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

                                    FORM 10-Q

(Mark One)

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

For the quarterly period ended               September 24, 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)


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 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. (check one):

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 number of shares of the registrant's  common stock outstanding as of October
23, 2006 was 74,239,024.


                                       1.

<PAGE>


                         APPLEBEE'S INTERNATIONAL, INC.
                                    FORM 10-Q
                     FISCAL QUARTER ENDED SEPTEMBER 24, 2006
                                      INDEX


<TABLE>
<CAPTION>
<S>          <C>                                                                                  <C>

PART I        FINANCIAL INFORMATION                                                               Page

Item 1.       Condensed Consolidated Financial Statements:

              Consolidated Balance Sheets as of September 24, 2006
                and December 25, 2005 .............................................................  3

              Consolidated Statements of Earnings for the 13 Weeks and 39 Weeks
                Ended September 24, 2006 and September 25, 2005 ...................................  4

              Consolidated Statement of Stockholders' Equity for the
                39 Weeks Ended September 24, 2006 .................................................  5

              Consolidated Statements of Cash Flows for the 39 Weeks
                Ended September 24, 2006 and September 25, 2005....................................  6

              Notes to Condensed Consolidated Financial Statements.................................  8

Item 2.       Management's Discussion and Analysis of
                Financial Condition and Results of Operations...................................... 21

Item 3.       Quantitative and Qualitative Disclosures About Market Risk........................... 35

Item 4.       Controls and Procedures.............................................................. 35


PART II       OTHER INFORMATION

Item 1.       Legal Proceedings.................................................................... 36

Item 1A.      Risk Factors......................................................................... 36

Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds.......................... 37

Item 5.       Other Information.................................................................... 37

Item 6.       Exhibits............................................................................. 38

Signatures ........................................................................................ 39

Exhibit Index...................................................................................... 40
</TABLE>


                                       2.
<PAGE>

                          PART I. FINANCIAL INFORMATION

Item 1.       Condensed Consolidated Financial Statements

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

<TABLE>
<CAPTION>

                                                                                    September 24,      December 25,
                                                                                         2006              2005
                                                                                    -------------      ------------
<S>                                                                                 <C>                <C>

                                     ASSETS
Current assets:
     Cash and cash equivalents.................................................         $   9,776        $  13,040
     Short-term investments, at market value...................................               291              286
     Receivables (less allowance of $325 in 2006 and $340 in 2005).............            36,958           37,857
     Receivables related to captive insurance subsidiary.......................               463            1,712
     Inventories...............................................................            10,400           20,373
     Prepaid income taxes......................................................                55            3,488
     Prepaid and other current assets..........................................            12,086           13,518
     Assets held for sale......................................................             7,498             --
                                                                                    --------------     ------------
        Total current assets...................................................            77,527           90,274
Property and equipment, net....................................................           620,983          590,593
Goodwill.......................................................................           139,111          138,443
Restricted assets related to captive insurance subsidiary......................            15,011           19,329
Other intangible assets, net...................................................             6,561            8,050
Other assets, net..............................................................            34,827           31,899
                                                                                    --------------     ------------
                                                                                        $ 894,020        $ 878,588
                                                                                    ==============     ============


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Current portion of long-term debt.........................................         $     274        $     259
     Notes payable.............................................................            10,000            7,900
     Accounts payable..........................................................            38,016           63,445
     Accrued expenses and other current liabilities............................            84,426          100,995
     Loss reserve related to captive insurance subsidiary......................             6,025           10,235
     Accrued dividends.........................................................              --             14,840
     Accrued income taxes......................................................             4,007             --
                                                                                    --------------     ------------
        Total current liabilities..............................................           142,748          197,674
                                                                                    --------------     ------------
Non-current liabilities:
     Long-term debt, less current portion......................................           184,006          180,208
     Deferred income taxes.....................................................            27,757           37,722
     Other non-current liabilities.............................................            60,372           50,374
                                                                                    --------------     ------------
        Total non-current liabilities..........................................           272,135          268,304
                                                                                    --------------     ------------
        Total liabilities......................................................           414,883          465,978
                                                                                    --------------    -------------
Commitments and contingencies (Note 3)
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................................................           255,029          234,988
     Unearned compensation.....................................................              --             (2,614)
     Retained earnings.........................................................           772,673          710,277
                                                                                    --------------     ------------
                                                                                        1,028,787          943,736
     Treasury stock - 34,563,782 shares in 2006 and 34,304,693 shares
        in 2005 at cost........................................................          (549,650)        (531,126)
                                                                                    --------------     ------------
        Total stockholders' equity.............................................           479,137          412,610
                                                                                    --------------     ------------
                                                                                        $ 894,020        $ 878,588
                                                                                    ==============     ============

</TABLE>


            See notes to condensed consolidated financial statements.

                                       3.
<PAGE>

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

<TABLE>
<CAPTION>
                                                                    13 Weeks Ended                         39 Weeks Ended
                                                          -----------------------------------    -----------------------------------
                                                           September 24,       September 25,       September 24,      September 25,
                                                               2006                2005                2006                2005
                                                          ---------------    ----------------    ----------------    ---------------
<S>                                                       <C>                <C>                 <C>                 <C>
Operating revenues:
     Company restaurant sales........................     $     286,938      $     272,673       $     890,965       $     815,834
     Franchise royalties and fees....................            33,340             31,589             103,581              97,090
     Other franchise income..........................               371              1,064               1,355               3,553
                                                          ---------------    ----------------    ----------------    ---------------
         Total operating revenues....................           320,649            305,326             995,901             916,477
                                                          ---------------    ----------------    ----------------    ---------------
Cost of company restaurant sales:
     Food and beverage...............................            76,616             71,555             237,285             215,755
     Labor...........................................            99,105             90,231             300,432             269,070
     Direct and occupancy............................            80,047             74,706             239,404             212,111
     Pre-opening expense.............................             1,115              1,089               3,022               3,524
                                                          ---------------    ----------------    ----------------    ---------------
         Total cost of company restaurant sales......           256,883            237,581             780,143             700,460
                                                          ---------------    ----------------    ----------------    ---------------
Cost of other franchise income.......................               694                790               1,741               2,838
General and administrative expenses..................            35,601             26,329             103,527              81,255
Amortization of intangible assets....................               154                204                 562                 658
Impairment and other restaurant closure costs........             1,900              3,900               6,500               3,900
Loss on disposition of property and equipment........               685                480               1,692               1,341
                                                          ---------------    ----------------    ----------------    ---------------
Operating earnings...................................            24,732             36,042             101,736             126,025
                                                          ---------------    ----------------    ----------------    ---------------
Other income (expense):
     Investment income...............................               885                568               1,345                 976
     Interest expense................................            (2,970)            (1,232)             (8,509)             (2,203)
     Other income....................................               301                593                 538               1,612
                                                          ---------------    ----------------    ----------------    ---------------
         Total other income (expense)................            (1,784)               (71)             (6,626)                385
                                                          ---------------    ----------------    ----------------    ---------------
Earnings before income taxes.........................            22,948             35,971              95,110             126,410
Income taxes.........................................             8,107             13,836              32,714              45,128
                                                          ---------------    ----------------    ----------------    ---------------
Net earnings.........................................     $      14,841      $      22,135       $      62,396       $      81,282
                                                          ===============    ================    ================    ===============

Basic net earnings per common share..................     $        0.20      $        0.28       $        0.84       $        1.02
                                                          ===============    ================    ================    ===============
Diluted net earnings per common share................     $        0.20      $        0.28       $        0.83       $        1.00
                                                          ===============    ================    ================    ===============

Basic weighted average shares outstanding............            73,902             78,485              74,044              79,692
                                                          ===============    ================    ================    ===============
Diluted weighted average shares outstanding..........            74,673             79,691              75,007              81,121
                                                          ===============    ================    ================    ===============
</TABLE>


            See notes to condensed consolidated financial statements.

                                       4.
<PAGE>

                 APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                   (Unaudited)
                                 (in thousands)


<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 25, 2005 ....................     108,503  $ 1,085  $234,988     $  (2,614)   $710,277   $ (531,126)  $  412,610

   Net earnings................................        --        --       --            --        62,396         --         62,396
   Purchases of treasury stock.................        --        --       --            --          --        (27,528)     (27,528)
   Reclassification of unearned compensation
      related to the adoption of Statement of
      Financial Accounting Standards
      No. 123(R) (Note 2)......................        --        --     (2,614)        2,614        --           --           --
   Stock options exercised and related tax
      benefit..................................        --        --      5,112          --          --          6,618       11,730
   Shares issued under employee benefit plans..        --        --      1,616          --          --          1,729        3,345
   Nonvested shares awarded under equity
     incentive plans...........................        --        --       (657)         --          --            657         --
   Stock-based compensation expense related
     to employee-based awards..................        --        --     16,584          --          --           --         16,584
                                                  --------- -------- ----------- ------------- --------- ------------- -------------
Balance, September 24, 2006....................     108,503  $ 1,085  $255,029     $    --      $772,673   $ (549,650)  $  479,137
                                                  ========= ======== =========== ============= ========= ============= =============

</TABLE>





            See notes to condensed consolidated financial statements.

