IHOP CORP - 10-K Annual Report

Title of each class		Name of each exchange on which registered
Common Stock, $.01 Par Value		New York Stock Exchange

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 ý No o

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

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

State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 29, 2003: $690 million.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

Class		Outstanding as of February 29, 2004
Common Stock, $.01 par value		21,412,273

Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on Tuesday, May 25, 2004 (the "2004 Proxy Statement") are incorporated by reference into Part III.

IHOP Corp. (referred to herein as "IHOP" or the "Company") was incorporated under the laws of the State of Delaware in 1976. In July 1991, IHOP completed an initial public offering of common stock. There were no significant changes to our corporate structure during 2003.

IHOP Corp.'s principal executive offices are located at 450 North Brand Boulevard, Glendale, California and our telephone number is (818) 240-6055. Our website is located at www.ihop.com. We make all of our filings with the Securities and Exchange Commission available free of charge on our website as soon as reasonably practicable after such reports have been filed with or furnished to the SEC. The information contained on our website is not incorporated into this Annual Report on Form 10-K.

This Annual Report on Form 10-K should be read in conjunction with the cautionary statements on page 15.

In January 2003, we announced significant changes in the way we conduct our business. These include a transition from Company-financed restaurant development (the "Old Model") to a more traditional franchise development model, in which franchisees finance, develop and operate their new restaurants (the "New Model"). In order to reflect the change in IHOP's business model, the Company has also changed the presentation of its segment information. IHOP identifies its segments based on the organizational units used by management to monitor performance and make operating decisions. IHOP's segments are recorded in four categories: franchise operations, rental operations, Company restaurant operations and financing operations. The Franchise Operations segment includes restaurants operated by our franchisees and area licensees in the United States and Canada. The Franchise Operations segment consists primarily of royalty revenues, sales of proprietary products, advertising fees and the portion of the franchise fees allocated to the Company's intellectual property. The Rental Operations segment consists of rental income and expense and direct financing lease interest income and capital lease interest expense on restaurants operated by franchisees. The Company Restaurant Operations segment includes Company-operated restaurants in the United States. The Financing Operations segment consists of the portion of franchise fees not allocated to the Company's intellectual property, sales of equipment as well as interest income from the financing of franchise fee and equipment leases. Prior period information has been restated to conform with the current year presentation, however, the management's discussion and analysis of financial condition and results of operations for the fiscal years ended December 31, 2002 and 2001 have not been restated. Please see Note 14 to the Consolidated Financial Statements in this Annual Report on Form 10-K for more details.

IHOP Corp. and its subsidiaries develop, operate and franchise International House of Pancakes restaurants, one of America's best-known, national, family restaurant chains. At December 31, 2003, there were 1,165 IHOP restaurants. Franchisees operated 991 of these restaurants, area licensees operated 130 restaurants, and IHOP operated 44 restaurants. Franchisees and area licensees are independent third parties who are licensed by IHOP to operate their restaurants using IHOP's trademarks, operating systems and methods. IHOP restaurants are located in 48 states and Canada.

IHOP restaurants feature table service and moderately priced, high-quality food and beverage items in an attractive and comfortable atmosphere. Although the restaurants are best known for their award-winning pancakes, omelets and other breakfast specialties, IHOP restaurants offer a broad array of lunch, dinner and snack items as well. They are open throughout the day and evening hours, and many operate 24 hours a day.

Franchisees and area licensees operate more than 95% of IHOP restaurants. Our approach to franchising is founded on the franchisees' active involvement in the day-to-day operations of their respective restaurants. We are selective in granting franchises and we prefer to franchise to those who intend to be active in the management of their restaurant(s), rather than to passive investors or investment groups.

We seek to increase our revenues and profits by focusing on several areas of our business. These areas include: (1) franchising of new IHOP restaurants, (2) marketing, advertising and product development programs aimed at attracting new guests and retaining our existing guests, and (3) implementation of restaurant-level operating changes designed to improve sales and profitability.

Prior to January 2003, IHOP financed and developed the large majority of new IHOP restaurants prior to franchising them (the "Old Model"). Under the Old Model, when the restaurant was ultimately franchised, we typically became the franchisee's landlord and equipment lessor. Our new business model (the "New Model") relies on franchisees to finance and develop IHOP restaurants. Under the New Model, IHOP approves the franchisees' proposed sites but does not contribute capital or become the franchisee's landlord.

The New Model contemplates that substantially all new IHOP restaurants will be financed and developed by franchisees or area licensees in 2004 and thereafter. In 2003, we developed 56 IHOP restaurants under the Old Model, and our franchisees and area licensees financed and developed 18 additional new restaurants.

Regardless of the business model, new IHOP restaurants are only developed after a stringent site selection process supervised by our senior management. We expect to add restaurants to the IHOP system in major markets where we already have a core guest base. We believe that concentrating growth in existing markets allows us to achieve economies of scale in our supervisory and advertising functions. We also look to strategically add restaurants in geographic areas in which we have no presence or our presence is limited.

In 2003, we primarily built two types of new free-standing restaurant buildings. The larger format restaurant is approximately 4,900 square feet in size and contains 176 seats. The second building type is designed for use in smaller markets. It is approximately 4,000 square feet in size and seats about 134 people. We also purchased and converted existing buildings into IHOP restaurants. The square footage and number of seats in a restaurant conversion vary by location. In 2003, restaurant conversions averaged 150 seats per restaurant. Our older A-Frame style restaurants, which have not been built since 1985, contain approximately 3,000 square feet and about 100 seats. Of the 56 new IHOP restaurants we developed in 2003, 21 were larger format buildings, 28 were smaller format buildings, and 7 were restaurant conversions or leased space in multi-tenant buildings.

To the greatest extent possible, subject to local zoning restrictions, we continue to use our familiar signature blue color on the roof, awnings and other exterior decor of our restaurants.

The table below sets forth our average development cost per restaurant in 2003. For leased restaurants the discounted present value of the lease and any additional sums paid to acquire the lease have been allocated to land, building and site improvements and other costs, as appropriate.

		Average Per Restaurant
Land		$	658,000
Building			883,000
Equipment			356,000
Site improvements and other costs			213,000

	Total	$	2,110,000

In 2003, we entered into several franchise development agreements. As of December 31, 2003, we had signed commitments from our franchisees to build 137 restaurants over the next several years. This number includes 11 Single-Store Development Agreements and 20 larger Multi-Store Development Agreements.

In 2004, we expect to open 40 to 55 new restaurants. We expect our franchisees to develop approximately 30 to 40 new restaurants. IHOP Corp. will develop approximately five to ten new restaurants, which includes the four holdover restaurants from 2003 under the Old Model, as well as the addition of Company-operated restaurants in Cincinnati, Ohio. We expect our area licensee in Florida to develop approximately five restaurants in 2004. In terms of timing, we expect the majority of openings to occur in the second half of 2004.

The following table represents our development commitments as of December 31, 2003.

The Company believes that a total of 400-800 additional IHOP restaurant opportunities exist in the United States as of December 31, 2003, and is actively recruiting existing and new franchisees to develop these opportunities.

Since 2003 was a year of transition from the Old Model to the New Model, our franchising activities included restaurants developed under both models in 2003. For clarity of presentation, the discussion is separated between those activities specific to the Old Model and those which apply to the New Model.

Under the Old Model, when we develop a restaurant, we identify the site for the new restaurant, purchase the site or lease it from a third party, and build the restaurant and equip it with all required equipment. We select and train the franchisee and supervisory personnel who will operate the restaurant. In addition, we finance approximately 80% of the franchise fee and lease the restaurant and

equipment to the franchisee. After the franchisee is operating the restaurant, we provide continuing support with respect to operations, marketing, training and new product development.

Our involvement in the development of new restaurants allows IHOP to charge a franchise and development fee. In addition, we derive income from the financing of the franchise and development fee and from the leasing of property and equipment to franchisees. However, we also incur obligations in the development, franchising and start-up operations of the new restaurants.

An initial franchise fee of approximately $200,000 to $550,000 is generally required for a newly developed restaurant, depending on the site. The franchisee typically pays approximately 20% of the initial franchise fee in cash, and we finance the remaining amount over five to eight years. We also receive continuing revenues from the franchisee as follows: (1) a royalty equal to 4.5% of the restaurant's sales; (2) income from the leasing of the restaurant and related equipment; (3) revenue from the sale of certain proprietary products, primarily pancake mixes; (4) a local advertising fee equal to about 2% of the restaurant's sales, which is usually paid to a local advertising cooperative and is used to purchase local television, radio and print advertising; and (5) a national advertising fee equal to 1% of the restaurant's sales which is primarily used to fund the creation of new television commercials, network television advertising time and to defray a portion of the Company's costs associated with marketing and advertising.

Under the New Model, IHOP's approach to franchising is similar to that of most of our franchising competitors in the foodservice industry. Franchisees can undertake individual store development or multi-store development. Under the single store development program, the franchisee is required to pay a non-refundable location fee of $15,000. If the proposed site is approved for development, the location fee of $15,000 is credited against an initial franchise fee of $50,000. The franchisee will then use his or her own capital, or arrange other financing to acquire a site, build and equip the business and fund working capital needs.

The Company also offers multi-store development opportunities for qualified franchisees. These multi-store development agreements provide franchisees with an exclusive right to develop new IHOP restaurants in designated geographic territories for specified periods of time. Multi-store developers are required to develop and operate a specified number of restaurants according to an agreed upon development schedule. Multi-store developers are required to pay a development fee of $20,000 for each restaurant to be developed under a multi-store development agreement. Additionally, for each store which is actually developed, there is an initial franchise fee of $40,000 against which the development fee of $20,000 is credited. The number of stores and the schedule of stores to be developed under multi-store development agreements is negotiated on an agreement by agreement basis. Therefore, the amounts of the development and initial franchise fees are subject to the outcome of those negotiations. With respect to restaurants developed under the New Model, the Company receives continuing revenues from the franchisee as follows: (1) a royalty equal to 4.5% of the restaurant's sales; (2) revenue from the sale of certain proprietary products, primarily pancake mixes; (3) a local advertising fee equal to about 2% of the restaurant's sales, which is usually paid to a local advertising cooperative and is used to purchase local television, radio and print advertising; and (4) a national advertising fee equal to 1% of the restaurant's sales which is primarily used to fund the creation of new television commercials, network television advertising time and to defray a portion of the Company's costs associated with marketing and advertising.

While there is no specific profile for franchise candidates, the Company primarily markets franchises to existing operators who currently own and operate one or more restaurants in the IHOP system and operators, that meet our operating standards, in other non-competing segments of the restaurant business.

We have entered into long-term area licensing agreements covering the state of Florida and the southern-most counties of Georgia and the province of British Columbia, Canada. As of December 31, 2003, the area licensee for the state of Florida and certain counties in Georgia operated or sub-franchised a total of 130 IHOP restaurants and the area licensee for the province of British Columbia, Canada operated or sub-franchised a total of 12 IHOP restaurants. The area license agreements provide for royalties ranging from 0.5% to 2% of sales, and advertising fees of 0.25% of sales and give the area licensees the right to develop new IHOP restaurants in their territories. We also derive revenue from the sale of proprietary products to these area licensees and their sub-franchisees. We treat the revenues from our area licensees as franchise operations revenues for financial reporting purposes.

Company-operated restaurants are those restaurants newly developed by IHOP that have not yet been franchised and those restaurants reacquired by us through negotiation or franchisee defaults. The type and number of Company-operated restaurants varies from time to time as we develop new restaurants, reacquire franchised restaurants and franchise new and reacquired restaurants.

Restaurants that we reacquire from franchisees typically require investment in remodeling and rehabilitation before being refranchised. They may remain as Company-operated restaurants for a period which typically ranges from one to five years. As a consequence, a significant number of Company-operated restaurants are likely to incur operating losses during the initial period of their rehabilitation. At the end of 2003, the Company operated a total of 44 IHOP restaurants. In 2003, the Company announced its intention to develop and operate between 15-20 IHOP restaurants in Cincinnati, Ohio. The development of the 15-20 restaurants will be completed over the next three years. The Company will operate these restaurants in order to highlight best practices in operations and training.

