open and operate restaurants successfully.

                                       15
<PAGE>

Further  penetrating   existing  mature  markets  could  impact  the  sales  and
profitability of our existing restaurants in those markets.

Part of our  restaurant  development  may  occur  in more  mature  markets.  Our
restaurants  typically  attract customers within a limited trade area. Sales and
profitability of existing  restaurants may be negatively impacted by the opening
of a restaurant within this trade area.

The impact of government  regulation may cause us to incur  additional  costs or
liabilities.

Our  restaurants  are  subject  to  various  foreign,  federal,  state and local
government  regulations,  including  those  related  to the  sale  of  food  and
alcoholic  beverages and labor laws. Failure to obtain or maintain the necessary
licenses,  permits and  approvals,  including  food and liquor  licenses,  could
adversely  affect our  operating  results or delay or result in our  decision to
cancel the opening of new  restaurants.  Local  authorities  may suspend or deny
renewal of our food and liquor  licenses if they determine that our conduct does
not meet applicable standards or if there are changes in regulations in which we
are unable to comply.

We are subject to "dram shop" statutes in some states.  These statutes generally
allow a person  injured  by an  intoxicated  person to recover  damages  from an
establishment  that  wrongfully  served  alcoholic  beverages to the intoxicated
person. A judgment  substantially in excess of our insurance coverage could harm
our financial condition.

Various federal and state labor laws related to employment eligibility,  minimum
wage requirements,  overtime pay, meal and rest breaks and other matters have an
effect on our  operating  costs.  Changes in these  laws,  including  additional
government-imposed  increases in minimum  wages,  overtime  pay,  paid leaves of
absence and mandated  health  benefits,  and  increased  tax  reporting  and tax
payment  requirements  for  associates  who receive  tips, or a reduction in the
number of states that allow tips to be credited toward minimum wage requirements
could harm our operating results.

The federal  Americans with  Disabilities  Act prohibits  discrimination  on the
basis of  disability  in public  accommodations  and  employment.  Although  our
restaurants are designed to be accessible to the disabled,  we could be required
to make  additional  modifications  to our restaurants to provide service to, or
make reasonable  accommodations  for, disabled  persons.  We are also subject to
various federal and state environmental  regulations that could delay or prevent
development of new restaurants in certain locations.

We are also subject to foreign,  federal and state laws that  regulate the offer
and sale of franchises and the relationship with our franchisees. These laws and
regulations,  together with decisions of several state and federal  courts,  may
limit our ability to enforce certain  provisions of, or alter or terminate,  our
franchise agreements.

A significant increase in litigation could have a material adverse effect on our
results of operations, financial condition and business prospects.

We are subject to complaints or litigation from guests alleging illness,  injury
or other  food  quality,  health  or  operational  concerns.  Adverse  publicity
resulting from these  allegations  could harm the operation and profitability of
our restaurants, regardless of whether the allegations are valid, whether we are
liable or whether the claim involves our restaurants or one of our franchisees.

                                       16
<PAGE>

Failure to comply with the various  federal and state labor laws  pertaining  to
minimum  wage,  overtime  pay,  meal and rest  breaks,  unemployment  tax rates,
workers' compensation rates, citizenship or residency requirements,  child labor
requirements  and sales taxes may have a material adverse effect on our business
or  operations.   Further,   employee  claims  based  on,  among  other  things,
discrimination,  harassment or wrongful termination may divert our financial and
management resources and adversely affect our operations.

Our  growth  and  profitability   could  be  impacted  by  the  lack  of  needed
inventories.

Our profitability depends, in part, on our strategies to control food costs. Our
dependence on commodities subjects us to the risk that shortages or interruption
in supply,  caused by  adverse  weather or other  conditions,  could  negatively
affect the availability, quality or cost of ingredients. Changes in the price of
commodities,   particularly  beef  and  chicken,  could  materially  impact  our
profitability.  We may not be able to react to increased food costs by adjusting
our supply chain  practices or menu pricing  which would  negatively  impact our
operating results.

Our global supply chain may be subject to  interruptions,  dislocation or may be
rendered less effective for a variety of reasons such as:

    o political unrest;
    o animal borne disease or illness;
    o contamination  of growing  fields,  water  supplies  or animal  processing
      facilities;
    o inadequate storage facilities; and
    o loss of effective  climate  controls in storage  facilities and processing
      plants.

Our continued growth depends on our successful  adaptation and implementation of
our operating systems.

System-wide  expansion  has and will continue to require the  implementation  of
enhanced  operating  systems.  There can be no assurance that we will be able to
anticipate,  invest in and  effectively  manage the  information  technology and
logistical resources necessary to support the growth of our business.

Our  future  growth  may  depend,  in part,  on our  acquisition  of  Applebee's
restaurants from our franchisees.

We  may  acquire  Applebee's  restaurants  from  our  franchisees.  There  is no
assurance  that we will be able to acquire  franchise  restaurants  at favorable
prices. In addition, if we complete acquisitions in the future, the acquisitions
may involve the following risks:

    o increases in our debt and contingent liabilities;
    o entry into  geographic  markets in which we have little or no direct prior
      experience; and
    o unanticipated or undiscovered  legal  liabilities or other  obligations of
      acquired franchise restaurants.

Even  if we are  successful  in  acquiring  franchise  operations,  there  is no
assurance that we will be able to operate the acquired  restaurants  profitably.
The integration of acquired restaurants into our operations may involve a number
of issues, any of which could materially and adversely affect our operations and
financial performance. These issues include:

    o burdens on our management resources;
    o diversion of cash flows;
    o acquisition  integration  issues,  such as  business  process  and  system
      incompatibilities;
    o potential loss of key personnel of acquired franchise restaurants; and
    o potential loss of customer relationships and related revenues.

                                       17
<PAGE>

Item 1B. Unresolved Staff Comments

Not applicable.





                                       18
<PAGE>

Item 2. Properties

As of December  31,  2006,  we operated 521 company  restaurants.  Of these,  we
leased the building for 86 sites, owned the building and leased the land for 230
sites,  and  owned the land and  building  for 205  sites.  In  addition,  as of
December 31, 2006, we owned five sites for future development of restaurants and
had entered into 11 lease agreements for restaurant sites we plan to open during
2007. Our leases generally have an initial term of 10 to 20 years,  with renewal
terms  of 5 to 20  years,  and  provide  for a fixed  rental  plus,  in  certain
instances,  percentage rentals based on gross sales. In addition,  our leases in
many  instances  include  escalation  of rent  payments  during the initial term
and/or during the renewal terms. Our  company-owned  restaurants have an average
of 4,940 square feet and seat an average of 168 guests.

Under our  franchise  agreements,  we have  certain  rights to gain control of a
restaurant site in the event of default under the franchise agreement.

We own an 80,000  square foot  office  building  and lease a 23,000  square foot
office  building  in  Overland  Park,   Kansas,   located  in  the  Kansas  City
metropolitan  area,  in  which  our  corporate  offices  are  headquartered.  In
September  2006,  we began to actively  market our existing  80,000  square foot
headquarters under a plan approved by management.  We also lease office space in
certain regions in which we operate restaurants.

In January 2006, we purchased land for a new corporate  headquarters  in Lenexa,
Kansas,  located in the Kansas City metropolitan area. We anticipate  relocating
to our new corporate headquarters in the fourth quarter of 2007.



                                       19
<PAGE>

The following table sets forth the 49 states, 16 countries outside of the United
States and one U.S.  territory in which Applebee's are located and the number of
restaurants operating in each state or country as of December 31, 2006:

<TABLE>
<CAPTION>
                                                                 Number of Restaurants
                                                  -----------------------------------------------------
                    State or Country                 Company            Franchise        Total System
            ----------------------------------    --------------      --------------     --------------
            <S>                                   <C>                 <C>                <C>
            Domestic:
            Alabama........................                 --                  28                 28
            Alaska.........................                 --                   2                  2
            Arizona........................                 --                  32                 32
            Arkansas.......................                  2                   9                 11
            California.....................                 25                  87                112
            Colorado.......................                 --                  31                 31
            Connecticut....................                 --                  11                 11
            Delaware.......................                  3                   8                 11
            Florida........................                 --                 106                106
            Georgia........................                 --                  71                 71
            Idaho..........................                 --                  10                 10
            Illinois.......................                 13                  54                 67
            Indiana........................                  7                  58                 65
            Iowa...........................                 --                  25                 25
            Kansas.........................                 16                  19                 35
            Kentucky.......................                  5                  31                 36
            Louisiana......................                 --                  16                 16
            Maine..........................                 11                  --                 11
            Maryland.......................                 12                  14                 26
            Massachusetts..................                 38                  --                 38
            Michigan.......................                 67                  21                 88
            Minnesota......................                 63                   2                 65
            Mississippi....................                  3                  13                 16
            Missouri.......................                 61                   2                 63
            Montana........................                 --                   7                  7
            Nebraska.......................                 --                  19                 19
            Nevada.........................                 15                  --                 15
            New Hampshire..................                 16                  --                 16
            New Jersey.....................                 --                  50                 50
            New Mexico.....................                  8                  10                 18
            New York.......................                  1                  94                 95
            North Carolina.................                  2                  53                 55
            North Dakota...................                 --                  10                 10
            Ohio...........................                 --                  92                 92
            Oklahoma.......................                 --                  19                 19
            Oregon.........................                 --                  17                 17
            Pennsylvania...................                  1                  63                 64
            Rhode Island...................                  8                  --                  8
            South Carolina.................                 --                  41                 41
            South Dakota...................                 --                   7                  7
            Tennessee......................                  5                  39                 44
            Texas..........................                 60                  34                 94
            Utah...........................                 --                  15                 15
            Vermont........................                  3                  --                  3
            Virginia.......................                 70                   2                 72
            Washington.....................                 --                  36                 36
            West Virginia..................                  2                  14                 16
            Wisconsin......................                  4                  43                 47
            Wyoming........................                 --                   5                  5
                                                  --------------      --------------     --------------
              Total Domestic...............                521               1,320              1,841
                                                  --------------      --------------     --------------

</TABLE>

                                       20
<PAGE>

<TABLE>
<CAPTION>
                                                                 Number of Restaurants
                                                  -----------------------------------------------------
                    State or Country                 Company            Franchise        Total System
            ----------------------------------    --------------      --------------     --------------
            <S>                                   <C>                 <C>                <C>
            International:
            Bahrain........................                 --                   1                   1
            Brazil.........................                 --                   4                   4
            Canada.........................                 --                  23                  23
            Chile..........................                 --                   1                   1
            Ecuador........................                 --                   1                   1
            Egypt..........................                 --                   1                   1
            Greece.........................                 --                   8                   8
            Guatemala......................                 --                   1                   1
            Honduras.......................                 --                   4                   4
            Jordan.........................                 --                   1                   1
            Kuwait.........................                 --                   3                   3
            Lebanon........................                 --                   1                   1
            Mexico.........................                 --                  32                  32
            Qatar..........................                 --                   2                   2
            Saudi Arabia...................                 --                   4                   4
            United Arab Emirates...........                 --                   1                   1
            U.S. Territories...............                 --                   1                   1
                                                  --------------      --------------     --------------
               Total International.........                 --                  89                  89
                                                  --------------      --------------     --------------
                  Total System.............                521               1,409               1,930
                                                  ==============      ==============     ==============
</TABLE>

Item 3. Legal Proceedings

We  are  subject  from  time  to  time  to  lawsuits,  claims  and  governmental
inspections or audits arising in the ordinary course of business.  Some of these
lawsuits  purport to be class actions and/or seek  substantial  damages.  In the
opinion of management,  these matters are adequately covered by insurance, or if
not so  covered,  are without  merit or are of such a nature or involve  amounts
that would not have a material  adverse  impact on our business or  consolidated
financial position.

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

Not applicable.

                                       21
<PAGE>

                                     PART II

Item 5. Market for Registrant's  Common Equity,  Related Stockholder Matters and
Issuer Purchases of Equity Securities

1.   Our common stock trades on The NASDAQ Global Select Market under the symbol
     APPB.

     The table below sets forth for the fiscal  quarters  indicated the reported
     high and low sale  prices of our common  stock,  as  reported on The NASDAQ
     Global Select Market.

<TABLE>
<CAPTION>
                                                       2006                             2005
                                          -------------------------------- -------------------------------
                                                High            Low              High           Low
                                          --------------- ---------------- --------------- ---------------
                <S>                       <C>             <C>              <C>             <C>
                First Quarter              $      26.47    $       21.62    $      29.19    $      24.69
                Second Quarter             $      25.04    $       19.43    $      28.65    $      24.25
                Third Quarter              $      23.07    $       17.29    $      26.79    $      19.95
                Fourth Quarter             $      25.47    $       20.77    $      23.98    $      19.73
</TABLE>

2.   Number of stockholders of record at February 23, 2007: 1,279

3.   We  declared an annual  dividend  of $0.22 per common  share on December 7,
     2006 for  stockholders of record on December 22, 2006, and the dividend was
     paid on January  22,  2007.  We  declared  an annual  dividend of $0.20 per
     common  share in October  2005 for  stockholders  of record on December 23,
     2005, and the dividend was paid on January 23, 2006.

     We presently anticipate continuing the payment of cash dividends which will
     be dependent upon future earnings and cash flows, capital requirements, our
     financial  condition,  returns to  shareholders  and certain other factors.
     There can be no  assurance  in 2007 or future  years as to the amount  that
     will be available for the declaration of dividends, if any.

4.   For  information  on our  equity  compensation  plans,  refer  to Item  12,
     "Security Ownership of Certain Beneficial Owners and Management and Related
     Stockholder Matters."

                                       22
<PAGE>


5.   Issuer Purchases of Equity Securities

During fiscal 2006, we  repurchased  1,760,506  shares of our common stock at an
average price of $21.88 for an aggregate cost of approximately $38,522,000.  The
table below sets forth  purchases of our common stock during the fourth  quarter
of fiscal 2006:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
                                         Purchases of Equity Securities(1)
-----------------------------------------------------------------------------------------------------------------------------------
                                           (a)               (b)                   (c)                        (d)
----------------------------------- ------------------ ------------- --------------------------- ----------------------------------
<S>                                 <C>                <C>           <C>                         <C>
                                                                       Total Number of Shares     Maximum Dollar Value of Shares
                                    Total Number of      Average        Purchased as Part of      that May Yet Be Purchased Under
                                    Shares Purchased    Price Paid    Publicly Announced Plans         the Plans or Programs
              Period                                    Per Share             or Programs                   (in thousands)
----------------------------------- ------------------ ------------- --------------------------- ----------------------------------
September 25, 2006 through
October 22, 2006                              4,200       $20.96                 4,200                       $101,351
----------------------------------- ------------------ ------------- --------------------------- ----------------------------------
October 23, 2006 through
November 19, 2006                            20,800       $23.97                20,800                       $250,852
----------------------------------- ------------------ ------------- --------------------------- ----------------------------------
November 20, 2006 through
December 31, 2006                           449,606       $23.15               449,606                       $240,445
----------------------------------- ------------------ ------------- --------------------------- ----------------------------------
              Total                         474,606                            474,606
=================================== ================== ============= =========================== ==================================



<FN>
(1) In October 2005, our Board of Directors authorized repurchases of our common
stock of up to $175,000,000  during 2005 and 2006, subject to market conditions.
In November 2006, with approximately  $100,000,000 of the previous authorization
remaining,  our Board of  Directors  authorized  additional  repurchases  of our
common stock of up to $150,000,000, subject to market conditions, for a total of
approximately $250,000,000 in authorized repurchases.
</FN>
</TABLE>

                                       23
<PAGE>


5. Performance Graph

The  following  graph  compares  the  annual  change  in  our  cumulative  total
stockholder  return for the five fiscal years ended  December 31, 2006 (December
30, 2001 to December 31, 2006) based upon the market price of our common  stock,
compared  with the  cumulative  total return on the NASDAQ  Market Index and the
Hemscott Group Index  assuming $100 was invested and dividends were  reinvested.
The NASDAQ Market Index includes both domestic and foreign  companies that trade
on the NASD Capital,  NASD Global and NASD Global Select  Markets.  The Hemscott
Group Index includes approximately 80 restaurant companies.

Comparison of five-year cumulative total return among Applebee's International,
               Inc., NASDAQ Market Index and Hemscott Group Index

                               (PERFORMANCE GRAPH)

  Source: Hemscott Industry Group

<TABLE>
<CAPTION>
                                                                      Measurement Period
                                       ----------------------------------------------------------------------------------
                                       December 30,  December 29,  December 28,  December 26,  December 25,  December 31,
       Company/Index/Market                2001          2002          2003          2004          2005          2006
------------------------------------   ------------  ------------  ------------  ------------  ------------  ------------
<S>                                    <C>            <C>            <C>            <C>           <C>            <C>
Applebee's International, Inc........   $  100.00     $  103.72     $  169.81     $  167.92     $  153.78     $  166.10
Hemscott Group Index.................   $  100.00     $   79.82     $  109.90     $  134.23     $  142.81     $  175.65
NASDAQ Market Index..................   $  100.00     $   69.75     $  104.88     $  113.70     $  116.19     $  128.12
</TABLE>




                                       24
<PAGE>

Item 6. Selected Financial Data

The following  table sets forth our selected  financial data for the periods and
the dates  indicated.  Fiscal 2006 contained 53 weeks.  Fiscal 2002 through 2005
each contained 52 weeks.  The following  should be read in conjunction  with the
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and  Analysis  of  Financial  Condition  and  Results of  Operations"  appearing
elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
                                                                          Fiscal Year Ended
                                           -------------------------------------------------------------------------------
                                             December 31,    December 25,    December 26,    December 28,    December 29,
                                                2006(1)         2005            2004            2003            2002
                                           --------------- --------------- --------------- --------------- ----------------
                                                              (in thousands, except per share amounts)
<S>                                        <C>             <C>              <C>            <C>             <C>
STATEMENT OF EARNINGS DATA:
Company restaurant sales.................   $  1,196,258    $  1,082,641    $    976,798    $  867,158      $  724,616
Franchise royalties and fees.............        139,855         128,813         121,221       109,604         102,180
Other franchise income...................          1,808           5,196          13,615        13,147           2,688
                                           --------------- --------------- --------------- -------------------------------
     Total operating revenues............   $  1,337,921     $ 1,216,650     $ 1,111,634     $ 989,909      $  829,484
                                           =============== =============== =============== ===============================

Operating earnings.......................   $    130,784    $    157,637    $    165,280    $  152,677      $  126,590
Net earnings.............................   $     80,906    $    101,802    $    110,865    $   94,349      $   80,527
Basic net earnings per share.............   $       1.09    $       1.29    $       1.36    $     1.14      $     0.97
Diluted net earnings per share...........   $       1.08    $       1.27    $       1.33    $     1.10      $     0.94
Dividends declared per share.............   $       0.22    $       0.20    $       0.06    $     0.05      $     0.04
Basic weighted average shares
   outstanding...........................         74,001          78,650          81,528        82,944          83,407
Diluted weighted average shares
   outstanding...........................         74,936          80,010          83,600        85,409          85,382

BALANCE SHEET DATA
     (AT END OF FISCAL YEAR):
Total assets.............................   $    935,456    $    878,588    $    754,431    $  651,078      $  573,647
Long-term debt, including
  current portion, and notes payable.....   $    175,185    $    188,367    $     35,694    $   20,862      $   52,563
Stockholders' equity.....................   $    486,654    $    412,610    $    496,727    $  453,143      $  385,201


<FN>
(1) Beginning in 2006, we began recording  stock-based  compensation  expense in
accordance  with  Statement  of  Financial   Accounting  Standards  No.  123(R),
"Stock-Based Compensation".
</FN>
</TABLE>



                                       25
<PAGE>

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


Forward-Looking Statements

The  statements  contained  in the  "Management's  Discussion  and  Analysis  of
Financial  Condition and Results of  Operations"  section  regarding  restaurant
development,  comparable sales,  revenue growth,  restaurant margins,  commodity
costs,  general and administrative  expenses,  capital  expenditures,  return on
equity  and  financial  commitments  are  forward-looking  and based on  current
expectations.  There are several risks and uncertainties that could cause actual
results to differ materially from those described.  These risks include, but are
not  limited to, our  ability  and the  ability of our  franchisees  to open and
operate additional  restaurants  profitably and generate positive operating cash
flows and return on invested  capital,  the impact of economic  and  demographic
factors  on  consumer  spending,  maintaining  and  growing  the  value  of  the
Applebee's brand, the impact of intense competition in the casual dining segment
of the restaurant industry, the impact of future leverage on our operations, the
failure to open the restaurants anticipated,  the impact of increases in capital
expenditure  costs on future  development,  our  ability to  attract  and retain
qualified  franchisees,  and the impact of further penetration of restaurants in
existing markets.  For a more detailed  discussion of the principal factors that
could cause actual results to be materially different,  you should read our risk
factors in Item 1A of this Form  10-K.  We  disclaim  any  obligation  to update
forward-looking statements.

General

We operate on a 52 or 53 week fiscal year ending on the last Sunday in December.
Our fiscal years are as follows:

<TABLE>
<CAPTION>
                                 Fiscal Year                     Number
   Fiscal Year                     Ending                       of Weeks
------------------        --------------------------        -----------------
<S>                       <C>                               <C>
      2004                December 26, 2004                        52
      2005                December 25, 2005                        52
      2006                December 31, 2006                        53
      2007                December 30, 2007                        52
</TABLE>

Our operating revenues are generated from three primary sources:

    o Company restaurant sales (food and beverage sales)
    o Franchise royalties and fees
    o Other franchise income

Beverage  sales  consist of sales of alcoholic  beverages,  while  non-alcoholic
beverages are included in food sales.

Franchise  royalties are  generally 4% of each  franchise  restaurant's  monthly
gross sales. Franchise fees typically are $35,000 for each restaurant opened.

Other franchise income includes revenue from information technology products and
services provided to certain  franchisees.  In 2005, other franchise income also
included  insurance  premiums for the current year and premium audit adjustments
for prior years from franchisee  participation in our captive insurance program.
In  2006,  we  discontinued  writing  insurance  coverage  for  new or  existing
participants.


                                       26
<PAGE>


Certain expenses relate only to company-owned restaurants. These include:

    o Food and beverage costs
    o Labor costs
    o Direct and occupancy costs
    o Pre-opening expenses

Cost of other franchise income includes costs related to information  technology
products and services  provided to certain  franchisees.  In 2005, cost of other
franchise  income included the costs related to franchisee  participation in our
captive insurance program.  In 2006, we discontinued  writing insurance coverage
for new or existing participants.  Cost of other franchise income includes costs
related to the resolution of claims arising from franchisee participation in our
captive insurance program.

Other expenses,  such as general and administrative  and amortization  expenses,
relate to both company-owned restaurants and franchise operations.