                                       5.
<PAGE>

                 APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                      39 Weeks Ended
                                                                              --------------------------------
                                                                              September 24,      September 25,
                                                                                  2006               2005
                                                                              -------------      -------------
<S>                                                                           <C>                <C>
 CASH FLOWS FROM OPERATING ACTIVITIES:
      Net earnings.......................................................       $  62,396          $  81,282
      Adjustments to reconcile net earnings to net cash provided by
       operating activities:
         Depreciation and amortization...................................          48,092             39,765
         Amortization of intangible assets...............................             562                658
         Stock-based compensation........................................          16,584              1,665
         Other amortization..............................................             233                182
         Deferred income tax benefit.....................................          (8,615)            (3,270)
         Impairment and other restaurant closure costs...................           6,500              3,900
         Loss on disposition of property and equipment...................           1,692              1,341
         Income tax benefit from stock-based compensation................           1,233              4,665
      Changes in assets and liabilities, exclusive of effect of
       acquisitions:
         Receivables.....................................................           1,540              2,981
         Receivables related to captive insurance subsidiary.............           1,249               (682)
         Inventories.....................................................          10,031             14,627
         Prepaid and other current assets................................             115                908
         Accounts payable................................................         (24,502)             8,981
         Accrued expenses and other current liabilities..................         (16,750)           (13,024)
         Loss reserve and unearned premiums related to
           captive insurance subsidiary..................................          (4,210)             1,344
         Income taxes....................................................           7,440             12,352
         Other non-current liabilities...................................           7,770              2,524
         Other...........................................................          (1,922)            (1,523)
                                                                              -------------      -------------
         NET CASH PROVIDED BY OPERATING ACTIVITIES.......................         109,438            158,676
                                                                              -------------      -------------
 CASH FLOWS FROM INVESTING ACTIVITIES:
      Purchases of property and equipment................................         (86,635)          (100,802)
      Change in restricted assets related to captive
         insurance subsidiary............................................           4,318             (2,800)
      Acquisition of restaurants.........................................          (8,053)           (46,848)
      Proceeds from sale of property and equipment.......................             281              1,205
                                                                              -------------      -------------
         NET CASH USED BY INVESTING ACTIVITIES...........................         (90,089)          (149,245)
                                                                              -------------      -------------
 CASH FLOWS FROM FINANCING ACTIVITIES:
      Purchases of treasury stock........................................         (27,528)          (120,856)
      Dividends paid.....................................................         (14,840)            (4,867)
      Issuance of common stock upon exercise of stock options............           8,814             11,822
      Shares issued under employee benefit plans.........................           3,345              3,428
      Excess tax benefits from stock-based compensation..................           1,683               --
      Net debt proceeds .................................................           5,913            100,540
                                                                              -------------      -------------
         NET CASH USED BY FINANCING ACTIVITIES...........................         (22,613)            (9,933)
                                                                              -------------      -------------
 NET DECREASE IN CASH AND CASH EQUIVALENTS...............................          (3,264)              (502)
 CASH AND CASH EQUIVALENTS, beginning of period..........................          13,040             10,642
                                                                              -------------      -------------
 CASH AND CASH EQUIVALENTS, end of period................................       $   9,776          $  10,140
                                                                              =============      =============
</TABLE>

            See notes to condensed consolidated financial statements.

                                       6.
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                          39 Weeks Ended
                                                                                ------------------------------------
                                                                                  September 24,       September 25,
                                                                                      2006                2005
                                                                                ----------------    ----------------
<S>                                                                             <C>                 <C>
SUPPLEMENTAL DISCLOSURES OF CASH
     FLOW INFORMATION:
     Cash paid during the 39 week period for:
       Income taxes........................................................        $    27,699         $    31,381
                                                                                ================    ================
       Interest............................................................        $     8,938         $     1,438
                                                                                ================    ================
</TABLE>


SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

We issued nonvested shares (previously  referred to as restricted stock prior to
fiscal  2006) with grant date fair values of  $3,598,000  for the 39 weeks ended
September 24, 2006 and nonvested shares,  net of forfeitures,  of $2,916,000 for
the 39 weeks ended September 25, 2005.

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 $1,522,000 and $3,049,000 for the 39
weeks ended September 24, 2006 and September 25, 2005, respectively.

We  had  property  and  equipment  purchases  accrued  in  accounts  payable  of
approximately $13,500,000 and $11,200,000 as of September 24, 2006 and September
25, 2005, respectively.


            See notes to condensed consolidated financial statements.

                                       7.
<PAGE>

                 APPLEBEE'S INTERNATIONAL, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.       Basis of Presentation

Our condensed  consolidated financial statements included in this Form 10-Q have
been prepared  without audit in accordance with the rules and regulations of the
Securities and Exchange  Commission  ("SEC").  Although certain  information and
footnote  disclosures  normally  included in  financial  statements  prepared in
accordance with accounting principles generally accepted in the United States of
America have been  condensed or omitted,  we believe  that the  disclosures  are
adequate to make the  information  presented not  misleading.  The  accompanying
condensed  consolidated  financial statements should be read in conjunction with
the audited financial statements and notes thereto included in our Annual Report
on Form 10-K for the fiscal year ended December 25, 2005.

We believe that all adjustments, consisting only of normal recurring adjustments
necessary  for a  fair  presentation  of the  results  of  the  interim  periods
presented,  have been made.  The results of operations  for the interim  periods
presented are not  necessarily  indicative of the results to be expected for the
full year.


2.       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,  stock  appreciation  rights
("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 September  24, 2006,  we had  3,487,420  shares
available  for grant  under the 1995 Plan.  We will not make  additional  grants
under the 1999  Plan.  We issue  shares  out of our  treasury  for stock  option
exercises, SAR exercises and nonvested share issuances.

Prior to fiscal 2006, we accounted  for these  stock-based  compensation  equity
awards under the intrinsic method of Accounting Principles Board ("APB") Opinion
No. 25. 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 Statement of Financial  Accounting  Standards ("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.

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 the 13 weeks
and 39 weeks  ended  September  25,  2005 (in  thousands,  except  for per share
amounts).

                                       8.
<PAGE>

<TABLE>
<CAPTION>
                                                                      13 Weeks Ended          39 Weeks Ended
                                                                       September 25,           September 25,
                                                                           2005                    2005
                                                                   ----------------------  ----------------------
<S>                                                                <C>                     <C>
Net earnings, as reported........................................    $     22,135            $     81,282

Add: Stock-based compensation expense included
    in net earnings, net of related taxes........................             385                   1,041
Less: Total stock-based employee compensation expense
     determined under fair value-based methods for all
     equity awards, net of related taxes (1).....................           2,049                   5,416
                                                                   ----------------------  ----------------------
Pro forma net earnings...........................................    $     20,471            $     76,907
                                                                   ======================  ======================
Basic net earnings per common share, as reported.................    $       0.28            $       1.02
                                                                   ======================  ======================
Basic net earnings per common share, as adjusted.................    $       0.26            $       0.97
                                                                   ======================  ======================
Diluted net earnings per common share, as reported...............    $       0.28            $       1.00
                                                                   ======================  ======================
Diluted net earnings per common share, as adjusted...............    $       0.26            $       0.95
                                                                   ======================  ======================

<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 the 13  weeks  ended
September 25, 2005 ("2005  quarter")  and the 39 weeks ended  September 25, 2005
("2005  year-to-date  period") had been derived using this approach,  additional
stock-based   compensation  would  have  been  $626  and  $2,240,  net  of  tax,
respectively,  and pro forma net income  would have been  $19,845  and  $74,667,
respectively. Additionally, basic and diluted pro forma earnings per share would
both have been $0.25 for the 2005 quarter and $0.94 and $0.92, respectively, for
the 2005 year-to-date period.
</FN>
</TABLE>

We  adopted  the  fair  value   recognition   provisions  of  SFAS  No.  123(R),
"Share-Based Payment" ("SFAS 123(R)") at the beginning of fiscal year 2006. SFAS
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 will be measured based on
the fair value on the grant date of the equity or liability  instruments issued.
Compensation  cost will be 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 fiscal 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.

Compensation  costs for the 13 weeks ended  September 24, 2006 ("2006  quarter")
and the 39 weeks ended September 24, 2006 ("2006 year-to-date period") have been
recognized  for all new equity  awards  granted in fiscal 2006 and those  equity
awards  granted  prior to  fiscal  2006  that have yet to reach the end of their

                                       9.