Restaurants that we reacquire are often underperforming as a result of having been poorly operated and physically neglected. When we reacquire a restaurant, we begin a multi-step rehabilitation program for that restaurant. First these restaurants are physically rehabilitated, then we hire, as necessary, and train the restaurant staff. After these first steps are completed, we implement new marketing and operations programs designed to regain the business of former guests and attract new patrons. After a restaurant has been rehabilitated, and its sales volume reaches acceptable levels, the restaurant is refranchised to a qualified franchisee.

We require most of our franchisees, and strongly encourage all of our franchisees, to periodically remodel their restaurants. In most instances, we require that our restaurants be remodeled at least every 5 years. There were 158 remodels completed in 2003.

The table below sets forth information regarding the distribution of single-unit and multi-unit franchisees in the IHOP system. It does not include information concerning our area licensees or their sub-franchisees as of December 31, 2003.

Number of Units Held by Franchisee	Franchisees	Percent of Total		Restaurants	Percent of Total
One	216	57.0	%	216	21.8	%
Two to Five	129	34.0	%	360	36.3	%
Six to Ten	20	5.2	%	154	15.5	%
Eleven to Fifteen	7	1.9	%	92	9.3	%
Sixteen and over	7	1.9	%	169	17.1	%

Total	379	100.0	%	991	100.0	%

It is our goal to make every dining experience at an IHOP restaurant a satisfying one. Our franchisees and managers of Company-operated restaurants always strive to exceed guests' expectations. We hold firm to the belief that a satisfied guest will be a repeat guest and will tell others about our restaurants. To ensure that our guests' expectations are fulfilled, all restaurants are operated in accordance with uniform operating standards and specifications relating to the quality and preparation of menu items, selection of menu items, maintenance, repair and cleanliness of premises, and the appearance and conduct of employees.

Our Operations Department is charged with ensuring that these high standards are met at all times. We have developed our operating standards in consultation with our franchisee operators. These standards are detailed in our Manual of Standard Operating Procedures.

The Company has established a rating system whereby all IHOP franchisees are evaluated and graded. The evaluation consists of many factors including consultation, mystery shop and health department scores. The franchisee grades are on an "A" through "F" scale. Our Operations Department works closely with all of our operators in order to improve their scores and grades. However, in the cases of "D" and "F" operators, immediate improvement is expected or proactive efforts are undertaken to remove these operators from our system.

Each franchise restaurant is assigned a Franchise Business Consultant and an Operational Assessment Specialist. The Franchise Business Consultant regularly visits an assigned group of restaurants and is responsible for the achievement of budgeted sales, consultation with franchisees regarding financial, operational, marketing, and human resource objectives, including certification of trainers, and development of strategies and tactics for each franchise restaurant. The Operational Assessment Specialist visits each restaurant twice a year and is responsible for conducting operational audits, providing consultation reports, and assessing product quality, quality assurance, equipment, facilities, and management techniques.

We are currently evaluating a plan to close our regional offices and consolidate all of our franchisee and operations support in our Restaurant Support Center ("RSC") in Glendale, CA. The RSC is designed to support our franchisees and restaurant operators. In 2004, the RSC will utilize an automated call center to facilitate its support functions.

Training is ongoing at all IHOP restaurants. A prospective franchisee is required to participate in an extensive training program before he or she is first sold a franchise. The training program involves classroom study and hands-on operational training in one of our regional training restaurants. Each franchisee learns to cook, wait on tables, serve as a host, wash dishes and perform each of the other

tasks necessary to operate a successful restaurant. New restaurant opening teams provide on-site instruction to restaurant employees to assist in the opening of most new IHOP restaurants.

The Company offers additional training courses from time to time on subjects such as suggestive selling, guest service, managing people, and limited time offer promotions.

The IHOP menu offers a large selection of high-quality, moderately priced products designed to appeal to a broad guest base. These include a wide variety of pancakes, waffles, omelets and breakfast specialties, chicken, steak, sandwiches, salads and lunch and dinner specialties. Most IHOP restaurants offer special items for children and seniors at reduced prices. In recognition of local tastes, IHOP restaurants typically offer regional specialties that complement the IHOP core menu. Our Product Research and Development Department works together with franchisees and our Operations and Marketing Departments to continually develop new menu and promotion ideas. These new items are thoroughly evaluated in our test kitchen and in limited regional tests, which include media support from time-to-time, before being introduced throughout the system. The purpose of adding new items is to be responsive to our guests' needs and requests.

The Company maintains an on-going independent Mystery Shop Program. The program is designed to give us a better understanding of how our restaurant teams operate and how we measure against our competitors. As a result, we are able to apply the individual feedback from each mystery shop visit at the restaurant level and work closely with our franchisees to develop a specific action plan to improve each restaurant's performance. We have set benchmark improvement scores against which we will measure future performance.

In 2004, we plan to conduct approximately four mystery shops per quarter in each of our restaurants.

Most IHOP franchisees and Company-operated restaurants contribute 2% of sales to local advertising cooperatives. The advertising co-ops use these funds to purchase television advertising time, radio advertising time and place advertisements in printed media or direct mail. In addition to television advertising, IHOP encourages other local marketing by its franchisees. These marketing programs often include discounts and specials aimed at increasing guest traffic and encouraging repeat business.

In 2003, we devoted a substantial portion of our advertising budget to national television advertising, in recognition of the national scope of the chain and the economies of scale available to national advertisers. We implemented new promotional media advertising and recommended pricing strategies for five different promotions, including the launch of a new advertising campaign supported by our first utilization of network television media, and achieved a system-wide same-store sales growth of 4.8% for the year.

In 2004, we plan to launch six different product promotions, three of which will be advertised on national network television. Building upon the strength of our breakfast offerings, we will include new breakfast offerings and an increased focus on lunch and dinner promotions. We will continue to use our very successful "Come hungry. Leave happy." advertising campaign. With the additions of a third period of network advertising and limited time offers unique to IHOP, we expect to continue to drive increased same-store sales throughout our system.

IHOP has entered into supply contracts for pancake mixes and pricing agreements for most major products carried in IHOP restaurants to ensure the availability of quality products at competitive prices. We also have negotiated agreements with food distribution companies to limit markups charged on food and restaurant supplies purchased by individual IHOP restaurants. In some instances, the Company is required to enter into commitments to purchase food and other items on behalf of the IHOP system as a whole. At December 31, 2003, our outstanding purchase commitments were $2.4 million. The Company has developed processes to facilitate the liquidation of these commitments to minimize financial exposure.

The restaurant business is highly competitive and is affected by, among other things, changes in eating habits and preferences, local, regional and national economic conditions, population trends and traffic patterns. The principal bases of competition in the industry are the type, quality and price of the food products served. Additionally, restaurant location, quality and speed of service, advertising, name identification and attractiveness of facilities are important.

The acquisition of sites is also highly competitive. Our system is often competing with other restaurant chains and retail businesses for suitable sites for the development of new restaurants.

Foodservice chains in the United States include the following segments: quick-service sandwich, chicken, pizza, fast casual, family restaurant, casual dining, dinner house, buffet, hotel restaurant and contract/catering. Differentiated chains competing within their segments against each other and local, single-outlet operators characterize the current structure of the U.S. restaurant and institutional foodservice market.

Information published in 2003 by The Nations Restaurant News ranked IHOP 27^th out of the top 100 foodservice chains based on estimated fiscal 2003 system-wide sales in the United States. The same publication included 10 family restaurant chains in its top 100 chains, and IHOP ranked second in this segment based on system-wide sales.

The Company also competes against other franchising organizations for new franchise developers.

We have registered our trademarks and service marks with the United States Patent and Trademark Office. These include "International House of Pancakes," "IHOP" and variations of each, as well as "The Home of the Never Empty Coffee Pot," "Rooty Tooty Fresh "N Fruity," and "Harvest Grain "N Nut." We also register new trademarks and service marks from time to time. We are not aware of any infringing uses that could materially affect our business or any prior claim to these marks that would prevent us from using or licensing the use thereof for restaurants in any area of the United States. We have also registered our trademarks and service marks and variations thereof in Canada for use by our current licensees. Where feasible and appropriate, we register our trademarks and service marks in other nations for future use. Our current registered trademarks and service marks will expire, unless renewed, at various dates from 2004 to 2012. We generally apply to renew our active trademarks prior to their expiration.

IHOP's business, like that of most restaurant companies, is somewhat seasonal. Our restaurants generally experience greater guest traffic and sales in the summer months and during various holidays when children are out of school and family vacations are more frequent. Restaurants located in certain

resort areas and warm weather climates tend to experience greater guest traffic and sales in the winter months.

IHOP is subject to various federal, state and local laws affecting our business as well as a variety of regulatory provisions relating to zoning of restaurant sites, sanitation, health and safety. As a franchisor, we are subject to state and federal laws regulating various aspects of franchise operations and sales. These laws impose registration and disclosure requirements on franchisors in the offer and sale of franchises. In certain cases, they also apply substantive standards to the relationship between franchisor and franchisee, including primarily defaults, termination, non-renewal of franchises, and the potential impact of new IHOP restaurants on sales levels at existing IHOP restaurants. Environmental requirements have not had a material effect on the operations of our Company-operated restaurants or the restaurants of our franchisees.

Various federal and state labor laws govern our relationships with our employees. These include such matters as minimum wage requirements, overtime and other working conditions. Significant additional government-imposed increases in minimum wages, paid leaves of absence, mandated health benefits or increased tax reporting and tax payment requirements with respect to employees who receive gratuities could, however, be detrimental to the economic viability of franchisee-operated and Company-operated IHOP restaurants.

At December 31, 2003, we employed 2,379 persons, of whom 266 were full-time, non-restaurant, corporate personnel.

The table below shows the location and status of the 1,165 IHOP restaurants as of December 31, 2003:

Location	Franchise	Company- Operated	Area License	Total
*United States*
Alabama	14	3	0	17
Alaska	1	0	0	1
Arizona	27	0	0	27
Arkansas	9	0	0	9
California	212	3	0	215
Colorado	29	1	0	30
Connecticut	8	0	0	8
Delaware	2	0	0	2
Florida	0	0	129	129
Georgia	48	1	1	50
Hawaii	1	0	0	1
Idaho	7	0	0	7
Illinois	42	2	0	44
Indiana	6	3	0	9
Iowa	8	0	0	8
Kansas	11	0	0	11
Louisiana	14	0	0	14
Maine	1	0	0	1
Maryland	27	1	0	28
Massachusetts	13	0	0	13
Michigan	10	7	0	17
Minnesota	8	0	0	8
Mississippi	7	1	0	8
Missouri	22	0	0	22
Montana	1	0	0	1
Nebraska	4	1	0	5
Nevada	20	0	0	20
New Hampshire	2	0	0	2
New Jersey	29	3	0	32
New Mexico	9	0	0	9
New York	35	3	0	38
North Carolina	26	3	0	29
North Dakota	1	0	0	1
Ohio	17	0	0	17
Oklahoma	16	0	0	16
Oregon	7	4	0	11
Pennsylvania	13	2	0	15
Rhode Island	1	0	0	1
South Carolina	17	0	0	17
South Dakota	1	0	0	1
Tennessee	22	2	0	24
Texas	141	1	0	142
Utah	16	0	0	16
Virginia	39	0	0	39
Washington	23	3	0	26
West Virginia	2	0	0	2
Wisconsin	9	0	0	9
Wyoming	1	0	0	1
*International*
Canada(1)	12	0	0	12

Totals	991	44	130	1,165

As of December 31, 2003, three of the 44 Company-operated restaurants were located on sites owned by IHOP and 41 were located on sites leased by IHOP from third parties. Of the 991 franchisee-operated restaurants, 63 were located on sites owned by IHOP, 769 were located on sites leased by IHOP from third parties and 159 were located on sites owned or leased by franchisees. All of the restaurants operated by area licensees were located on sites owned or leased by the area licensees.