Overview

Applebee's  International,  Inc. and our  subsidiaries  develop,  franchise  and
operate casual dining restaurants under the name "Applebee's  Neighborhood Grill
& Bar(R),"  which is the largest  casual  dining  concept in the world with over
1,900 system-wide restaurants open as of December 31, 2006(1). The casual dining
segment of the  restaurant  industry  is highly  competitive  and there are many
factors that affect our profitability. Our industry is susceptible to changes in
economic  conditions,  trends  in  lifestyles,   fluctuating  costs,  government
regulation,  availability of resources and consumer perceptions. When evaluating
and assessing our financial performance, we believe there are five key factors:

    o Development - the number of new company and franchise  restaurants  opened
      during the period. Our expansion strategy has been to cluster  restaurants
      in  targeted   markets,   thereby   increasing   consumer   awareness  and
      convenience,   and  enabling  us  to  take   advantage   of   operational,
      distribution  and advertising  efficiencies.  We currently expect that the
      Applebee's system will ultimately  encompass at least 3,000 restaurants in
      the United States, as well as the potential for at least 1,000 restaurants
      internationally.  In  2006,  we and  our  franchisees  opened  35 and  108
      restaurants,   respectively.   Together,  we  have  opened  at  least  100
      restaurants system-wide each year for the past 14 fiscal years.

    o Comparable  restaurant  sales - a  year-over-year  comparison of sales for
      restaurants  open at least 18  months.  Changes in  comparable  restaurant
      sales are driven by changes in the average  guest check and/or  changes in
      guest traffic.  Average guest check changes result from menu price changes
      and/or  changes  in menu  mix.  During  2006,  the  impact  of menu  price
      increases on company  restaurants was approximately  2.2%. Although we may
      have  changes in our average  guest check from period to period,  our main
      focus has been  increasing  guest traffic as we view this  component to be
      more  indicative of the long-term  health of the Applebee's  brand. We are
      constantly  seeking to increase  guest  traffic by  focusing on  improving
      operations and enhancing our menu with new food and beverage offerings. In
      2006,  we began  implementation  of a plan to  substantially  improve  the
      quality and flavor profile of our food and beverage  offerings as a result
      of comprehensive  consumer research we completed in 2005. In 2006, company
      comparable  sales  decreased 1.0%,  while domestic  franchise and domestic
      system-wide  comparable  sales decreased 0.5% and 0.6%,  respectively.  We
      believe our sales and traffic  have been  negatively  impacted by multiple
      factors. Lower income households, which represent a significant portion of
      our guests,  have been impacted by higher energy costs and interest rates.
      The bar and grill category of the restaurant  industry has been negatively
      impacted  by  increased  trade-down  to  quick-service   restaurants.   In
      addition,  the supply  growth of units  opened in the category in 2006 and
      2005 has outpaced demand contributing to weaker sales trends.

(1) Source: Nation's Restaurant News, "Special Report: Top 100," June 26, 2006.

                                       27
<PAGE>

    o Company  restaurant  margins -  company  restaurant  sales,  less food and
      beverage,  labor,  direct and occupancy  restaurant  costs and pre-opening
      expenses,  expressed as a percentage of company restaurant sales.  Company
      restaurant  margins are susceptible to  fluctuations  in commodity  costs,
      labor  costs  and  other  operating  costs  such  as  utilities.   Company
      restaurant  margins  were 12.1%,  13.4% and 15.6% in 2006,  2005 and 2004,
      respectively.

    o General and administrative  expenses - general and administrative expenses
      expressed  as a  percentage  of  total  operating  revenues.  General  and
      administrative  expenses were 10.5%, 9.0% and 9.4% in 2006, 2005 and 2004,
      respectively.   Stock-based   compensation   included   in   general   and
      administrative  expenses was 1.5%,  0.2%, and 0.1% in 2006, 2005 and 2004,
      respectively.

    o Return  on  invested  capital - net  earnings  expressed  as a percent  of
      average invested capital.  We believe this is an important indicator as it
      allows us to evaluate our ability to create value for our shareholders.


Application of Critical Accounting Policies

Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations  is based  upon our  consolidated  financial  statements,  which were
prepared in accordance  with  accounting  principles  generally  accepted in the
United  States of America.  These  principles  require us to make  estimates and
assumptions  that  affect the  reported  amounts in the  consolidated  financial
statements  and notes thereto.  Actual results may differ from these  estimates,
and such differences may be material to our consolidated  financial  statements.
We believe that the following  accounting  policies involve a significant degree
of judgment or complexity.

Inventory  valuation:  We state  inventories  at the  lower of cost,  using  the
first-in,  first-out  method,  or market.  Market is  determined  based upon our
estimates of the net realizable value.

We may  periodically  purchase and  maintain  inventories  of certain  specialty
products to ensure  sufficient  supplies to the system,  to ensure continuity of
supply, or to control food costs. We review and make quality control inspections
of our inventories to determine  obsolescence on an ongoing basis. These reviews
require management to make certain estimates and judgments  regarding  projected
usage which may change in the future and may  require us to record an  inventory
impairment.

Property and equipment: We report property and equipment at historical cost less
accumulated  depreciation.  Depreciation is provided on the straight-line method
over the  estimated  useful  lives of the  assets.  Leasehold  improvements  are
amortized over the lesser of the lease term or the estimated  useful life of the
related  asset.  The useful  lives of the  assets  are based  upon  management's
expectations.  We  periodically  review the assets for changes in  circumstances
which may impact their useful lives. If there are changes in circumstances  that
revise  an  asset's  useful  life,  we  will  adjust  the  depreciation  expense
accordingly for that asset in future periods.

Stock-based  compensation:   Beginning  in  2006,  we  account  for  stock-based
compensation  in accordance  with  Statement of Financial  Accounting  Standards
("SFAS") No.  123(R),  "Share-Based  Payment".  As required by SFAS No.  123(R),
stock-based  compensation  is estimated  for equity  awards at fair value at the
grant date. We determine the fair value of equity awards using a binomial model.
The binomial model requires various highly judgmental  assumptions including the
expected life,  stock price  volatility  and the forfeiture  rate. If any of the
assumptions  used in the model change  significantly,  stock-based  compensation
expense may differ  materially  in the future from that  recorded in the current
period.

                                       28
<PAGE>

Impairment and other restaurant closure costs: We periodically review restaurant
property and equipment for impairment on a restaurant-by-restaurant  basis using
certain market and restaurant  operating  indicators  including  historical cash
flows as well as current  estimates of future cash flows and/or  appraisals.  We
review  other   long-lived   assets  at  least   annually  and  when  events  or
circumstances  indicate  that  the  carrying  value  of  the  asset  may  not be
recoverable.  The  recoverability is assessed in most instances by comparing the
carrying value to its undiscounted cash flows. This assessment  process requires
the use of estimates and assumptions  regarding  future cash flows and estimated
useful lives,  which are subject to a significant  degree of judgment.  If these
assumptions  change in the  future,  we may be  required  to  record  impairment
charges for these assets.

Income taxes: We record  valuation  allowances  against our deferred tax assets,
when necessary,  in accordance with SFAS No. 109, "Accounting for Income Taxes."
Realization of deferred tax assets is dependent on future  taxable  earnings and
is therefore uncertain. We assess the likelihood that our deferred tax assets in
each of the  jurisdictions  in which we operate  will be  recovered  from future
taxable  income.  Deferred tax assets do not include future tax benefits that we
deem likely not to be realized.

We are  periodically  audited by foreign and domestic tax  authorities  for both
income and sales and use  taxes.  We record  accruals  when we  determine  it is
probable that we have an exposure in a matter relating to an audit. The accruals
may change in the future due to new developments in each matter.

Legal and  insurance  reserves:  We are  periodically  involved in various legal
actions.  We are required to assess the probability of any adverse  judgments as
well as the potential range of loss. We determine the required  accruals after a
review of the facts of each legal action.

We use estimates in the determination of the appropriate liabilities for general
liability,  workers' compensation and health insurance.  The estimated liability
is  established  based upon  historical  claims data and  third-party  actuarial
estimates of  settlement  costs for incurred  claims.  Unanticipated  changes in
these factors may require us to revise our estimates.

We periodically reassess our assumptions and judgments and make adjustments when
significant  facts  and  circumstances  dictate.  A change  in any of the  above
estimates could impact our consolidated  statements of earnings, and the related
asset or liability recorded in our consolidated balance sheets would be adjusted
accordingly.  Historically,  actual results have not been  materially  different
than the estimates that are described above.

Acquisitions

All of our  acquisitions  discussed  below  have  been  accounted  for using the
purchase  method of accounting  and,  accordingly,  our  consolidated  financial
statements reflect the results of operations for each acquisition  subsequent to
the date of  acquisition.  The  assets  acquired  and  liabilities  assumed  are
recorded at  estimates  of fair value as  determined  by  management  based upon
information available.  We finalize the allocation of purchase price to the fair
value of assets  acquired and  liabilities  assumed  when we obtain  information
sufficient to complete the allocation, but in each case, no longer than one year
after the acquisition date.

In April 2004, we completed the  acquisition  of the operations and assets of 10
Applebee's   restaurants   located  in  Southern  California  for  approximately
$13,800,000  in cash.  The  purchase  price was  allocated  to the fair value of
property and equipment of  $2,500,000,  goodwill of  $10,800,000,  and other net
assets of approximately $500,000.

                                       29
<PAGE>

In May 2005,  we completed  the  acquisition  of 12  Applebee's  restaurants  in
Missouri, Kansas and Arkansas, which included one restaurant under construction,
for  approximately  $39,500,000 in cash. The purchase price was allocated to the
fair value of property and equipment of  $17,500,000,  goodwill of  $21,500,000,
reacquired franchise rights of approximately  $300,000,  and other net assets of
approximately $200,000.

In January 2006, we completed the acquisition of four Applebee's  restaurants in
the Houston market for approximately  $8,100,000 in cash. The purchase price was
allocated to the fair value of property and equipment of $7,400,000, goodwill of
approximately  $500,000,  reacquired franchise rights of approximately $100,000,
and other net assets of approximately $100,000.

The  following  table is comprised of actual  company  restaurant  sales for the
three  restaurant  acquisitions  above,  which are included in our  consolidated
financial statements for each period presented, and pro forma company restaurant
sales. The pro forma company  restaurant sales for 2006 include sales related to
the January 2006 acquisition  discussed above as if the acquisition had occurred
as of the  beginning of 2006.  The pro forma company  restaurant  sales for 2005
includes  sales  related  to the  January  2006  acquisition  and the  May  2005
acquisition  discussed  above  as if the  acquisitions  had  occurred  as of the
beginning of 2005.  The pro forma  company  restaurant  sales for 2004  includes
sales  related  to the May  2005  acquisition  and the  April  2004  acquisition
discussed above as if the acquisition had occurred as of the beginning of 2004.

<TABLE>
<CAPTION>
                                                             2006            2005            2004
                                                       --------------- --------------- ---------------
<S>                                                    <C>             <C>             <C>
Actual company restaurant sales
    for acquired restaurants.........................    $   6,400       $  17,000       $  17,600
                                                       =============== =============== ===============

Pro forma company restaurant sales
    for acquired restaurants.........................    $   7,100       $  32,800       $  52,600
                                                       =============== =============== ===============
</TABLE>

In April 2005, we completed the acquisition of eight  Applebee's  restaurants in
the  Memphis  market,  which  were  closed in 2004 by a former  franchisee,  for
approximately  $8,800,000  payable in cash. In connection with this acquisition,
we paid  approximately  $800,000 in 2004 and  $8,000,000  in 2005.  The purchase
price of $8,800,000 was allocated to the fair value of property and equipment of
approximately  $8,200,000  and  goodwill  of  approximately  $600,000.  We  have
remodeled and opened seven restaurants and the remaining  restaurant was sold to
a third-party.

Captive Insurance Subsidiary

In 2002, we formed  Neighborhood  Insurance,  Inc., a Vermont  corporation and a
wholly-owned captive insurance  subsidiary to provide Applebee's  International,
Inc. and qualified  franchisees with workers' compensation and general liability
insurance.  In 2005,  we reduced the types of insurance  coverage  plans offered
which  resulted  in  fewer  franchisee  participants  in our  captive  insurance
program.  Through 2005, Applebee's  International,  Inc. and covered franchisees
made premium payments to the captive insurance company which pays administrative
fees and insurance  claims,  subject to individual  and aggregate  maximum claim
limits under the captive insurance company's  reinsurance  policies.  Franchisee
premium amounts billed by the captive  insurance  company were established based
upon  third-party  actuarial  estimates  of  settlement  costs for  incurred and
anticipated claims and administrative fees. Franchisee premiums were included in
other franchise  income ratably over the policy year and the related  offsetting
expenses  were  included  in  cost  of  other  franchise  income.  In  2006,  we
discontinued writing insurance coverage for new or existing  participants.  Cost
of other  franchise  income  includes  costs related to the resolution of claims
arising from franchisee  participation in our captive insurance  program.  We do
not expect  franchisee  participation in the captive insurance company to have a
material impact on our net earnings. Our consolidated balance sheets include the
following balances related to the captive insurance subsidiary:

                                       30
<PAGE>

    o Franchise premium receivables of approximately  $400,000 and $1,700,000 as
      of December  31, 2006 and December  25,  2005,  respectively,  included in
      receivables related to captive insurance subsidiary.
    o Cash equivalent and other long-term investments restricted for the payment
      of claims of approximately  $12,600,000 and $18,600,000 as of December 31,
      2006 and December 25, 2005,  respectively,  included in restricted  assets
      related to captive insurance subsidiary.
    o Loss reserve  related to captive  insurance  subsidiary  of  approximately
      $12,600,000 and $20,700,000 as of December 31, 2006 and December 25, 2005,
      respectively.  Approximately  $6,500,000 and  $10,500,000 for December 31,
      2006 and December 25, 2005, respectively, is included in other non-current
      liabilities.





                                       31
<PAGE>

Results of Operations

The  following  table  contains   information   derived  from  our  consolidated
statements of earnings  expressed as a percentage of total  operating  revenues,
except where otherwise noted. Percentages may not add due to rounding.
<TABLE>
<CAPTION>
                                                                           Fiscal Year Ended
                                                            ------------------------------------------------
                                                             December 31,    December 25,    December 26,
                                                                 2006            2005            2004
                                                            --------------- --------------- ----------------
  <S>                                                       <C>             <C>             <C>
  Operating revenues:
       Company restaurant sales.........................           89.4%           89.0%            87.9%
       Franchise royalties and fees.....................           10.5            10.6             10.9
       Other franchise income...........................            0.1             0.4              1.2
                                                            --------------- --------------- ----------------
          Total operating revenues......................          100.0%          100.0%           100.0%
                                                            =============== ================ ===============
  Cost of sales (as a percentage of company restaurant sales):
       Food and beverage................................           26.7%           26.5%            26.5%
       Labor............................................           33.7            33.1             32.5
       Direct and occupancy.............................           27.1            26.6             25.1
       Pre-opening expense..............................            0.4             0.4              0.3
                                                            --------------- --------------- ----------------
          Total cost of sales...........................           87.9%           86.6%            84.4%
                                                            =============== =============== ================

  Cost of other franchise income (as a percentage of
     other franchise income)............................          149.3%           94.1%           105.8%
  General and administrative expenses...................           10.5             9.0              9.4
  Amortization of intangible assets.....................            0.1             0.1              0.1
  Impairment and other restaurant closure costs.........            0.7             0.3              --
  Loss on disposition of property and equipment.........            0.2             0.2              0.2
                                                            --------------- --------------- ----------------
  Operating earnings....................................            9.8            13.0             14.9
                                                            --------------- --------------- ----------------
  Other income (expense):
       Investment income................................            0.2             0.1              0.1
       Interest expense.................................           (0.9)           (0.4)            (0.1)
       Other income.....................................             --             0.1              0.3
                                                            --------------- --------------- ----------------
          Total other income (expense)..................           (0.6)           (0.1)             0.3
                                                            --------------- --------------- ----------------
  Earnings before income taxes and cumulative effect of
       change in accounting principle...................            9.1            12.9             15.2
  Income taxes..........................................            3.1             4.5              5.2
                                                            --------------- --------------- ----------------
  Earnings before cumulative effect of change in
       accounting principle.............................            6.0             8.4             10.0
  Cumulative effect of change in accounting principle,
       net of tax.......................................             --              --               --
                                                            --------------- --------------- ----------------
  Net earnings..........................................            6.0%            8.4%            10.0%
                                                            =============== =============== ================
</TABLE>

                                       32
<PAGE>

Fiscal Year Ended December 31, 2006 Compared With Fiscal Year Ended December 25,
2005

Company Restaurant Sales. Total company restaurant sales increased  $113,617,000
(10.5%) from  $1,082,641,000  in 2005 to  $1,196,258,000 in 2006. The percentage
increase in total company  restaurant sales was due to an increase in the number
of  restaurant  weeks  open of  approximately  13%.  The 53rd  week  contributed
$24,312,000  to company  restaurant  sales.  Excluding  the 53rd  week,  company
restaurant  sales  increased by 8.3%.  This increase was  partially  offset by a
decline in average weekly sales of 2.0%.

Comparable  restaurant sales at company  restaurants  decreased by 1.0% in 2006.
Weighted average weekly sales at company restaurants decreased 2.0% from $45,552
in 2005 to $44,637 in 2006.  Excluding  the 53rd week in 2006,  company  average
weekly sales  decreased  2.3%. The decrease in average weekly sales was due to a
decline  in  guest  traffic  of  approximately  3.5%  in  2006,  as  well as the
underperformance   of  restaurants  open  less  than  18  months.  In  2006,  we
experienced more  significant  guest count declines in New England and Virginia,
where approximately 25% of our company restaurants are located.  These decreases
were partially  offset by an increase in the average guest check  resulting from
menu price increases of approximately  2.2% in 2006. We took a price increase of
approximately 1.4% in January 2007.

Franchise Royalties and Fees. Franchise royalties and fees increased $11,042,000
(8.6%) from  $128,813,000  in 2005 to  $139,855,000 in 2006 due primarily to the
increased number of franchise  restaurants  operating during 2006 as compared to
2005 and the  impact of the 53rd week in 2006  which  contributed  approximately
$2,900,000 to franchise  royalties.  Excluding the 53rd week in 2006,  franchise
royalties and fees increased 6.3%.  Domestic  franchise  weighted average weekly
sales and  franchise  comparable  restaurant  sales  decreased by 0.1% and 0.5%,
respectively,  in 2006.  Excluding the 53rd week,  domestic  franchise  weighted
average weekly sales decreased 0.5% in 2006.

Other Franchise Income.  Other franchise income decreased  $3,388,000 (65%) from
$5,196,000  in 2005 to  $1,808,000  in 2006 due  primarily  to the  decision  to
discontinue writing new coverage in our captive insurance program.

Cost of Company  Restaurant  Sales. Food and beverage costs increased from 26.5%
in 2005 to 26.7% in 2006.  Food and beverage costs were  negatively  impacted by
improved menu offerings which had higher food costs as a percentage of sales, an
enhanced bar menu, and higher alcoholic beverage costs as a percentage of sales,
partially  related  to our  late-night  value  strategy.  These  increases  were
partially  offset by menu price  increases  of  approximately  2.2% in 2006.  We
currently expect net commodity costs to increase by approximately 1% in 2007.

Labor costs  increased from 33.1% in 2005 to 33.7% in 2006. The increase in 2006
was due  primarily  to higher  management  and hourly wage rates  including  the
impact of state  minimum  wage rate  increases  and  payroll  taxes,  which were
partially offset by lower health insurance and workers'  compensation  expenses.
We currently  expect labor costs to be negatively  impacted by recently  enacted
state hourly minimum wage increases in 2007.

Direct and  occupancy  costs  increased  from 26.6% in 2005 to 27.1% in 2006 due
primarily to higher utility costs and unfavorable year-over-year comparisons for
depreciation,  as a percentage  of sales,  due to its  relatively  fixed nature.
These  increases  were partially  offset by the favorable  impact of a change in
accounting  convention for smallwares that was implemented in the second quarter
of fiscal 2006.

Cost of  Other  Franchise  Income.  Cost of  other  franchise  income  decreased
$2,193,000  (45%) from  $4,892,000 in 2005 to $2,699,000 in 2006.  This decrease
was due to the  decision  to  discontinue  writing  new  coverage in our captive
insurance program, which was partially offset by $1,500,000 recorded in 2006 for
estimated insurance losses from franchise participants.

                                       33
<PAGE>

General  and  Administrative  Expenses.   General  and  administrative  expenses
increased from 9.0% in 2005 to 10.5% in 2006 due primarily to the recognition of
stock-based  compensation  related  to  adoption  of  SFAS  No.  123(R),  higher
compensation expense due to staffing levels and expenses incurred related to the
development   of   international   markets  which   increased  our  general  and
administrative expenses by 0.4%, as a percentage of total revenues.  Stock-based
compensation  included in general and administrative  expenses was 1.5% and 0.2%
in 2006 and 2005, respectively.

Impairment and Other Restaurant  Closure Costs.  Impairment and other restaurant
closure  costs  increased  $4,900,000  from  $3,900,000 in 2005 to $8,800,000 in
2006. In 2006, we recorded the following costs:

    o $5,500,000  to decrease the carrying  amounts of property,  equipment  and
      lease  acquisition  costs of restaurants  for which the original  carrying
      value was not deemed recoverable
    o $1,500,000  to decrease the carrying  amount of an investment of which the
      original  carrying  value was  deemed to be greater  than the fair  market
      value
    o $900,000 to record lease  obligations  for  restaurants  closed during the
      year
    o $900,000 to decrease the carrying amount of a corporate  aircraft of which
      the  original  carrying  value was deemed to be greater  than fair  market
      value

In 2005, we recorded the following impairment and restaurant closure costs:

    o $2,600,000  to decrease  the  original  carrying  amounts of property  and
      equipment  of  restaurants  for which the  carrying  value was not  deemed
      recoverable
    o $1,300,000 to decrease the original  carrying amount of a long-lived asset
      that was abandoned

Interest Expense.  Interest expense increased $7,056,000 from $4,365,000 in 2005
to  $11,421,000  in 2006 due  primarily to higher  interest  rates and increased
borrowings  under our credit  facility  used to fund  capital  expenditures  and
repurchases of our common stock.

Income Taxes.  The effective income tax rate, as a percentage of earnings before
income  taxes,  decreased  from  34.9% in 2005 to  33.8%  in 2006 due to  higher
employment tax credits and the resolution of state tax matters.

Net earnings. Net earnings decreased $20,896,000 (21%) from $101,802,000 in 2005
to  $80,906,000  in  2006  due  primarily  to  the  recognition  of  stock-based
compensation related to adoption of SFAS No. 123(R) and lower restaurant margins
due to a decrease in average weekly sales which resulted in an increase in labor
and direct and occupancy costs, which were partially offset by the impact of the
53rd week in 2006.

Fiscal Year Ended December 25, 2005 Compared With Fiscal Year Ended December 26,
2004

Company Restaurant Sales. Total company restaurant sales increased  $105,843,000
(11%)  from  $976,798,000  in 2004 to  $1,082,641,000  in 2005.  The  percentage
increase in total company  restaurant sales was due to an increase in the number
of restaurant weeks open of  approximately  13%, which was partially offset by a
decline in average weekly sales of 2.1%.