<PAGE>

service period.  As required by SFAS 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 condensed
consolidated financial statements as follows:

<TABLE>
<CAPTION>
                                                                                            2006            2005
                                                            2006            2005        Year-to-Date    Year-to-Date
                                                          Quarter         Quarter          Period          Period
                                                       --------------- --------------- --------------- ---------------
<S>                                                    <C>             <C>             <C>             <C>
Labor................................................     $   216         $    --         $   703         $     --
General and administrative expenses..................       4,956             598          15,881            1,600
Income taxes.........................................      (1,827)           (213)         (5,760)            (559)
                                                       --------------- --------------- --------------- ---------------
Stock-based compensation expense included
   in net earnings, net of related tax...............     $ 3,345         $   385         $10,824          $ 1,041
                                                       =============== =============== =============== ===============
</TABLE>


As of September 24, 2006,  we had  unrecognized  compensation  expense for stock
options and SARs of $18,400,000 to be recognized over a weighted  average period
of 2.0 years.

As required by SFAS  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 fiscal 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 fiscal  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 fiscal  2005 and the 2006  year-to-date  period,  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 fiscal 2005  option  grants  expire six to seven years from the
date of the grant.  In the first  quarter of fiscal  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 10 years from the grant date.

                                      10.
<PAGE>

Transactions for stock options relative to both plans for the 2006  year-to-date
period were as follows:

<TABLE>
<CAPTION>
                                                                     1995 Plan
                                        ---------------------------------------------------------------------
                                                                             Weighted
                                                              Weighted        Average
                                                               Average       Remaining
                                            Number of         Exercise      Contractual        Aggregate
                                             Options            Price          Life         Intrinsic Value
                                        ------------------ -------------- ---------------- ------------------
                                                                                              (in thousands)
    <S>                                 <C>                <C>            <C>              <C>
    Options outstanding at
        December 25, 2005............        7,365,933        $   21.33        6.5 years
           Granted...................          410,921        $   22.14
           Exercised.................         (559,100)       $   11.98                        $    5,042
           Expired...................             (120)       $    8.30
           Forfeited.................         (476,398)       $   25.63
                                        ------------------
    Options outstanding at
        September 24, 2006...........        6,741,236        $   21.85        6.0 years       $   16,955
                                        ==================
    Options exercisable at
        September 24, 2006...........        2,308,902        $   15.34        5.5 years       $   16,550
                                        ==================
</TABLE>


<TABLE>
<CAPTION>
                                                                     1999 Plan
                                        ---------------------------------------------------------------------
                                                                             Weighted
                                                              Weighted        Average
                                                               Average       Remaining
                                            Number of         Exercise      Contractual        Aggregate
                                             Options            Price          Life         Intrinsic Value
                                        ------------------ -------------- ---------------- ------------------
                                                                                              (in thousands)
    <S>                                 <C>                <C>            <C>              <C>
    Options outstanding at
        December 25, 2005............          664,656        $   13.73        6.0 years
           Granted...................             --                --
           Exercised.................         (155,853)       $   14.21                        $    1,411
           Expired...................             --                --
           Forfeited.................             (505)       $   13.22
                                        ------------------
    Options outstanding at
        September 24, 2006...........          508,298        $   13.58        5.2 years       $    4,336
                                        ==================
    Options exercisable at
        September 24, 2006...........          503,798        $   13.56        5.2 years       $    4,307
                                        ==================
</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.

                                      11.
<PAGE>



We derived the following  weighted-average  assumptions using the binomial model
in the 2006 quarter and the 2006 year-to-date period and the Black-Scholes model
for the 2005 quarter and the 2005 year-to-date period for stock options:

<TABLE>
<CAPTION>
                                                                                        2006             2005
                                                     2006             2005          Year-to-Date     Year-to-Date
                                                    Quarter          Quarter           Period           Period
                                                 --------------  ----------------  ---------------  ---------------
                                                   (Binomial)    (Black-Scholes)      (Binomial)    (Black-Scholes)
<S>                                              <C>             <C>               <C>              <C>
   Expected term in years....................           5.2              5.6               4.8             5.2
   Expected stock price volatility...........          32.1%            32.0%             31.4%           32.2%
   Expected dividend yield...................           1.0%             0.9%              0.9%            0.7%
   Risk-free interest rate...................           4.7%             3.7%              4.6%            3.8%
   Fair value of options granted.............      $   6.90       $     8.56         $    6.89       $    8.64
</TABLE>


Stock Appreciation Rights

Beginning in the first quarter of fiscal 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 the 2006 year-to-date  period expire six to seven
years  from  the  date  of  the  grant.  Transactions  for  SARs  for  the  2006
year-to-date period were as follows:

<TABLE>
<CAPTION>

                                                                     1995 Plan
                                        ---------------------------------------------------------------------
                                                                             Weighted
                                                              Weighted        Average
                                                               Average       Remaining
                                            Number of         Exercise      Contractual        Aggregate
                                             Options            Price          Life         Intrinsic Value
                                        ------------------ -------------- ---------------- ------------------
                                                                                              (in thousands)
    <S>                                 <C>                <C>            <C>              <C>
    SARs outstanding at
        December 25, 2005............             --                --
           Granted(1)................          960,414        $   21.67
           Exercised.................             --                --
           Expired...................             --                --
           Forfeited.................          (46,725)       $   22.32
                                        ------------------
    SARs outstanding at                                                                        $    882
        September 24, 2006...........          913,689        $   21.63        6.4 years
                                        ==================
    SARs exercisable at
         September 24, 2006..........             --
                                        ==================
<FN>
(1) Upon exercise of SARs, employees will receive the number of shares of common
stock equal 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>

                                      12.
<PAGE>


We  derived  the  following  weighted-average  assumptions  for SARs  using  the
binomial model:
<TABLE>
<CAPTION>
                                                                2006
                                              2006           Year-to-Date
                                             Quarter           Period
                                         ---------------    --------------
<S>                                      <C>                <C>
Expected term in years                          4.2                4.2
Expected stock price volatility                32.1%              31.7%
Expected dividend yield                         1.0%               0.9%
Risk-free interest rate                         4.7%               4.8%
Fair value of SARs granted                 $   6.09           $   6.24
</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.
The  weighted  average  fair value of  nonvested  shares  granted was $20.84 and
$25.77 in the 2006 quarter and the 2005  quarter,  respectively,  and $21.67 and
$27.81  in the  2006  year-to-date  period  and the  2005  year-to-date  period,
respectively. Transactions during the 2006 year-to-date period were as follows:
<TABLE>
<CAPTION>
                                                                                                Weighted
                                                                                Number of        Average
                                                                                  Awards       Fair Value
                                                                              --------------- --------------
<S>                                                                           <C>             <C>
Nonvested share awards outstanding as of December 25, 2005.................      257,813       $  24.03
Granted....................................................................      166,050          21.67
Vested.....................................................................      (98,618)         19.09
Forfeited..................................................................      (35,157)         26.09
                                                                              --------------- --------------
Nonvested share awards outstanding as of September 24, 2006................      290,088       $  24.11
                                                                              =============== ==============
</TABLE>


                                      13.

<PAGE>

As of September 24, 2006, we had  unrecognized  compensation  expense related to
nonvested share awards of approximately $2,500,000 which will be recognized over
a weighted average period of 1.3 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
September 24, 2006, 190,590 shares of the 1,850,000 shares which were authorized
under this plan were available for purchase.


3.       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 September 24, 2006,
we have outstanding lease guarantees of approximately $15,800,000.  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 $12,800,000.  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 September 24, 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 September 24, 2006, there
were loans  outstanding to six franchisees for  approximately  $69,200,000 under
this program.  The fair value of our guarantees under this financing  program is
approximately  $140,000  and  is  recorded  in  non-current  liabilities  in our
consolidated balance sheet as of September 24, 2006.

Severance  agreements:  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 September 24, 2006, we would have
been required to make payments totaling approximately $12,100,000.  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 September 24, 2006.

                                      14.
<PAGE>

4.       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 and  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
                                                            2006            2005        Year-to-Date    Year-to-Date
                                                          Quarter         Quarter          Period          Period
                                                       --------------- --------------- --------------- ---------------
<S>                                                    <C>             <C>             <C>             <C>
Net earnings.........................................    $  14,841       $  22,135       $  62,396       $  81,282
                                                       =============== =============== =============== ===============

Basic weighted average shares outstanding............       73,902          78,485          74,044          79,692
Dilutive effect of stock options and
   equity-based compensation.........................          771           1,206             963           1,429
                                                       --------------- --------------- --------------- ---------------
Diluted weighted average shares outstanding..........       74,673          79,691          75,007          81,121
                                                       =============== =============== =============== ===============

Basic net earnings per common share..................    $    0.20       $    0.28       $    0.84       $    1.02
                                                       =============== =============== =============== ===============
Diluted net earnings per common share................    $    0.20       $    0.28       $    0.83       $    1.00
                                                       =============== =============== =============== ===============
</TABLE>

We excluded stock options and 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  5,700,000  and  3,400,000  of these
options and SARs from our diluted  weighted  average share  computation  for the
2006 quarter and the 2005 quarter, respectively, and approximately 5,300,000 and
900,000 of these options and SARs for the 2006 year-to-date  period and the 2005
year-to-date period, respectively.