IHOP's leases with its landlords generally provide for an initial term of 15 to 25 years, with most having one or more five-year renewal options in favor of IHOP. The leases typically provide for payment of rents in an amount equal to the greater of a fixed amount or a specified percentage of gross sales and for payment by IHOP of taxes, insurance premiums, maintenance expenses and certain other costs. Historically, it has been our practice to seek and extend, through negotiation, those leases that expire without renewal options. However, from time to time we choose not to renew a lease or are unsuccessful in negotiating satisfactory renewal terms. When this occurs, the restaurant is closed and possession of the premises is returned to the landlord.

We currently lease our principal corporate offices in Glendale, California under a lease expiring in July 2010. We also lease regional offices in Lyndhurst, New Jersey; Norcross, Georgia; Lombard, Illinois; Dallas, Texas; Portland, Oregon; Fredericksburg, Virginia; and Greenwood Village, Colorado. However, we are currently evaluating a plan to close the regional offices once the Restaurant Support Center becomes fully operational.

IHOP is subject to various claims and legal actions that arise in the ordinary course of business, many of which are covered by insurance. We believe such claims and legal actions, individually or in the aggregate, will not have a material adverse effect on our business or the financial condition, results of operations, or cash flows of the Company.

There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

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

Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "IHP". As of January 31, 2004, there were approximately 7,618 stockholders of record.

The following table sets forth the high and low prices of IHOP's common stock for each quarter of 2003 and 2002 as reported by the NYSE.

In March 2003, the board of directors declared a cash dividend of $.25 per common share, which was paid on May 19, 2003, to stockholders of record as of May 1, 2003. At that time, the board of directors indicated its intention to declare and pay recurring quarterly dividends in the future, subject to the discretion of the board of directors and the Company's earnings, financial condition, cash requirements, future prospects and other factors. The Company has paid regular quarterly dividends of $0.25 per common share since May 2003.

On January 8, 2004, the Company declared a quarterly cash dividend of $0.25 per common share payable February 20, 2004, to stockholders of record as of February 2, 2004.

Financial covenants in the purchase agreements governing our 5.20% senior notes, our 5.88% senior notes, and our 7.42% senior notes; our leasehold mortgage term loans; and our revolving credit agreement limit our ability to pay dividends. As of December 31, 2003, the most restrictive of our covenants with respect to dividends were contained in our leasehold mortgage term loans. These loans required that we maintain a fixed charge coverage ratio of at least 1.35 to 1, with the amount of cash dividends deducted from the numerator used to calculate this ratio. During the fourth quarter of 2003, IHOP violated these affirmative covenants due to the declaration of a quarterly cash dividend in the fourth quarter of 2003. The creditor has issued a waiver for the covenant violation for the fiscal year ended December 31, 2003. Effective March 8, 2004, the leasehold mortgage term loans were amended so that cash dividends would no longer be deducted from the numerator in calculating this ratio. After giving effect to this amendment, the Company's most restrictive covenant requires the Company to maintain a ratio of consolidated debt to total capitalization of 0.5 to 1.0. Under this test, as of December 31, 2003 the Company had $90.4 million in retained earnings available for payment as dividends.

Additional information regarding this item is presented under the caption "Securities Authorized for Issuance Under Equity Compensation Plans" in the proxy statement for our 2004 annual meeting of stockholders and is incorporated herein by reference.

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

The following discussion and analysis provides information we believe is relevant to an assessment and understanding of IHOP's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto. Certain forward-looking statements are contained in this report. They use such words as "may," "will," "expect," "believe," "plan," or other similar terminology. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to be materially different than those expressed or implied in such statements. These factors include, but are not limited to: risks associated with the implementation of the Company's strategic growth plan; the ability to continue to attract qualified franchisees; availability of suitable locations and terms for the sites designated for development; legislation and government regulation, including the ability to obtain satisfactory regulatory approvals; conditions beyond IHOP's control such as weather, natural disasters or acts of war or terrorism; availability and cost of materials and labor; cost and availability of capital; competition; continuing acceptance of the International House of Pancakes brand and concept by guests and franchisees; IHOP's overall marketing, operational and financial performance; economic and political conditions; adoption of new, or changes in, accounting policies and practices and other factors discussed from time to time in our press releases, public statements and/or filings with the Securities and Exchange Commission. Forward-looking information is provided by us pursuant to the safe harbor established under the Private Securities Litigation Reform Act of 1995 and should be evaluated in the context of these factors. In addition, we disclaim any intent or obligation to update these forward-looking statements.

In January 2003, we announced significant changes in the way we conduct our business. These changes included a transition from Company-financed restaurant development (the "Old Model") to a more traditional franchise development model, in which franchisees finance and develop new restaurants (the "New Model"). It was the Company's intention to complete the transition from Company development to franchisee development by the end of 2003. Due to construction delays, we expect to complete the development and franchising of the final four restaurants under the Old Model in 2004.

Our franchising activities in 2003 included both Company financed and franchisee financed development. For clarity of presentation, the discussion below is separated between those activities specific to the Old Model and those which apply to the New Model.

Under the Old Model, when we develop a restaurant we identify the site for the new restaurant, purchase the site or lease it from a third party, and build the restaurant and equip it with all required equipment. We select and train the franchisee and supervisory personnel who will operate the restaurant. In addition, we typically finance approximately 80% of the franchise fee, and lease the restaurant and equipment to the franchisee. In accordance with GAAP, the equipment lease between the Company and the franchisee is treated as a sale in our financial statements. After the franchisee is operating the restaurant, we provide continuing support with respect to operations, marketing and new product development.

Our involvement in the development of new restaurants allows IHOP to charge a franchise and development fee ranging from $200,000 to $550,000. In addition, we derive income from the financing

of the franchise fee and from the leasing of property and equipment to franchisees. However, we also incur obligations in the development, franchising and start-up operations of the new restaurants.

The franchisee typically pays approximately 20% of the initial franchise fee in cash, and we finance the remaining amount over five to eight years. We also receive continuing revenues from the franchisee as follows: (1) a royalty equal to 4.5% of the restaurant's sales; (2) income from the leasing of the restaurant property and related equipment; (3) revenue from the sale of certain proprietary products, primarily pancake mixes; (4) a local advertising fee equal to about 2% of the restaurant's sales, which is usually collected by IHOP and then paid to a local advertising cooperative; and (5) a national advertising fee equal to 1% of the restaurant's sales. In some cases, we have agreed to accept reduced royalties for a period of time from franchisees in order to assist them in establishing their businesses, where business conditions justify it.

Under the New Model, IHOP's approach to franchising is similar to that of most franchising systems in the foodservice industry. Franchisees can undertake individual store development or multi-store development. Under the single store development program, the franchisee is required to pay a non-refundable location fee of $15,000. If the proposed site is approved for development, the location fee of $15,000 is credited against an initial franchise fee of $50,000. The franchisee then uses his or her own capital and financial resources to acquire the site, build and equip the business and fund working capital needs.

In addition to offering franchises for individual restaurants, the Company offers multi-store development agreements for certain qualified franchisees. These multi-store development agreements provide franchisees with an exclusive right to develop new IHOP restaurants in designated geographic territories for a specified period of time. Multi-store developers are required to develop and operate a specified number of restaurants according to an agreed upon development schedule. Multi-store developers are required to pay a development fee of $20,000 for each restaurant to be developed under a multi-store development agreement. Additionally, for each store which is actually developed, the franchise developer must pay an initial franchise fee of $40,000 against which the development fee of $20,000 is credited. The number of stores and the schedule of stores to be developed under multi-store development agreements is negotiated on an agreement by agreement basis. With respect to restaurants developed under the New Model, the Company receives continuing revenues from the franchisee as follows: (1) a royalty equal to 4.5% of the restaurant's sales; (2) revenue from the sale of certain proprietary products, primarily pancake mixes; (3) a local advertising fee equal to about 2% of the restaurant's sales, which is usually paid to a local advertising cooperative; and (4) a national advertising fee equal to 1% of the restaurant's sales.

While there is no specific profile for franchise candidates, the Company primarily markets franchises to existing operators who currently own and operate one or more restaurants in the IHOP system and meet our operating standards and operators in other non-competing segments of the restaurant business, such as quick service or casual dining restaurants.

IHOP's revenues and expenses are recorded in four categories: Franchise Operations, Rental Operations, Company Restaurant Operations and Financing Operations.

Franchise Operations revenue consists primarily of royalty revenues, sales of proprietary products, advertising fees and the portion of the franchise fees allocated to the Company's intellectual property. Franchise expenses include advertising expense and the cost of proprietary products.

Rental Operations revenue includes revenue from operating leases and interest income from direct financing leases. Rental expenses are costs of operating leases and interest expense on capital leases on franchisee-operated restaurants.

Company restaurant sales are retail sales at IHOP-operated restaurants. Company restaurant expenses are operating expenses at IHOP-operated restaurants and include food, labor and benefits, utilities, rent and other real estate related costs.

Financing Operations revenue consists of the portion of franchise fees not allocated to the Company's intellectual property, sales of equipment as well as interest income from the financing of franchise fee and equipment leases. Financing expenses are primarily the cost of restaurant equipment and interest expense not associated with capital leases.

Beginning in the second quarter of 2003, IHOP changed its methodology for calculating comparable store sales from a 12-month basis to an 18-month basis. Under the new methodology, we compare year over year retail sales of restaurants which have been open continuously for 18 months or more. Prior year information has been restated for ease of comparison. The Company believes this provides a more accurate view of its system's performance by excluding the impact of high sales levels typically seen during the first months of operations at new restaurants. All same-store sales information in this Annual Report on Form 10-K is presented using the 18-month methodology.

The following table summarizes IHOP's restaurant development and franchising activity:

We prepare our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires senior management to make estimates, assumptions and subjective or complex judgments that are inherently uncertain and may significantly impact the reported amounts of assets, liabilities, revenue and expenses during the reporting period. Changes in the estimates, assumptions and judgments affecting the application of these policies may result in materially different amounts being reported under different conditions or using different assumptions. We consider the following policies to be most critical in understanding the judgments that are involved in preparing our Consolidated Financial Statements.

We regularly evaluate our long-lived assets for impairment at the individual restaurant level. Restaurant assets are evaluated for impairment on a quarterly basis or whenever events or circumstances indicate that the carrying value of a restaurant may not be recoverable. We consider factors such as the number of years the restaurant has been operated by the Company, sales trends, cash flow trends, remaining lease life, and other factors which may apply on a case by case basis. These impairment evaluations require an estimation of cash flows over the remaining useful life of the asset.

Recoverability of the restaurant's assets is measured by comparing the assets carrying value to the undiscounted future cash flows expected to be generated over the assets remaining useful life. If the total expected undiscounted future cash flows are less than the carrying amount of the asset, the carrying amount is written down to the estimated fair value, and a loss resulting from impairment is recognized by a charge to earnings. The fair value is determined by discounting the future cash flows based on our cost of capital.

The Company may elect to close certain Company-operated restaurants. Typically such decisions are based on operating performance or strategic considerations. In these instances, we reserve, or write-off, the full carrying value of these restaurants as impaired.

Periodically, the Company will reacquire a previously franchised restaurant. At the time of reacquisition, the franchise will be recorded at the lower of (1) the sum of the franchise receivables and costs of reacquisition, or (2) the estimated net realizable value. The net realizable value of a reacquired franchise is based on the Company's average five-year historical franchise resale value. The historical resale value used for each restaurant in 2003 was $220,000. An impairment loss will be recognized equal to the amount by which the reacquisition value exceeds the historical resale value.

Judgments and estimates made by the Company related to long-lived assets are affected by factors such as economic conditions, changes in franchise historical resale values, and changes in operating performance. As the Company assesses the ongoing expected cash flows and carrying value of its long-lived assets, these factors could cause the Company to realize impairment charges.