Comparable  restaurant sales at company  restaurants  decreased by 0.9% in 2005.
Weighted average weekly sales at company restaurants decreased 2.1% from $46,536
in 2004 to $45,552 in 2005. These decreases were due, in part, to a reduction in
guest  traffic  of  approximately  3.0% in 2005 as  compared  to 2004 due to the
launch of our Weight  Watchers(R) menu system-wide in May 2004. In addition,  we
experienced more significant guest count declines in Kansas City,  Minnesota and
New England,  where  approximately  40% of our company  restaurants are located,
which was consistent  with industry  trends in these markets.  Weighted  average
weekly sales  declined more than  comparable  sales due to weaker new restaurant
opening volumes in Kansas City, Minnesota,  New England, St. Louis and Virginia.
These decreases were partially  offset by an increase in the average guest check
resulting  from  menu  price  increases  of  approximately  2.5% in 2005 and our
Carside To Go initiative. Carside To Go sales mix increased from 9.3% of company
restaurant sales in 2004 to 10.0% of company restaurant sales in 2005.

                                       34
<PAGE>

Franchise Royalties and Fees.  Franchise royalties and fees increased $7,592,000
(6%) from  $121,221,000  in 2004 to  $128,813,000  in 2005 due  primarily to the
increased number of franchise  restaurants  operating during 2005 as compared to
2004 and increases in comparable  franchise  restaurant sales.  Weighted average
weekly sales and franchise comparable restaurant sales each increased by 2.7% in
2005. These increases were due primarily to the implementation of the Carside To
Go program which was completed in early 2005.

Other Franchise Income.  Other franchise income decreased  $8,419,000 (62%) from
$13,615,000  in 2004 to  $5,196,000  in 2005 due  primarily to fewer  franchisee
participants in our captive  insurance  program  resulting from the reduction of
the types of insurance  coverage plans offered.  Franchise premiums are included
in other franchise income ratably over the policy year.

Cost of Company  Restaurant  Sales.  Food and beverage  costs were 26.5% in both
2004 and 2005.  Food and beverage  costs were  favorably  impacted by menu price
increases of 2.5% in 2005, which were offset by higher commodity costs and lower
order  incidences of both alcoholic and  non-alcoholic  beverages,  which have a
lower cost of sales. In addition,  2004 was unfavorably  impacted by the company
portion of the June 2004 impairment of approximately  $500,000 for excess riblet
inventories which no longer met our quality standards.

Labor costs  increased from 32.5% in 2004 to 33.1% in 2005. The increase in 2005
was due  primarily  to higher  management  and hourly  costs due to lower  sales
volumes,  higher wage rates, payroll taxes and group insurance costs, which were
partially  offset  by  lower  management  incentive  compensation  and  workers'
compensation expense.

Direct and occupancy costs increased from 25.1% in 2004 to 26.6% in 2005. Direct
and  occupancy  costs were  unfavorably  impacted  due  primarily to lower sales
volumes at company  restaurants,  which resulted in  unfavorable  year over year
comparisons for depreciation,  rent and property tax expenses as a percentage of
sales,  due to their  relatively  fixed nature,  as well as higher utilities and
packaging costs.

Cost of  Other  Franchise  Income.  Cost of  other  franchise  income  decreased
$9,509,000  (66%) from  $14,401,000 in 2004 to $4,892,000 in 2005. This decrease
was due  primarily to fewer  franchisee  participants  in our captive  insurance
program  resulting  from the reduction of the types of insurance  coverage plans
offered and the franchisee  portion of the June 2004 impairment of approximately
$1,600,000  for  excess  riblet  inventories  which no  longer  met our  quality
standards.

General  and  Administrative  Expenses.   General  and  administrative  expenses
decreased  from  9.4% in 2004 to 9.0% in 2005 as a result of the  absorption  of
general and administrative  expenses over a larger revenue base, lower incentive
compensation  expense and a reduction in costs  associated  with compliance with
Section 404 of the Sarbanes-Oxley  Act. These decreases were partially offset by
higher  compensation  expense  due  to  higher  management  training  costs  and
increased  regional  operations  management  staffing  relating to the increased
number of company restaurant openings as compared to 2004.

Impairment and Other  Restaurant  Closure  Costs.  In 2005, we recorded an asset
impairment  charge of $3,900,000  consisting  of a $2,600,000  write-down of the
carrying  value  of  the  property  and  equipment  of  four  restaurants  and a
$1,300,000  write-down of one other long-lived asset (Note 6 of the consolidated
financial statements).

                                       35
<PAGE>
Interest  Expense.  Interest  expense  increased  from  $1,626,000  in  2004  to
$4,365,000  in 2005 due  primarily  to  increased  borrowings  under our  credit
facility  used to  acquire  12  restaurants  in May  2005  and to  fund  capital
expenditures and repurchases of our common stock.

Other  Income.  Other income  decreased  $1,795,000  from  $3,557,000 in 2004 to
$1,762,000  in 2005.  In 2004,  we  recorded  several  significant  items  which
resulted in higher other income for that year.  These items  consisted of income
of $1,600,000 for the resolution of certain  previously  disclosed  long-running
international  franchise disputes and $600,000 of income for final consideration
related to the sale of 12 restaurants in Philadelphia in 1999.

Income Taxes.  The effective income tax rate, as a percentage of earnings before
income taxes,  increased  from 34.2% in 2004 to 34.9% in 2005 due to an increase
in state and local income taxes.

Net earnings.  Net earnings decreased  $9,063,000 (8%) from $110,865,000 in 2004
to  $101,802,000  in 2005 due  primarily  to lower  restaurant  margins due to a
decrease  in average  weekly  sales  which  resulted in an increase in labor and
direct and occupancy costs.

Liquidity and Capital Resources

Our primary  sources of liquidity are cash provided by operations and borrowings
under our credit  facility.  Our need for  capital  resources  historically  has
resulted from the construction and acquisition of restaurants, refurbishment and
capital replacement for existing restaurants, the repurchase of our common stock
and investment in information  technology systems. We obtain capital through our
ongoing operations and debt financing.

Cash  flows  from  our  operating  activities  primarily  include  the net  cash
generated  from company and franchise  operations  and management of credit from
trade  suppliers.  Cash  flows  used by  investing  activities  include  capital
expenditures for restaurant construction, refurbishment, information technology,
acquisitions of franchise  restaurants,  sale-leaseback  transactions  and asset
sales. Cash flows used by financing activities include borrowings and repayments
of debt, repurchases of our common stock, dividends to shareholders and the cash
received  from the  exercise of employee  stock  options.  The  following  table
presents a summary of our cash flows for 2006, 2005 and 2004 (in thousands):
<TABLE>
<CAPTION>
                                                                2006              2005              2004
                                                          ----------------  ----------------  ----------------
      <S>                                                 <C>               <C>               <C>
      Net cash provided by operating activities..........   $   174,594       $   221,203       $   190,605
      Net cash used by investing activities..............      (121,672)         (187,718)         (134,055)
      Net cash used by financing activities..............       (43,653)          (31,087)          (63,775)
                                                          ----------------  ----------------  ----------------
      Net increase (decrease) in cash
         and cash equivalents............................   $     9,269       $     2,398       $    (7,225)
                                                          ================  ================  ================
</TABLE>

Capital  expenditures,  excluding franchise  acquisitions,  were $122,896,000 in
2006, $139,396,000 in 2005 and $104,620,000 in 2004.

Excluding costs related to the  construction of our new corporate  headquarters,
capital  expenditures are expected to be between  $70,000,000 and $80,000,000 in
2007 and will primarily be for the development of new restaurants, refurbishment
and  capital  replacement  for  existing  restaurants  and  the  enhancement  of
information systems. Costs for the new corporate headquarters are expected to be
approximately  $30,000,000  in 2007.  We intend to enter  into a  sale-leaseback
transaction  with  respect  to the  new  headquarters  upon  its  completion  or
thereafter,  depending  upon  market  conditions.  We  currently  expect to open
between 10 and 15 company  restaurants in 2007. Because we expect to continue to
purchase  a portion  of our  restaurant  sites,  the  amount  of actual  capital
expenditures  will be dependent  upon,  among other  things,  the  proportion of
leased versus owned  properties.  If we construct more or fewer restaurants than
we  currently  anticipate,  or  acquire  additional  restaurants,   our  capital
requirements will increase or decrease accordingly.

                                       36
<PAGE>

In January 2006, we completed the acquisition of four Applebee's  restaurants in
the Houston area for approximately $8,100,000 in cash.

In May 2005,  we completed  the  acquisition  of 12  Applebee's  restaurants  in
Missouri, Kansas and Arkansas, which included one restaurant under construction,
for approximately $39,500,000 in cash.

In April 2005, we completed the acquisition of eight  Applebee's  restaurants in
the  Memphis  market,  which  were  closed in 2004 by a former  franchisee,  for
approximately  $8,800,000  payable in cash. In connection with this acquisition,
we paid approximately $800,000 in 2004 and $8,000,000 in 2005.

In April 2004, we completed the  acquisition  of the operations and assets of 10
Applebee's   restaurants   located  in  Southern  California  for  approximately
$13,800,000 in cash.

In December 2006, we entered into a new five-year revolving credit facility. The
terms of the  bank  credit  agreement  provide  for  $400,000,000  in  unsecured
revolving credit as well as an additional  $200,000,000 of revolving credit upon
satisfaction of the conditions set forth in the credit facility. The facility is
subject to various covenants and restrictions which, among other things, require
the  maintenance  of stipulated  fixed charge and leverage  ratios,  as defined.
There is no limit on cash  dividends or repurchases of our common stock provided
the  declaration  and payment of such  dividend or  repurchase of stock does not
cause a default of any other covenant  contained in the agreement.  The facility
is  subject to other  standard  terms,  conditions,  covenants  and fees.  As of
December 31, 2006,  we were in compliance  with the  covenants  contained in our
credit agreement.  We had borrowings of $170,000,000,  standby letters of credit
of  approximately   $15,600,000   outstanding  and  approximately   $214,400,000
available under our revolving credit facility.

In October 2005, our Board of Directors approved a $175,000,000 authorization to
repurchase  our common stock,  subject to market  conditions.  In November 2006,
with approximately  $100,000,000 of the previous  authorization  remaining,  our
Board of Directors authorized  additional  repurchases of our common stock of up
to  $150,000,000,  subject to market  conditions,  for a total of  approximately
$250,000,000 in authorized  repurchases.  During 2006, we repurchased  1,760,506
shares of our common stock at an average  price of $21.88 for an aggregate  cost
of  approximately  $38,522,000.  As of December 31, 2006,  we had  approximately
$240,400,000 remaining under our repurchase authorizations.

In October 2006, we entered into a sale-leaseback arrangement with a third-party
finance  company  involving  five  restaurant  properties.  As a result  of this
transaction, we received approximately $3,100,000 in cash.

In December  2006, the Board of Directors  declared an annual  dividend of $0.22
per share  payable to  shareholders  of record on  December  22,  2006.  We paid
approximately $16,300,000 in January 2007 related to this dividend.

As of December 31, 2006,  our liquid assets  totaled  $22,602,000.  These assets
consisted  of cash  and  cash  equivalents  in the  amount  of  $22,309,000  and
short-term  investments in the amount of $293,000.  The working  capital deficit
decreased  from  $107,400,000  as of  December  25,  2005 to  $81,626,000  as of
December 31, 2006.  This  decrease  resulted  primarily  from a  combination  of
factors  which  included  decreases  in  accounts  payable and  inventories,  an
increase in receivables and accrued income taxes, a reclassification of property
and  equipment  to  assets  held for sale,  and  higher  sales of gift  cards as
compared to the redemption of gift cards.

                                       37
<PAGE>

We believe that our liquid assets and cash generated from  operations,  combined
with  available   borrowings,   will  provide  sufficient  funds  for  operating
activities,  capital expenditures,  currently approved repurchases of our common
stock  and the  payment  of  dividends  for at  least  the  next 12  months  and
thereafter for the foreseeable future.

The following table shows our debt amortization  schedule,  future capital lease
commitments (including principal and interest payments),  future operating lease
commitments   (operating  leases  in  Note  12  to  the  consolidated  financial
statements)  and  future  purchase  obligations  as of  December  31,  2006  (in
thousands):
<TABLE>
<CAPTION>
                                                                   Payments due by period
                                            ----------------------------------------------------------------------
                 Certain                                     Less than       1-3           3-5        More than 5
         Contractual Obligations                Total          1 year       Years         Years          years
------------------------------------------- --------------  ------------ ------------- ------------- -------------
<S>                                         <C>             <C>          <C>           <C>           <C>
Long-term Debt (excluding capital
  lease obligations) and Notes
  Payable(1)...............................  $  171,269      $      77    $       90    $   170,108   $       994
Capital Lease Obligations..................       7,522            822         1,731          1,792         3,177
Operating Leases (2).......................     402,019         29,307        58,211         56,842       257,659
Purchase Obligations - Company(3)..........     206,395         49,145       127,903         29,347          --
Purchase Obligations - Franchise(4)........     475,126         52,776       342,983         79,367          --

<FN>
(1) The amounts for long-term debt are primarily  borrowings under our revolving
credit facility and exclude interest payments which are variable in nature.
(2)The  amounts for operating  leases  include  option  periods where failure to
exercise such options would result in an economic  penalty such that the renewal
appears reasonably assured.
(3) The amounts for company purchase  obligations  include  commitments for food
items, energy, supplies,  severance and employment agreements, our new corporate
headquarters, and other miscellaneous commitments.
(4) The amounts for franchise purchase  obligations include commitments for food
items and  supplies  made by us for our  franchisees.  We contract  with certain
suppliers to ensure competitive  pricing.  These amounts will only be payable by
us if our franchisees do not meet certain minimum contractual requirements.
</FN>
</TABLE>

Other Contractual Obligations

In connection with the sale of restaurants to franchisees and other parties,  we
have, in certain cases,  remained  contingently  liable for the remaining  lease
payments.  As of December 31, 2006,  we have  outstanding  lease  guarantees  of
approximately $15,300,000.  In addition, we or our subsidiaries are contingently
liable for various  leases that we have assigned in connection  with the sale of
restaurants  to  franchisees  and  other  parties,  in the  potential  amount of
$12,300,000. These leases expire at various times with the final lease agreement
expiring  in 2018.  We did not record a  liability  related to these  contingent
lease liabilities as of December 31, 2006 or December 25, 2005.

In 2004,  we  arranged  for a  third-party  financing  company  to provide up to
$250,000,000  to  qualified  franchisees  for loans to fund  development  of new
restaurants  through  October 2007,  subject to our approval.  We will provide a
limited  guarantee of 10% of certain loans advanced under this program.  We will
be released  from our guarantee if certain  operating  results are met after the
restaurant has been open for at least two years. As of December 31, 2006,  there
were loans outstanding to five franchisees for  approximately  $65,800,000 under
this program.  The fair value of our guarantees under this financing  program is
approximately  $130,000  and  is  recorded  in  non-current  liabilities  in our
consolidated balance sheet as of December 31, 2006.

We have severance and employment  agreements with certain officers providing for
severance  payments  to be  made  in  the  event  the  associate  resigns  or is
terminated not related to a change in control, some of which require payments to
be made only if we enforce  certain  terms in the  agreements.  If the severance
payments had been due as of December 31,  2006,  we would have been  required to
make payments totaling approximately $10,600,000. In addition, we have severance
and  employment   agreements  with  certain  officers  which  contain  severance
provisions   related  to  a  change  in  control.   The  agreements  define  the
circumstances which will constitute a change in control.  Those provisions would
have required additional aggregate payments of approximately  $5,300,000 if such
officers had been terminated as of December 31, 2006.

                                       38
<PAGE>

New Accounting Pronouncements

In March 2006, the Emerging  Issues Task Force ("EITF")  issued EITF Issue 06-3,
"How Taxes  Collected  from Customers and Remitted to  Governmental  Authorities
Should  Be  Presented  in the  Income  Statement  (That  Is,  Gross  versus  Net
Presentation)."  A consensus  was reached  that  entities  may adopt a policy of
presenting  sales taxes in the income  statement on either a gross or net basis.
If taxes are  significant,  an entity  should  disclose its policy of presenting
taxes and the amounts of taxes. The guidance is effective for periods  beginning
after December 15, 2006. We present company sales net of sales taxes. The impact
of this  adoption  did not change our method for  recording  sales  taxes in our
consolidated financial statements.

In July 2006, the Financial  Accounting  Standards  Board  ("FASB")  issued FASB
Interpretation  No. ("FIN") 48,  "Accounting  for  Uncertainty in Income Taxes,"
which clarifies the accounting for uncertainty in income taxes recognized in the
financial  statements in accordance  with SFAS No. 109,  "Accounting  for Income
Taxes." FIN 48 is effective for fiscal years  beginning after December 15, 2006.
The impact of this adoption will not be material to our  consolidated  financial
statements.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This
statement  defines fair value,  establishes  a framework for using fair value to
measure  assets  and  liabilities,  and  expands  disclosures  about  fair value
measurements.  The statement applies whenever other statements require or permit
assets or  liabilities  to be measured at fair value.  SFAS No. 157 is effective
for fiscal years  beginning after November 15, 2007. The impact of this adoption
will not be material to our consolidated financial statements.

In September  2006,  the FASB issued SFAS No. 158,  "Employers'  Accounting  for
Defined Benefit Pension and Other Postretirement Plans." This statement requires
companies to recognize a net liability or asset and an offsetting  adjustment to
accumulated  other  comprehensive  income to report the funded status of defined
benefit pension and other  postretirement  benefit plans. The statement requires
prospective  application,  and the recognition and disclosure  requirements  are
effective  for  companies  with fiscal  years  ending  after  December 15, 2006.
Additionally,  SFAS No.  158  requires  companies  to  measure  plan  assets and
obligations at their year-end  balance sheet date. This requirement is effective
for fiscal years ending after December 15, 2008. The impact of this adoption was
not material to our consolidated  financial  statements and we are in compliance
with the measurement date provisions of this statement as of December 31, 2006.

In September  2006, the SEC issued Staff  Accounting  Bulletin  ("SAB") No. 108,
"Considering   the  Effects  of  Prior  Year   Misstatements   when  Quantifying
Misstatements in Current Year Financial Statements," which provides interpretive
guidance  regarding the  consideration  given to prior year  misstatements  when
determining  materiality  in current year financial  statements.  SAB No. 108 is
effective  for fiscal years ending after  November 15, 2006.  The impact of this
adoption was not material to our consolidated financial statements.

                                       39
<PAGE>

In October  2006,  the FASB  issued FASB Staff  Position  ("FSP") FAS 123 (R)-5,
"Amendment  to FSP  FAS  123  (R)-1."  FSP  FAS  123(R)-5  addresses  whether  a
modification of an instrument in connection with an equity  restructuring should
be considered a modification for purposes of applying FSP FAS 123(R)-1. This FSP
states that no change in the recognition or the measurement  (due to a change in
classification  as a result  of a  modification  solely  to  reflect  an  equity
restructuring  that  occurs when the  holders  are no longer  employees)  of the
instruments  will result if two  conditions are met: (1) there is no increase in
fair value of the award or the antidilution  provision is not added to the terms
of the award in contemplation of an equity  restructuring and (2) all holders of
the same  class of  equity  instruments  are  treated  in the same  manner.  The
effective date of FSP FAS 123(R)-5 is the first reporting period beginning after
October  10,  2006.  The  impact  of  this  adoption  was  not  material  to our
consolidated financial statements.

In February  2007,  the FASB issued  SFAS No.  159,  "The Fair Value  Option for
Financial Assets and Liabilities."  This statement permits entities to choose to
measure many financial instruments and certain other items at fair value. If the
fair value option is elected,  unrealized gains and losses will be recognized in
earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. We are currently  evaluating the impact
of this adoption on our consolidated financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk from fluctuations in interest rates and changes in
commodity  prices.  Our revolving  credit  facility  currently bears interest at
either the bank's prime rate or LIBOR plus 0.50%, at our option.  As of December
31, 2006,  the total amount of debt subject to interest  rate  fluctuations  was
$170,000,000,  which was  outstanding  on our revolving  credit  facility.  A 1%
change in  interest  rates  would  result in an increase or decrease in interest
expense of  approximately  $1,700,000  per year.  We may from time to time enter
into interest rate swap agreements to manage the impact of interest rate changes
on our  earnings.  A  substantial  portion of the food products and utilities we
purchase are subject to price  volatility due to factors that are outside of our
control such as weather,  seasonality and fuel costs. As part of our strategy to
moderate this volatility, we have entered into fixed price purchase commitments.

Item 8. Financial Statements and Supplementary Data

See the Index to Consolidated Financial Statements on Page F-1.

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

Not applicable.

Item 9A. Controls and Procedures

As of December 31, 2006, we have evaluated the  effectiveness  of the design and
operation of our disclosure  controls and procedures,  under the supervision and
with  the  participation  of the  Chief  Executive  Officer  ("CEO")  and  Chief
Financial Officer ("CFO"). Based on this evaluation,  our management,  including
the CEO and CFO,  concluded  that our  disclosure  controls and  procedures  are
effective.

During the fourth  fiscal  quarter,  there have been no changes in our  internal
control over financial  reporting that occurred that have materially affected or
are reasonably  likely to materially  affect our internal control over financial
reporting.

                                       40
<PAGE>

Management's Report on Internal Control over Financial Reporting

The management of Applebee's International, Inc. is responsible for establishing
and maintaining adequate internal control over financial  reporting,  as defined
in Exchange  Act Rule  13a-15(f).  Our internal  control  system was designed to
provide reasonable  assurance to the company's management and board of directors
regarding  the  preparation  and  fair   presentation  of  published   financial
statements in accordance with generally accepted accounting principles.

Management  recognizes that there are inherent  limitations in the effectiveness
of any system of internal  control,  and  accordingly,  even effective  internal
control  can  provide  only  reasonable  assurance  with  respect  to  financial
statement  preparation  and fair  presentation.  Further,  because of changes in
conditions, the effectiveness of internal control may vary over time.

Under the supervision and with the  participation  of our management,  including
our CEO and CFO, we assessed the effectiveness of the company's internal control
over financial reporting as of December 31, 2006. In making this assessment,  we
used the criteria set forth by the Committee of Sponsoring  Organizations of the
Treadway Commission in Internal  Control--Integrated  Framework.  Based upon our
assessment,  we conclude that, as of December 31, 2006,  the company's  internal
control over financial reporting is effective,  in all material respects,  based
upon those criteria. Our independent registered public accounting firm, Deloitte
& Touche  LLP,  issued an  attestation  report  dated  February  28, 2007 on our
assessment  and on the  effectiveness  of the  company's  internal  control over
financial reporting, which is included herein.

                                       41
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Applebee's International, Inc. and Subsidiaries
Overland Park, Kansas

We  have  audited   management's   assessment,   included  in  the  accompanying
Management's  Report  on  Internal  Control  Over  Financial   Reporting,   that
Applebee's  International,  Inc. and  subsidiaries  (the  "Company")  maintained
effective  internal  control over  financial  reporting as of December 31, 2006,
based on criteria established in Internal  Control--Integrated  Framework issued
by the Committee of Sponsoring  Organizations  of the Treadway  Commission.  The
Company's  management is responsible for maintaining  effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's  assessment  and an opinion on the  effectiveness  of the Company's
internal control over financial reporting based on our audit.