5.       Acquisitions

All of our  acquisitions  discussed  below  have  been  accounted  for using the
purchase  method of accounting  and,  accordingly,  our  condensed  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 January 2006, we completed the acquisition of four Applebee's  restaurants in
the  Houston  market  for  approximately  $8,200,000.  The  purchase  price  was
allocated to the fair value of property and equipment of $7,400,000, goodwill of
approximately  $600,000,  reacquired franchise rights of approximately $100,000,
and  other  net  assets  of  approximately  $100,000.  In  connection  with this
acquisition, we paid approximately $8,100,000 in the 2006 year-to-date period.

                                      15.
<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.

The following table is comprised of actual company  restaurant sales for the two
restaurant  acquisitions above, which are included in our condensed consolidated
financial statements for each period presented, and pro forma company restaurant
sales. The pro forma company  restaurant sales for the 2006 quarter and the 2006
year-to-date  period  include  sales  related to the  January  2006  acquisition
discussed  above as if the  acquisition had occurred as of the beginning of each
respective  period.  The pro forma company restaurant sales for the 2005 quarter
and the  2005  year-to-date  period  include  sales  for  the  two  acquisitions
discussed above as if the  acquisitions had occurred as of the beginning of each
respective period.

<TABLE>
<CAPTION>
                                                                                         2006            2005
                                                           2006           2005       Year-to-Date    Year-to-Date
                                                          Quarter        Quarter        Period          Period
                                                       -------------- ------------- --------------  --------------
<S>                                                    <C>            <C>           <C>             <C>
Actual company restaurant sales for acquired
    restaurants......................................    $  1,500       $ 7,500       $   4,800       $ 10,300
                                                       ============== ============= ==============  ==============

Pro forma company restaurant sales for acquired
     restaurants.....................................    $  1,500       $ 8,200       $   5,500       $ 24,600
                                                       ============== ============= ==============  ==============
</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.

6.       Goodwill and Other Intangible Assets

Changes in goodwill are summarized below (in thousands):

<TABLE>
<CAPTION>
                                                                   September 24,         December 25,
                                                                       2006                  2005
                                                                -------------------  -------------------
      <S>                                                       <C>                  <C>
      Carrying amount, beginning of the year..................      $    138,443        $   116,344
      Goodwill acquired during the period.....................               668             22,099
                                                                -------------------  -------------------
      Goodwill amount, end of the period......................      $    139,111        $   138,443
                                                                ===================  ===================
</TABLE>



                                      16.
<PAGE>

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

<TABLE>
<CAPTION>

                                                                  September 24, 2006
                                             --------------------------------------------------------------
                                               Gross Carrying         Accumulated             Net Book
                                                   Amount             Amortization              Value
                                             ------------------    ------------------    ------------------
<S>                                          <C>                   <C>                   <C>
Amortized intangible assets:
    Franchise interest and rights.......       $        6,371        $      6,103          $        268
    Lease acquisition costs (1).........                3,430                 590                 2,840
    Noncompete agreement................                  350                 175                   175
                                             ------------------    ------------------    ------------------
Total...................................       $       10,151        $      6,868          $      3,283
                                             ==================    ==================    ==================

</TABLE>

<TABLE>
                                                                   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 9).
</FN>
</TABLE>

We expect annual amortization  expense for amortizable other assets for the next
five fiscal years to range from approximately $200,000 to $700,000.

Intangible   assets  not  subject  to  amortization  are  summarized  below  (in
thousands):

<TABLE>
<CAPTION>
                                                                     September 24,           December 25,
                                                                         2006                    2005
                                                                ----------------------  --------------------
      <S>                                                       <C>                     <C>
      Carrying amount, beginning of the year..................      $     3,138            $     2,793
      Nonamortizable intangible assets acquired
           during the period..................................              140                    345
                                                                ---------------------   --------------------
      Nonamortizable intangible assets amount,
           end of the period..................................      $     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 5).

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 5).

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.

                                      17.
<PAGE>

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 the 2006
quarter, 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  September  24,  2006.  In  addition,  we began to
actively  market a corporate  aircraft.  As a result,  we recorded an impairment
charge of  approximately  $900,000  to reduce  the  carrying  amount to its fair
value, which was based on an independent third-party estimate.

8.       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 any new insurance coverage.  Franchise premium adjustments
will be included in other franchise  income and cost of other  franchise  income
when  audited.  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  $500,000 and $1,700,000
        as of September 24, 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  $14,300,000  and  $18,600,000 as of
        September  24, 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
        $16,000,000  and  $20,700,000  as of September 24, 2006 and December 25,
        2005,   respectively.   Approximately  $8,000,000  and  $10,500,000  for
        September 24, 2006 and December 25, 2005,  respectively,  is included in
        other non-current liabilities.

9.       Impairment and Other Restaurant Closure Costs

During the 2006  year-to-date  period,  we had impairment  and other  restaurant
closure costs as follows:

    o   In  connection   with  the  review  of  long-lived   assets  during  our
        preparation  of  the  2006  quarter  condensed   consolidated  financial
        statements,  we recorded an asset impairment  charge of $1,900,000.  The
        impairment  charge consisted of approximately  $1,000,000  write-down of
        the carrying value of two restaurants whose carrying amounts were deemed
        not recoverable  and  approximately  $900,000  write-down of a corporate
        aircraft.

                                      18.
<PAGE>

    o   We previously  recorded impairment and other restaurant closure costs of
        $3,000,000  in the second  quarter of fiscal 2006 and  $1,600,000 in the
        first quarter of fiscal 2006.

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 the 2006  year-to-date  period were calculated by
comparing the carrying value of the restaurants'  assets to the estimated future
cash flow projections.

10.      Treasury Shares

As of  September  24,  2006,  we had  approximately  34,564,000  shares  held in
treasury.  A  reconciliation  of our treasury  shares for the 2006  year-to-date
period is provided below (shares in thousands):
<TABLE>
<CAPTION>
                                                                  Treasury
                                                                   Shares
                                                               ---------------
    <S>                                                        <C>
    Balance as of December 25, 2005........................         34,305
    Purchases of treasury stock............................          1,286
    Stock options exercised................................           (711)
    Shares issued under employee benefit plans.............           (185)
    Nonvested shares awarded under equity incentive
        plans..............................................           (131)
                                                               ---------------
    Balance as of September 24, 2006.......................         34,564
                                                               ===============
</TABLE>


11.      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. This issue
will not impact the method for recording  these sales taxes in our  consolidated
financial statements.

In July 2006, the 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. We are evaluating the impact the adoption of
FIN 48 will have on 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. We are evaluating the impact
the adoption of SFAS No. 157 will have on our consolidated financial statements.

                                      19.
<PAGE>

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. We are  evaluating  the impact
the adoption of SFAS No. 158 will have on our consolidated financial statements.

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. We are evaluating the
impact of SAB No. 108 on our consolidated financial statements.


                                      20.
<PAGE>

Item 2.  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,  the ability of our franchisees to
obtain  financing,  the  continued  growth of our  franchisees,  our  ability to
attract and retain qualified  franchisees,  the impact of intense competition in
the casual dining  segment of the  restaurant  industry,  the impact of economic
factors on consumer  spending  and our ability to control  restaurant  operating
costs which are impacted by market  changes,  minimum wage and other  employment
laws, food costs and inflation.  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 our 2005  Annual  Report on 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 and fiscal periods are as follows:
<TABLE>
<CAPTION>
                                                                              Number
          Fiscal Year                       Fiscal Year End                  of Weeks
--------------------------------       --------------------------        -----------------
<S>                                    <C>                               <C>
             2005                          December 25, 2005                    52
             2006                          December 31, 2006                    53
             2007                          December 30, 2007                    52
<CAPTION>
            Fiscal                                                            Number
            Period                         Fiscal Period End                 of Weeks
--------------------------------       --------------------------        -----------------
<S>                                    <C>                               <C>
         2005 Quarter                     September 25, 2005                    13
         2006 Quarter                     September 24, 2006                    13
   2005 Year-to-date period               September 25, 2005                    39
   2006 Year-to-date period               September 24, 2006                    39
</TABLE>

Our 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 range
from  $30,000 to $35,000 for each  restaurant  opened.  Other  franchise  income
includes revenue from information  technology  products and services provided to

                                      21.
<PAGE>

certain  franchisees.  In fiscal  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 fiscal
2006, we  discontinued  writing any new insurance  coverage.  Franchise  premium
adjustments will be included in other franchise income when audited.