We are self-insured for a significant portion of our employee health and workers' compensation obligations. The Company maintains stop-loss coverage with third party insurers to limit its total exposure. The accrued liability associated with these programs is based on our estimate of the ultimate costs to be incurred to settle known claims and claims incurred but not reported as of the balance sheet date. Our estimated liability is not discounted and is based on a number of assumptions and factors, including historical trends, actuarial assumptions and economic conditions. If actual trends, including the severity or frequency of claims, differ from our estimates, our financial results could be impacted.

We estimate certain components of our provision for income taxes. These estimates include, but are not limited to, effective state and local income tax rates, allowable tax credits for items such as work opportunity tax credits, FICA taxes paid on reported tip income, and estimates related to depreciation expense allowable for tax purposes. Our estimates are made based on the best available information at the time that we prepare the provision. All tax returns are subject to audit within the statute of limitations by the federal and state governments, and could be subject to differing interpretations of the tax laws.

applicability of FIN 46 and 46R, the Company is currently evaluating financial information recently received from its franchisees to determine if the Company is the "primary beneficiary" (as such term is defined by FIN 46) which would require consolidation of those franchisees that qualify as variable interest entities. However, FIN 46R does provide relief if, after making an exhaustive effort, the Company is unable to obtain the required financial information from franchisees. The Company is currently evaluating whether it will qualify for this scope exclusion.

In May 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement did not have any impact on our Consolidated Financial Statements. This statement establishes standards for the classification and measurement of certain financial instruments with the characteristics of both liabilities and equity. The adoption of SFAS No. 150 is effective for financial statements issued after May 2003.

IHOP's fiscal year ends on the Sunday nearest to December 31 of each year. For convenience, we report all fiscal years as ending on December 31. Each of the years ended December 31, 2003 and 2002 were comprised of 52 weeks (364 days).

System-wide retail sales include the sales of all IHOP restaurants as reported to IHOP by its franchisees, area licensees and Company-operated restaurants. System-wide retail sales grew by 14.6% or $216.5 million to $1.7 billion in 2003 over the same period in 2002. The growth in system-wide sales was primarily due to an increase in the number of effective restaurants, and a 4.8% increase in comparable restaurant sales. "Effective restaurants" are the number of restaurants in operation in a given fiscal period, adjusted to account for restaurants in operation for only a portion of the fiscal period. Effective restaurants grew by 8.5% from 1,042 to 1,131 in 2003 over 2002 due to new restaurant development. The increase in comparable sales was primarily attributable to new limited time promotions, network advertising, and improved operations of our restaurants.

In 2004, we expect system-wide sales to be in the range of $1.8 billion to $1.9 billion. System-wide sales growth is expected to be driven by the annualized effect of new restaurant openings in 2003, expected new restaurant openings in 2004 and expected improvement in same-store sales. In addition, the anticipated increase in system-wide sales will be due in part to the benefit of a 53^rd week in fiscal 2004. We utilize a weekly fiscal calendar to close our books. In order to align our fiscal year end to the calendar year, we utilize a 53-week fiscal calendar approximately every six years to account for this required adjustment. As such, we will record an additional week of retail sales in fiscal 2004.

Franchise revenues are the revenues received by IHOP from its franchisees and area licensees and include royalties, sales of proprietary products, advertising fees and core franchise fees ("Core Franchise Fees" are the portion of total franchise fees allocable to the license to franchisees to use the Company's intellectual property. Franchise revenues grew by 13.9% from $123.1 million in 2002 to $140.1 million in 2003. Franchise revenues grew primarily due to an increase in franchise restaurant retail sales of 15.9% from $1,278.1 million in 2002 to $1,481.3 million in 2003. The increase in franchise restaurant retail sales was primarily due to a 10.4% increase in the number of effective franchise restaurants from 843 in 2002 to 931 in 2003 and a 4.8% increase in comparable franchise restaurant retail sales from 2002 to 2003.

Franchise expenses consist primarily of advertising and the cost of proprietary products, which are variable in nature and are expected to fluctuate with franchise revenues. Franchise expenses increased

by 16.6% to $64.3 million in 2003 from $55.1 million in 2002. The increase in franchise expenses was primarily a result of the increase in franchise revenues mentioned above. In addition, IHOP contributed $2.0 million in 2003 towards advertising expense compared to $0.8 million in 2002. The additional contribution is consistent with our strategic decisions to strengthen our IHOP brand. In 2004, it is expected that the Company will contribute no more than $1.5 million. In addition, we sometimes offer financial assistance relief for a limited time to certain franchisees whose units are not currently profitable. This short-term subsidy is aimed at minimizing the losses of these franchisees. In 2003, we granted $2.2 million in financial assistance relief to the operators of 38 restaurants as compared to $1.2 million granted to the operators of 28 restaurants in 2002.

Franchise operations profit increased by 11.7% from $67.9 million in 2002 to $75.9 million in 2003.

In the third and fourth quarters of 2003, we refranchised 36 Company-operated restaurants. This was done for both strategic and financial reasons. In order to refranchise many of these restaurants, we lowered royalty rates and accepted reduced franchise fees. Because of these transactions in 2003, we believe that in 2004, our system-wide overall average royalty rate will be approximately 4.3% as compared with 4.4% in 2002.

In 2004, franchise operations segment profit is expected to increase slightly. The increase will be due to increased sales expected at franchise restaurants from annualized restaurant growth in 2003 and new development in 2004. Franchise operations margin is expected to decline in 2004 primarily due to lower royalty rates from refranchised restaurants and lower franchise fees due to a decrease in the number of restaurants we expect to franchise.

Rental revenue includes rental income from operating leases and interest income from direct financing leases. Rental revenues increased by 17.7% to $117.3 million in 2003 from $99.6 million in 2002. The increase in rental income is associated with an increase in the number of operating leases associated with new restaurants. In addition, rent receipts under most leases are tied to sales of the restaurants, and accordingly the increase is also partially due to improved same-store sales.

Rental expenses consist primarily of rental expense associated with operating leases and interest expense on direct financing leases. Rental expenses increased by 17.4% to $86.6 million in 2003 from $73.8 million in of 2002. An increase in rental costs associated with an increase in the number of operating leases, was the primary cause of the increase in rental expense.

Rental operations profit increased by 18.8% from $25.8 million in 2002 to $30.6 million in 2003.

In 2004, rental operations segment profit is expected to increase by approximately 15% due to the anticipated increase in the number of operating leases associated with the refranchising of Company-operated restaurants and the annualized effect of restaurant openings in 2003.

Company restaurant operations revenues are retail sales to guests at restaurants operated by IHOP. Company restaurant operations revenues increased by 0.6% to $74.9 million in 2003 from $74.4 million in 2002. The increase in revenue is primarily due to an increase in average sales per effective Company restaurant of 6.2% partially offset by a 5.3% decrease in the number of effective IHOP-operated restaurants from 76 in 2002 to 72 in 2003. "Effective restaurants" are the number of restaurants in a given fiscal period adjusted to account for restaurants open for only a portion of the period.

Company restaurant expenses include primarily food, labor and benefits, incentives, utilities, rent and other real estate related costs. Company restaurant expenses increased by 4.2% to $81.7 million in 2003 from $78.4 million in 2002. Company restaurant expenses were impacted by higher labor, workers'

compensation, performance incentive, franchise incentive, and transition costs associated with the refranchising of Company-operated restaurants.

Company restaurant operations loss was $6.9 million in 2003, or 71.9% greater than the loss of $4.0 million in 2002.

In 2004, the loss on Company operations will be substantially reduced due to the decrease in the number of Company-operated restaurants as a result of our refranchising efforts. We have also established a separate management team exclusively for Company-operated restaurants. The new Company operations management team is charged with improving revenue and profitability through better operational execution. We believe that this move allows us to more effectively improve the performance of Company-operated restaurants.

The Financing Operations segment consists of the portion of franchise fees not allocated to the Company's intellectual property, sales of equipment as well as interest income from the financing of franchise fee and equipment leases. Finance operations revenues increased by 5.4% to $72.5 million in 2003 from $68.8 million in 2002. The increase in revenues was primarily due to an increase in franchise and equipment notes interest income associated with newly franchised restaurants.

Financing operations costs and expenses are primarily the cost of restaurant equipment and interest expense not associated with capital leases. Finance operations costs and expenses increased by 14.2% to $43.6 million in 2003 from $38.2 million in 2002. This is primarily due to an increase to $5.2 million in 2003 from $916,000 in 2002 in interest expense associated with the senior notes issued in the November 2002 private placement.

Financing operations profit decreased by 5.5% to $28.9 million in 2003 from $30.6 million in 2002. The primary reason for the decrease in finance operations profit was the additional interest expense of $5.2 million discussed above.

In 2004, financing operations profit is expected to decrease significantly due to the planned reduction in the number of units for which we will receive development and financing fees. In 2003, the Company developed and franchised 56 restaurants for which it received development and franchising fees. It is expected that in 2004, the number of transactions for which such fees will be received will decline to four. The elimination of development and financing fees will lead to a margin decline in this segment. This will be partially offset by increased interest income received due to the increased number of restaurants developed in 2003.

General and administrative expenses increased $5.0 million, or 10.2%, from $49.5 million in the twelve months ended December 31, 2002 to $54.6 million in the same period of 2003. The increase in general and administrative expenses was due primarily to higher bonus expense, normal increases in salaries and wages, the mystery shop program and additional costs associated with the new initiatives in the areas of Marketing, Operations, Training, Research and Development, and Information Technology. Corporate bonus which, was based on financial performance, was $3.5 million in 2003. There was no Corporate bonus expense in 2002.

In 2004, we expect that general and administrative expenses will be between $53 million and $58 million in 2004.

Other (income) expense, net, increased by $0.6 million or 11.4%, from $5.4 million in 2002 to $6.1 million in 2003. This is primarily due to an increase in asset impairment losses of $1.7 million from $0.5 million in 2002 to $2.2 million in 2003 on IHOP-operated restaurants, partially offset by an increase in interest income generated primarily from our investments in marketable securities.

In January 2003, the Company adopted a new operating model, moving from Company-developed and financed restaurant growth to franchisee-financed development. As a result, 2003 financial results were impacted by certain transition and reorganization charges. In 2003, we incurred $9.1 million in reorganization charges. $5.5 million of these expenses were related to the write-off of development costs associated with potential sites that we are no longer going to develop as a result of the adoption of our new business model. In addition, we incurred $3.6 million in management consulting, legal fees, severance costs and other expenses. Almost all of the anticipated reorganization charges were incurred in 2003.

Cash and cash equivalents at December 31, 2003 decreased to $28.0 million from $98.7 million at December 31, 2002, primarily due to the purchase of highly liquid marketable securities of $45.5 million.

Marketable securities at December 31, 2003 increased to $45.5 million from zero at December 31, 2002, primarily due to the purchase of short-term investment grade corporate bonds maturing at various dates through December 2004.

Property and equipment, net at December 31, 2003 increased 9.8% to $314.2 million from $286.2 million at December 31, 2002, primarily due to new restaurant development.

Other assets at December 31, 2003 increased to $27.7 million from $16.1 million at December 31, 2002, primarily due to an $11.0 million increase in deferred rent on operating subleases. Rental income on operating subleases is reflected in the income statement on a straight-line basis in accordance with generally accepted accounting principles. Deferred rent on operating subleases is the difference between straight-line rent and the actual amount received. As a result of its franchising efforts in 2003, the Company had an increase of 91 new operating subleases.

Other liabilities at December 31, 2003 increased to $25.8 million from $15.3 million at December 31, 2002, primarily due to a $7.0 million increase in deferred rent on operating prime leases. Rental expense on operating prime leases is reflected in the income statement on a straight-line basis in accordance with generally accepted accounting principles. Deferred rent on operating prime leases is the difference between straight-line rent and the actual amount paid. As a result of its development efforts in 2003, the Company had an increase of 37 new operating prime leases.

Stockholders' Equity: On January 13, 2003, the Company announced that the Board of Directors had authorized the repurchase of up to 2.6 million shares of IHOP Corp. common stock. For the year ended December 31, 2003, the Company repurchased 0.6 million shares of its common stock for a total of $19.4 million. Also, in 2003, the Company began paying a quarterly cash dividend of $.25 per share of common stock. See Note 9 to the Consolidated Financial Statements in this Annual Report on Form 10-K for more details.