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

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

Because  of  the  inherent   limitations  of  internal  control  over  financial
reporting,  including  the  possibility  of  collusion  or  improper  management
override of controls,  material  misstatements  due to error or fraud may not be
prevented or detected on a timely basis. Also,  projections of any evaluation of
the  effectiveness  of the internal  control over financial  reporting to future
periods are subject to the risk that the controls may become inadequate  because
of changes in conditions,  or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion,  management's  assessment that the Company maintained  effective
internal  control over  financial  reporting as of December 31, 2006,  is fairly
stated, in all material respects,  based on the criteria established in Internal
Control--Integrated   Framework   issued   by  the   Committee   of   Sponsoring
Organizations  of the  Treadway  Commission.  Also in our  opinion,  the Company
maintained, in all material respects,  effective internal control over financial
reporting as of December 31, 2006, based on the criteria established in Internal
Control--Integrated   Framework   issued   by  the   Committee   of   Sponsoring
Organizations of the Treadway Commission.

                                       42
<PAGE>

We have also  audited,  in accordance  with the standards of the Public  Company
Accounting   Oversight  Board  (United  States),   the  consolidated   financial
statements  as of and for the year ended  December 31, 2006,  of the Company and
our report dated  February 28, 2007  expressed an  unqualified  opinion on those
financial statements and included an explanatory paragraph regarding a change in
accounting for stock-based  compensation upon adoption of Statement of Financial
Accounting Standards No. 123(R), "Share-Based Payment."

DELOITTE & TOUCHE LLP

Kansas City, Missouri
February 28, 2007

Item 9B. Other Information

Not applicable.


                                       43
<PAGE>

                                    PART III

Item 10. Directors, Executive Officers and Corporate Governance

If you would like information about our executive officers,  you should read the
section entitled "Executive and Other Senior Officers of the Registrant" in Part
I of this report. You should read the information under the caption "Information
About the Board of  Directors  and  Executive  and Other  Senior  Officers"  for
information  on our  Board of  Directors  and  audit  committee  of the Board of
Directors  and  the  caption  "Section  16(a)  Beneficial   Ownership  Reporting
Compliance"  for information  regarding our Section 16(a)  reporting  compliance
located  in the  definitive  proxy  statement  for the 2007  Annual  Meeting  of
Stockholders  (the "Proxy  Statement").  We incorporate that information in this
document by reference.

Our Board of  Directors  has  adopted a Code of Conduct for all  associates  and
directors.   A  copy  of  this   document  is   available   on  our  website  at
www.applebees.com,  free of charge, under the Investors section. We will satisfy
any disclosure  requirements  under Item 5.05 on Form 8-K regarding an amendment
to, or waiver from,  any  provision  of the Code with  respect to our  principal
executive officer, principal financial officer, principal accounting officer and
persons  performing similar functions by disclosing the nature of such amendment
or waiver on our website or in a report on Form 8-K.

Our Board of Directors has determined  that Mr. Eric L. Hansen,  a member of the
audit committee and an independent  director,  is an audit  committee  financial
expert, as defined under 407(d)(5) of Regulation S-K.

Item 11. Executive Compensation

If you would like information about our director and executive compensation, you
should read the  information  under the  caption  "Executive  Compensation"  and
"Information  About the  Board of  Directors  and  Executive  and  Other  Senior
Officers - Director  Compensation  and - Compensation  Committee  Interlocks and
Insider  Participation" in the Proxy Statement.  We incorporate that information
in this document by reference.

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

If you  would  like  information  about the stock  owned by our  management  and
certain large stockholders and information about our equity  compensation plans,
you should read the information  under the captions "Stock Ownership of Officers
and  Directors"  and "Stock  Ownership  of Major  Stockholders"  and  "Executive
Compensation - Equity  Compensation Plan Information" in the Proxy Statement for
the Annual  Meeting of  Stockholders.  We incorporate  that  information in this
document by reference.

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

If you would like information about certain transactions which we have completed
or  certain  relationships  which we have  entered  into,  you  should  read the
information  under  the  caption  "Related  Party  Transactions"  in  the  Proxy
Statement.  For  information  on  director  independence  you  should  read  the
information  under the caption  "Information  About the Board of  Directors  and
Executive  and  Other  Senior  Officers  -  Corporate  Governance"  in the Proxy
Statement. We incorporate that information in this document by reference.


                                       44
<PAGE>


Item 14. Principal Accounting Fees and Services

If you would like information  about fees paid to our auditors,  you should read
the  information  under the caption "Fees and Services of Deloitte & Touche LLP"
in the Proxy  Statement.  We  incorporate  that  information in this document by
reference.

                                       45
<PAGE>



                                     PART IV

Item 15.      Exhibits, Financial Statement Schedules

(a)     List of documents filed as part of this report:

        1. Financial Statements:

           The financial  statements  are listed in the  accompanying  "Index to
           Consolidated Financial Statements" on Page F-1.

        2. Financial Statement Schedules:

           None.

        3. Exhibits:

           The exhibits filed with or  incorporated  by reference in this report
           are listed on the Exhibit Index beginning on page E-1.



                                       46
<PAGE>


                                   SIGNATURES


Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                         APPLEBEE'S INTERNATIONAL, INC.


Date: February 28, 2007              By:   /s/   David L. Goebel
      ------------------                  ------------------------
                                           David L. Goebel
                                           Director, Chief Executive Officer and
                                           President
                                           (principal executive officer)


                                POWER OF ATTORNEY

KNOWN TO ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below  constitutes and appoints David L. Goebel and Rebecca R. Tilden,  and each
of them,  his true and lawful  attorney-in-fact  and  agent,  with full power of
substitution  and  resubstitution,  for him and in his name, place and stead, in
any and all  capacities,  to sign any  amendments to this Form 10-K, and to file
the same,  with exhibits  thereto and other  documents in connection  therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that said attorney-in-fact or his substitute or substitutes,  may do or cause to
be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.


By:      /s/   David L. Goebel                           Date: February 28, 2007
        ----------------------------------------              ------------------
         David L. Goebel
         Director, Chief Executive Officer and President
         (principal executive officer)

By:      /s/   Steven K. Lumpkin                         Date: February 28, 2007
        ----------------------------------------              ------------------
         Steven K. Lumpkin
         Director, Executive Vice President, Chief
         Financial Officer and Treasurer
         (principal financial officer)

By:      /s/   Beverly O. Elving                         Date: February 28, 2007
        ----------------------------------------              ------------------
         Beverly O. Elving
         Vice President and Controller
         (principal accounting officer)

By:      /s/   Lloyd L. Hill                             Date: February 28, 2007
        ----------------------------------------              ------------------
         Lloyd L. Hill
         Director, Chairman of the Board


                                       47
<PAGE>



By:      /s/   Erline Belton                             Date: February 28, 2007
        ----------------------------------------              ------------------
         Erline Belton
         Director


By:      /s/   Gina Boswell                              Date: February 28, 2007
        ----------------------------------------              ------------------
         Gina Boswell
         Director


By:      /s/   Douglas R. Conant                         Date: February 28, 2007
        ----------------------------------------              ------------------
         Douglas R. Conant
         Director


By:      /s/   D. Patrick Curran                         Date: February 28, 2007
        ----------------------------------------              ------------------
         D. Patrick Curran
         Director


By:      /s/   Eric L. Hansen                            Date: February 28, 2007
        ----------------------------------------              ------------------
         Eric L. Hansen
         Director


By:      /s/   Jack P. Helms                             Date: February 28, 2007
        ----------------------------------------              ------------------
         Jack P. Helms
         Director


By:      /s/   Rogelio Rebolledo                         Date: February 28, 2007
        ----------------------------------------              ------------------
         Rogelio Rebolledo
         Director


By:      /s/   Burton M. Sack                            Date: February 28, 2007
        ----------------------------------------              ------------------
         Burton M. Sack
         Director


By:      /s/   Michael A. Volkema                        Date: February 28, 2007
         ---------------------------------------              ------------------
         Michael A. Volkema
         Director





                                       48
<PAGE>

                    APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>


                                                                                                              Page

<S>                                                                                                          <C>

   Report of Independent Registered Public Accounting Firm..................................................  F-2

   Consolidated Balance Sheets as of December 31, 2006 and
       December 25, 2005  ..................................................................................  F-3

   Consolidated Statements of Earnings for the Fiscal Years Ended December 31, 2006,
       December 25, 2005 and December 26, 2004..............................................................  F-4

   Consolidated Statements of Stockholders' Equity for the Fiscal Years Ended
       December 31, 2006, December 25, 2005 and December 26, 2004...........................................  F-5

   Consolidated Statements of Cash Flows for the Fiscal Years Ended December 31, 2006,
       December 25, 2005 and December 26, 2004..............................................................  F-6

   Notes to Consolidated Financial Statements...............................................................  F-8

</TABLE>




























                                      F-1

<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Applebee's International, Inc. and Subsidiaries
Overland Park, Kansas

We have  audited the  accompanying  consolidated  balance  sheets of  Applebee's
International, Inc. and subsidiaries (the "Company") as of December 31, 2006 and
December  25,  2005,  and  the  related  consolidated  statements  of  earnings,
stockholders'  equity,  and cash flows for each of the three years in the period
ended December 31, 2006. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2006
and December 25, 2005,  and the results of its operations and its cash flows for
each of the three  fiscal  years in the  period  ended  December  31,  2006,  in
conformity with accounting principles generally accepted in the United States of
America.

As discussed in Note 3 to the  consolidated  financial  statements,  the Company
changed its method of accounting for stock-based  compensation  upon adoption of
Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment."

We have also  audited,  in accordance  with the standards of the Public  Company
Accounting  Oversight Board (United States),  the effectiveness of the Company's
internal control over financial  reporting as of December 31, 2006, based on the
criteria  established in Internal  Control--Integrated  Framework  issued by the
Committee of Sponsoring  Organizations of the Treadway Commission and our report
dated  February  28,  2007,  expressed an  unqualified  opinion on  management's
assessment of the effectiveness of the Company's internal control over financial
reporting  and an  unqualified  opinion on the  effectiveness  of the  Company's
internal control over financial reporting.

DELOITTE & TOUCHE LLP

Kansas City, Missouri
February 28, 2007

                                      F-2
<PAGE>


                 APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                      (in thousands, except share amounts)

<TABLE>
<CAPTION>

                                                                                       December 31,       December 25,
                                                                                           2006               2005
                                                                                      --------------     --------------

                                                       ASSETS
<S>                                                                                    <C>                <C>
Current assets:
     Cash and cash equivalents.....................................................     $   22,309         $  13,040
     Short-term investments, at market value.......................................            293               286
     Receivables, net of allowance.................................................         47,771            37,857
     Receivables related to captive insurance subsidiary...........................            453             1,712
     Inventories...................................................................         11,524            20,373
     Prepaid income taxes..........................................................             55             3,488
     Prepaid and other current assets..............................................         15,255            13,518
     Assets held for sale..........................................................          7,633               --
                                                                                      --------------     -------------
        Total current assets.......................................................        105,293            90,274
Property and equipment, net........................................................        636,031           590,593
Goodwill...........................................................................        138,950           138,443
Restricted assets related to captive insurance subsidiary..........................         13,356            19,329
Other intangible assets, net.......................................................          6,408             8,050
Other assets, net..................................................................         35,418            31,899
                                                                                      --------------     -------------
                                                                                        $  935,456         $ 878,588
                                                                                      ==============     =============


                                        LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Current portion of long-term debt.............................................     $      265         $     259
     Notes payable.................................................................            --              7,900
     Accounts payable..............................................................         43,235            63,445
     Accrued expenses and other current liabilities................................        113,641           100,995
     Loss reserve related to captive insurance subsidiary..........................          6,094            10,235
     Accrued dividends.............................................................         16,299            14,840
     Accrued income taxes..........................................................          7,385               --
                                                                                      --------------     -------------
        Total current liabilities..................................................        186,919           197,674
                                                                                      --------------     -------------
Non-current liabilities:
     Long-term debt, less current portion..........................................        174,920           180,208
     Deferred income taxes.........................................................         25,126            37,722
     Other non-current liabilities.................................................         61,837            50,374
                                                                                      --------------     -------------
        Total non-current liabilities..............................................        261,883           268,304
                                                                                      --------------     -------------
        Total liabilities..........................................................        448,802           465,978
                                                                                      --------------     -------------
Commitments and contingencies (Notes 12, 13 and 18)
     Stockholders' equity:
     Preferred stock - par value $0.01 per share: authorized - 1,000,000 shares;
        no shares issued...........................................................            --                --
     Common stock - par value $0.01 per share:  authorized - 125,000,000 shares;
        issued - 108,503,243 shares................................................          1,085             1,085
     Additional paid-in capital....................................................        265,122           234,988
     Unearned compensation.........................................................            --             (2,614)
     Retained earnings.............................................................        774,884           710,277
                                                                                      --------------     -------------
                                                                                         1,041,091           943,736
     Treasury stock - 34,393,331 shares in 2006 and 34,304,693 shares in 2005,
        at cost....................................................................       (554,437)         (531,126)
                                                                                      --------------     -------------
        Total stockholders' equity.................................................        486,654           412,610
                                                                                      --------------     -------------
                                                                                        $  935,456         $ 878,588
                                                                                      ==============     =============

</TABLE>




                 See notes to consolidated financial statements.

                                      F-3
<PAGE>


                 APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF EARNINGS
                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>

                                                                                  Fiscal Year Ended
                                                                  ----------------------------------------------------
                                                                   December 31,       December 25,       December 26,
                                                                       2006               2005               2004
                                                                  --------------     --------------     --------------

<S>                                                               <C>                <C>                <C>
Operating revenues:
     Company restaurant sales................................      $ 1,196,258        $ 1,082,641        $   976,798
     Franchise royalties and fees............................          139,855            128,813            121,221
     Other franchise income..................................            1,808              5,196             13,615
                                                                  --------------     --------------     --------------
        Total operating revenues.............................        1,337,921          1,216,650          1,111,634
                                                                  --------------     --------------     --------------
Cost of company restaurant sales:
     Food and beverage.......................................          319,813            286,522            259,134
     Labor...................................................          403,516            358,563            317,659
     Direct and occupancy....................................          323,843            287,656            244,707
     Pre-opening expense.....................................            4,348              4,767              3,025
                                                                  --------------     --------------     --------------
        Total cost of company restaurant sales...............        1,051,520            937,508            824,525
                                                                  --------------     --------------     --------------
Cost of other franchise income...............................            2,699              4,892             14,401
General and administrative expenses..........................          140,824            109,768            104,810
Amortization of intangible assets............................              721                878                663
Impairment and other restaurant closure costs................            8,800              3,900                --
Loss on disposition of property and equipment................            2,573              2,067              1,955
                                                                  --------------     --------------     --------------
Operating earnings...........................................          130,784            157,637            165,280
                                                                  --------------     --------------     --------------
Other income (expense):
     Investment income.......................................            2,768              1,695              1,284
     Interest expense........................................          (11,421)            (4,365)            (1,626)
     Other income............................................               16              1,762              3,557
                                                                  --------------     --------------     --------------
        Total other income (expense).........................           (8,637)              (908)             3,215
                                                                  --------------     --------------     --------------
Earnings before income taxes and cumulative effect of change
     in accounting principle.................................          122,147            156,729            168,495
Income taxes.................................................           41,241             54,702             57,630
                                                                  --------------     --------------     --------------
Earnings before cumulative effect of change in accounting               80,906            102,027            110,865
     principle...............................................
Cumulative effect of change in accounting principle,
     net of tax..............................................              --                (225)               --
                                                                  --------------     --------------     --------------
Net earnings.................................................      $    80,906          $ 101,802        $   110,865
                                                                  ==============     ==============     ==============

Basic net earnings per common share:
     Basic earnings before cumulative effect of change in
        accounting principle.................................      $      1.09          $    1.30        $      1.36
     Cumulative effect of change in accounting principle,
        net of tax...........................................              --                 --                 --
                                                                  --------------     --------------     --------------
Basic net earnings per common share..........................      $      1.09          $    1.29        $      1.36
                                                                  ==============     ==============     ==============

Diluted net earnings per common share:
     Diluted earnings before cumulative effect of change in
        accounting principle.................................      $      1.08          $    1.28        $      1.33
     Cumulative effect of change in accounting principle,
        net of tax...........................................              --                 --                 --
                                                                  --------------     --------------     --------------
Diluted net earnings per common share........................      $      1.08          $    1.27        $      1.33
                                                                  ==============     ==============     ==============

Basic weighted average shares outstanding....................           74,001             78,650             81,528
                                                                  ==============     ==============     ==============
Diluted weighted average shares outstanding..................           74,936             80,010             83,600
                                                                  ==============     ==============     ==============


</TABLE>


                 See notes to consolidated financial statements.

                                      F-4
<PAGE>


                 APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                    (in thousands, except per share amounts)
<TABLE>
<CAPTION>

                                                   Common Stock     Additional                                              Total
                                                -----------------    Paid-In        Unearned    Retained    Treasury   Stockholders'
                                                 Shares   Amount     Capital     Compensation   Earnings      Stock        Equity
                                                -------- --------  ------------  ------------  ----------  ----------  -------------
<S>                                             <C>      <C>       <C>           <C>          <C>         <C>          <C>
Balance, December 28, 2003.....................  108,503  $1,085    $  201,951    $  (1,377)   $ 517,365   $(265,881)   $  453,143

   Net earnings................................     --       --           --           --        110,865        --         110,865
   Purchases of treasury stock.................     --       --           --           --           --       (99,723)      (99,723)
   Dividends declared on common stock, $0.06
     per share.................................     --       --           --           --         (4,867)       --          (4,867)
   Stock options exercised and related tax
     benefit...................................     --       --         13,756         --           --        16,200        29,956
   Shares issued under employee benefit plans..     --       --          3,747         --           --         2,232         5,979
   Nonvested shares awarded under equity
     incentive plans, net of forfeitures.......     --       --          1,443       (1,969)        --           526          --
   Amortization of unearned compensation
     relating to nonvested shares..............     --       --           --          1,422         --          --           1,422
   Dividends paid for fractional shares........     --       --           --           --            (48)       --             (48)
                                                -------- --------  ------------  ------------  ----------  ----------  -------------
Balance, December 26, 2004.....................  108,503   1,085       220,897       (1,924)     623,315    (346,646)      496,727

   Net earnings................................     --       --           --           --        101,802        --         101,802
   Purchases of treasury stock.................     --       --           --           --           --      (196,066)     (196,066)
   Dividends declared on common stock, $0.20
     per share.................................     --       --           --           --        (14,840)       --         (14,840)
   Stock options exercised and related tax          --       --          9,274         --           --         9,080        18,354
     benefit...................................
   Shares issued under employee benefit plans       --       --          2,586         --           --         1,816         4,402
   Nonvested shares awarded under equity
     incentive plans, net of forfeitures.......     --       --          2,231       (2,921)        --           690          --
   Amortization of unearned compensation
     relating to nonvested shares..............     --       --           --          2,231         --          --           2,231
                                                -------- --------  ------------  ------------  ----------  ----------  -------------
Balance, December 25, 2005.....................  108,503   1,085       234,988       (2,614)     710,277    (531,126)      412,610

   Net earnings................................     --       --           --           --         80,906        --          80,906
   Purchases of treasury stock.................     --       --           --           --           --       (38,522)      (38,522)
   Dividends declared on common stock, $0.22
     per share.................................     --       --           --           --        (16,299)       --         (16,299)
   Reclassification of unearned compensation
     related to the adoption of Statement of
     Financial Accounting Standards No.
     123(R) (Note 3)...........................     --       --         (2,614)       2,614         --          --            --
   Stock options exercised and related tax          --       --         10,017         --           --        11,981        21,998
     benefit...................................
   Shares issued under employee benefit plans       --       --          1,935         --           --         2,232         4,167
   Nonvested shares awarded under equity
     incentive plans...........................     --       --           (998)        --           --           998          --
   Stock-based compensation expense related to
     employee-based equity awards..............     --       --         21,794         --           --          --          21,794
                                                -------- --------  ------------  ------------  ----------  ----------  -------------
Balance, December 31, 2006.....................  108,503  $1,085    $  265,122    $    --      $ 774,884   $(554,437)   $  486,654
                                                ======== ========  ============  ============  ==========  ==========  =============

</TABLE>

                 See notes to consolidated financial statements.

                                      F-5
<PAGE>



                 APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>

                                                                                         Fiscal Year Ended
                                                                           ----------------------------------------------
                                                                            December 31,    December 25,    December 26,
                                                                                2006            2005            2004
                                                                           --------------  --------------  --------------

<S>                                                                         <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net earnings......................................................      $  80,906       $ 101,802       $ 110,865
     Adjustments to reconcile net earnings to net cash provided by
        operating activities:
        Cumulative effect of change in accounting principle, net of
           net of tax..................................................           --               225            --
        Depreciation and amortization..................................         64,738          54,580          46,051
        Amortization of intangible assets..............................            721             878             663
        Stock-based compensation.......................................         21,794           2,231           1,422
        Other amortization.............................................            366             246             309
        Deferred income tax provision (benefit)........................        (12,083)          9,871          25,313
        Inventory impairment...........................................           --              --             2,000
        Impairment and other restaurant closure costs..................          8,800           3,900            --
        Loss on disposition of property and equipment..................          2,573           2,067           1,955
        Income tax benefit from stock-based compensation...............          2,757           5,370          10,459
     Changes in assets and liabilities, exclusive of effects of
        acquisitions:
        Receivables....................................................         (9,202)          1,371          (7,218)
        Receivables related to captive insurance subsidiary............          1,259             154          (2,116)
        Inventories....................................................          8,907          15,753         (16,925)
        Prepaid and other current assets...............................         (2,246)         (2,583)           (665)
        Accounts payable...............................................        (16,194)         18,757           5,197
        Accrued expenses and other current liabilities.................         13,694          11,842          (3,542)
        Loss reserve and unearned premiums related to
           captive insurance subsidiary................................         (8,143)         (1,202)          6,880
        Income taxes...................................................         10,818          (5,941)          8,378
        Other non-current liabilities..................................          7,070           4,866           2,702
        Other..........................................................         (1,941)         (2,984)         (1,123)
                                                                           --------------  --------------  --------------
        NET CASH PROVIDED BY OPERATING ACTIVITIES......................        174,594         221,203         190,605
                                                                           --------------  --------------  --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchases of property and equipment...............................       (122,896)       (139,396)       (104,620)
     Change in restricted assets related to captive insurance
        subsidiary.....................................................          5,973          (1,943)         (6,623)
     Acquisition of restaurants........................................         (8,120)        (47,616)        (13,817)
     Lease acquisition costs...........................................           --              --            (4,875)
     Acquisition of other intangible asset.............................           --              --            (2,809)
     Proceeds from sale of property and equipment......................            281           1,237              66
     Proceeds from sale-leaseback transaction..........................          3,090            --              --
     Maturities and sales of short-term investments....................           --              --              (253)
     Other investing activities........................................           --              --            (1,124)
                                                                           --------------  --------------  --------------
        NET CASH USED BY INVESTING ACTIVITIES..........................       (121,672)       (187,718)       (134,055)
                                                                           --------------  --------------  --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
     Purchases of treasury stock.......................................        (38,522)       (196,066)        (99,723)
     Dividends paid....................................................        (14,840)         (4,867)         (3,911)
     Issuance of common stock upon exercise of stock options...........         17,072          12,984          19,497
     Shares issued under employee benefit plans........................          4,167           4,402           5,979
     Excess tax benefits from stock-based compensation.................          2,169            --              --
     Net debt proceeds (payments)......................................        (13,182)        152,673          14,832
     Deferred financing costs relating to issuance of long-term debt...           (517)           (213)           (449)
                                                                           --------------  --------------  --------------
        NET CASH USED BY FINANCING ACTIVITIES..........................        (43,653)        (31,087)        (63,775)
                                                                           --------------  --------------  --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................          9,269           2,398          (7,225)
CASH AND CASH EQUIVALENTS, beginning of period.........................         13,040          10,642          17,867
                                                                           --------------  --------------  --------------
CASH AND CASH EQUIVALENTS, end of period...............................      $  22,309       $  13,040       $  10,642
                                                                           ==============  ==============  ==============

</TABLE>

                 See notes to consolidated financial statements.