Certain expenses relate only to company operated 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 fiscal 2005, cost of
other franchise income included the costs related to franchisee participation in
our captive insurance program.  In fiscal 2006, we discontinued  writing any new
insurance coverage. 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 operated 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,"  which is the  largest  casual  dining  concept in the world with nearly
1,900  system-wide  restaurants open as of September 24, 2006. 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.  As the  largest  casual  dining  concept in the world,
    Applebee's has a unique  opportunity to leverage our brand,  system size and
    scale to optimize  our future  growth.  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  encompass at least 3,000  restaurants in the United
    States,   as  well  as  the  potential   for  at  least  1,000   restaurants
    internationally.  In the 2006 quarter and the 2006  year-to-date  period, we
    and our franchisees opened 28 and 92 restaurants, respectively. Together, we
    have opened at least 100 restaurants  system-wide  each year for the past 13
    fiscal  years.  In 2006,  we  currently  expect  to open  approximately  125
    restaurants system-wide,  comprised of approximately 35 company and at least
    90 franchise  restaurants.  Development  costs,  which include  construction
    costs,  fixtures  and  equipment  and land costs,  continue to increase as a
    result of increased  demand for material,  labor and commercial real estate.
    We  continually  evaluate our  development  strategy.  As a result of rising
    development costs, slower industry sales trends and the  underperformance of
    several of our newer restaurants,  we currently expect to open approximately
    10 to 15 company restaurants in fiscal 2007.

                                      22.
<PAGE>

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  the 2006  quarter  and the 2006  year-to-date
    period, the impact of menu price increases on company  restaurants was 2.5%.
    In the  fourth  quarter,  we will  roll  over a 1% price  increase  taken in
    November of 2005. We do not expect to take further company  restaurant price
    increases for the remainder of fiscal 2006.  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 operations and improving 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 the 2006 quarter,  company  comparable sales decreased
    1.7% while  domestic  franchise and domestic  system-wide  comparable  sales
    decreased  2.5% and 2.3%,  respectively.  In the 2006  year-to-date  period,
    company  comparable  sales  decreased  0.8%,  while  domestic  franchise and
    domestic system-wide comparable sales decreased 0.4% and 0.5%, 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 chains in the  category in 2006 and 2005 has  outpaced
    demand contributing to weaker sales trends. As a result of these factors, we
    currently expect system-wide  comparable sales for the remainder of the year
    to be in a range from down 1.0% to down 3.0%.

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  were 10.5% and 12.9% in the 2006  quarter  and the 2005
    quarter,  respectively,  and 12.4% and 14.1% in the 2006 year-to-date period
    and the 2005 year-to-date period,  respectively.  We currently expect fiscal
    2006 company restaurant margins, which will be dependent on comparable sales
    performance at company restaurants, to be lower than margins in fiscal 2005.
    Company  restaurant  margins are  susceptible to  fluctuations  in commodity
    costs,  labor costs and other operating costs such as utilities.  We attempt
    to negotiate  contracts  for the  majority of our food  products in order to
    mitigate the impact of rising  commodity  costs. We currently  expect fiscal
    2006 net commodity  costs to be flat,  including the negative impact of fuel
    surcharges.  In  addition,  our  improved  menu  offerings  are  expected to
    increase food costs,  as a percentage of sales,  when compared to other menu
    offerings.  We expect labor costs to continue to be  negatively  impacted by
    hourly wage rate increases  (including the potential impact of various state
    and federal  minimum wage rate  initiatives),  incremental  hourly  training
    labor to support our new food  campaigns,  management wage rate increases to
    remain  competitive and  modifications  to our bonus plan designed to retain
    our best restaurant managers.  In addition,  higher energy costs,  including
    utilities  and the cost of materials  used in the  production  of packaging,
    will have a  negative  impact on  company  restaurant  margins,  but will be
    partially  offset  by  the  favorable  impact  of  a  change  in  accounting
    convention  for  smallwares  that was  implemented  in the second quarter of
    fiscal 2006 and the impact of the 53rd week in fiscal 2006.

o   General and administrative  expenses - general and  administrative  expenses
    expressed  as  a  percentage  of  total  operating  revenues.   General  and
    administrative expenses were 11.1% and 8.6% in the 2006 quarter and the 2005
    quarter,  respectively,  and 10.4% and 8.9% in the 2006 year-to-date  period
    and the 2005 year-to-date  period,  respectively.  Stock-based  compensation
    included in general  and  administrative  expenses  was 1.5% and 0.2% in the
    2006 quarter and the 2005  quarter,  respectively,  and 1.6% and 0.2% in the
    2006 year-to-date period and the 2005 year-to-date period, respectively.

                                      23.
<PAGE>
    General and administrative  expenses, as a percentage of operating revenues,
    for fiscal  2006 are  expected  to be in the  low-to-mid  10 percent  range,
    including the impact of stock-based compensation.

o   Return  on  equity  -  net  earnings  expressed  as  a  percent  of  average
    stockholders' equity. We believe this is an important indicator as it allows
    us to evaluate our ability to create value for our  shareholders.  In fiscal
    2006,  our  return on equity has  declined  due  primarily  to the impact of
    stock-based   compensation   and  lower  than  expected  sales  and  company
    restaurant  margins. We now expect our return on equity in fiscal 2006 to be
    lower than our stated goal of at least 20%.

Application of Critical Accounting Policies


Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations is based upon our condensed 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  condensed  consolidated
financial  statements  and notes  thereto.  Actual results may differ from these
estimates,  and such  differences may be material to our condensed  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 fiscal 2006, we account for stock-based
compensation in accordance with SFAS No. 123(R). 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.

Impairment of long-lived assets: 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

                                      24.
<PAGE>

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  condensed  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 January 2006, we completed the acquisition of four Applebee's  restaurants in
the  Houston  market  for  approximately  $8,200,000.  The  purchase  price  was
allocated to the fair value of property and equipment of $7,400,000, goodwill of
approximately  $600,000,  reacquired franchise rights of approximately $100,000,
and  other  net  assets  of  approximately  $100,000.  In  connection  with this
acquisition, we paid approximately $8,100,000 in the 2006 year-to-date period.

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.

                                      25.
<PAGE>
The following table is comprised of actual company  restaurant sales for the two
restaurant  acquisitions above, which are included in our condensed consolidated
financial statements for each period presented, and pro forma company restaurant
sales. The pro forma company  restaurant sales for the 2006 quarter and the 2006
year-to-date  period  include  sales  related to the  January  2006  acquisition
discussed  above as if the  acquisition had occurred as of the beginning of each
respective  period.  The pro forma company restaurant sales for the 2005 quarter
and the  2005  year-to-date  period  include  sales  for  the  two  acquisitions
discussed above as if the  acquisitions had occurred as of the beginning of each
respective period.

<TABLE>
<CAPTION>
                                                                                         2006            2005
                                                           2006           2005       Year-to-Date    Year-to-Date
                                                          Quarter        Quarter        Period          Period
                                                       -------------- ------------- --------------  --------------
<S>                                                    <C>            <C>           <C>              <C>
Actual company restaurant sales for acquired
    restaurants......................................    $  1,500       $ 7,500       $   4,800        $ 10,300
                                                       ============== ============= ===============  ==============

Pro forma company restaurant sales for acquired
     restaurants.....................................    $  1,500       $ 8,200       $   5,500        $ 24,600
                                                       ============== ============= ===============  ==============
</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 any new insurance coverage.  Franchise premium adjustments
will be included in other franchise  income and cost of other  franchise  income
when  audited.  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:

                                      26.
<PAGE>

    o   Franchise premium  receivables of approximately  $500,000 and $1,700,000
        as of September 24, 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  $14,300,000  and  $18,600,000 as of
        September  24, 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
        $16,000,000  and  $20,700,000  as of September 24, 2006 and December 25,
        2005,   respectively.   Approximately  $8,000,000  and  $10,500,000  for
        September 24, 2006 and December 25, 2005,  respectively,  is included in
        other non-current liabilities.