Each of the fiscal years ended December 31, 2002 and 2001 were comprised of 52 weeks (364 days).

System-wide retail sales include the sales from all IHOP restaurants as reported to IHOP by its franchisees, area licensees, and Company-operated restaurants. System-wide retail sales grew by 9.9% to $1.48 billion in 2002 over the same period in 2001. Growth in the number of effective restaurants from 970 to 1,042 and increases in average sales per effective restaurant from $1,387,000 to $1,419,000 primarily caused the growth in system-wide retail sales. "Effective restaurants" are the number of restaurants in operation in a given fiscal period, adjusted to account for restaurants in operation for only a portion of the fiscal period. Effective restaurants grew by 7.4% in 2002 over the same period in 2001 due to new restaurant development. Average sales per effective restaurant increased by 2.3% in 2002 over the prior year period. Newly developed restaurants generally have seating capacities and sales greater than the system-wide averages.

Franchise operations revenues are the revenues received by IHOP from its franchisees and include rent, royalties, sales of proprietary products, advertising fees and interest income. Franchise operations revenues grew by 14.3% to $238.4 million in 2002 over the same period in 2001. Franchise operations revenues grew primarily due to an increase in retail sales in franchise restaurants of 11.5% in 2002 over the same period in 2001. Retail sales in franchised restaurants grew primarily due to a 9.9% increase from 767 to 843 in the number of effective franchise restaurants and a 1.5% increase from $1,494,000 to $1,516,000 in average sales per effective restaurant in 2002 over the same period in 2001, respectively.

Franchise operations costs and expenses include facility rent, advertising, the cost of proprietary products, and other direct costs associated with franchise operations. Franchise operations costs and expenses increased by 22.7% to $105.7 million in 2002 from $86.1 million in 2001. The increase in franchise operating costs was primarily a result of the increases in rent expense, due to the increase in the number of effective restaurants.

Sublease transactions with franchisees are structured with little or no margin at inception of the sublease, but with margin improvement anticipated over the life of the lease as retail sales increase (primarily because excess rent provisions in the subleases are tied to retail sales). New unit development will therefore have a negative effect on rent margin percentages. Rent margin percentages decreased from 42.4% in 2001 to 38.3% in 2002.

Franchise operations margin was $132.7 million or 55.7% of franchise operations revenues in 2002, compared with $122.5 million or 58.7% in 2001. The decrease in the margin percentage was primarily due to the increased rent expense mentioned above.

Sales of franchises and equipment increased by 12.8% to $53.0 million in 2002 from $47.0 million in 2001. The increase in sales was primarily due to an 8.1% increase in the sale of IHOP-developed restaurants from 74 in 2001 to 80 in 2002.

Cost of sales of franchises and equipment increased by 13.5% to $35.3 million in 2002 from $31.1 million in 2001. The increase in cost of sales of franchises and equipment was primarily due to changes in the number of restaurants franchised in 2002, compared to the same period in 2001. IHOP franchised 100 restaurants in 2002 as compared to 95 in 2001.

Margin on sales of franchises and equipment was $17.7 million or 33.4% of revenues from sales of franchises and equipment in 2002, compared with $15.9 million or 33.9% in 2001, respectively. The decrease in margin percentage primarily resulted from the mix of units franchised as well as higher preopening costs.

Company operations revenues are retail sales to guests at restaurants operated by IHOP. Company operations revenues increased by 8.2% to $74.4 million in 2002 from $68.8 million in the prior year. Increases in the number of effective IHOP-operated restaurants coupled with the increase in the average sales per IHOP-operated restaurant caused the revenue increase. Effective IHOP-operated restaurants increased from 72 to 76 or 5.6% in 2002 from 2001. Average sales per effective IHOP-operated restaurant increased from approximately $.96 million in 2001 to $.98 million in 2002 or 2.4%.

Company operations costs and expenses include food, labor and benefits, utilities, rent and other real estate related costs. Company operations costs increased by 9.0% to $72.3 million in 2002 from $66.3 million in 2001. Company operations costs increased primarily as a result of the above changes in revenues. However, Company operations costs and expenses were also impacted by higher labor costs primarily due to the hiring of Assistant General Managers in our Company-operated restaurants in 2002.

Company operations margin is Company operations revenues less Company operations costs and expenses. Company operations margin was $2.2 million in 2002, compared to $2.5 million in 2001. Company operations margin percentage was 2.9% of Company operations revenues in 2002, compared with 3.6% in the same period in 2001. Company operations margin was lower in 2002 compared to the same period of 2001 primarily due to higher labor costs.

In assessing the performance of its Company operations, management considers various other costs and expenses not included in Company operations margin. IHOP owns some of the real property of the Company-operated restaurants and internally charges those restaurants market rents. These rent expenses are eliminated in consolidation. The buildings, leasehold improvements and equipment employed in these restaurants are depreciated or amortized in accordance with our policies, and this expense is reflected in the statement of operations as depreciation and amortization. Interest expense related to capital leases on real property of certain Company-operated restaurant leases is also viewed by management as expense related to the Company-operated restaurants, but is included as interest expense in the statement of operations. In addition, employee benefit expenses related to IHOP's employee stock ownership plan ("ESOP") are included in Company operations margin, but are excluded from management's assessment of the performance of Company-operated restaurants.

Intercompany real estate charges were $1.5 million in 2002 and $0.9 million in 2001. Depreciation and amortization expense was $4.5 million in 2002 and $4.2 million in 2001. Interest expense was $2.1 million in 2002 and $2.4 million in 2001. ESOP related costs were $0.5 million in 2002 and $0.5 million in 2001. After reflecting these other costs and expenses (i.e. rent, depreciation and interest) as part of Company operations and excluding ESOP related costs, the loss before income taxes from Company operations was $5.0 million in 2002 compared to $4.4 million in 2001.

Field, corporate and administrative costs and expenses increased by 18.8% to $48.3 million in 2002 from $40.6 million in 2001. The rise in expenses was primarily due to higher consulting, consumer research and compensation expenses. Field, corporate and administrative expenses were 3.3% of system-wide sales in 2002, compared to 3.0% in 2001.

During 2002, the Company engaged consulting firms to assist in evaluating its current business, conducting consumer research, and developing a new long-term strategy. Approximately $2.4 million of costs related to this project were incurred in 2002. Excluding these costs, field, corporate and administrative expenses were 3.1% of system-wide sales in 2002.

IHOP believes that field, corporate and administrative costs and expenses will continue to grow at a rate which exceeds the rate of growth in revenues for at least the next 12 months. The growth in costs and expenses will be aimed at enhancing future earnings and same-store sales growth. After 2003, we expect that the rate of growth in field, corporate and administrative costs and expenses will be less than the growth in revenue.

Depreciation and amortization expense increased by 7.8% to $16.0 million in 2002 from $14.8 million in 2001. The increases were caused primarily by the addition of new restaurants to the IHOP chain from our restaurant development program.

The balance of cash and cash equivalents at December 31, 2002 increased to $98.7 million from $6.3 million at December 31, 2001, primarily due to the funds provided by our $100 million private placement in November 2002.

The balance of property and equipment, net at December 31, 2002, increased 20.2% to $286.2 million from $238.0 million at December 31, 2001, primarily due to new restaurant development.

The balance of long-term receivables at December 31, 2002 increased 8.1% to $332.8 million from $307.9 million in 2001 primarily due to IHOP's financing activities associated with the sales of franchises and equipment. Given our new operating model, we expect our long-term receivables to increase at a lower rate in 2003, and begin to decline in 2004 and thereafter.

The balance of long-term debt increased by 190.3% in 2002 primarily due to the $100 million private placement in November 2002.

In 2003, cash and cash equivalents decreased by $70.7 million or 71.6% from $98.7 million in 2002 to $28 million in 2003. The Company ended the period with $28 million in total cash and cash equivalents and $45.5 million in liquid investments.

Cash provided by operating activities in fiscal 2003 totaled $71.3 million and resulted primarily from net income of $36.8 million, non-cash charges of $32.6 million and other balance sheet changes of $1.9 million. The decrease in prepaid expenses contributed $5.8 million primarily due to the application of income tax overpayments to the current year tax liability. The increase in accrued compensation and benefits contributed $4.3 million due primarily to the accrual of incentive bonuses for 2003. The decrease in accounts payable of $10.2 million reflects the decrease in construction activity at year-end 2003 due to the transition to our new model.

In 2003, we opened 56 IHOP-developed restaurants. We funded total capital additions in 2003 of $80.5 million, which included the cost of the newly-opened restaurants, new equipment for existing restaurants, remodels of existing restaurants, restaurants under construction, and other capital expenditures. This amount is down significantly from the $141.7 million invested for these purposes in 2002.

In January 2003, our Board of Directors approved an increase in our stock repurchase program that permits the purchase of up to 2.6 million shares. During 2003, we repurchased approximately 0.6 million shares of common stock under our stock repurchase program at an aggregate cost of $19.4 million. Depending on market conditions and other factors, these purchases may be commenced or suspended at any time or from time to time without prior notice.

In 2004, capital expenditures are expected to be approximately $10 million to $15 million. These capital expenditures include costs associated with the development of four restaurants under the "Old Model," the development of restaurants in IHOP's new Company operations market in Cincinnati, Ohio and investment in information technology.

The Internal Revenue Service ("IRS") has proposed adjustments in connection with its examination of the Company's 2000 and 2001 federal income tax returns. The proposed adjustments would accelerate the tax years in which the Company reports initial franchise fee income for federal income tax purposes. If the IRS is successful, the Company would be required to report additional income for its 2000 tax year of approximately $45.2 million and additional income for its 2001 tax year of approximately $4.8 million. The Company's federal income tax liability with respect to the proposed adjustments, exclusive of interest, penalties and any related state tax liability, would be approximately $15.8 million for 2000 and $1.7 million for 2001. The Company is currently contesting the proposed adjustments through IRS administrative proceedings.

For the tax years under audit, and potentially for subsequent tax years, such proposed adjustments could result in material cash payments by the Company. The Company had previously recorded in its consolidated financial statements the expected federal and state deferred income tax liability. Therefore, the proposed adjustments relate only to a timing issue. Although the Company cannot determine at this time the resolution of this matter, we do not believe that the proposed adjustments, if upheld, will have a material adverse effect on our financial condition or results of operations.

We expect to fund our liquidity needs, including operating expenses, capital expenditures, the repayment of long-term debt and capital lease obligations, stock repurchases and required income tax payments, from a combination of existing cash balances, cash flows from operating activities and principal receipts from notes and equipment contracts receivable. In 2004, we expect cash from operations of $50 million to $55 million, and principal receipts from notes and equipment contracts receivable of $17 million to $22 million.

As an additional source of liquidity, we have a $25 million line of credit which expires in May 2005. Borrowings under the revolving line of credit agreement bear interest at the bank's reference rate (prime) or, at IHOP's option, at the bank's quoted rate or at a Eurodollar rate. There was no balance outstanding under this agreement at December 31, 2003 nor were there any borrowings under the agreement during the year.

The following table presents the contractual principal receipts on various receivables due from our franchisees as of December 31, 2003.

The above trend primarily reflects the decrease in long-term receivables attributable to the Company's decision to no longer finance the development of restaurants.

The Company does not have any other off-balance sheet arrangements other than the purchase commitments that are disclosed under "Disclosure of Contractual Obligations".

The following are our significant contractual obligations and payments as of December 31, 2003:

The Company is exposed to interest rate risk for its investments in marketable securities. At December 31, 2003, the Company had $45.5 million in marketable securities maturing at various dates through December 2004. The Company's investments are comprised primarily of highly liquid investment grade corporate bonds. The Company generally holds investments until maturity, and therefore should not bear any interest risk due to early disposition. Any premium or discount recognized upon the purchase of an investment is amortized over the term of the investment. At December 31, 2003, the fair value of investments approximated the carrying value.