                                      F-6
<PAGE>



                 APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
                                 (in thousands)

<TABLE>
<CAPTION>

                                                                                             Fiscal Year Ended
                                                                           ------------------------------------------------------
                                                                              December 31,      December 25,       December 26,
                                                                                  2006              2005               2004
                                                                           ----------------- -----------------  -----------------

<S>                                                                         <C>               <C>                <C>
SUPPLEMENTAL DISCLOSURES OF CASH
     FLOW INFORMATION:
     Cash paid during the year for:
       Income taxes....................................................      $     37,580      $     45,402       $     12,428
                                                                           ================= =================  =================
       Interest........................................................      $     11,575      $      3,340       $      1,056
                                                                           ================= =================  =================
</TABLE>

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

We issued  nonvested  shares  (referred to as  restricted  stock prior to fiscal
2006) with grant date fair values of $4,500,000 in 2006,  $2,921,000 in 2005 and
$1,945,000 in 2004.

In 2002,  we entered  into a rabbi trust  agreement to protect the assets of the
nonqualified deferred compensation plan for certain of our associates.  The plan
investments  are  included  in other  assets and the  offsetting  obligation  is
included in other non-current liabilities in our consolidated balance sheets. We
had  non-cash  increases  in  these  balances  of  $3,357,000,   $3,940,000  and
$3,881,000 in 2006, 2005 and 2004, respectively.

We made matching contributions in shares of our common stock to a profit sharing
plan and trust  established  in accordance  with Section  401(k) of the Internal
Revenue Code of $1,308,000 in 2004. In 2005, we began matching  contributions in
cash.

We  had  property  and  equipment  purchases  accrued  in  accounts  payable  of
approximately  $10,400,000  and $11,100,000 as of December 31, 2006 and December
25, 2005, respectively.

We declared cash dividends of  $16,299,000,  $14,840,000 and $4,867,000 in 2006,
2005 and 2004 which were subsequently paid in the following year.


                 See notes to consolidated financial statements.


                                      F-7
<PAGE>


                APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

Applebee's  International,  Inc. and our  subsidiaries  develop,  franchise  and
operate casual dining restaurants under the name "Applebee's  Neighborhood Grill
& Bar." As of  December  31,  2006,  there  were 1,930  Applebee's  restaurants.
Franchisees  operated  1,409  of  these  restaurants  and 521  restaurants  were
company-owned. These restaurants were located in 49 states, 16 countries outside
of the United States and one U.S. territory.

On  September  20, 2002,  we formed  Neighborhood  Insurance,  Inc., a regulated
Vermont  corporation  and a  wholly-owned  subsidiary,  as a  captive  insurance
company.  Neighborhood  Insurance,  Inc. was  established to provide  Applebee's
International,  Inc. and qualified  franchisees  with workers'  compensation and
general liability insurance. In 2006, we discontinued writing insurance coverage
for new or existing participants (Note 14).

2. Summary of Significant Accounting Policies

Principles of consolidation:  The consolidated  financial statements include our
accounts and the accounts of our wholly-owned  subsidiaries.  We have eliminated
all intercompany profits, transactions and balances.

Fiscal year:  Our fiscal year ends on the last Sunday of the calendar  year. The
fiscal year ended December 31, 2006  contained 53 weeks.  The fiscal years ended
December 25, 2005 and December  26, 2004 each  contained 52 weeks.  These fiscal
years will be referred to hereafter as 2006, 2005 and 2004, respectively.

Cash and cash equivalents:  We consider all money market investment  instruments
to be cash and cash equivalents.  Periodically,  we have outstanding checks that
are  written  in excess of the cash  balances  at our bank  which  create a book
overdraft  and are  required  to be  presented  as a  current  liability.  As of
December  25,  2005,  we had  checks  written  in  excess of a bank  balance  of
$13,430,000 which were included in accounts payable in the consolidated  balance
sheets.  This balance was  subsequently  funded  through our credit  facility in
2006.

Financial  instruments:  Our financial  instruments  as of December 31, 2006 and
December 25, 2005 consist of cash equivalents,  short-term investments, accounts
receivable,  notes  payable and  long-term  debt,  excluding  capitalized  lease
obligations.  The carrying amount of cash  equivalents  and accounts  receivable
(including receivables related to the captive insurance subsidiary) approximates
fair value  because of the short  maturity  of those  instruments.  We based the
carrying amount of short-term  investments on quoted market prices. We based the
fair value of our long-term debt,  excluding  capitalized lease obligations,  on
quotations made on similar issues. The fair value of these financial instruments
approximates the carrying amounts reported in the consolidated balance sheets.

Investments:  We have  certificates  of deposit that are included in  short-term
investments and auction rate  securities that are included in restricted  assets
related to the captive insurance  subsidiary in our consolidated balance sheets.
We have classified all investments as available-for-sale.  Due to the short time
period between reset dates of the interest rates,  there are no unrealized gains
or  losses  associated  with  the  auction  rate  securities.   The  contractual
maturities of the auction rate securities range from 2030 to 2033.

Inventories:  We state  inventories  at the lower of cost,  using the  first-in,
first-out method, or market.  When necessary,  we record inventory  reserves for
obsolescence  and shrinkage  based upon inventory  turnover  trends,  historical
experience and the specific identification method.

                                      F-8
<PAGE>

Property and equipment: We report property and equipment at historical cost less
accumulated  depreciation.  Depreciation is recorded on a  straight-line  method
over the  estimated  useful  lives of the  assets.  Leasehold  improvements  are
amortized  over the lesser of the lease  term,  as defined in  operating  leases
below, or the estimated  useful life of the related asset. The general ranges of
original depreciable lives are as follows:

    o Buildings                  20 years
    o Leasehold improvements     15-20 years
    o Furniture and equipment    2-7 years

We  record  capitalized  interest  in  connection  with the  development  of new
restaurants and amortize it over the estimated useful life of the related asset.
We capitalized  $959,000 in interest costs during 2006, $462,000 during 2005 and
$189,000 during 2004.

Software   costs:   Costs  incurred  in  connection   with  the  development  of
internal-use  software are  capitalized  and amortized over the expected  useful
life of the asset.

Goodwill:  Goodwill is not subject to amortization  but is tested for impairment
annually or more frequently if events or changes in circumstances  indicate that
the asset might be impaired.  If an impairment  is indicated,  the fair value of
the reporting  unit's goodwill is determined by allocating the unit's fair value
to its assets and liabilities (including any unrecognized  intangible assets) as
if the reporting unit had been acquired in a business combination. The amount of
impairment for goodwill is measured as the excess of its carrying value over its
implied fair value.

Impairment of long-lived assets: We review our restaurant property and equipment
for impairment  quarterly on a  restaurant-by-restaurant  basis using historical
cash flows as well as current estimates of future cash flows and/or appraisals.

We review other  non-amortizing  long-lived  assets  annually and when events or
circumstances  indicate  that  the  carrying  value  of  the  asset  may  not be
recoverable.  The  recoverability is assessed in most instances by comparing the
carrying value to its undiscounted cash flows.

Use of estimates:  The  preparation of financial  statements in conformity  with
accounting  principles  generally  accepted  in the  United  States  of  America
requires  management to make estimates and assumptions.  These estimates,  which
are frequently made in consultation with certain third-party advisors,  include,
but are not  limited to,  estimates  for legal  actions  and general  liability,
workers'  compensation  and  health  insurance,  long-term  incentives  and  the
collectibility of receivables.

We are  periodically  involved in various  legal  actions  arising in the normal
course of  business.  We are required to assess the  probability  of any adverse
judgments as well as the  potential  range of loss.  We  determine  the required
accruals after consideration of the probability of adverse judgment and a review
of the facts of each legal action.

The estimated liability for general liability,  workers' compensation and health
insurance  is  established  based upon  historical  claims data and  third-party
actuarial  estimates of  settlement  costs for incurred  claims.  We  recognized
expense of  $24,168,000  in 2006,  $27,557,000  in 2005 and  $25,116,000 in 2004
related to these types of insurance in our  consolidated  financial  statements.
Unanticipated changes in these factors may require us to revise our estimates.

We have various long-term associate  incentive  compensation plans which require
us to make estimates to determine our liability based upon projected performance
of plan criteria.  If actual  performance  against the criteria differs from our
estimates  in  the  future,   we  will  be  required  to  adjust  our  liability
accordingly.

                                      F-9
<PAGE>

We  continually  assess the  collectibility  of our  franchise  receivables.  We
establish  our  allowance  for bad debts  based on  several  factors,  including
historical  collection  experience,  the current economic  environment and other
specific  information  available to us at the time.  The allowance for bad debts
may  change in the  future  due to  changes  in the  factors  above or other new
developments.

Estimates  and  assumptions  used by management  affect the reported  amounts of
assets and liabilities,  the 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 those
estimates.

Revenue  Recognition:  We  recognize  company  restaurant  sales  when  food and
beverage items are sold.  Company restaurant sales are reported net of sales tax
collected  from  our  guests  and  are  remitted  to  the   appropriate   taxing
authorities.

We record a liability  in the period in which a gift card is issued and proceeds
are received. As gift cards are redeemed,  this liability is reduced and revenue
is recognized. We recognize gift card slippage income when the likelihood of the
redemption of the card becomes remote.

We recognize  royalties on a franchisee's sales in the period in which the sales
are reported to have  occurred.  The  recognition  of franchise fees is deferred
until  we  have  performed  substantially  all of  our  related  obligations  as
franchisor,  typically when the restaurant  opens.  Franchise fees,  included in
franchise royalties and fees in the consolidated statements of earnings, totaled
$3,957,000 for 2006, $3,358,000 for 2005 and $3,096,000 for 2004.

Other franchise income includes insurance premiums from franchisee participation
in our captive  insurance  program in 2005 and 2004 and revenue from information
technology products and services provided to certain franchisees in all periods.
Income  from  franchisee   premiums  and  information   technology  services  is
recognized  ratably over the related  contract  period.  Income from information
technology  products  is  recognized  when the  products  are  installed  at the
restaurant.

Advertising costs: We recognize  company-owned  restaurant  contributions to the
national marketing pool in the period the contribution  accrues. We expense most
local advertising  costs for company-owned  restaurants as we incur them, but we
expense the production costs of advertising the first time the advertising takes
place. Advertising expense related to company-owned  restaurants was $56,731,000
for 2006, $51,969,000 for 2005 and $46,324,000 for 2004.

Operating  leases:  We account for our  restaurant  and office  space  leases in
accordance  with Statement of Financial  Accounting  Standards  ("SFAS")  No.13,
"Accounting  for Leases" and other  authoritative  guidance.  We recognize  rent
expense for our operating leases, which have escalating rentals over the term of
the lease,  on a  straight-line  basis over the  initial  term and those  option
periods  where  failure to exercise  such  options  would  result in an economic
penalty such that the renewal appears reasonably assured. In addition, the lease
term is deemed to  commence  on the date we become  legally  obligated  for rent
payments.  Prior to 2006, we capitalized the  straight-line  rent amounts during
the construction period of leased properties.  In 2006, we changed our policy to
expense the  straight-line  rent during the  construction  period as required by
FASB Staff Position ("FSP") 13-1, "Accounting for Rental Costs Incurred during a
Construction   Period."  The  impact  of  FSP  13-1  was  not  material  to  our
consolidated   financial  statements.   Straight-line  rent  subsequent  to  the
construction  period  and  prior to the  restaurant  opening  is  recognized  as
expense.  We use a  consistent  lease  term  when  calculating  depreciation  of
leasehold improvements,  determining  straight-line rent expense and determining
classification  of our leases as either  operating or capital.  Contingent rents
are generally  amounts due as a result of sales in excess of amounts  stipulated
in certain restaurant leases and are included in rent expense as they accrue.

                                      F-10
<PAGE>

Certain of our lease  agreements  contain tenant  improvement  allowances,  rent
holidays,  lease  premiums,  rent  escalation  clauses  and/or  contingent  rent
provisions. For purposes of recognizing incentives,  premiums, rent holidays and
minimum rental expenses on a  straight-line  basis over the terms of the leases,
we use the date of initial possession to begin amortization,  which is generally
when we enter the property and begin to make  improvements in preparation of its
intended use.

For tenant improvement allowances, we record a deferred rent liability in either
other current  liabilities or other non-current  liabilities on the consolidated
balance  sheet and amortize  the  deferred  rent over the term of the lease as a
reduction  to direct  and  occupancy  costs in the  consolidated  statements  of
earnings.

Asset Retirement  Obligations:  In 2005, we adopted FASB  Interpretation  No. 47
"Accounting for Conditional  Asset Retirement  Obligations"  ("FIN 47"). We have
entered into  certain  leases which may require us to return the property to the
landlord in its original condition.  Beginning in 2005, we recorded expenses for
these leases in our  consolidated  financial  statements in direct and occupancy
costs.  We recorded an expense of $350,000  ($225,000,  net of income taxes) for
years prior to 2005 as a cumulative  effect of a change in accounting  principle
as required by FIN 47.

Pre-opening  expense:  We expense direct  training,  food and beverage costs and
other costs,  including rent expense  subsequent to the construction  period but
prior to restaurant opening,  related to opening new or relocated restaurants as
they are incurred, which is typically in the month of opening.

Income taxes: We use the asset and liability method to determine deferred income
taxes.  Deferred tax assets and  liabilities  are computed based upon future tax
consequences   associated  with  differences  between  the  financial  statement
carrying amount and the tax bases of assets and liabilities.

Net  earnings  per share:  We compute  basic net  earnings  per common  share by
dividing income available to common  shareholders by the weighted average number
of common shares outstanding for the reporting period.  Diluted net earnings per
common share  reflects  the  potential  dilution  that could occur if holders of
options or other  contracts to issue common stock  exercised or converted  their
holdings into common stock. Outstanding stock options, stock appreciation rights
and other  equity-based  compensation  represent  the only  dilutive  effects on
weighted average shares. The chart below presents a reconciliation between basic
and diluted weighted average shares outstanding and the related net earnings per
share.  All amounts in the chart,  except per share  amounts,  are  expressed in
thousands.

<TABLE>
<CAPTION>

                                                                2006              2005               2004
                                                          ----------------  ----------------  ----------------
<S>                                                        <C>               <C>               <C>
      Net earnings.......................................   $     80,906      $    101,802      $    110,865
                                                          ================  ================  ================

      Basic weighted average shares outstanding..........         74,001            78,650            81,528
      Dilutive effect of stock options and
          equity-based compensation......................            935             1,360             2,072
                                                          ----------------  ----------------  ----------------
      Diluted weighted average shares outstanding........         74,936            80,010            83,600
                                                          ================  ================  ================

      Basic net earnings per common share................   $       1.09      $       1.29      $       1.36
                                                          ================  ================  ================
      Diluted net earnings per common share..............   $       1.08      $       1.27      $       1.33
                                                          ================  ================  ================
</TABLE>

We excluded stock options and stock  appreciation  rights ("SARs") with exercise
prices  greater  than the  average  market  price of our  common  stock  for the
applicable  periods from the  computation  of diluted  weighted  average  shares
outstanding  as the effect  would be  anti-dilutive.  We excluded  approximately
5,400,000,  2,800,000  and  1,500,000 of these options and SARs from our diluted
weighted average share computation for 2006, 2005 and 2004, respectively.

                                      F-11
<PAGE>

Cash  flows:  For  purposes of the  consolidated  statements  of cash flows,  we
consider all highly liquid  investments  purchased with an original  maturity of
three months or less to be cash equivalents.

New accounting  pronouncements:  In March 2006,  the Emerging  Issues Task Force
("EITF")  issued  EITF Issue  06-3,  "How Taxes  Collected  from  Customers  and
Remitted to Governmental Authorities Should Be Presented in the Income Statement
(That Is, Gross versus Net Presentation)." A consensus was reached that entities
may adopt a policy of presenting sales taxes in the income statement on either a
gross or net basis.  If taxes are  significant,  an entity  should  disclose its
policy of presenting  taxes and the amounts of taxes.  The guidance is effective
for periods  beginning  after December 15, 2006. We present company sales net of
sales  taxes  in our  consolidated  financial  statements.  The  impact  of this
adoption did not change our method for recording sales taxes in our consolidated
financial statements.

In July 2006, the Financial  Accounting  Standards  Board  ("FASB")  issued FASB
Interpretation  No. ("FIN") 48,  "Accounting  for  Uncertainty in Income Taxes,"
which clarifies the accounting for uncertainty in income taxes recognized in the
financial  statements in accordance  with SFAS No. 109,  "Accounting  for Income
Taxes." FIN 48 is effective for fiscal years  beginning after December 15, 2006.
The impact of this adoption will not be material to our  consolidated  financial
statements.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This
statement  defines fair value,  establishes  a framework for using fair value to
measure  assets  and  liabilities,  and  expands  disclosures  about  fair value
measurements.  The statement applies whenever other statements require or permit
assets or  liabilities  to be measured at fair value.  SFAS No. 157 is effective
for fiscal years  beginning after November 15, 2007. The impact of this adoption
will not be material to our consolidated financial statements.

In September  2006,  the FASB issued SFAS No. 158,  "Employers'  Accounting  for
Defined Benefit Pension and Other Postretirement Plans." This statement requires
companies to recognize a net liability or asset and an offsetting  adjustment to
accumulated  other  comprehensive  income to report the funded status of defined
benefit pension and other  postretirement  benefit plans. The statement requires
prospective  application,  and the recognition and disclosure  requirements  are
effective  for  companies  with fiscal  years  ending  after  December 15, 2006.
Additionally,  SFAS No.  158  requires  companies  to  measure  plan  assets and
obligations at their year-end  balance sheet date. This requirement is effective
for fiscal years ending after December 15, 2008. The impact of this adoption was
not material to our consolidated  financial  statements and we are in compliance
with the measurement date provisions of this statement as of December 31, 2006.

In September  2006, the SEC issued Staff  Accounting  Bulletin  ("SAB") No. 108,
"Considering   the  Effects  of  Prior  Year   Misstatements   when  Quantifying
Misstatements in Current Year Financial Statements," which provides interpretive
guidance  regarding the  consideration  given to prior year  misstatements  when
determining  materiality  in current year financial  statements.  SAB No. 108 is
effective  for fiscal years ending after  November 15, 2006.  The impact of this
adoption was not material to our consolidated financial statements.

In October  2006,  the FASB  issued FASB Staff  Position  ("FSP") FAS 123 (R)-5,
"Amendment  to FSP  FAS  123  (R)-1."  FSP  FAS  123(R)-5  addresses  whether  a
modification of an instrument in connection with an equity  restructuring should
be considered a modification for purposes of applying FSP FAS 123(R)-1. This FSP
states that no change in the recognition or the measurement  (due to a change in
classification  as a result  of a  modification  solely  to  reflect  an  equity
restructuring  that  occurs when the  holders  are no longer  employees)  of the
instruments  will result if two  conditions are met: (1) there is no increase in
fair value of the award or the antidilution  provision is not added to the terms
of the award in contemplation of an equity  restructuring and (2) all holders of
the same  class of  equity  instruments  are  treated  in the same  manner.  The
effective date of FSP FAS 123(R)-5 is the first reporting period beginning after
October  10,  2006.  The  impact  of  this  adoption  was  not  material  to our
consolidated financial statements.

                                      F-12
<PAGE>

In February  2007,  the FASB issued  SFAS No.  159,  "The Fair Value  Option for
Financial Assets and Liabilities."  This statement permits entities to choose to
measure many financial instruments and certain other items at fair value. If the
fair value option is elected,  unrealized gains and losses will be recognized in
earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. We are currently  evaluating the impact
of this adoption on our consolidated financial statements.

3. Stock-Based Compensation

Our Board of  Directors  has  approved  the  Amended  and  Restated  1995 Equity
Incentive Plan ("1995 Plan") and the 1999 Employee  Incentive Plan ("1999 Plan")
which  allow  for  the  granting  of  stock  options,  SARs,  nonvested  shares,
performance  units and performance  shares to eligible  participants.  Grants of
stock options may be either incentive or nonqualified.  There are 19,900,000 and
2,473,875 shares authorized under the 1995 Plan and the 1999 Plan, respectively.
As of December 31, 2006, we estimate  there are 3,382,155  shares  available for
grant under the 1995 Plan.  This estimate is based upon the total number of SARs
that would be  exercised  using the market price of our stock as of December 29,
2006.  We will not make  additional  grants  under the 1999  Plan.  Only  shares
actually issued upon exercise of a SAR are counted against the shares authorized
under the 1995  Plan.  We issue  shares  out of our  treasury  for stock  option
exercises, SAR exercises and nonvested share issuances.

In  2002,  our  Board of  Directors  approved  performance  share  plans  with a
three-year  performance  period.  Performance shares represent rights to receive
our  common  stock,  cash  or  any  combination  thereof,   based  upon  certain
performance  criteria.  In 2004, we reversed  $447,000 of  compensation  expense
previously  recognized  due  to  the  2004  performance  versus  our  three-year
performance  criteria.  We  recorded  compensation  expense  of  $65,000 in 2005
related to these  grants.  These  amounts  were based on the market price of our
common  stock at the end of each fiscal  year.  We no longer  grant  performance
shares.

Prior to 2006, we accounted  for these  stock-based  compensation  equity awards
under the intrinsic  method of Accounting  Principles  Board ("APB") Opinion No.
25. APB Opinion No. 25 required  compensation cost to be recognized based on the
excess,  if any,  between  the quoted  market  price of the stock at the date of
grant and the amount an  employee  must pay to acquire  the stock.  All  options
awarded under both of our plans were granted with an exercise price equal to the
fair market  value on the date of the grant and,  accordingly,  no  compensation
expense was  recognized  for stock option  awards.  In addition,  we adopted the
disclosure provisions of SFAS No. 148, "Accounting for Stock-Based  Compensation
-  Transition  and  Disclosure,  an amendment  of FASB  Statement  No. 123." The
statement required prominent  disclosures in financial  statements regarding the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results.


                                      F-13
<PAGE>


Under APB Opinion No. 25, pro forma  expense for  stock-based  compensation  was
calculated using a graded vesting schedule over the explicit vesting period. The
following  table  presents the effect on our net earnings and earnings per share
had we adopted the fair value method of accounting for stock-based  compensation
under SFAS No. 123, "Accounting for Stock-Based  Compensation" for 2005 and 2004
(in thousands, except for per share amounts).