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>
                                                                                             2006          2005
                                                                                           Year-to-      Year-to-
                                                                2006          2005           Date          Date
                                                              Quarter        Quarter        Period        Period
                                                            -------------  ------------  ------------- -------------
<S>                                                         <C>            <C>           <C>           <C>
Operating revenues:
     Company restaurant sales..............................     89.5%          89.3 %        89.5%         89.0%
     Franchise royalties and fees..........................     10.4           10.3          10.4          10.6
     Other franchise income................................      0.1            0.3           0.1           0.4
                                                            -------------  ------------  ------------- -------------
        Total operating revenues...........................    100.0%         100.0%        100.0%        100.0%
                                                            =============  ============  ============= =============
Cost of sales (as a percentage of company
     restaurant sales):
     Food and beverage.....................................     26.7%          26.2%         26.6%         26.4%
     Labor.................................................     34.5           33.1          33.7          33.0
     Direct and occupancy..................................     27.9           27.4          26.9          26.0
     Pre-opening expense...................................      0.4            0.4           0.3           0.4
                                                            -------------  ------------  ------------- -------------
        Total cost of sales................................     89.5%          87.1%         87.6%         85.9%
                                                            =============  ============  ============= =============

Cost of other franchise income (as a percentage of other
     franchise income).....................................    187.1%          74.2%        128.5%         79.9%
General and administrative expenses........................     11.1            8.6          10.4           8.9
Amortization of intangible assets..........................      --             0.1           0.1           0.1
Impairment and other restaurant closure costs..............      0.6            1.3           0.7           0.4
Loss on disposition of property and equipment..............      0.2            0.2           0.2           0.1
                                                            -------------  ------------  ------------- -------------
Operating earnings.........................................      7.7           11.8          10.2          13.8
                                                            -------------  ------------  ------------- -------------

Other income (expense):
     Investment income.....................................      0.3            0.2           0.1           0.1
     Interest expense......................................     (0.9)          (0.4)         (0.9)         (0.2)
     Other income .........................................      0.1            0.2           0.1           0.2
                                                            -------------  ------------  ------------- -------------
        Total other income (expense).......................     (0.6)            --          (0.7)           --
                                                            -------------  ------------  ------------- -------------

Earnings before income taxes...............................      7.2           11.8           9.6          13.8
Income taxes...............................................      2.5            4.5           3.3           4.9
                                                            -------------  ------------  ------------- -------------
Net earnings...............................................      4.6%           7.2%          6.3%          8.9%
                                                            =============  ============  ============= =============
</TABLE>
                                      27.
<PAGE>


The  following  table  sets  forth  certain  financial   information  and  other
restaurant data relating to company and franchise restaurants, as reported to us
by franchisees:

<TABLE>
<CAPTION>
                                                               13 Weeks Ended                       39 Weeks Ended
                                                      ---------------------------------    ---------------------------------
                                                      September 24,      September 25,     September 24,      September 25,
                                                          2006               2005               2006              2005
                                                      --------------     --------------    ---------------    --------------
<S>                                                   <C>                <C>               <C>                <C>
Number of restaurants:
     Company:
         Beginning of period.......................          507                462               486                424
         Restaurant openings.......................            6                 12                25                 39
         Restaurant closings.......................           (1)                (1)               (3)                (1)
         Restaurants acquired from franchisees.....           --                 --                 4                 11
                                                      --------------     --------------    ---------------    --------------
         End of period.............................          512                473               512                473
                                                      --------------     --------------    ---------------    --------------
     Franchise:
         Beginning of period.......................        1,353              1,260             1,318              1,247
         Restaurant openings.......................           22                 23                67                 52
         Restaurant closings.......................           (3)                (1)               (9)                (6)
         Restaurants acquired from franchisees.....           --                 --                (4)               (11)
                                                      --------------     --------------    ---------------    --------------
         End of period.............................        1,372              1,282             1,372              1,282
                                                      --------------     --------------    ---------------    --------------
     Total:
         Beginning of period.......................        1,860              1,722             1,804              1,671
         Restaurant openings.......................           28                 35                92                 91
         Restaurant closings.......................           (4)                (2)              (12)                (7)
                                                      --------------     --------------    ---------------    --------------
         End of period.............................        1,884              1,755             1,884              1,755
                                                      ==============     ==============    ===============    ==============

Weighted average weekly sales per restaurant:
     Company.......................................   $   43,331         $   44,825        $   45,527         $   46,561
     Domestic franchise............................   $   47,516         $   48,677        $   50,394         $   50,521
     Domestic total................................   $   46,327         $   47,598        $   49,011         $   49,424

Change in comparable restaurant sales:(1)
     Company.......................................       (1.7)%             (1.6)%            (0.8)%             (0.8)%
     Domestic franchise............................       (2.5)%              1.6 %            (0.4)%              2.9 %
     Domestic total................................       (2.3)%              0.8 %            (0.5)%              2.0 %

Total operating revenues (in thousands):
     Company restaurant sales......................   $  286,938         $  272,673        $  890,965         $  815,834
     Franchise royalties and fees(2)...............       33,340             31,589           103,581             97,090
     Other franchise income(3).....................          371              1,064             1,355              3,553
                                                      --------------     --------------    ---------------    --------------
     Total.........................................   $  320,649         $  305,326        $  995,901         $  916,477
                                                      ==============     ==============    ===============    ==============

<FN>
(1) When computing comparable restaurant sales, restaurants open for at least 18
months are compared from period to period.
(2) Franchise royalties are generally 4% of each franchise restaurant's reported
monthly  gross  sales.   Reported   franchise  sales  (including   international
restaurants),  in thousands,  were $830,458 and $790,949 in the 2006 quarter and
the 2005  quarter,  respectively,  and  $2,594,659  and  $2,444,429  in the 2006
year-to-date period and the 2005 year-to-date  period,  respectively.  Franchise
fees typically range from $30,000 to $35,000 for each restaurant opened.
(3) Other franchise income includes revenue from information technology products
and  services  provided to certain  franchisees.  In  addition,  the 2005 period
includes  insurance  premiums  from  franchisee  participation  in  our  captive
insurance program.
</FN>
</TABLE>
                                      28.
<PAGE>



2006 Quarter  Compared With 2005 Quarter and 2006  Year-to-Date  Period Compared
With 2005 Year-to-Date Period

Company Restaurant Sales.  Total company restaurant sales increased  $14,265,000
(5%) from  $272,673,000  in the 2005 quarter to $286,938,000 in the 2006 quarter
and increased $75,131,000 (9%) from $815,834,000 in the 2005 year-to-date period
to  $890,965,000 in the 2006  year-to-date  period.  The percentage  increase in
total  company  restaurant  sales  was  due  to an  increase  in the  number  of
restaurant  weeks open of  approximately  9% in the 2006  quarter and 12% in the
2006  year-to-date  period,  which was partially offset by a decline in weighted
average weekly sales in the 2006 quarter and the 2006 year-to-date period.

Comparable restaurant sales at company restaurants decreased by 1.7% and 0.8% in
the  2006  quarter  and the 2006  year-to-date  period,  respectively.  Weighted
average weekly sales at company  restaurants  decreased 3.3% from $44,825 in the
2005 quarter to $43,331 in the 2006 quarter and  decreased  2.2% from $46,561 in
the 2005  year-to-date  period to $45,527 in the 2006 year-to-date  period.  The
decrease in average  weekly sales was due to a decline in guest  traffic in 2006
as compared to 2005 as well as the  underperformance  of  restaurants  open less
than 18 months.  In both periods,  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
2.5% in the 2006 quarter and the 2006 year-to-date period.

Franchise Royalties and Fees.  Franchise royalties and fees increased $1,751,000
(6%) from $31,589,000 in the 2005 quarter to $33,340,000 in the 2006 quarter and
increased  $6,491,000 (7%) from $97,090,000 in the 2005  year-to-date  period to
$103,581,000  in the 2006  year-to-date  period due  primarily to the  increased
number of franchise restaurants operating during both periods as compared to the
prior year.  Domestic  franchise  weighted  average  weekly sales and comparable
restaurant sales decreased 2.4% and 2.5%, respectively,  in the 2006 quarter and
decreased 0.3% and 0.4%, respectively, in the 2006 year-to-date period.

Other Franchise  Income.  Other franchise income  decreased  $693,000 (65%) from
$1,064,000  in the 2005  quarter to $371,000 in the 2006  quarter and  decreased
$2,198,000 (62%) from $3,553,000 in the 2005  year-to-date  period to $1,355,000
in the 2006  year-to-date  period due  primarily to the decision to  discontinue
writing new  coverage  in our captive  insurance  program.  In 2005,  franchisee
premiums were included in other franchise income ratably over the policy year.

Cost of Company  Restaurant  Sales. Food and beverage costs increased from 26.2%
in the 2005 quarter to 26.7% in the 2006 quarter and increased from 26.4% in the
2005  year-to-date  period to 26.6% in the 2006  year-to-date  period.  Food and
beverage costs in both periods were  negatively  impacted by an increase in food
spoilage  and waste  associated  with a  reduction  in the  number of menu items
offered, our enhanced bar menu and a new fall menu. In addition,  we experienced
an  unfavorable  shift in menu mix 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 2.5% in the 2006
quarter and the 2006 year-to-date period.

Labor  costs  increased  from  33.1%  in the 2005  quarter  to 34.5% in the 2006
quarter and increased from 33.0% in the 2005 year-to-date period to 33.7% in the
2006 year-to-date period. Both periods were unfavorably impacted by hourly state
minimum wage rate increases,  higher management wage rates,  training related to

                                      29.
<PAGE>

the  rollout of a new  promotion,  payroll  taxes and the impact of lower  sales
volumes, as a percentage of sales, which were partially offset by lower workers'
compensation  expense.  In addition,  the 2006 quarter was favorably impacted by
lower health insurance expense and was unfavorably  impacted by higher incentive
compensation as a result of  modifications  to our bonus plan designed to retain
our best restaurant managers.