IHOP is exposed to market risk from changes in interest rates on debt and changes in commodity prices. IHOP's exposure to interest rate risk relates to its $25 million revolving line of credit agreement and its $12 million mortgage term loan with its banks. Borrowings under the revolving line of credit agreement bear interest at the bank's reference rate (prime) or, at IHOP's option, at the bank's quoted rate or at a Eurodollar rate. There was no balance outstanding under this agreement at December 31, 2003 nor were there any borrowings under the agreement during 2003. Borrowings under the mortgage term loan agreement bear interest at the London Interbank Offered Rate ("LIBOR") plus the applicable margin. The applicable margin will be a function of the funded debt to EBITDA ratio as defined under the loan agreement. The impact on our results of operations due to a hypothetical 1% interest rate change would be immaterial.

In March 2002, IHOP entered into a $17.2 million variable rate term loan also included in leasehold mortgage term loans. This loan, which accrues interest at one-month LIBOR, will amortize over twelve years and has a maturity date of April 1, 2014. The outstanding balance as of December 31, 2003, was $15.6 million. The interest rate was 3.66% at December 31, 2003. The lending institution required IHOP to enter into an interest rate swap agreement for 50%, or $8.6 million, of the loan as a means of reducing IHOP's interest rate exposures. This strategy will effectively use an interest rate swap to convert $8.6 million in variable rate borrowings into fixed rate liabilities. The interest rate swap agreement is considered to be a hedge against changes in the amount of future cash flows associated with interest payments on this variable rate loan.

Many of the food products purchased by IHOP and its franchisees and area licensees are affected by commodity pricing and are, therefore, subject to unpredictable price volatility. We attempt to mitigate price fluctuations by entering into forward purchase agreements on all our major products. None of these food product contracts or agreements is a derivative instrument. Extreme changes in commodity prices and/or long-term changes could affect IHOP's franchisees, area licensees and Company-operated restaurants adversely. We expect that in most cases the IHOP system would be able to pass increased commodity prices through to its consumers via increases in menu prices. From time to time, competitive circumstances could limit short-term menu price flexibility, and in those cases margins would be negatively impacted by increased commodity prices. This would be mitigated by the fact that the majority of IHOP restaurants are franchised and IHOP's revenue stream from franchisees is based on the gross sales of the restaurants. We believe that any changes in commodity pricing that cannot be adjusted for by changes in menu pricing or other strategies would not be material to either IHOP's financial condition, results of operations or cash flows.

In some instances, the Company is required to enter into commitments to purchase food and other items on behalf of the IHOP system as a whole. At December 31, 2003, our outstanding purchase commitments were $2.4 million. The Company has developed processes to facilitate the liquidation of these commitments to minimize financial exposure.

		Page Reference
Consolidated Balance Sheets as of December 31, 2003 and 2002		32
Consolidated Statements of Operations for each of the three years in the period ended December 31, 2003		33
Consolidated Statements of Stockholders' Equity for each of the three years in the period ended December 31, 2003		34
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2003		35
Notes to the Consolidated Financial Statements		36
Report of Independent Auditors		54

IHOP Corp. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share amounts)

IHOP Corp. and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share amounts)

IHOP Corp. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(In thousands, except share amounts)

IHOP Corp. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

IHOP Corp. and its subsidiaries ("IHOP" or the "Company") engage exclusively in the food-service industry, primarily in the United States, wherein we franchise and operate restaurants. In January 2003, we announced significant changes in the way we conduct our business. These changes included a transition from Company financed restaurant development (the "Old Model") to a more traditional franchise development model, in which franchisees finance and develop new restaurants (the "New Model").

The consolidated financial statements include the accounts of IHOP Corp. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

IHOP's fiscal year ends on the Sunday nearest to December 31 of each year. For convenience, we report all fiscal years as ending on December 31 and fiscal quarters as ending on March 31, June 30 and September 30.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires IHOP management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. They also affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

IHOP at times purchases highly liquid, investment-grade securities with an original maturity of three months or less. These cash equivalents are stated at cost which approximates market value. We do not believe that we are exposed to any significant credit risk on cash and cash equivalents. At times, cash and cash equivalent balances may be in excess of FDIC insurance limits.

Investment securities consist primarily of short-term investment grade corporate bonds with maturities of 12 months or less that are classified as "held-to-maturity" and carried at amortized cost which approximates fair value.

Inventories consisting of merchandise and supplies are stated at the lower of cost (on a first-in, first-out basis) or market.

Property and equipment are stated at cost and depreciated on the straight-line method over the estimated useful lives as follows:

Category		Depreciable Life
Buildings and improvements		Shorter of lease term or 40 years
Leaseholds and improvements		Shorter of lease term or 3—25 years
Equipment and fixtures		3—10 years
Properties under capital lease		Primary lease term

Leaseholds and improvements are amortized over a period not exceeding the primary term of the lease.

We regularly evaluate our long-lived assets for impairment at the individual restaurant level. Restaurant assets are evaluated for impairment on a quarterly basis or whenever events or circumstances indicate that the carrying value of a restaurant may not be recoverable. We consider factors such as the number of years the restaurant has been operated by the Company, sales trends, cash flow trends, remaining lease life, and site specific considerations which may apply on a case by case basis. These impairment evaluations require an estimation of cash flows over the remaining useful life of the asset.

Recoverability of a restaurant's assets is measured by comparing the assets carrying value to the undiscounted future cash flows expected to be generated over the assets remaining useful life. If the total expected undiscounted future cash flows are less than the carrying amount of the asset, the carrying amount is written down to the estimated fair value, and a loss resulting from impairment is recognized by a charge to earnings. The fair value is determined by discounting the future cash flows based on our cost of capital.

Periodically, the Company will reacquire a previously franchised restaurant. At the time of reacquisition, the franchise will be recorded at the lower of (1) the sum of the franchise receivables and costs of reacquisition, or (2) the estimated net realizable value. The net realizable value of a reacquired franchise is based on the Company's average five-year historical franchise resale value. The historical resale value used in 2003 was $220,000. An impairment loss will be recognized equal to the amount by which the reacquisition value exceeds the historical resale value.

In June 2001, Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," were issued and are effective for fiscal years beginning after December 15, 2001. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. As a result, the Company's amortization of goodwill in the amount of $107,000 ($67,000 net of income taxes) per quarter ceased effective January 1, 2002. Upon adoption of SFAS No. 142, the Company was required to reassess the useful lives of its other intangible assets as well as perform a transitional impairment test of indefinite-lived intangible assets. Since the Company does not have any intangible assets other than goodwill, the adoption of the provisions of the statement affecting other intangible assets had no impact on the Company's financial position, results of operations or cash flows.

Also, in connection with the adoption of SFAS No. 142, the Company was required to carry out a transitional goodwill impairment evaluation, which required an assessment of whether there was an indication that goodwill was impaired as of the date of adoption. Initially, the Company identified its reporting units and determined the carrying value of each reporting unit by assigning the assets and liabilities (excluding goodwill) to those reporting units as of the date of adoption. All existing goodwill at the date that SFAS No. 142 was adopted is assigned to one or more reporting units in a reasonable and supportable manner as prescribed by the standard.

During the second quarter of 2002, the Company completed its transitional goodwill impairment evaluation, and determined that none of the recorded goodwill was impaired. In accordance with SFAS No. 142, goodwill is tested for impairment at least annually and more frequently if circumstances indicate that it may be impaired.

IHOP's revenues and expenses are recorded in four categories: franchise operations, rental operations, Company restaurant operations and financing operations.

The Franchise Operations segment consists primarily of royalty revenues, sales of proprietary products, advertising fees and the portion of the franchise fees allocated to the Company's intellectual property. Rental revenue includes revenue from operating leases and interest income from direct financing leases. Company restaurant sales are retail sales at IHOP-operated restaurants. The Financing

Operations segment consists of the portion of franchise fees not allocated to the Company's intellectual property, of sales of equipment as well as interest income from the financing of franchise fee and equipment leases.

Sales by Company-operated restaurants are recognized on a cash basis. Revenues from franchised and area licensed restaurants include continuing rent and service fees and initial franchise fees. Continuing fees are recognized in the period earned. Initial franchise fees are recognized upon the opening of a restaurant, which is when the Company has performed substantially all initial services required by the franchise agreement. Fees from Development Agreements are deferred and recorded into income when a restaurant under the Development Agreement is opened.

The Company leases the majority of its restaurants with the exception of those where a franchisee enters into a lease directly with a landlord, those associated with area license agreements or those where IHOP owns the land. The leased restaurants are either sublet to franchisees or operated by IHOP. IHOP's leases generally provide for an initial term of 15 to 25 years, with most having one or more five-year renewal options in favor of the Company. The rental payments or receipts on those property leases that meet the capital lease criteria will result in the recognition of interest expense or interest income and a reduction of capital lease obligation or financing lease receivable. Capital lease obligations are amortized based on IHOP's incremental borrowing rate and direct financing leases are amortized using the implicit interest rate. Assets under capital leases are included in Property, Plant, and Equipment and are depreciated over the shorter of their useful lives or the life of the lease. The rental payments or receipts on leases that meet the operating lease criteria are recorded as rental expense or rental income. Rental expense and rental income for these operating leases are recognized on a straight-line basis over the original terms of the leases. The difference between straight-line rent expense or income is reflected in the balance sheet as deferred rent.

Expenditures related to the opening of new restaurants, other than those for capital assets, are charged to expense when incurred.

Advertising expenses included in Company Restaurant Operations and Franchise Operations for the years ended December 31, 2003, 2002 and 2001 were $5.1 million, $3.8 million and $3.6 million, respectively. In addition, significant advertising expenses are also incurred by franchisees through local advertising cooperatives and a national advertising fund.

Deferred income taxes are determined using the liability method. A deferred tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates that are expected to be in effect when these differences reverse. Deferred tax expense is the result of changes in the deferred tax asset or liability. If necessary, valuation allowances are established to reduce deferred tax assets to their expected realizable values.

Basic net income per share is computed by dividing the net income attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income attributable to common stockholders by the weighted average number of common and common equivalent shares outstanding during the period. Common share equivalents included in the diluted computation represent shares issuable upon assumed exercises of outstanding stock options using the treasury stock method.

Comprehensive income includes net income and other comprehensive income components which, under GAAP, bypass the income statement and are reported in the balance sheet as a separate component of stockholders' equity. As of December 31, 2003, our swap liability was $0.9 million. In 2003, the Company had other comprehensive income of $135,000 due to an interest rate swap that the Company entered into during 2002. In 2002, the Company had other comprehensive losses of $680,000 due to this swap agreement. For the period ended December 31, 2001, IHOP had no other comprehensive income components, as defined by GAAP. As a result, net income is the same as comprehensive income for the year ended December 31, 2001.

In accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," we have elected to account for our stock-based employee compensation plans under the intrinsic value method which requires compensation expense to be recorded only if, on the date of grant, the current market price of the Company's common stock exceeds the exercise price the employee must pay for the stock. The Company's policy is to grant stock options at the fair market value of the underlying stock at the date of grant.

Had compensation cost for IHOP's stock option plans been determined based on the fair value at the grant date for awards during each of the three years in the period ended December 31, 2003, consistent with the provisions of SFAS No. 123, IHOP's net income and diluted net income per share would have been reduced to the pro forma amounts indicated below:

	2003			2002			2001
	(In thousands, except per share amounts)
Net income, as reported	$	36,782		$	40,848		$	40,288
Add stock-based compensation expense included in reported net income, net of tax		118			144			—
Less stock-based compensation expense determined under the fair-value accounting method, net of tax		(1,610	)		(1,532	)		(960	)

Net income, pro forma	$	35,290		$	39,460		$	39,328

Net income per share-diluted, as reported	$	1.70		$	1.92		$	1.94
Net income per share-diluted, pro forma	$	1.63		$	1.86		$	1.89

In 2001, IHOP adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts. During 2001, IHOP purchased natural gas contracts equal to 25% of estimated requirements through December 2002 to limit exposure to market increases in natural gas prices for IHOP-operated restaurants only. These derivative instruments do not qualify under SFAS No. 133 as either a fair value or cash flow hedge. They are valued at fair value with the resultant gain or loss recognized in current earnings. In 2003, we did not purchase any natural gas contracts. The adoption of SFAS No. 133 had no material impact on IHOP's results of operations, financial position or cash flows.