<TABLE>
<CAPTION>

                                                                2005              2004
                                                          ----------------  ----------------

<S>                                                        <C>               <C>
Net earnings, as reported.............................      $    101,802      $    110,865
Add:  Stock-based compensation expense
     included in net earnings, net of related taxes                1,409               638
Less:  Total stock-based employee
    compensation expense determined under
    fair value based methods for all equity awards,
    net of related  taxes (1).........................             8,536             8,555
                                                          ----------------  ----------------

Pro forma net earnings................................      $     94,675      $    102,948
                                                          ================  ================

Basic net earnings per common share,
    as reported.......................................      $       1.29      $       1.36
                                                          ================  ================
Basic net earnings per common share,
    as adjusted.......................................      $       1.20      $       1.26
                                                          ================  ================

Diluted net earnings per common share,
    as reported.......................................      $       1.27      $       1.33
                                                          ================  ================
Diluted net earnings per common share,
    as adjusted.......................................      $       1.18      $       1.23
                                                          ================  ================

<FN>
(1) SFAS No. 123 (revised 2004) requires  compensation  expense to be recognized
over the requisite  service period which is generally from the grant date to the
earlier of a) the  explicit  vesting  date or b) the date on which the  employee
becomes  retirement  eligible.  If pro forma  expense for 2005 and 2004 had been
derived using this approach, additional stock-based compensation would have been
$2,731 and $2,013, net of tax, respectively, and pro forma net income would have
been $91,944 and  $100,935,  respectively.  Additionally,  basic and diluted pro
forma earnings per share would have been $1.17 and $1.15, respectively, for 2005
and $1.24 and $1.21, respectively, for 2004.
</FN>
</TABLE>

We  adopted  the  fair  value   recognition   provisions  of  SFAS  No.  123(R),
"Share-Based  Payment" ("SFAS 123(R)") at the beginning of 2006. SFAS No. 123(R)
requires  all  stock-based  compensation,  including  grants of  employee  stock
options, to be recognized in the statement of earnings based on fair value. With
limited  exceptions,  the amount of  compensation  cost is measured based on the
fair  value on the grant  date of the equity or  liability  instruments  issued.
Compensation  cost is  recognized  over the  period  that an  employee  provides
service for that award. We adopted this accounting  treatment using the modified
prospective  transition  method;  therefore,  results for prior periods have not
been restated.

Beginning  in 2006,  we  changed  our  method of  determining  the fair value of
stock-based equity awards from the Black-Scholes  model to a binomial model. The
binomial  model  considers  a  range  of  assumptions  relative  to  volatility,
risk-free  interest rates and employee  exercise  behavior,  which models actual
employee behaviors.  We believe the binomial model provides a fair value that is
more  representative  of  actual  and  future  experience  as  compared  to  the
Black-Scholes model.

                                      F-14
<PAGE>

Compensation  costs for 2006  have been  recognized  for all new  equity  awards
granted in 2006 and those equity  awards  granted prior to 2006 that have yet to
reach the end of their service period.  As required by SFAS No. 123(R), we began
recognizing  expense for employee  stock-based  compensation over the shorter of
the  vesting  period or the period from the date of the grant until the date the
employee becomes eligible for retirement.  We recognize  expense for stock-based
compensation  over  the  graded  vesting  period.   We  recognized   stock-based
compensation in the consolidated financial statements as follows:
<TABLE>
<CAPTION>

                                                                   2006            2005            2004
                                                              --------------- --------------- ---------------

<S>                                                             <C>             <C>             <C>
       Labor................................................     $    930        $    --         $    --
       General and administrative expenses..................       20,864           2,231             975
       Income taxes.........................................       (7,410)           (822)           (337)
                                                              --------------- --------------- ---------------
       Stock-based compensation expense included
          in net earnings, net of related tax...............     $ 14,384        $  1,409        $    638
                                                              =============== =============== ===============
</TABLE>

As of December  31, 2006,  we had  unrecognized  compensation  expense for stock
options and SARs of $16,300,000 to be recognized over a weighted  average period
of 1.8 years.

As required by SFAS No. 123(R),  unearned compensation of $2,614,000,  which was
previously  reflected as a reduction to stockholders'  equity as of December 25,
2005, was  reclassified  as a reduction to additional  paid-in  capital upon our
adoption of this statement.

Stock Options

Prior to 2005, we granted  substantially  all of our equity awards through stock
options once per year.  These stock options  generally vest over three years and
expire ten years from the date of the grant.

In 2005, we granted  substantially  all of our equity awards  through  quarterly
stock option grants.  Grants issued in the first quarter of each year vest three
years from the date of the grant.  Grants issued in subsequent  quarters vest on
the same date as the first  quarterly  stock option grant of that year.  In 2005
and 2006,  we also granted to certain  employees  stock  options with 25% of the
grant  vesting four years from the grant date and the remaining 75% of the grant
vesting  five years from the grant date.  The 2005 option  grants  expire six to
seven years from the date of the grant.  In the first quarter of 2006, we issued
grants to certain  employees  and members of the Board of  Directors  which vest
either  one or  three  years  from  the  date of the  grant.  As  part of  their
compensation  package,  the outside members of the board of directors  receive a
grant of options in the first  quarter of every year which expire ten years from
the grant date.


                                      F-15
<PAGE>


Transactions  for stock options  relative to both plans for 2004 to 2006 were as
follows:

<TABLE>
<CAPTION>

                                                                     1995 Plan
                                        ---------------------------------------------------------------------
                                                                             Weighted
                                                              Weighted        Average
                                                              Average        Remaining
                                                              Exercise      Contractual         Aggregate
                                        Number of Options       Price          Life          Intrinsic Value
                                        ------------------ -------------- ---------------- -------------------
                                                                                             (in thousands)
<S>                                        <C>               <C>             <C>               <C>
    Options outstanding at
        December 28, 2003............       5,487,048         $  12.84        7.4 years
           Granted...................       1,596,944         $  25.82
           Exercised.................      (1,445,331)        $  10.09                          $   22,138
           Forfeited.................        (570,853)        $  14.91
                                        ------------------
    Options outstanding at
        December 26, 2004............       5,067,808         $  17.48        7.3 years
           Granted...................       3,277,725         $  25.69
           Exercised.................        (638,163)        $  11.89                          $    9,188
           Forfeited.................        (341,437)        $  23.80
                                        ------------------
    Options outstanding at
        December 25, 2005............       7,365,933         $  21.33        6.5 years
           Granted...................         453,943         $  22.16
           Exercised.................      (1,058,021)        $  13.45                          $   10,838
           Expired...................            (120)        $   8.30
           Forfeited.................        (586,486)        $  25.62
                                        ------------------
    Options outstanding at
        December 31, 2006............       6,175,249         $  22.33        5.8 years         $   20,139
                                        ==================
    Options vested and expected to
        vest at December 31, 2006....       5,667,470         $  22.07        1.1 years         $   19,786
                                        ==================
    Options exercisable at
        December 31, 2006............       1,985,145         $  16.02        5.4 years         $   17,473
                                        ==================
</TABLE>


                                      F-16
<PAGE>

<TABLE>
<CAPTION>


                                                                     1999 Plan
                                        ---------------------------------------------------------------------
                                                                              Weighted
                                                              Weighted         Average
                                                              Average        Remaining
                                                              Exercise       Contractual        Aggregate
                                        Number of Options       Price           Life         Intrinsic Value
                                        ------------------ -------------- ---------------- ------------------
                                                                                             (in thousands)
<S>                                        <C>               <C>             <C>              <C>
    Options outstanding at
        December 28, 2003............       1,775,097         $   12.77       7.7 years
           Granted...................           --                  --
           Exercised.................        (572,048)        $   10.46                        $    8,744
           Forfeited.................         (73,439)        $   14.81
                                        ------------------
    Options outstanding at
        December 26, 2004............      1,129,610          $   13.80       7.0 years
           Granted...................           --                  --
           Exercised.................        (418,813)        $   13.67                        $    5,325
           Forfeited.................         (46,141)        $   16.02
                                        ------------------
    Options outstanding at
        December 25, 2005............         664,656         $   13.73       6.0 years
           Granted...................           --                  --
           Exercised.................        (213,758)        $   13.74                        $    2,090
           Expired...................           --                  --
           Forfeited.................            (505)        $   13.22
                                        ------------------
    Options outstanding at
        December 31, 2006............         450,393         $   13.72       4.9 years        $    4,933
                                        ==================
    Options vested and expected to
        vest at December 31, 2006....         450,315         $   13.72       4.9 years        $    4,932
                                        ==================
    Options exercisable at
        December 31, 2006............         445,893         $   13.69       4.9 years        $    4,895
                                        ==================
</TABLE>

The aggregate  intrinsic value was calculated  using the difference  between the
current  market price and the grant price for only those equity awards that have
a grant price that is less than the current market price.


                                      F-17
<PAGE>



The following table summarizes  information  relating to our fixed-priced  stock
options outstanding for both plans at December 31, 2006.
<TABLE>
<CAPTION>

                                            Options Outstanding                      Options Exercisable
                              ------------------------------------------------  -------------------------------
                                                  Weighted
                                                  Average
                                                 Remaining         Weighted                         Weighted
                                  Number        Contractual        Average           Number         Average
  Range of Exercise Prices      Outstanding        Life         Exercise Price    Exercisable    Exercise Price
----------------------------  --------------  ---------------  ---------------  --------------- ---------------
<S>                            <C>              <C>               <C>             <C>              <C>

 1995 Plan:
  $   6.18     to $  14.72        849,089        4.0 years         $  11.40          849,089        $  11.40
  $  16.12     to $  21.00        820,438        6.0 years         $  17.09          709,677        $  16.54
  $  21.01     to $  23.22      1,136,137        6.0 years         $  22.39          136,330        $  21.47
  $  23.35     to $  25.72        262,273        6.4 years         $  24.87           50,999        $  24.80
  $  25.79     to $  25.79        940,453        7.0 years         $  25.79          131,220        $  25.79
  $  25.85     to $  26.29        111,705        7.8 years         $  25.98           96,580        $  26.00
  $  26.30     to $  26.30      1,429,000        5.6 years         $  26.30             --              --
  $  26.31     to $  28.91        626,154        5.6 years         $  27.95          11,250         $  26.87
                              --------------                                    ---------------
  $   6.18     to $  28.91      6,175,249        5.8 years         $  22.33        1,985,145        $  16.02
                              ==============                                    ===============

 1999 Plan:
  $   7.24     to $  13.22        161,969        4.0 years         $  10.27         161,969         $  10.27
  $  13.60     to $  16.13        156,496        5.1 years         $  15.12         151,996         $  15.09
  $  16.15     to $  17.60        131,928        5.9 years         $  16.29         131,928         $  16.29
                              --------------                                    ---------------
  $   7.24     to $  17.60        450,393        4.9 years         $  13.72         445,893         $  13.69
                              ==============                                    ===============
</TABLE>

The number of options exercisable for each plan are summarized below:

<TABLE>
<CAPTION>

                                             1995 Plan                     1999 Plan
                                   ------------------------------ ----------------------------
                                                      Weighted                       Weighted
                                                      Average                        Average
                                       Options        Exercise         Options       Exercise
                                     Exercisable        Price        Exercisable       Price
                                   --------------- -------------- ---------------- -----------

<S>                                <C>               <C>             <C>             <C>
    December 26, 2004...........    1,572,468         $ 10.70         403,863         $10.95

    December 25, 2005...........    1,919,347         $ 13.33         556,656         $13.24

    December 31, 2006...........    1,985,145         $ 16.02         445,893         $13.69
</TABLE>

We derived the following weighted-average assumptions using the binomial model
in 2006 and the Black-Scholes model for 2005 and 2004 for stock options:
<TABLE>
<CAPTION>

                                                     2006             2005              2004
                                                 --------------  ----------------  ---------------
                                                   (Binomial)     (Black-Scholes)   (Black-Scholes)
<S>                                                <C>              <C>               <C>
   Expected term in years....................           4.8              5.1               4.8
   Expected stock price volatility...........          31.5%            32.3%             41.6%
   Expected dividend yield...................           0.9%             0.7%              0.3%
   Risk-free interest rate...................           4.6%             3.9%              2.7%
   Fair value of options granted.............       $  6.85          $  8.43           $  9.84

</TABLE>

                                      F-18


<PAGE>



Stock Appreciation Rights

Beginning in 2006,  we began  granting  substantially  all of our equity  awards
through quarterly nonvested share and SAR grants which are exercisable in shares
of our common stock. Grants issued for the first quarter of each year vest three
years from the date of the grant.  Grants issued in subsequent  quarters vest on
the same date as the first  quarterly  grant of that year.  The SARs  granted in
2006 expire six to seven years from the date of the grant. Transactions for SARs
for 2006 were as follows:

<TABLE>
<CAPTION>


                                                                     1995 Plan
                                        ---------------------------------------------------------------------
                                                                             Weighted
                                                             Weighted         Average
                                                              Average        Remaining
                                            Number of        Exercise       Contractual        Aggregate
                                              SARs             Price           Life         Intrinsic Value
                                        ------------------ -------------- ---------------- ------------------
                                                                                            (in thousands)
<S>                                          <C>              <C>             <C>             <C>
    SARs outstanding at
        December 25, 2005............             --                --
           Granted(1)................         1,231,467       $   21.81
           Exercised.................             --                --
           Expired...................             --                --
           Forfeited.................           (64,600)      $   22.17
                                        ------------------
    SARs outstanding at
        December 31, 2006............         1,166,867       $   21.80        6.2 years        $    3.354
                                        ==================
    SARs vested and expected to
        vest at December 31, 2006....           997,571       $   21.80        2.2 years        $    2,868
                                        ==================
    SARs exercisable at
        December 31, 2006............             --
                                        ==================
<FN>

(1) Upon exercise of SARs, employees will receive the number of shares of common
stock equal in value to the  appreciation  in the fair market value based on the
difference  between the fair market  value on the grant date and the fair market
value on the date of exercise. The number of shares of common stock delivered as
payment of such appreciation will reduce the shares available for issuance under
the 1995 Plan.
</FN>
</TABLE>

The following table  summarizes information  related to our  SARs outstanding at
December 31, 2006.
<TABLE>
<CAPTION>

                                              SARs Outstanding                         SARs Exercisable
                              ------------------------------------------------  -------------------------------
                                                  Weighted
                                                  Average
                                                 Remaining         Weighted                        Weighted
                                 Number         Contractual        Average          Number         Average
  Range of Exercise Prices     Outstanding         Life         Exercise Price    Exercisable    Exercise Price
----------------------------  --------------  ---------------  ---------------  --------------- ---------------

<S>                            <C>              <C>               <C>               <C>                 <C>
 1995 Plan:
  $  19.92     to $  21.00        598,164        6.2 years         $  20.66             --                 --
  $  22.34     to $  22.34        267,978        6.2 years         $  22.34             --                 --
  $  23.57     to $  23.57        300,725        6.2 years         $  23.57             --                 --
                              --------------                                    ---------------
  $  19.92     to $  23.57      1,166,867        6.2 years         $  21.80             --                 --
                              ==============                                    ===============

</TABLE>

                                      F-19
<PAGE>


We  derived  the  following  weighted-average  assumptions  for SARs  using  the
binomial model:
<TABLE>
<CAPTION>

                                                2006
                                            --------------

<S>                                           <C>
Expected term in years                             4.2
Expected stock price volatility                   31.7%
Expected dividend yield                            0.9%
Risk-free interest rate                            4.7%
Fair value of SARs granted                     $  6.27
</TABLE>

Assumptions

We  determined  our  assumptions  for stock  options and SAR grants based on the
following methodology:

Expected  term: We have  determined  the expected term based upon the assumption
that all  outstanding  options and SARs will be exercised at the midpoint of the
current holding period and the full contractual term.

Expected  volatility:  We have  determined  the expected  volatility  based on a
weighted  average of Applebee's  volatility  over the expected term,  historical
volatility of certain peer group restaurant  volatilities and Applebee's implied
volatility.

Expected  dividend yield:  We have determined the expected  dividend yield based
upon our expected dividends as a percentage of our current stock price.

Risk-free  interest rate: We have  determined the risk-free  interest rate using
the U.S.  Treasury  yield  curve in  effect  at the  time of the  grant  for the
expected term of the equity award.

Nonvested Shares

We grant nonvested shares under our 1995 Plan. Nonvested shares vest either one,
two or three  years  after the date of the grant.  The fair  value of  nonvested
shares  granted is equal to the market  price of the stock at the date of grant.
Transactions during 2004 to 2006 were as follows:

<TABLE>
<CAPTION>

                                                                                                 Weighted
                                                                                 Number of       Average
                                                                                  Awards        Fair Value
                                                                              --------------- --------------

<S>                                                                              <C>             <C>
Nonvested share awards outstanding as of December 28, 2003.................       182,602         $16.59
Granted....................................................................        84,882          25.08
Vested.....................................................................       (73,031)         14.99
Forfeited..................................................................        (7,183)         22.26
                                                                              --------------- --------------
Nonvested share awards outstanding as of December 26, 2004.................       187,270         $20.85
Granted....................................................................       117,679          27.66
Vested.....................................................................       (33,917)         18.53
Forfeited..................................................................       (13,219)         25.30
                                                                               --------------- -------------
Nonvested share awards outstanding as of December 25, 2005.................       257,813         $24.03
Granted....................................................................       204,501          21.79
Vested.....................................................................      (105,168)         19.29
Forfeited..................................................................       (37,245)         25.85
                                                                              --------------- --------------
Nonvested share awards outstanding as of December 31, 2006.................       319,901         $23.95
                                                                              =============== ==============
</TABLE>
                                      F-20
<PAGE>

As of December 31, 2006, we had  unrecognized  compensation  expense  related to
nonvested  share awards of  approximately  $2,200,000,  which will be recognized
over a weighted average period of 1.5 years.

Employee stock purchase plan

Our Board of Directors  has  authorized  an employee  stock  purchase  plan that
allows  associates  to  purchase  shares of our common  stock at a 15%  discount
through a payroll  deduction.  We record  compensation  for this plan  using the
Black-Scholes  valuation  model in the quarter that the purchase  occurs.  As of
December 31, 2006,  142,480 shares of the 1,850,000 shares which were authorized
under this plan were available for purchase.

4. Acquisitions

All of our  acquisitions  discussed  below  have  been  accounted  for using the
purchase  method of accounting  and,  accordingly,  our  consolidated  financial
statements reflect the results of operations for each acquisition  subsequent to
the date of  acquisition.  The  assets  acquired  and  liabilities  assumed  are
recorded at  estimates  of fair value as  determined  by  management  based upon
information available.  We finalize the allocation of purchase price to the fair
value of assets  acquired and  liabilities  assumed  when we obtain  information
sufficient to complete the allocation, but in each case, no longer than one year
after the acquisition date.

In April 2004, we completed our  acquisition  of the operations and assets of 10
Applebee's   restaurants   located  in  Southern  California  for  approximately
$13,800,000  in cash.  The  purchase  price was  allocated  to the fair value of
property and equipment of  $2,500,000,  goodwill of  $10,800,000,  and other net
assets of approximately $500,000.

In May 2005,  we completed  the  acquisition  of 12  Applebee's  restaurants  in
Missouri, Kansas and Arkansas, which included one restaurant under construction,
for  approximately  $39,500,000 in cash. The purchase price was allocated to the
fair value of property and equipment of  $17,500,000,  goodwill of  $21,500,000,
reacquired franchise rights of approximately  $300,000,  and other net assets of
approximately $200,000.

In January 2006, we completed the acquisition of four Applebee's  restaurants in
the Houston market for approximately  $8,100,000 in cash. The purchase price was
allocated to the fair value of property and equipment of $7,400,000, goodwill of
approximately  $500,000,  reacquired franchise rights of approximately $100,000,
and other net assets of approximately $100,000.

The  following  table is comprised of actual  company  restaurant  sales for the
three  restaurant  acquisitions  above,  which are included in our  consolidated
financial statements for each period presented, and pro forma company restaurant
sales. The pro forma company  restaurant sales for 2006 include sales related to
the January 2006 acquisition  discussed above as if the acquisition had occurred
as of the  beginning of 2006.  The pro forma company  restaurant  sales for 2005
includes  sales  related  to the  January  2006  acquisition  and the  May  2005
acquisition  discussed  above  as if the  acquisitions  had  occurred  as of the
beginning of 2005. The pro forma company restaurant sale for 2004 includes sales
related to the May 2005  acquisition  and the April 2004  acquisition  discussed
above as if the acquisition had occurred as of the beginning of 2004.

<TABLE>
<CAPTION>

                                                            2006            2005            2004
                                                       --------------- --------------- ---------------
<S>                                                     <C>             <C>             <C>
Actual company restaurant sales
    for acquired restaurants.........................    $   6,400       $  17,000       $  17,600
                                                       =============== =============== ===============

Pro forma company restaurant sales
    for acquired restaurants.........................    $   7,100       $  32,800       $  52,600
                                                       =============== =============== ===============
</TABLE>

                                      F-21
<PAGE>

In April 2005, we completed the acquisition of eight  Applebee's  restaurants in
the  Memphis  market,  which  were  closed in 2004 by a former  franchisee,  for
approximately  $8,800,000  payable in cash. In connection with this acquisition,
we paid  approximately  $800,000 in 2004 and  $8,000,000  in 2005.  The purchase
price of $8,800,000 was allocated to the fair value of property and equipment of
approximately  $8,200,000  and  goodwill  of  approximately  $600,000.  We  have
remodeled and opened seven restaurants and the remaining  restaurant was sold to
a third-party.

5. Inventory Impairment

In 2004, we determined that we had excess  inventories of riblets that no longer
met our quality standards.  Accordingly,  we recorded an inventory impairment of
$2,000,000  ($1,300,000,  net of income taxes) in our consolidated statements of
earnings for 2004. The portion of the riblet inventory impairment related to the
company's  historical usage of  approximately  $400,000 was recorded in food and
beverage cost and the portion related to the  franchisee's  historical  usage of
approximately  $1,600,000 was recorded in cost of other franchise  income in the
consolidated statements of earnings.

6. Impairment and Other Restaurant Closure Costs

In 2006, we recorded impairment and other restaurant closure costs of $8,800,000
($5,830,000,  net of taxes)  consisting  of $5,500,000 of property and equipment
and lease  acquisition  costs,  $1,500,000  for a write-down  of an  investment,
$900,000  for  restaurant  closure  costs and  $900,000  for a  write-down  of a
corporate aircraft.  This charge has been included in our consolidated statement
of earnings for 2006.

In 2005,  we recorded an impairment  of  $3,900,000  ($2,500,000,  net of income
taxes)  consisting  of a  $2,600,000  write-down  of the  carrying  value of the
property and equipment of three restaurants that were not performing as expected
and one restaurant that was closed and relocated and a $1,300,000  write-down of
one other  long-lived  asset.  This  impairment  charge has been included in our
consolidated statements of earnings for 2005.

In assessing restaurants for impairment, we use current and historical operating
results to estimate future cash flows on a restaurant by restaurant  basis.  The
asset  impairment  charges for 2005 and 2006 were  calculated  by comparing  the
carrying  value of the  restaurants'  assets to the  estimated  future cash flow
projections.  In assessing the above  non-restaurant  assets for impairment,  we
used an estimate of their fair market value.

7. Assets Held for Sale

We classify  assets as held for sale when there is a plan for disposal of assets
and those  assets  meet the held for sale  criteria  as defined in SFAS No. 144,
"Accounting  for Impairment or Disposal of Long-Lived  Assets."  During 2006, we
began to  actively  market  our  existing  corporate  headquarters  under a plan
approved by management.  Consequently,  we have classified the building and land
as held for sale as of December  31,  2006.  In  addition,  we began to actively
market a corporate aircraft and other assets with immaterial carrying values. We
ceased  amortizing these assets when we classify the assets as held for sale. In
February 2007,  the corporate  aircraft was sold and we recognized an immaterial
gain.