Direct and occupancy  costs increased from 27.4% in the 2005 quarter to 27.9% in
the 2006 quarter and  increased  from 26.0% in the 2005  year-to-date  period to
26.9% in the 2006  year-to-date  period due  primarily to higher  utilities  and
unfavorable  year-over-year  comparisons for depreciation and rent expense, as a
percentage of sales, due to their relatively fixed nature,  which 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. The 2006
quarter was favorably impacted by lower advertising expense due to the timing of
our food promotions.

Cost of Other Franchise Income. Cost of other franchise income decreased $96,000
(12%) from  $790,000 in the 2005  quarter to  $694,000  in the 2006  quarter and
decreased  $1,097,000 (39%) from $2,838,000 in the 2005  year-to-date  period to
$1,741,000 in the 2006  year-to-date  period due to the decision to  discontinue
writing new  coverage  in our captive  insurance  program,  which was  partially
offset by $425,000 in the 2006  quarter  and  $925,000 in the 2006  year-to-date
period recorded for estimated insurance losses from franchise participants.

General  and  Administrative  Expenses.   General  and  administrative  expenses
increased  from  8.6% in the 2005  quarter  to 11.1%  in the  2006  quarter  and
increased  from  8.9% in the  2005  year-to-date  period  to  10.4%  in the 2006
year-to-date period due primarily to the recognition of stock-based compensation
related to adoption of SFAS 123(R),  higher compensation expense due to staffing
levels  and an  accrued  legal  expense of  $1,500,000  related  to the  pending
settlement and related costs of a California  wage and hour lawsuit.  The impact
of the pending  legal  settlement  is 0.5% and 0.2% in the 2006  quarter and the
2006 year-to-date period,  respectively.  Stock-based  compensation  included in
general and  administrative  expenses  was 1.5% and 0.2% in the 2006 quarter and
the 2005  quarter,  respectively,  and  1.6%  and 0.2% in the 2006  year-to-date
period and the 2005 year-to-date  period,  respectively.  In addition,  expenses
incurred  related to the  development  of  international  markets  increased our
general and administrative expenses by 0.4% in both 2006 periods.

Impairment and Other Restaurant  Closure Costs.  Impairment and other restaurant
closure  costs  decreased  $2,000,000  from  $3,900,000  in the 2005  quarter to
$1,900,000  in the  2006  quarter  and  increased  from  $3,900,000  in the 2005
year-to-date  period to $6,500,000 in the 2006 year-to-date  period.  During the
2006 year-to-date  period, we had impairment and other restaurant  closure costs
as follows:
    o   In  connection   with  the  review  of  long-lived   assets  during  our
        preparation  of  the  2006  quarter  condensed   consolidated  financial
        statements,  we recorded an asset impairment  charge of $1,900,000.  The
        impairment  charge consisted of approximately  $1,000,000  write-down of
        the carrying value of two restaurants whose carrying amounts were deemed
        not recoverable  and  approximately  $900,000  write-down of a corporate
        aircraft.
    o   We previously  recorded impairment and other restaurant closure costs of
        $3,000,000  in the second  quarter of fiscal 2006 and  $1,600,000 in the
        first quarter of fiscal 2006.

Interest Expense. Interest expense increased from $1,232,000 in the 2005 quarter
to $2,970,000 in the 2006 quarter and from  $2,203,000 in the 2005  year-to-date
period to  $8,509,000  in the 2006  year-to-date  period due primarily to higher
interest rates and increased  borrowings used for capital  expenditure  funding,
repurchases of our common stock and acquisitions.

                                      30.
<PAGE>

Income Taxes.  The effective income tax rate, as a percentage of earnings before
income  taxes,  decreased  from  38.5% in the 2005  quarter to 35.3% in the 2006
quarter and decreased from 35.7% in the 2005 year-to-date period to 34.4% in the
2006 year-to-date period. Both periods were impacted by favorable employment tax
credits.  The year-to-date  period was also favorably impacted by the resolution
of state tax matters. In addition,  the income tax rates in the 2005 quarter and
the 2005 year-to-date  period were impacted by higher state tax rates discovered
following the completion of the 2004 tax returns.

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, the repurchase of
our common stock, and investment in information technology systems. In the past,
we have obtained 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  from  investing   activities   include  capital
expenditures for restaurant construction, refurbishment, information technology,
acquisitions  of  franchisee  restaurants  and  asset  sales.  Cash  flows  from
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 the 2006 year-to-date period and the 2005 year-to-date period
(in thousands):

<TABLE>
<CAPTION>
                                                            2006               2005
                                                        Year-to-Date       Year-to-Date
                                                           Period             Period
                                                     ------------------- ------------------
<S>                                                  <C>                 <C>
Net cash provided by operating activities..........    $   109,438         $   158,676

Net cash used by investing activities..............        (90,089)           (149,245)

Net cash used by financing activities..............        (22,613)             (9,933)
                                                     ------------------- ------------------

Net decrease in cash and cash equivalents..........    $    (3,264)        $      (502)
                                                     =================== ==================
</TABLE>

Capital  expenditures  were  $100,802,000  in the 2005  year-to-date  period and
$86,635,000 in the 2006  year-to-date  period.  In 2006, we currently  expect to
open approximately 35 company restaurants,  and capital expenditures,  excluding
franchise   acquisitions,   are   expected  to  be  between   $115,000,000   and
$125,000,000.  The decrease in the expected capital  expenditures of $20,000,000
from the  amount  reported  in the  second  quarter  of fiscal  2006 is due to a
reduction  in 2007  restaurant  openings  and a delay in the  timing of  capital
expenditures related to the new corporate headquarters.

Future  capital  expenditures  will  primarily  be for  the  development  of new
restaurants, refurbishment and capital replacement for existing restaurants, and
the  enhancement  of  information  systems.  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.

In fiscal 2006, we expect to incur approximately $12,500,000 in costs associated
with the construction of our new corporate headquarters including $4,500,000 for
land, which we paid in January 2006. We will incur additional construction costs
in fiscal 2007, the amount of which has yet to be determined. We intend to enter
into a sale leaseback arrangement of the new headquarters upon its completion or
thereafter, depending upon market conditions.


                                      31.
<PAGE>

In January 2006, we completed the acquisition of four Applebee's  restaurants in
the  Houston  area  for  approximately   $8,200,000.  In  connection  with  this
acquisition, we paid approximately $8,100,000 in the 2006 year-to-date period.

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 in cash. In connection with this acquisition,  we paid
approximately $800,000 in 2004 and $8,000,000 in 2005.

In December  2004, we completed the  refinancing of our  $150,000,000  unsecured
revolving  credit  facility.  The  new  bank  credit  agreement  provided  for a
$150,000,000 five-year unsecured revolving credit facility, of which $40,000,000
may be used for the  issuance of letters of credit.  The  facility is subject to
various  covenants  and  restrictions  which,  among other  things,  require the
maintenance  of  stipulated   fixed  charge,   leverage  and   indebtedness   to
capitalization  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. 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.  As of September 24, 2006, we
were in compliance with the covenants  contained in our credit agreement.  As of
September 24, 2006, we had borrowings of $189,000,000, standby letters of credit
of $16,400,000  outstanding and  approximately  $44,600,000  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.  During the 2006
year-to-date  period, we repurchased  1,285,900 shares of our common stock at an
average price of $21.41 for an aggregate  cost of  $27,528,000.  As of September
24, 2006, we had $101,439,000 remaining under our repurchase authorization.

In October 2005, the Board of Directors declared an annual dividend of $0.20 per
share  payable  to  shareholders  of  record  on  December  23,  2005.  We  paid
approximately $14,800,000 in January 2006 related to this dividend.

As of September 24, 2006,  our liquid assets totaled  $10,067,000.  These assets
consisted  of  cash  and  cash  equivalents  in the  amount  of  $9,776,000  and
short-term  investments in the amount of $291,000.  The working  capital deficit
decreased  from  $107,400,000  as of  December  25,  2005 to  $65,221,000  as of
September 24, 2006. This decrease was due primarily to the higher  redemption of
gift cards as compared to sales of gift cards in the 2006 year-to-date period, a
reclass of  property  and  equipment  to assets held for sale and  decreases  in
accounts payable and dividends accrued in fiscal 2005.