IHOP does not hold or issue financial instruments for trading purposes. The estimated fair values of all cash and cash equivalents, notes receivable and equipment contracts receivable as of December 31, 2003 and 2002, approximated their carrying amounts in the Consolidated Balance Sheets as of those dates. The estimated fair values of notes receivable and equipment leases receivable are based on current interest rates offered for similar loans in our present lending activities.

The estimated fair values of long-term debt are based on current rates available to IHOP for similar debt of the same remaining maturities. The carrying values of long-term debt at December 31, 2003 and 2002 were $139,615,000 and $145,768,000, respectively, and the fair values at those dates were $148,096,000 and $154,162,000, respectively.

Certain reclassifications have been made to prior year information to conform to the current year presentation.

In January 2003, the Financial Accounting Standards Board ("FASB") issued FIN 46, "Consolidation of Variable Interest Entities." FIN 46 establishes a new and far-reaching consolidation accounting model. Although FIN 46 was initially focused on special purpose entities, the applicability of FIN 46 goes beyond such entities and can have applicability to franchise arrangements, regardless of whether the Company has voting or ownership control of such franchisee. In response to a number of comment letters and implementation questions, in December 2003 the FASB issued FIN 46R, which delays the effective date of FIN 46 for certain entities until March 31, 2004, as well as provides clarification regarding franchise considerations and other implementation issues. To determine the applicability of FIN 46 and 46R, the Company is currently evaluating financial information recently received from its franchisees to determine if the Company is the "primary beneficiary" (as such term is defined by FIN 46) which would require consolidation of those franchisees that qualify as variable interest entities. However, FIN 46R does provide relief if, after making an exhaustive effort, the Company is unable to obtain the required financial information from franchisees. The Company is currently evaluating whether it will qualify for this scope exclusion.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement did not have any impact on our Consolidated Financial Statements. This statement establishes standards for the classification and measurement of certain financial instruments with the characteristics of both liabilities and equity. The adoption of SFAS No. 150 is effective for financial statements issued after May 2003.

Marketable securities are classified as "held-to-maturity" and carried at amortized cost which approximates fair value. The following table shows our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2003. There were no marketable securities as of December 31, 2002.

	Less than 12 months
Description of Securities	Fair Value		Unrealized Losses
	(In thousands)
Corporate Bonds	$	45,324	$	(109	)
Other		104		—

	$	45,428	$	(109	)

	2003			2002
	(In thousands)
Accounts receivable	$	28,075		$	31,656
Notes receivable		63,039			57,522
Equipment leases receivable		180,105			158,221
Direct financing leases receivable		131,254			133,804

		402,473			381,203
Less allowance for doubtful accounts		(1,321	)		(1,671	)

		401,152			379,532
Less current portion		(47,116	)		(46,740	)

Long-term receivables	$	354,036		$	332,792

Accounts receivable primarily includes receivables due from franchisees and distributors. Notes receivable include franchise fee notes in the amount of $59,344,000 and $55,571,000 at December 31, 2003 and 2002, respectively. Franchise fee notes are due in equal weekly installments, primarily bear interest averaging 10.27% per annum, and are collateralized by the franchise. The term of an equipment contract coincides with the term of the corresponding restaurant building lease. Equipment contracts are due in equal weekly installments, primarily bear interest averaging 10.84% per annum, and are collateralized by the equipment. Where applicable, franchise fee notes, equipment contracts and building leases contain cross-default provisions wherein a default under one constitutes a default under all. There is not a disproportionate concentration of credit risk in any geographic area.

	2003			2002
	(In thousands)
Land	$	33,060		$	25,857
Buildings and improvements		60,824			46,225
Leaseholds and improvements		223,596			189,870
Equipment and fixtures		15,497			18,506
Construction in progress		4,804			29,983
Properties under capital lease obligations		54,907			43,784

		392,688			354,225
Less accumulated depreciation and amortization		(78,467	)		(67,999	)

Property and equipment, net	$	314,221		$	286,226

Buildings and improvements are structures, and improvements to structures, on land owned by the Company. Leaseholds and improvements are structures, and improvements to structures, on land leased by the Company. Properties under capital lease represent the values of property leased under a capital lease. The value of leased property is recorded at the lower of the fair value of the leased property, or the present value of the minimum lease payments, at the inception of the lease.

Accumulated depreciation and amortization includes accumulated amortization for properties under capital lease obligations in the amount of $9,930,000 and $7,837,000 at December 31, 2003 and 2002, respectively.

Reacquired franchises and equipment held for sale are accounted for on the specific identification basis. At the date of reacquisition, the franchise and equipment are recorded at the lower of (1) the sum of the franchise receivables and costs of reacquisition, or (2) the estimated net realizable value. Pending the sale of such franchise, the carrying value is amortized ratably over the remaining life of the asset or lease and the estimated net realizable value is evaluated in conjunction with our impairment evaluation of long-lived assets. The estimated net realizable value used in 2003 was $220,000 for each franchise held for resale.

	2003			2002
	(In thousands)
Franchises	$	6,341		$	11,370
Equipment		10,284			14,272

		16,625			25,642
Less amortization		(5,875	)		(8,181	)

		10,750			17,461
Less current portion		(1,597	)		(2,619	)

Long-term reacquired franchises and equipment held for sale, net	$	9,153		$	14,842

	2003			2002
	(In thousands)
Senior Notes due November 2008, payable in equal annual installments commencing November 2000, at a fixed interest rate of 7.42%	$	19,445		$	23,333
Senior Notes Series A due October 2012, at a fixed interest rate of 5.88%		5,000			5,000
Senior Notes Series B due October 2012, at a fixed interest rate of 5.20%		95,000			95,000
Leasehold mortgage term loans		25,840			27,496
Other		61			888

Total debt		145,346			151,717
Less current maturities		(5,731	)		(5,949	)

Long-term debt	$	139,615		$	145,768

In 2002, IHOP completed a private placement of $100 million of non-collateralized senior notes in two tranches ($5 million and $95 million) due October 2012. The notes have an average fixed interest rate of 5.234% with annual principal payments of $13.6 million commencing October 2006. Proceeds from the sale of the senior notes were intended to be used to fund capital expenditures for new restaurants and for general corporate purposes.

Included in leasehold mortgage term loans is a loan amount totaling $10.2 million and $10.9 million as of December 31, 2003 and 2002, respectively, due May 2013. The loan is collateralized by certain IHOP restaurants. Borrowings under this loan agreement bear interest at the London Interbank Offered Rate ("LIBOR") plus the applicable margin. The applicable margin will be a function of the funded debt to EBITDA as defined under the loan agreement. This rate was 3.63% and 3.17% at December 31, 2003 and 2002, respectively.

On March 13, 2002, IHOP entered into a $17.2 million variable rate term loan also included in leasehold mortgage term loans. This loan, which accrues interest at one-month LIBOR, will amortize over twelve years and has a maturity date of April 1, 2014. The outstanding balance as of December 31, 2003 was $15.6 million. The interest rate was 3.66% at December 31, 2003. The lending institution required IHOP to enter into an interest rate swap agreement for 50%, $8.6 million, of the loan as a means of reducing IHOP's interest rate exposure. This strategy will effectively use an interest rate swap to convert $8.6 million in variable rate borrowings into fixed rate liabilities. The interest rate swap agreement is considered to be a hedge against changes in the amount of future cash flows associated with interest payments on this variable rate loan. As a result, the interest rate swap agreement is stated at fair value and the related net loss of $0.5 million on this agreement as of December 31, 2003 is reflected in stockholders' equity as a component of comprehensive income (loss).

IHOP has a non-collateralized revolving credit agreement with a bank in the amount of $25 million with a maturity date of May 31, 2004. Borrowings under the agreement bear interest at the bank's reference rate (prime) or, at our option, at the bank's quoted rate or at a Eurodollar rate. A commitment fee of 0.375% per annum is payable on unborrowed funds available under the agreement.

The prime rate was 4.00% at December 31, 2003 and 4.25% at December 31, 2002. There was no outstanding balance under the agreement at December 31, 2003 nor were there any borrowings under the agreement during 2003. There was no outstanding balance at December 31, 2002 and the largest amount outstanding under the agreement during 2002 was $15 million.

	(In thousands)
2004	$	5,731
2005		5,839
2006		19,558
2007		19,732
2008		19,928
Thereafter		74,558

	$	145,346

The Company leases the majority of its restaurants with the exception of those where a franchisee enters into a lease directly with a landlord and those associated with area license agreements. The restaurants are subleased to franchisees or operated by IHOP. These noncancelable leases and subleases consist primarily of land, buildings and improvements.

The following is the Company's net investment in direct financing lease receivables:

	2003			2002
	(In thousands)
Total minimum rents receivable	$	349,224		$	372,893
Less unearned income		(217,970	)		(239,089	)

Net investment in direct financing lease receivables		131,254			133,804
Less current portion		(1,425	)		(1,202	)

Long-term direct financing lease receivables	$	129,829		$	132,602

Contingent rental income for the years ended December 31, 2003, 2002 and 2001 was $29,348,000, $23,393,000 and $21,899,000, respectively.

	2003			2002
	(In thousands)
Total minimum leases receivable	$	430,156		$	373,828
Less unearned income		(250,051	)		(215,607	)

Net investment in equipment leases receivables		180,105			158,221
Less current portion		(5,368	)		(4,960	)

Long-term equipment leases receivable	$	174,737		$	153,261

The following are minimum future lease payments on the Company's noncancelable leases as lessee at December 31, 2003:

	Capital Leases			Operating Leases
	(In thousands)
2004	$	22,537		$	59,152
2005		22,899			58,806
2006		22,904			58,312
2007		22,944			58,785
2008		23,089			58,857
Thereafter		298,599			888,706

Total minimum lease payments		412,972		$	1,182,618

Less interest		(232,152	)

Capital lease obligations		180,820
Less current portion		(3,156	)

Long-term capital lease obligations	$	177,664

The asset cost and carrying amount on IHOP-owned property leased at December 31, 2003, was $88.0 million and $80.3 million, respectively.

The minimum future lease payments shown above have not been reduced by the following future minimum rents to be received on noncancelable subleases and leases of owned property at December 31, 2003:

	Direct Financing Leases		Operating Leases
	(In thousands)
2004	$	18,551	$	83,116
2005		18,774		84,046
2006		18,847		84,773
2007		19,032		85,907
2008		19,294		86,873
Thereafter		254,726		1,554,083

Total minimum rents receivable	$	349,224	$	1,978,798

IHOP has noncancelable leases, expiring at various dates through 2032, that require payment of contingent rents based upon a percentage of sales of the related restaurant as well as property taxes, insurance and other charges. Subleases to franchisees of properties under such leases are generally for the full term of the lease obligation at rents that include IHOP's obligations for property taxes, insurance, contingent rents and other charges. Generally, the noncancelable leases include renewal options. Contingent rent expense for all noncancelable leases for the years ended December 31, 2003, 2002 and 2001 was $2,779,000, $2,713,000 and $2,902,000, respectively. Minimum rent expense for all noncancelable operating leases for the years ended December 31, 2003, 2002 and 2001 was $59,460,000, $50,988,000 and $40,312,000, respectively.

In January 2003, the Company adopted a new operating model, moving from Company-developed and financed restaurant growth to franchisee-financed development. As a result, the 2003 financial results were impacted by certain transition and reorganization charges. For the twelve months ended December 31, 2003, we incurred $9.1 million in reorganization charges. $5.5 million of these expenses were related to the write-off of development costs associated with potential sites that we are no longer going to develop as a result of the adoption of our new business model. In addition, we incurred $3.6 million in management consulting, legal fees, severance costs and other expenses associated with the transition to our new business model. Almost all of the anticipated reorganization charges were incurred in 2003.