                                      F-22
<PAGE>

8. Receivables

Receivables are comprised of the following (in thousands):
<TABLE>
<CAPTION>
                                                                           December 31,        December 25,
                                                                               2006                2005
                                                                         -----------------   -----------------
      <S>                                                                <C>                 <C>
      Franchise royalty, advertising and trade receivables.............     $    39,123         $     27,098
      Credit card receivables..........................................           9,492                8,853
      Other............................................................              73                2,246
                                                                         -----------------   -----------------
                                                                                 48,688               38,197
      Less allowance for bad debts.....................................             917                  340
                                                                         -----------------   -----------------
                                                                            $    47,771         $     37,857
                                                                         =================   =================
</TABLE>

We had a  provision  for bad  debts  of  $592,000  in  2006.  We did not  have a
provision for bad debts in 2005 or 2004. We had write-offs against the allowance
for bad debts of  $15,000,  $77,000 and  $627,000  during  2006,  2005 and 2004,
respectively.

9. Prepaid and Other Current Assets

Prepaid and other current assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
                                                                           December 31,        December 25,
                                                                               2006                2005
                                                                         -----------------   -----------------
      <S>                                                                <C>                 <C>
      Deferred income taxes............................................     $      5,825        $      6,338
      Other............................................................            9,430               7,180
                                                                         -----------------   -----------------
                                                                            $     15,255        $     13,518
                                                                         =================   =================
</TABLE>

10. Goodwill and Other Intangible Assets

We have  completed  the  annual  goodwill  impairment  test  required  under the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets" in the fourth
fiscal  quarter  for  each  year  reported  in our  consolidated  statements  of
earnings.  We  determined  that  no  impairment  existed  and  as a  result,  no
impairment losses were recorded in any year.

Goodwill is summarized below (in thousands):
<TABLE>
<CAPTION>
                                                                           December 31,        December 25,
                                                                               2006                2005
                                                                         -----------------   -----------------
      <S>                                                                <C>                 <C>
      Carrying amount, beginning of the year...........................     $   138,443         $   116,344
      Goodwill acquired during the year................................             507              22,099
                                                                         -----------------   -----------------
      Carrying amount, end of the year.................................     $   138,950         $   138,443
                                                                         =================   =================
</TABLE>


                                      F-23
<PAGE>


Intangible  assets subject to amortization  pursuant to SFAS No. 142,  "Goodwill
and Other Intangible Assets," are summarized below (in thousands):
<TABLE>
<CAPTION>

                                                                   December 31, 2006
                                             --------------------------------------------------------------
                                              Gross Carrying          Accumulated            Net Book
                                                  Amount             Amortization              Value
                                             ------------------    ------------------    ------------------
<S>                                          <C>                   <C>                   <C>
Amortized intangible assets:
    Franchise interest and rights.......       $       6,371         $       6,172         $         199
    Lease acquisition costs(1)..........               3,430                   650                 2,780
    Noncompete agreement................                 350                   199                   151
                                             ------------------    ------------------    ------------------
Total...................................       $      10,151         $       7,021         $       3,130
                                             ==================    ==================    ==================
</TABLE>
<TABLE>
<CAPTION>
                                                                   December 25, 2005
                                             --------------------------------------------------------------
                                              Gross Carrying          Accumulated            Net Book
                                                  Amount             Amortization              Value
                                             ------------------    ------------------    ------------------
<S>                                          <C>                   <C>                   <C>
Amortized intangible assets:
    Franchise interest and rights.......       $       6,371         $       5,896         $         475
    Lease acquisition costs(1)..........               4,939                   743                 4,196
    Noncompete agreement................                 350                   109                   241
                                             ------------------    ------------------    ------------------

Total...................................       $      11,660         $       6,748         $       4,912
                                             ==================    ==================    ==================
<FN>
(1) In connection with the review of long-lived assets during our preparation of
the second quarter of fiscal 2006 condensed  consolidated  financial statements,
we recorded  an asset  impairment  charge of  approximately  $1,100,000,  net of
accumulated amortization, for lease acquisition costs related to two restaurants
whose carrying amounts were not deemed recoverable (Note 6).
</FN>
</TABLE>

Amortizable  other intangible  assets consist of franchise  interest and rights,
lease acquisition costs and a noncompete agreement.

Franchise  interest and rights represent the allocation of the purchase price of
our 1988  acquisition of the Applebee's  concept to the  restaurants we acquired
and the franchise agreements that we assumed based on an independent  valuation.
We amortize the allocated  costs over the estimated  life of the  restaurants or
the franchise agreements on a straight-line basis which originally ranged from 7
to 20 years.

Franchise  interest  and  rights  are being  amortized  over the next one to two
years,  lease  acquisition costs are being amortized over the next 5 to 18 years
and the noncompete agreement is being amortized over the next two years.

We expect annual  amortization  expense for amortizable  other intangible assets
for the next five fiscal years to range from approximately $200,000 to $500,000.

Intangible   assets  not  subject  to  amortization  are  summarized  below  (in
thousands):
<TABLE>
<CAPTION>
                                                                    December 31,            December 25,
                                                                        2006                    2005
                                                                ----------------------  --------------------
      <S>                                                       <C>                     <C>
      Carrying amount, beginning of the year..................      $      3,138           $     2,793
      Nonamortizable intangible assets acquired
           during the year....................................               140                   345
                                                                ----------------------  --------------------
      Nonamortizable intangible assets amount,
           end of the year....................................      $      3,278           $     3,138
                                                                ======================  ====================
</TABLE>

In connection  with our  acquisition of four  Applebee's  restaurants in Houston
from a  franchisee  in January  2006,  we  recorded  approximately  $100,000  of
reacquired franchise rights (Note 4).

                                      F-24
<PAGE>

In connection  with our  acquisition  of 12 Applebee's  restaurants in Missouri,
Kansas and Arkansas  from a franchisee  in May 2005,  we recorded  approximately
$300,000 of reacquired franchise rights (Note 4).

The amount  allocated to reacquired  franchise  rights is based upon the initial
franchise fees received from these  franchisees.  This  intangible  asset has an
indefinite  life  and,  accordingly,  will  not  be  amortized  but  tested  for
impairment at least annually.

11. Other Assets

Other assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
                                                                           December 31,        December 25,
                                                                               2006                2005
                                                                         -----------------   -----------------
      <S>                                                                <C>                 <C>
      Nonqualified deferred compensation plan
        investments  (Note 20).........................................     $     18,729        $     14,493
      Liquor licenses..................................................            6,814               6,541
      Notes receivable.................................................            1,305               1,478
      Deferred financing costs, net....................................            1,013                 664
      Minority investment in unaffiliated company, at net realizable
        value..........................................................              750               2,250
      Other............................................................            6,807               6,473
                                                                         -----------------   -----------------
                                                                            $     35,418        $     31,899
                                                                         =================   =================
</TABLE>

12. Property and Equipment

Property and equipment, net, is comprised of the following (in thousands):

<TABLE>
<CAPTION>
                                                                           December 31,       December 25,
                                                                               2006               2005
                                                                         -----------------  ------------------
      <S>                                                                <C>                <C>
      Land.............................................................     $   107,193        $    97,476
      Buildings and leasehold improvements.............................         527,049            482,074
      Furniture and equipment..........................................         291,501            263,526
      Construction in progress.........................................          28,757             25,755
                                                                         -----------------  ------------------
                                                                                954,500            868,831
      Less accumulated depreciation and capitalized
         lease amortization............................................         318,469            278,238
                                                                         -----------------  ------------------
                                                                            $   636,031        $   590,593
                                                                         =================  ==================
</TABLE>

We have recorded  capitalized leases of $4,055,000 at both December 31, 2006 and
December 25, 2005,  which are included in buildings and leasehold  improvements.
We had  accumulated  amortization of such property of $2,258,000 at December 31,
2006 and $2,025,000 at December 25, 2005. These capitalized leases relate to the
buildings on certain restaurant  properties.  The land portion of the restaurant
property leases is accounted for as an operating lease.

We had  depreciation  and capitalized  lease  amortization  expense  relating to
property  and  equipment  of  $64,738,000  for  2006,  $54,580,000  for 2005 and
$46,051,000  for 2004. Of these  amounts,  capitalized  lease  amortization  was
$233,000 during 2006, $240,000 during 2005 and $239,000 during 2004.

                                      F-25
<PAGE>

We lease certain of our restaurants. The leases generally provide for payment of
minimum annual rent, real estate taxes,  insurance and maintenance  and, in some
cases,  contingent  rent  (calculated  as a  percentage  of  sales) in excess of
minimum rent.  Total rental expense for all operating leases is comprised of the
following (in thousands):
<TABLE>
<CAPTION>
                                                           2006                2005                2004
                                                     ------------------  ------------------  -----------------
      <S>                                            <C>                 <C>                 <C>
      Minimum rent.................................    $       26,860      $       23,929      $     20,416
      Contingent rent..............................             1,453               1,389             1,254
                                                     ------------------  ------------------  -----------------
                                                       $       28,313      $       25,318      $     21,670
                                                     ==================  ==================  =================
</TABLE>

The present value of  capitalized  lease  payments and the future  minimum lease
payments under noncancelable  operating leases over the lease term as defined in
Note 2  (including  leases  executed  for sites to be  developed  in 2007) as of
December 31, 2006 are as follows (in thousands):
<TABLE>
<CAPTION>
                                                                            Capitalized          Operating
                                                                              Leases              Leases
                                                                         ------------------ ------------------
      <S>                                                                <C>                <C>
      2007.............................................................     $        822       $     29,307
      2008.............................................................              851             29,234
      2009.............................................................              880             28,977
      2010.............................................................              895             28,544
      2011.............................................................              896             28,298
      Thereafter.......................................................            3,178            257,659
                                                                         ------------------ ------------------
      Total minimum lease payments.....................................            7,522       $    402,019
                                                                                            ==================
      Less amounts representing interest...............................            3,606
                                                                         ------------------
      Present value of minimum lease payments..........................     $      3,916
                                                                         ==================
</TABLE>

In October 2006, we entered into a sale-leaseback arrangement with a third-party
finance  company  involving  five  restaurant  properties.  As a result  of this
transaction,  we recorded a deferred gain of approximately $3,100,000 which will
be recognized over the 10-year remaining lease term on a straight-line basis.


13. Notes Payable and Long-Term Debt

Our debt,  which  includes  both notes  payable and  long-term  debt,  including
capitalized lease obligations, is comprised of the following (in thousands):
<TABLE>
<CAPTION>
                                                                           December 31,       December 25,
                                                                               2006               2005
                                                                         ----------------- ------------------
     <S>                                                                 <C>               <C>
     Notes payable; interest at federal funds rate plus 0.50% at
         December 31, 2006, at federal funds rate plus 0.625% at
         December 25, 2005............................................      $      --         $     7,900
     Unsecured revolving credit facility; interest at LIBOR plus
         0.5% or prime rate at December 31, 2006, due
         December 2011 and LIBOR plus 0.625% or prime
         rate at December 25, 2005....................................          170,000           175,000
     Capitalized lease obligations (Note 12)..........................            3,916             4,054
     Other............................................................            1,269             1,413
                                                                         ----------------- ------------------
     Total notes payable and long-term debt...........................          175,185           188,367
     Less notes payable and current portion of long-term debt.........              265             8,159
                                                                         ----------------- ------------------
     Long-term debt, less current portion.............................      $   174,920       $   180,208
                                                                         ================= ==================
</TABLE>

In December 2006, we entered into a new five-year revolving credit facility. The
terms of the  bank  credit  agreement  provide  for  $400,000,000  in  unsecured
revolving  credit  and an  additional  $200,000,000  of  revolving  credit  upon
satisfaction of the conditions set forth in the credit facility. The facility is
subject to various covenants and restrictions which, among other things, require
the  maintenance  of stipulated  fixed charge and leverage  ratios,  as defined.
There is no limit on cash dividends provided that the declaration and payment of
such  dividend does not cause a default of any other  covenant  contained in the
agreement.  The  facility  is  subject  to  other  standard  terms,  conditions,
covenants and fees.


                                      F-26
<PAGE>

As of December 31, 2006,  we are in compliance  with the covenants  contained in
our  credit   agreement.   As  of  December  31,  2006,  we  had  borrowings  of
$170,000,000,  letters of credit of $15,600,000  outstanding  and  approximately
$214,400,000 available under our revolving credit facility.

In December 2004, we had a $150,000,000 unsecured revolving credit facility. The
bank credit agreement provided for a $150,000,000  five-year unsecured revolving
credit facility,  of which $40,000,000 could be used for the issuance of letters
of credit. The facility was subject to various covenants and restrictions which,
among other  things,  required  the  maintenance  of  stipulated  fixed  charge,
leverage and indebtedness to  capitalization  ratios,  as defined.  There was no
limit on cash  dividends  provided  that the  declaration  and  payment  of such
dividend  does not  cause a  default  of any  other  covenant  contained  in the
agreement.  The  facility  was  subject  to other  standard  terms,  conditions,
covenants, and fees.

In September  2005,  we entered into an amendment to our credit  facility  which
increased  the  revolving  credit  commitment  available  from  $150,000,000  to
$200,000,000.  In October 2005, we entered into a second amendment to our credit
facility  which  increased  the  revolving  credit  commitment   available  from
$200,000,000  to  $250,000,000  and provided for an  additional  $75,000,000  of
revolving  credit upon  satisfaction  of the  conditions set forth in the credit
facility.

Maturities of notes  payable and long-term  debt,  including  capitalized  lease
obligations, ending during the years indicated, are as follows (in thousands):
<TABLE>
     <S>                                                                                    <C>
     2007...............................................................................      $       265
     2008...............................................................................              292
     2009...............................................................................              368
     2010...............................................................................              458
     2011...............................................................................          170,519
     Thereafter.........................................................................            3,283
                                                                                            -----------------
                                                                                              $   175,185
                                                                                            =================
</TABLE>

14. Captive Insurance Subsidiary

In 2002, we formed  Neighborhood  Insurance,  Inc., a Vermont  corporation and a
wholly-owned captive insurance  subsidiary to provide Applebee's  International,
Inc. and qualified  franchisees with workers' compensation and general liability
insurance.  In 2005,  we reduced the types of insurance  coverage  plans offered
which  resulted  in  fewer  franchisee  participants  in our  captive  insurance
program.  Through 2005, Applebee's  International,  Inc. and covered franchisees
made premium payments to the captive insurance company which pays administrative
fees and insurance  claims,  subject to individual  and aggregate  maximum claim
limits under the captive insurance company's  reinsurance  policies.  Franchisee
premium amounts billed by the captive  insurance  company were established based
upon  third-party  actuarial  estimates  of  settlement  costs for  incurred and
anticipated claims and administrative fees. Franchisee premiums were included in
other franchise  income ratably over the policy year and the related  offsetting
expenses  were  included  in  cost  of  other  franchise  income.  In  2006,  we
discontinued writing insurance coverage for new or existing  participants.  Cost
of other  franchise  income  includes  costs related to the resolution of claims
arising from franchisee  participation in our captive insurance  program.  We do
not expect  franchisee  participation in the captive insurance company to have a
material impact on our net earnings. Our consolidated balance sheets include the
following balances related to the captive insurance subsidiary:

    o Franchise premium receivables of approximately  $400,000 and $1,700,000 as
      of December  31, 2006 and December  25,  2005,  respectively,  included in
      receivables related to captive insurance subsidiary.


                                      F-27
<PAGE>
    o Cash equivalent and other long-term investments restricted for the payment
      of claims of approximately  $12,600,000 and $18,600,000 as of December 31,
      2006 and December 25, 2005,  respectively,  included in restricted  assets
      related to captive insurance subsidiary.
    o Loss reserve  related to captive  insurance  subsidiary  of  approximately
      $12,600,000 and $20,700,000 as of December 31, 2006 and December 25, 2005,
      respectively.  Approximately  $6,500,000 and  $10,500,000 for December 31,
      2006 and December 25, 2005, respectively, is included in other non-current
      liabilities.

Our activity in the loss and loss adjustment reserve,  which includes Applebee's
International,  Inc. and participating  franchisees,  is summarized in the table
below (in thousands):
<TABLE>
<CAPTION>
                                                                           December 31,       December 25,
                                                                               2006               2005
                                                                         ----------------- -----------------
     <S>                                                                 <C>               <C>
     Total balance, beginning of the year.............................      $    20,478       $    18,801

     Incurred related to:
        Current year..................................................             --               7,141
        Prior year....................................................           (2,190)            2,406
                                                                         ----------------- -----------------
          Total incurred..............................................           (2,190)            9,547
                                                                         ----------------- -----------------

     Paid related to:
        Current year..................................................             --               1,546
        Prior year....................................................            5,878             6,324
                                                                         ----------------- -----------------
          Total paid..................................................            5,878             7,870
                                                                         ----------------- -----------------
     Total balance, end of the year...................................           12,410            20,478
     Less current portion.............................................            5,910             9,976
                                                                         ----------------- -----------------
     Long-term portion (Note 16)......................................      $     6,500       $    10,502
                                                                         ================= =================
</TABLE>

Loss  reserve  estimates  are  established  based  upon  third-party   actuarial
estimates of ultimate  settlement  costs for  incurred  claims  (which  includes
claims  incurred but not reported) using data currently  available.  The reserve
estimates are  regularly  analyzed and adjusted  when  necessary.  Unanticipated
changes in the data used to  determine  the reserve may require us to revise our
estimates.

Deferred policy  acquisition costs include premium taxes,  fronting fees and net
commissions   and  are  deferred  and  amortized   over  our  fiscal  year  and,
accordingly,  we did not  have  any  deferred  policy  acquisition  costs  as of
December 31, 2006 or December 25, 2005. We had acquisition  expenses  payable of
$184,000 as of December  31, 2006 and $259,000 as of December 25, 2005 that were
included in the current portion of loss reserve and unearned premiums related to
captive insurance subsidiary in the consolidated balance sheets.

15. Accrued Expenses and Other Current Liabilities

Accrued  expenses and other current  liabilities  are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
                                                                           December 31,        December 25,
                                                                               2006                2005
                                                                         ------------------  -----------------
      <S>                                                                <C>                 <C>
      Gift cards........................................................    $     48,252        $     39,162
      Compensation and related taxes....................................          31,701              35,488
      Restaurant occupancy costs........................................          13,821               9,271
      Sales and use taxes...............................................           7,914               6,798
      Insurance loss reserves...........................................           4,120               5,327
      Other.............................................................           7,833               4,949
                                                                         ------------------  -----------------
                                                                            $    113,641        $    100,995
                                                                         ==================  =================
</TABLE>


                                      F-28
<PAGE>

16.      Other Non-Current Liabilities

Other non-current liabilities are comprised of the following (in thousands):
<TABLE>
<CAPTION>

                                                                           December 31,        December 25,
                                                                               2006                2005
                                                                         ------------------  -----------------
      <S>                                                                <C>                 <C>
      Restaurant occupancy costs........................................    $     22,307        $     19,969
      Nonqualified deferred compensation plan
        liabilities  (Note 20)..........................................          18,729              14,493
      Long-term insurance loss reserves.................................           7,117                --
      Loss and loss adjustment reserve related to
        captive insurance subsidiary....................................           6,500              10,502
      Deferred gain on sale-leaseback...................................           2,706                --
      Compensation......................................................           2,190               3,033
      Other.............................................................           2,288               2,377
                                                                         ------------------  -----------------
                                                                            $     61,837        $     50,374
                                                                         ==================  =================
</TABLE>

17. Income Taxes

We, along with our subsidiaries,  file a consolidated federal income tax return.
The income tax provision consists of the following (in thousands):
<TABLE>
<CAPTION>
                                                                    2006             2005             2004
                                                               ---------------  ---------------  ---------------
    <S>                                                        <C>              <C>              <C>
    Current provision:
        Federal............................................     $   42,902       $   40,198       $   30,171
        State and local....................................         10,422            4,633            2,146
    Deferred provision (benefit):
        Federal............................................        (10,559)           9,248           23,625
        State and local....................................         (1,524)             623            1,688
                                                               ---------------  ---------------  ---------------
    Income taxes before cumulative effect of change
        in accounting principle............................         41,241           54,702           57,630
    Income taxes related to the cumulative effect of
        change in accounting principle.....................           --               (125)            --
                                                               ---------------  ---------------  ---------------
    Total income taxes.....................................     $   41,241       $   54,577       $   57,630
                                                               ===============  ===============  ===============
</TABLE>


The deferred  income tax  provision  (benefit) is comprised of the following (in
thousands):

<TABLE>
<CAPTION>
                                                                    2006             2005            2004
                                                               ---------------  --------------- ----------------
    <S>                                                        <C>              <C>             <C>
    Depreciation and amortization..........................     $    2,339       $   13,090      $   24,278
    Stock-based compensation...............................         (6,842)            --              --
    Impairment and other restaurant closure costs..........         (3,300)          (1,463)           --
    Other..................................................         (4,280)          (1,756)          1,035
                                                               ---------------  --------------- ----------------
    Net change in deferred income taxes....................     $  (12,083)      $    9,871      $   25,313
                                                               ===============  =============== ================
</TABLE>


                                      F-29
<PAGE>

A  reconciliation  between  the  income  tax  provision  and  the  expected  tax
determined by applying the statutory federal income tax rates to earnings before
income taxes follows (in thousands):
<TABLE>
<CAPTION>
                                                                    2006             2005            2004
                                                               ---------------  --------------- ----------------
    <S>                                                        <C>              <C>             <C>
    Federal income tax at statutory rates..................     $   42,751       $   54,851      $   58,973
    Increase (decrease) to income tax expense:
        State and local income taxes, net of
           federal benefit.................................          5,200            3,764           3,083
        Employment related tax credits, net................         (6,596)          (4,502)         (3,894)
        Other..............................................           (114)             589            (532)
                                                               ---------------  --------------- ----------------
    Income taxes before cumulative effect of change
        in accounting principle............................         41,241           54,702          57,630
    Income taxes related to the cumulative effect of
        change in accounting principle.....................           --               (125)           --
                                                               ---------------  --------------- ----------------
    Total income taxes.....................................     $   41,241       $   54,577      $   57,630
                                                               ===============  =============== ================
</TABLE>

The net current  deferred  income tax asset  amounts are included in prepaid and
other  current  assets and the net  non-current  deferred  income tax  liability
amounts  are  included  in other  non-current  liabilities  in the  accompanying
consolidated  balance sheets. The significant  components of deferred income tax
assets and  liabilities  and the related  balance sheet  classifications  are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                            December 31,         December 25,
                                                                                2006                 2005
                                                                         -----------------     -----------------
    <S>                                                                  <C>                   <C>
    Classified as current:
        Accrued expenses............................................        $     3,032           $     3,879
        Allowance for bad debts.....................................                783                   128
        Other, net..................................................              2,010                 2,331
                                                                         -----------------     -----------------
        Net deferred income tax asset...............................        $     5,825           $     6,338
                                                                         =================     =================

    Classified as non-current:
        Depreciation and amortization...............................        $   (48,984)          $   (48,530)
        Stock-based compensation....................................              7,926                  --
        Impairment and other restaurant closure costs...............              3,300                 1,463
        Franchise deposits..........................................                648                   446
        Other, net..................................................             11,984                 8,899
                                                                         -----------------     -----------------
        Net deferred income tax liability...........................        $   (25,126)          $   (37,722)
                                                                         =================     =================
</TABLE>

18. Commitments and Contingencies

Litigation,  claims and disputes:  We are subject from time to time to lawsuits,
claims and governmental  inspections or audits arising in the ordinary course of
business.  Some of these  lawsuits  purport  to be  class  actions  and/or  seek
substantial damages. In the opinion of management,  these matters are adequately
covered by insurance,  or, if not so covered, are without merit or are of such a
nature or involve  amounts that would not have a material  adverse impact on our
business or consolidated financial position.