We believe that our liquid assets and cash generated from  operations,  combined
with  available   borrowings,   will  provide   sufficient   funds  for  capital
expenditures,  repurchases  of our common  stock,  the payment of dividends  and

                                      32.
<PAGE>

operating  activities  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  and  future  purchase  obligations  as of  September  24,  2006 (in
thousands):
<TABLE>
<CAPTION>

                                                                          Payments due by period
                                                   ---------------------------------------------------------------------
                        Certain                                    Less than 1       1-3          3-5       More than 5
                Contractual Obligations                Total           year         years        years         years
      -------------------------------------------- -------------  ------------- ------------- ------------ -------------
      <S>                                          <C>            <C>           <C>           <C>          <C>
      Long-term Debt (excluding capital
         lease obligations) (1)..................   $   190,324    $  12,099     $      88     $ 177,106    $   1,031
      Capital Lease Obligations..................         7,739          815         1,716         1,814        3,394
      Operating Leases (2).......................       395,875       28,876        57,571        56,292      253,136
      Purchase Obligations - Company(3)..........       183,907      163,574        12,074         8,259         --
      Purchase Obligations - Franchise(4)........       424,250      369,765        32,355        22,130         --

<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,  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 September 24, 2006,  we have  outstanding  lease  guarantees of
approximately $15,800,000.  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
$12,800,000. 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 September 24, 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 September 24, 2006, there
were loans  outstanding to six franchisees for  approximately  $69,200,000 under
this program.  The fair value of our guarantees under this financing  program is
approximately  $140,000  and  is  recorded  in  non-current  liabilities  in our
consolidated balance sheet as of September 24, 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 September  24, 2006,  we would have been required to

                                      33.
<PAGE>

make payments totaling approximately $12,100,000. 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 September 24, 2006.

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. This issue
will not impact the method for recording  these sales taxes in our  consolidated
financial statements.

In July 2006, the 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. We are evaluating the impact the adoption of
FIN 48 will have on 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. We are evaluating the impact
the adoption of SFAS No. 157 will have on 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. We are  evaluating  the impact
the adoption of SFAS No. 158 will have on our consolidated financial statements.

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. We are evaluating the
impact of SAB No. 108 on our consolidated financial statements.

                                      34.
<PAGE>



Item 3.       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 bears interest at either the
bank's prime rate or LIBOR plus 0.75%, at our option.  As of September 24, 2006,
the total amount of debt subject to interest rate fluctuations was $189,000,000,
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  $1,900,000 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 4.       Controls and Procedures

As of September 24, 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 2006 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.


                                      35.
<PAGE>


                           PART II. OTHER INFORMATION

Item 1.       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 1A.      Risk Factors

There have been no material  changes in our risk factors from those disclosed in
our 2005 Annual Report on Form 10-K.



                                      36.

<PAGE>

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

(c) Issuer Purchases of Equity Securities.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                     Purchases of Equity Securities(1)
--------------------------------------------------------------------------------------------------------------
                                     (a)          (b)               (c)                          (d)
------------------------------- ------------- ----------- ------------------------- --------------------------
                                                                                     Maximum Dollar Value of
                                    Total       Average     Total Number of Shares    Shares that May Yet Be
                                  Number of      Price       Purchased as Part of       Purchased Under the
                                   Shares       Paid Per      Publicly Announced         Plans or Programs
            Period                Purchased      Share         Plans or Programs          (in thousands)
------------------------------- ------------- ----------- ------------------------- --------------------------
<S>                             <C>           <C>         <C>                       <C>
June 26, 2006 through July
23, 2006                              --           --                --                     $112,833
------------------------------- ------------- ----------- ------------------------- --------------------------
July 24, 2006 through August
20, 2006                           388,800      $18.61            388,800                   $105,596
------------------------------- ------------- ----------- ------------------------- --------------------------
August 21, 2006 through
September 24, 2006                 209,900      $19.81            209,900                   $101,439
------------------------------- ------------- ----------- ------------------------- --------------------------
            Total                  598,700                        598,700
=============================== ============= =========== ========================= ==========================

<FN>
(1) In October 2005, our Board of Directors authorized additional repurchases of
our common stock of up to $175,000,000, subject to market conditions.
</FN>
</TABLE>

Item 5.       Other Information

    (a) None

    (b) As  disclosed  in our  Current  Report on Form 8-K filed with the SEC on
        August 30, 2006, the Board of Directors has adopted Amended and Restated
        Bylaws of the Company (the "Bylaws"). These Bylaws change the procedures
        by which  holders of our common stock may nominate  persons for election
        to our Board of Directors at a meeting of  stockholders  and adopt a new
        advance notice  procedure for stockholders who wish to submit matters to
        a  meeting  of our  stockholders.  The  previous  bylaw  for  submitting
        nominations of directors has been deleted and the new provision  governs
        all   submissions  by  stockholders  of  proposals  to  our  stockholder
        meetings.

        Under Article II,  Section 7 of the Bylaws,  any  stockholder  proposal,
        including,  without  limitation,  a notice of  intention  to nominate an
        individual  for  election  to the Board,  must be  delivered  to the our
        corporate  secretary not less than 120 days nor more than 165 days prior
        to the date on which we first mailed our proxy  materials  for the prior
        year's annual meeting of stockholders;  provided,  however,  that in the
        event the date of the annual meeting is advanced by more than 30 days or
        delayed  (other  than as a result of  adjournment)  by more than 30 days
        from the anniversary of the previous  year's annual  meeting,  notice by
        the  stockholder to be timely must be delivered not later than the close
        of business on the later of the 60th day prior to such annual meeting or
        the tenth day  following  the date on which public  announcement  of the
        date of such  meeting  is  first  made.  The  notice  must  contain  the
        information specified in the Bylaws.

                                      37.
<PAGE>

        As  previously  stated  in our 2006  definitive  Proxy  Statement,  if a
        stockholder  wants us to include a proposal in our proxy  statement  and
        form of proxy for presentation at the 2007 meeting, it must be submitted
        no later than  December 12, 2006,  and must comply with the rules of the
        Securities and Exchange Commission.

        Under the Bylaws,  if a  stockholder  (i) wants to submit a proposal for
        the 2007  annual  meeting but does not ask us to include it in the proxy
        statement,  or (ii)  intends  to  nominate a person as a  candidate  for
        election  to the Board  directly,  rather  than  through  the  Corporate
        Governance/Nominating  Committee,  the stockholder still must submit the
        proposal or nomination  under the  timeframes  set forth above.  For our
        2007 annual  meeting,  we must  receive  proposals  and  nominations  no
        earlier  than October 28, 2006 and no later than  December 12, 2006.  If
        the date of the 2007 annual  meeting is advanced by more than 30 days or
        delayed  (other  than as a result of  adjournment)  by more than 30 days
        from the  anniversary of the 2006 annual meeting,  the stockholder  must
        submit  any such  proposal  or  nomination  no later  than the  close of
        business on the later of the 60th day prior to the 2007  annual  meeting
        or the tenth day following the day on which public  announcement  of the
        date of such  meeting is first made.  If we do not  receive  notice of a
        proposal  by the dates  set forth  above,  or if we meet  certain  other
        requirements of the SEC rules, the persons named as proxies in the proxy
        materials  relating to that meeting will use their  discretion in voting
        the proxies when these matters are raised at the meeting.

        The  revised  Bylaws  also  change  some   procedural   aspects  of  how
        stockholders  may  recommend   nominees  for  the  board  of  directors.
        Stockholders may still submit  recommendations for nominees to the Board
        of Directors to the Corporate  Governance/Nominating  Committee but must
        now deliver to the corporate  secretary the same information  within the
        same  time  periods  as  required  by the  revised  Bylaws  for a direct
        nomination at a meeting.  The committee will consider  these  candidates
        the same way it evaluates all other candidates.

Item 6.       Exhibits

The Exhibits listed on the accompanying  Exhibit Index are filed as part of this
report.




                                      38.

<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.
                                     (Registrant)



Date:     October 25, 2006           By:  /s/    David L. Goebel
         -------------------            ----------------------------------------
                                        David L. Goebel
                                        Director, President and
                                        Chief Executive Officer
                                        (principal executive officer)

Date:     October 25, 2006           By:  /s/    Steven K. Lumpkin
         -------------------            ----------------------------------------
                                        Steven K. Lumpkin
                                        Director, Executive Vice President,
                                        Chief Financial Officer and Treasurer
                                        (principal financial officer)

Date:     October 25, 2006           By:  /s/    Beverly O. Elving
         -------------------            ----------------------------------------
                                        Beverly O. Elving
                                        Vice President and Controller
                                        (principal accounting officer)



                                      39.

<PAGE>


                         APPLEBEE'S INTERNATIONAL, INC.
                                  EXHIBIT INDEX
<TABLE>
<CAPTION>
  Exhibit
  Number                                           Description of Exhibit
------------   -----------------------------------------------------------------------------------------------

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

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

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

     10.4      Amended and Restated Nonqualified Deferred Compensation Plan.

     10.5      Form of Officer Restricted Stock Award Agreement for shares subject to the Company's stock
               ownership guidelines.

     10.6      Form  of  Officer  Restricted  Stock  Award  Agreement  for  Participants  in the  Executive
               Retirement Plan.

     10.7      Amended Executive Stock Ownership Guidelines.

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

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

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

</TABLE>

                                      40.