Lease guarantees and  contingencies:  In connection with the sale of restaurants
to  franchisees  and  other  parties,  we  have,  in  certain  cases,   remained
contingently  liable for the remaining lease payments.  As of December 31, 2006,
we have outstanding lease guarantees of approximately $15,300,000.  In addition,
we or our subsidiaries  are contingently  liable for various leases that we have
assigned in connection  with the sale of restaurants  to  franchisees  and other
parties in the potential  amount of $12,300,000.  These leases expire at various
times  with the final  lease  agreement  expiring  in 2018.  We did not record a
liability  related to these contingent lease liabilities as of December 31, 2006
or December 25, 2005.


                                      F-30
<PAGE>

Franchisee guarantees:  In 2004, we arranged for a third-party financing company
to  provide  up to  $250,000,000  to  qualified  franchisees  for  loans to fund
development of new restaurants through October 2007, subject to our approval. We
will provide a limited  guarantee of 10% of certain  loans  advanced  under this
program. We will be released from our guarantee if certain operating results are
met after the  restaurant  has been open for at least two years.  As of December
31, 2006,  there were loans  outstanding to five  franchisees for  approximately
$65,800,000  under this  program.  The fair value of our  guarantees  under this
financing  program is  approximately  $130,000  and is recorded  in  non-current
liabilities in our consolidated balance sheet as of December 31, 2006.

Severance  agreements:  We have severance and employment agreements with certain
officers  providing for  severance  payments to be made in the event the officer
resigns  or is  terminated  not  related to a change in  control,  some of which
require  payments to be made only if we enforce certain terms in the agreements.
If the  severance  payments had been due as of December 31, 2006,  we would have
been required to make payments totaling approximately $10,600,000.  In addition,
we have severance and employment  agreements with certain officers which contain
severance  provisions related to a change in control.  The agreements define the
circumstances which will constitute a change in control.  Those provisions would
have required additional aggregate payments of approximately  $5,300,000 if such
officers had been terminated as of December 31, 2006.

19. Stockholders' Equity

In October 2005,  our Board of Directors  authorized  repurchases  of our common
stock of up to $175,000,000  during 2005 and 2006, subject to market conditions.
In November 2006 our Board of Directors authorized additional repurchases of our
common stock of up to $150,000,000,  subject to market conditions.  During 2006,
we  repurchased  1,760,506  shares of our common  stock at an  average  price of
$21.88 for an aggregate cost of  approximately  $38,522,000.  As of December 31,
2006,  we had  approximately  $240,400,000  remaining  under  our  2005 and 2006
repurchase authorizations.

A  reconciliation  of our  treasury  shares for the past three  fiscal  years is
provided below (shares in thousands):
<TABLE>
<CAPTION>

                                                                       Treasury
                                                                        Shares
                                                                    ---------------
<S>                                                                 <C>
Balance as of December 28, 2003..............................            25,716
Purchases of treasury stock..................................             3,994
Stock options exercised......................................            (1,982)
Shares issued under employee benefit plans...................              (275)
Nonvested shares awarded under equity incentive plans........               (78)
                                                                    ---------------
Balance as of December 26, 2004..............................            27,375
Purchases of treasury stock..................................             8,288
Stock options exercised......................................            (1,045)
Shares issued under employee benefit plans...................              (209)
Nonvested shares awarded under equity incentive plans........              (104)
                                                                    ---------------
Balance as of December 25, 2005..............................            34,305
Purchases of treasury stock..................................             1,761
Stock options exercised......................................            (1,268)
Shares issued under employee benefit plans...................              (237)
Nonvested shares awarded under equity incentive plans........              (168)
                                                                    ---------------
Balance as of December 31, 2006..............................            34,393
                                                                    ===============
</TABLE>

                                      F-31
<PAGE>
20. Employee Benefit Plans

Nonqualified  deferred compensation plan: In 2002, we entered into a rabbi trust
agreement to protect the assets of the nonqualified  deferred  compensation plan
for certain of our associates.  Each participant's account is comprised of their
contribution, our matching contribution and each participant's share of earnings
or losses in the plan. In accordance  with Emerging Issues Task Force No. 97-14,
"Accounting for Deferred  Compensation  Arrangements Where Amounts Are Held in a
Rabbi Trust and  Invested,"  the accounts of the rabbi trust are reported in our
consolidated  financial  statements.  As of December  31, 2006 and  December 25,
2005, our  consolidated  balance sheets include the  investments in other assets
and the offsetting obligation is included in other non-current liabilities.  The
deferred compensation plan investments are considered trading securities and are
reported at fair value with the realized and unrealized holding gains and losses
related  to  these  investments  recorded  in  other  income  (expense)  and the
offsetting amount is recorded in general and administrative expenses.

Employee retirement plans: During 1992, we established a profit sharing plan and
trust in accordance  with Section  401(k) of the Internal  Revenue Code. We make
matching  contributions of 50% of associate  contributions not to exceed 4.0% of
an associate's compensation in any year. Through 2004, we made our contributions
in shares of our common stock.  Beginning in 2005, we make our  contributions in
cash. In 2005, our contributions vested at the rate of 20% after the associate's
second year of service,  60% after three years of service,  80% after four years
of service and 100% after five years of service.  In 2006, our vesting  schedule
changed  to 100%  vesting  immediately.  Contributions  under  these  plans were
$2,614,000 in 2006, $2,429,000 in 2005 and $2,158,000 in 2004.


                                      F-32
<PAGE>
21. Quarterly Results of Operations (Unaudited)

The  following  presents  the  unaudited   consolidated   quarterly  results  of
operations  for 2006 and 2005.  The  fiscal  quarter  ended  December  31,  2006
contained 14 weeks.  All other fiscal quarters  contained 13 weeks. All amounts,
except per share amounts, are expressed in thousands.
<TABLE>
<CAPTION>
                                                                                    2006
                                                         ------------------------------------------------------------
                                                                            Fiscal Quarter Ended
                                                         ------------------------------------------------------------
                                                          March 26,        June 25,      September 24,   December 31,
                                                             2006            2006            2006            2006
                                                         ------------    ------------    ------------    ------------
<S>                                                      <C>             <C>             <C>             <C>
Operating revenues:
     Company restaurant sales.........................     $307,899        $296,128        $286,938        $305,293
     Franchise royalties and fees.....................       35,935          34,306          33,340          36,274
     Other franchise income...........................          445             539             371             453
                                                         ------------    ------------    ------------    ------------
        Total operating revenues......................      344,279         330,973         320,649         342,020
                                                         ------------    ------------    ------------    ------------
Cost of company restaurant sales:
     Food and beverage................................       82,236          78,433          76,616          82,528
     Labor............................................      101,031         100,296          99,105         103,084
     Direct and occupancy.............................       78,946          80,411          80,047          84,439
     Pre-opening expense..............................          750           1,157           1,115           1,326
                                                         ------------    ------------    ------------    ------------
        Total cost of company restaurant sales........      262,963         260,297         256,883         271,377
                                                         ------------    ------------    ------------    ------------
Cost of other franchise income........................          766             281             694             958
General and administrative expenses...................       35,606          32,320          35,601          37,297
Amortization of intangible assets.....................          204             204             154             159
Impairment and other restaurant closure costs.........        1,600           3,000           1,900           2,300
Loss on disposition of property and equipment.........          577             430             685             881
                                                         ------------    ------------    ------------    ------------
Operating earnings....................................       42,563          34,441          24,732          29,048
                                                         ------------    ------------    ------------    ------------
Other income (expense):
     Investment income................................          745            (285)            885           1,423
     Interest expense.................................       (2,554)         (2,985)         (2,970)         (2,912)
     Other income.....................................          136             101             301            (522)
                                                         ------------    ------------    ------------    ------------
        Total other income (expense)..................      (1,673)          (3,169)         (1,784)         (2,011)
                                                         ------------    ------------    ------------    ------------
Earnings before income taxes..........................       40,890          31,272          22,948          27,037
Income taxes..........................................       13,739          10,868           8,107           8,527
                                                         ------------    ------------    ------------    ------------
Net earnings..........................................     $ 27,151        $ 20,404        $ 14,841        $ 18,510
                                                         ============    ============    ============    ============

Basic net earnings per common share...................     $   0.37        $   0.28        $   0.20        $   0.25
                                                         ============    ============    ============    ============
Diluted net earnings per common share.................     $   0.36        $   0.27        $   0.20        $   0.25
                                                         ============    ============    ============    ============

Basic weighted average shares outstanding.............       74,147          74,112          73,902          73,883
                                                         ============    ============    ============    ============
Diluted weighted average shares outstanding...........       75,281          75,083          74,673          74,859
                                                         ============    ============    ============    ============
</TABLE>

                                      F-33
<PAGE>

<TABLE>
<CAPTION>
                                                                                       2005
                                                          ---------------------------------------------------------------
                                                                               Fiscal Quarter Ended
                                                          ---------------------------------------------------------------
                                                           March 27,         June 26,       September 25,   December 25,
                                                              2005             2005            2005             2005
                                                          -------------    -------------   -------------   --------------
<S>                                                       <C>              <C>             <C>             <C>
Operating revenues:
     Company restaurant sales..........................     $270,458         $272,703        $272,673        $ 266,807
     Franchise royalties and fees......................       33,008           32,493          31,589           31,723
     Other franchise income............................        1,065            1,424           1,064            1,643
                                                          -------------    -------------   -------------   --------------
        Total operating revenues.......................      304,531          306,620         305,326          300,173
                                                          -------------    -------------   -------------   --------------
Cost of company restaurant sales:
     Food and beverage.................................       71,635           72,565          71,555           70,767
     Labor.............................................       88,724           90,115          90,231           89,493
     Direct and occupancy..............................       66,367           71,038          74,706           75,545
     Pre-opening expense...............................        1,167            1,268           1,089            1,243
                                                          -------------    -------------   -------------   --------------
        Total cost of company restaurant sales.........      227,893          234,986         237,581          237,048
                                                          -------------    -------------   -------------   --------------
Cost of other franchise income.........................          819            1,229             790            2,054
General and administrative expenses....................       26,946           27,980          26,329           28,513
Amortization of intangible assets......................          228              226             204              220
Impairment and other restaurant closure costs..........         --               --             3,900             --
Loss on disposition of property and equipment..........          297              564             480              726
                                                          -------------    -------------   -------------   --------------
Operating earnings.....................................       48,348           41,635          36,042           31,612
                                                          -------------    -------------   -------------   --------------
Other income (expense):
     Investment income.................................          (41)             449             568              719
     Interest expense..................................         (337)            (634)         (1,232)          (2,162)
     Other income......................................          435              584             593              150
                                                          -------------    -------------   -------------   --------------
        Total other income (expense)...................           57              399             (71)          (1,293)
                                                          -------------    -------------   -------------   --------------
Earnings before income taxes and cumulative effect of         48,405           42,034          35,971           30,319
  change in accounting principle.......................
Income taxes...........................................       16,748           14,544          13,836            9,574(1)
                                                          -------------    -------------   -------------   --------------
Earnings before cumulative effect of change in                31,657           27,490          22,135           20,745
  accounting principle.................................
Cumulative effect of change in accounting principle,
  net of tax...........................................         --               --              --               (225)
                                                          -------------    -------------   -------------   --------------
Net earnings...........................................     $ 31,657         $ 27,490        $ 22,135        $  20,520
                                                          =============    =============   =============   ==============

Basic net earnings per common share:
Basic earnings before cumulative effect of change in
  accounting principle.................................     $   0.39         $   0.34        $   0.28        $    0.27
Cumulative effect of change in accounting principle,
  net of tax...........................................         --               --              --               --
                                                          -------------    -------------   -------------   --------------
Basic net earnings per common share....................     $   0.39         $   0.34        $   0.28        $    0.27
                                                          =============    =============   =============   ==============

Diluted net earnings per common share:
Diluted earnings before cumulative effect of change
  in accounting principle..............................     $   0.38         $   0.34        $   0.28        $    0.27
Cumulative effect of change in accounting principle,
  net of tax...........................................         --               --              --               --
                                                          -------------    -------------   -------------   --------------
Diluted net earnings per common share..................     $   0.38         $   0.34        $   0.28        $    0.27
                                                          =============    =============   =============   ==============

Basic weighted average shares outstanding..............       80,705           79,897          78,485           75,525
                                                          =============    =============   =============   ==============
Diluted weighted average shares outstanding............       82,375           81,360          79,691           76,542
                                                          =============    =============   =============   ==============
<FN>
(1) Fourth quarter 2005 net earnings reflect a decrease in income tax expense of
$1.1 million due to the resolution of a state income tax matter.
</FN>
</TABLE>
                                      F-34
<PAGE>


                         APPLEBEE'S INTERNATIONAL, INC.
                                  EXHIBIT INDEX

   Exhibit
    Number                    Description of Exhibit
--------------  ----------------------------------------------------------------

        3.1     Certificate  of  Incorporation,  as amended,  of the  Registrant
                (incorporated  by reference  to Exhibit 3.1 of the  Registrant's
                Annual  Report on Form 10-K for the fiscal  year ended  December
                31, 1995).

        3.2     Amended and Restated  Bylaws of Applebee's  International,  Inc.
                (incorporated by reference to the Registrant's Form 8-K filed on
                August 30, 2006).

        4.1     Certificate of the Voting Powers, Designations,  Preferences and
                Relative  Participating,  Optional and Other Special  Rights and
                Qualifications  of Series A Participating  Cumulative  Preferred
                Stock  of  Applebee's   International,   Inc.  (incorporated  by
                reference to Exhibit 4.2 of the  Registrant's  Annual  Report on
                Form 10-K for the fiscal year ended December 25, 1994).

       10.1     Form of Applebee's Development Agreement.

       10.2     Form of Applebee's Franchise Agreement.

       10.3     Schedule of Applebee's  Development and Franchise  Agreements as
                of December 31, 2006.

       10.4     Revolving  Credit  Agreement  dated  as  of  December  18,  2006
                (incorporated  by reference to Exhibit 10.1 of the  Registrant's
                Form 8-K filed on December 20, 2006).

                Management Contracts and Compensatory Plans or Arrangements


       10.5     Amended and Restated 1995 Equity Incentive Plan (incorporated by
                reference to Exhibit 10.3 of the  Registrant's  Quarterly Report
                on Form 10-Q for the fiscal quarter ended June 26, 2005).

       10.6     Amendment to the Amended and Restated 1995 Equity Incentive Plan
                (incorporated  by reference to Exhibit 10.3 of the  Registrant's
                Quarterly  Report on Form 10-Q for the fiscal quarter ended June
                25, 2006).

       10.7     Employee  Stock  Purchase  Plan,  as  amended  (incorporated  by
                reference to Exhibit 10.4 of the  Registrant's  Quarterly Report
                on Form 10-Q for the fiscal quarter ended June 26, 2005).

       10.8     1999 Management and Executive  Incentive Plan  (incorporated  by
                reference to Exhibit 10.13 of the Registrant's  Annual Report on
                Form 10-K for the fiscal year ended December 26, 1999).

       10.9     1999  Employee  Incentive  Plan,  as  amended  (incorporated  by
                reference to Exhibit 10.14 of the Registrant's  Annual Report on
                Form 10-K for the fiscal year ended December 26, 1999).


                                      E-1
<PAGE>



   Exhibit
    Number                    Description of Exhibit
--------------  ----------------------------------------------------------------

      10.10     2001 Senior  Executive Bonus Plan  (incorporated by reference to
                Exhibit 10.12 of the Registrant's Annual Report on Form 10-K for
                the fiscal year ended December 30, 2001).

      10.12     Current  Form of  Change in  Control  and  Noncompete  Agreement
                (incorporated  by reference to Exhibit 10.4 of the  Registrant's
                Quarterly  Report  on Form  10-Q for the  fiscal  quarter  ended
                September 26, 2004) and schedule of parties thereto.

      10.13     Form   of   Officer    Nonqualified   Stock   Option   Agreement
                (incorporated  by reference to Exhibit 10.1 of the  Registrant's
                Form 8-K filed on December 15, 2004).

      10.14     Form of Officer  Incentive Stock Option Agreement  (incorporated
                by reference to Exhibit 10.2 of the Registrant's  Form 8-K filed
                on December 15, 2004).

      10.15     Form of Officer  Restricted Stock Award Agreement  (incorporated
                by reference to Exhibit 10.3 of the Registrant's  Form 8-K filed
                on December 15, 2004).

      10.16     Form of Officer  Restricted  Stock  Award  Agreement  for shares
                subject   to   the   Company's   stock   ownership    guidelines
                (incorporated  by reference to Exhibit 10.4 of the  Registrant's
                Form 8-K filed on December 15, 2004).

      10.17     Form of  Nonqualified  Stock Option  Agreement  for  Nonemployee
                Directors  (incorporated  by  reference  to Exhibit  10.5 of the
                Registrant's Form 8-K filed on December 15, 2004).

      10.18     Form  of  Restricted  Stock  Award  for  Nonemployee   Directors
                (incorporated  by reference to Exhibit 10.6 of the  Registrant's
                Form 8-K filed on December 15, 2004).

      10.19     Executive  Nonqualified  Stock  Purchase Plan  (incorporated  by
                reference to Exhibit 10.2 of the  Registrant's  Quarterly Report
                on Form 10-Q for the fiscal quarter ended June 27, 2004).

      10.20     Form  of   Indemnification   Agreement  with  all  Officers  and
                Directors  (incorporated  by  reference  to Exhibit  10.3 of the
                Registrant's  Quarterly  Report  on Form  10-Q  for  the  fiscal
                quarter ended June 27, 2004) and schedule of parties thereto.

      10.21     Executive Retirement Plan, as amended (incorporated by reference
                to Exhibit  10.1 of the  Registrant's  Quarterly  Report on Form
                10-Q for the fiscal  quarter  ended  March 28,  2004 and Exhibit
                10.5 of the  Registrant's  Quarterly Report on Form 10-Q for the
                fiscal quarter ended June 26, 2005).

      10.22     Executive Health Plan (incorporated by reference to Exhibit 10.2
                of the Registrant's Quarterly Report on Form 10-Q for the fiscal
                quarter ended March 28, 2004).

                                      E-2
<PAGE>

   Exhibit
    Number                    Description of Exhibit
--------------  ----------------------------------------------------------------

      10.23     Director Compensation Policy.

      10.24     FlexPerx  Program  (incorporated by reference to Exhibit 10.1 of
                the Registrant's Form 8-K filed on January 7, 2005).

      10.25     Form of Stock  Appreciation  Rights  Agreement  (incorporated by
                reference to Form 8-K filed on February 22, 2006).

      10.26     CEO  Use  of  the  Company  Airplane  Policy   (incorporated  by
                reference to Exhibit 10.6 of the  Registrant's  Quarterly Report
                on Form 10-Q for the fiscal quarter ended June 26, 2005).

      10.27     Personal Use of Corporate Aircraft for Senior Team (incorporated
                by  reference  to  Exhibit  10.7 of the  Registrant's  Quarterly
                Report on Form 10-Q for the fiscal quarter ended June 26, 2005).

      10.28     Asset Purchase Agreement with The Ozark Apples, Inc. dated April
                8,  2005  (incorporated  by  reference  to  Exhibit  10.2 of the
                Registrant's  Quarterly  Report  on Form  10-Q  for  the  fiscal
                quarter ended June 26, 2005).

      10.29     Memorandum of Understanding, dated October 5, 2002 and Amendment
                1 dated July 1,  2005,  with Louis A.  Kaucic  (incorporated  by
                reference to Exhibit 10.14 of the Registrant's  Annual Report on
                Form  10-K for the  fiscal  year  ended  December  28,  2003 and
                Exhibit 10.1 to the  Registrant's  Quarterly Report on Form 10-Q
                for the fiscal quarter ended June 26, 2005).

      10.30     Employment  Agreement dated as of January 9, 2006 by and between
                the Company and David L. Goebel  (incorporated  by  reference to
                the Registrant's Form 8-K filed on January 9, 2006).

      10.31     Employment  Agreement dated as of January 9, 2006 by and between
                the Company and Steven K. Lumpkin  (incorporated by reference to
                the Registrant's Form 8-K filed on January 9, 2006).

      10.32     2001 Senior  Executive Bonus Plan, as amended  (incorporated  by
                reference to the Registrant's Form 8-K filed on May 16, 2006).

      10.33     Separation  Agreement,  Release and Waiver dated May 17, 2006 by
                and between the Company and John C.  Cywinski  (incorporated  by
                reference to the Registrant's Form 8-K filed on May 18, 2006).

      10.34     Personal Use of  Corporate  Aircraft by  Non-Executive  Chairman
                (incorporated by reference to the Registrant's Form 8-K filed on
                August 30, 2006).

      10.35     Severance  Plan for Officers  (incorporated  by reference to the
                Registrant's Form 8-K filed on August 30, 2006).



                                      E-3
<PAGE>

   Exhibit
    Number                    Description of Exhibit
--------------  ----------------------------------------------------------------

      10.36     Amended and Restated  Nonqualified  Deferred  Compensation  Plan
                (incorporated  by reference to Exhibit 10.3 of the  Registrant's
                Quarterly  Report  on Form  10-Q for the  fiscal  quarter  ended
                September 24, 2006).

      10.37     New Form of Officer  Restricted Stock Award Agreement for shares
                subject   to   the   Company's   stock   ownership    guidelines
                (incorporated  by reference to Exhibit 10.3 of the  Registrant's
                Quarterly  Report  on Form  10-Q for the  fiscal  quarter  ended
                September 24, 2006).

      10.38     New  Form  of  Officer  Restricted  Stock  Award  Agreement  for
                Participants in the Executive  Retirement Plan  (incorporated by
                reference to Exhibit 10.3 of the  Registrant's  Quarterly Report
                on Form 10-Q for the fiscal quarter ended September 24, 2006).

      10.39     Amended  Executive Stock Ownership  Guidelines  (incorporated by
                reference to Exhibit 10.3 of the  Registrant's  Quarterly Report
                on Form 10-Q for the fiscal quarter ended September 24, 2006).

         21     Subsidiaries of Applebee's International, Inc.

       23.1     Consent of Deloitte & Touche LLP.

         24     Power of Attorney (see page 47 of the Form 10-K).

       31.1     Certification  of Principal  Executive  Officer  Pursuant to SEC
                Rule 13a-14(a).

       31.2     Certification  of Chief Financial  Officer  Pursuant to SEC Rule
                13a-14(a).

         32     Certification  Pursuant to Section 906 of the Sarbanes-Oxley Act
                of 2002.

                                      E-4