In March 2003 the Board of Directors declared a quarterly cash dividend of $.25 per share, paid on May 19, 2003 to stockholders of record on May 1, 2003. Subsequent to this declaration of a quarterly dividend, the Company declared a quarterly cash dividend of $0.25 per common share paid on August 18, 2003 to stockholders of record as of August 1, 2003; and declared a third quarterly cash dividend of $0.25 per common share paid on November 21, 2003 to stockholders of record as of November 3, 2003.

The Stock Incentive Plan (the "1991 Plan") was adopted in 1991 and amended and restated in 1998 to authorize the issuance of up to 3,760,000 shares of common stock pursuant to options, restricted stock, and other long-term stock-based incentives to officers and key employees of IHOP. The 2001 Stock Incentive Plan (the "2001 Plan") was adopted in 2001 to authorize the issuance of up to 1,200,000 shares of common stock. No option can be granted at an option price of less than the fair market value at the date of grant as defined by the Plan. Exercisability of options is determined at, or after, the date of grant by the administrator of both Plans. All options granted under both Plans through December 31, 2003, become exercisable one-third after one year, two-thirds after two years and 100% after three years or immediately upon a change in control of IHOP, as defined by both Plans.

The Stock Option Plan for Non-Employee Directors (the "Directors Plan") was adopted in 1994 and amended and restated in 1999 to authorize the issuance of up to 400,000 shares of common stock pursuant to options to non-employee members of IHOP's Board of Directors. Options are to be granted at an option price equal to 100% of the fair market value of the stock on the date of grant. Options granted pursuant to the Directors Plan vest and become exercisable one-third after one year, two-thirds after two years and 100% after three years. Options for the purchase of shares are granted to each non-employee Director under the Directors Plan as follows: (1) an option to purchase 15,000 shares on February 23, 1995, or on the Director's election to the Board of Directors if he or she was not a Director on such date, and (2) an option to purchase 5,000 shares annually in conjunction with IHOP's Annual Meeting of Stockholders for that year.

On January 13, 2003, the Company announced that the Board of Directors had authorized the repurchase of up to 2.6 million shares of IHOP Corp. common stock. For the twelve months ended December 31, 2003, the Company had cumulatively repurchased 0.6 million shares of its common stock.

Information regarding activity for stock options outstanding under IHOP's stock option plans is as follows:

Shares Under Option	Shares		Weighted Average Exercise Price
Outstanding at December 31, 2000	1,906,563		$	14.59
Granted	323,000			23.64
Exercised	(619,192	)		11.53
Terminated	(22,001	)		17.37

Outstanding at December 31, 2001	1,588,370			17.58
Granted	354,000			28.66
Exercised	(509,004	)		14.93
Terminated	(48,165	)		25.31

Outstanding at December 31, 2002	1,385,201			21.12
Granted	301,750			25.35
Exercised	(588,081	)		17.72
Terminated	(90,827	)		24.20

Outstanding at December 31, 2003	1,008,043		$	24.09

Exercisable at December 31, 2003	479,326		$	21.71

Information regarding options outstanding and exercisable at December 31, 2003 is as follows:

The fair value of each option grant issued during each of the three years in the period ended December 31, 2003, reflecting the basis for the proforma disclosure in Note 1, is estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

	2003	2002			2001
Risk free interest rate	2.63%—3.25%		3.50	%		5.75	%
Expected volatility	37.0%		37.0	%		37.0	%
Dividend yield	0%—3.56%		—			—
Weighted average expected life	5 Years		5 Years			5 Years
Weighted average fair value of options granted	$ 25.35	$	30.25		$	24.18

		Year Ended December 31,
		2003			2002		2001
		(In thousands)
Provision for income taxes:
Current
	Federal	$	15,418		$	11,714	$	13,008
	State and foreign		3,641			2,032		1,494

			19,059			13,746		14,502

Deferred
	Federal		3,876			9,778		8,224
	State		(867	)		965		1,447

			3,009			10,763		9,671

Provision for income taxes		$	22,068		$	24,509	$	24,173

The provision for income taxes differs from the expected federal income tax rates as follows:

	2003		2002		2001
Statutory federal income tax rate	35.0	%	35.0	%	35.0	%
State and other taxes, net of federal tax benefit	2.5		2.5		2.5

Effective tax rate	37.5	%	37.5	%	37.5	%

	2003		2002
	(In thousands)
Differences in capitalization and depreciation and amortization of reacquired franchises and equipment	$	10,826	$	9,137
Differences in capitalization and depreciation and application of cash receipts and disbursements of direct financing leases and capital lease obligations		19,613		15,817
Other		6,919		510

	$	37,358	$	25,464

	2003		2002
	(In thousands)
Differences between financial and tax accounting in the recognition of franchise and equipment sales	$	94,750	$	84,597
Differences between book and tax basis of property and equipment		13,152		6,821
Deferred dividends		3,441		5,022

	$	111,343	$	96,440

In 1987, IHOP adopted a noncontributory Employee Stock Ownership Plan ("ESOP"). The ESOP is a stock bonus plan under Section 401(a) of the Internal Revenue Code. The plan covers IHOP employees who meet the minimum credited service requirements of the plan. Employees whose terms of service are covered by a collective bargaining agreement are not eligible for the ESOP unless the terms of such agreement specifically provide for participation in the ESOP.

The cost of the ESOP is borne by IHOP through contributions determined by the Board of Directors in accordance with the ESOP provisions and Internal Revenue Service regulations. The contributions to the plan for the years ended December 31, 2003, 2002 and 2001 were $2,210,000, $1,998,000 and $1,850,000, respectively. The contribution for the year ended December 31, 2003 will be made in shares of IHOP Corp. common stock.

Shares of stock acquired by the ESOP are allocated to each eligible employee and held by the ESOP. Upon the employee's termination after vesting, or in certain other limited circumstances, the employee's shares are distributed to the employee according to his or her direction.

In 2001, IHOP adopted a defined contribution plan authorized under Section 401(k) of the Internal Revenue Code. The plan covers IHOP employees who meet the minimum credited service requirements of the 401(k) plan. Employees whose terms of service are covered by a collective bargaining agreement are not eligible. Employees may contribute up to 15 percent of their pre-tax covered compensation subject to limitations of the tax code. IHOP Corp. common stock is not an investment option for employees in the 401(k) plan. The administrative cost of the 401(k) plan is borne by IHOP. The Company does not contribute towards the plan.

On December 26, 2001, the Company loaned $1.2 million to its President and Chief Executive Officer. A portion of the loan ($600,000) was a personal loan. Pursuant to the employment agreement signed by the President and Chief Executive Officer in December 2001, this personal loan is interest free and forgiven in annual increments of $100,000. As of December 31, 2003 and 2002 the outstanding balance of this personal loan was $400,000 and $500,000, respectively. The other portion of the loan ($600,000) was an interest free bridge loan used to fund a portion of the down payment on a new home. In early 2002, $490,000 of this loan was repaid and $110,000, which represents the decline in the value of a former residence, was forgiven by the Company, upon the recommendation of the compensation committee of the Board of Directors. As of December 31, 2003 and 2002, the remaining balance of this loan was zero.

IHOP is subject to various claims and legal actions that have arisen in the ordinary course of business. We believe such claims and legal actions, individually or in the aggregate, will not have a material adverse effect on our financial condition, results of operations, or cash flows.

On January 13, 2003 we announced significant changes in the way the Company conducts business. These include a transition from Company-financed restaurant development to a more traditional franchise development model, in which franchisees finance and develop their new restaurants. As a result of the change in IHOP's business model, the Company has also changed the presentation of its segment information. IHOP identifies its operating segments based on the organizational units used by management to monitor performance and make operating decisions. The Franchise Operations segment includes restaurants operated by franchisees and area licensees in the United States and Canada. The Franchise Operations segment consists primarily of royalty revenues, sales of proprietary products, advertising fees and franchise fees. The Rental Operations segment consists of rental income and expense and direct financing lease interest income and capital lease interest expense on restaurants operated by franchisees. The Company Restaurant Operations segment includes Company-operated restaurants in the United States. The Finance Operations segment consists of sales of franchises and equipment as well as interest income from the financing of franchise fee and equipment contract notes.

Prior period segment information has been restated to conform with the current year presentation. Information on segments and a reconciliation to income before income taxes are as follows:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity, and cash flows present fairly, in all material respects, the financial position of IHOP Corp. and its subsidiaries (the "Company") at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Los Angeles, California
February 13, 2004, except for the loan amendment
discussed in Note 6 for which the date is March 8, 2004

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

(a) Disclosure Controls and Procedures. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective.

(b) Internal Control Over Financial Reporting. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Information appearing under the captions "Information Concerning Nominees and Members of the Board of Directors," "Executive Officers of the Company" and "Compliance with Section 16(a) of the Securities Exchange Act" contained in the 2004 Proxy Statement is incorporated herein by reference.

The information regarding the Registrant's audit committee financial experts set forth in the sections entitled "Board Committees and their Functions" and "Report of the Audit Committee" contained in the 2004 Proxy Statement is incorporated herein by reference.

On February 13, 2004, the Nominating and Corporate Governance Committee of the Board of Directors of the Company adopted a Code of Ethics for Chief Executive and Senior Financial Officers, including the Company's principal executive officer, principal financial officer and controller. A copy of the Code of Ethics is available on the Company's web site at www.ihop.com. The Company intends to post on its web site any amendments to, or waivers from, this Code of Ethics within two days of any such amendment or waiver.

Information appearing under the captions "Executive Compensation—Summary of Compensation," "Executive Compensation—Stock Options and Stock Appreciation Rights" and "Executive Officers of the Company—Employment Agreements" contained in the 2004 Proxy Statement is incorporated herein by reference.

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

Information appearing under the captions "Security Ownership of Certain Beneficial Owners and Management" and "Securities Authorized for Issuance under Equity Compensation Plans" contained in the 2004 Proxy Statement is incorporated herein by reference.

Information appearing under the caption "Certain Relationships and Related Transactions" contained in the 2004 Proxy Statement is incorporated herein by reference.

The information contained in the section entitled "Independent Auditor Fees" in the Registrant's definitive Proxy Statement for its 2004 Annual Meeting of Stockholders is incorporated herein by reference.

The following documents are contained in Part II, Item 8 of this Annual Report on Form 10-K:

All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.

Exhibits not incorporated by reference are filed herewith. The remainder of the exhibits have heretofore been filed with the Securities and Exchange Commission and are incorporated herein by reference. Management contracts or compensatory plans or arrangements are marked with an asterisk.

On October 24, 2003, IHOP furnished a Current Report on Form 8-K, dated October 24, 2003, under Item 12 with respect to earnings information for the quarterly period ended September 30, 2003.

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, on this 12^th day of March, 2004.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant, and in the capacities indicated, on this 12^th day of March 2004.

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Delaware (State or other jurisdiction of incorporation or organization)		95-3038279 (I.R.S. Employer Identification No.)
450 North Brand Boulevard, Glendale, California (Address of principal executive offices)		91203-2306 (Zip Code)

	Fiscal Year 2003						Fiscal Year 2002
	Prices						Prices
Quarter	Prices				Dividends Paid		Prices				Dividends Paid
Quarter	High		Low		Dividends Paid		High		Low		Dividends Paid
First	$	25.14	$	20.98		—	$	33.92	$	27.40	—
Second		32.64		22.42	$	0.25		36.46		28.42	—
Third		36.65		31.31		0.25		29.50		23.38	—
Fourth		39.40		32.80		0.25		25.44		21.08	—

			Year Ended December 31,
			2003		2002		2001		2000		1999
			(In thousands, except per share amounts)
Revenues
	Franchise revenues		$	140,131	$	123,050	$	111,129	$	102,624	$	93,081
	Rental income			117,258		99,595		84,037		69,914		60,640
	Company restaurant sales			74,880		74,433		68,810		72,818		70,204
	Financing revenues			72,536		68,796		60,460		57,888		49,310

		Total revenues		404,805		365,874		324,436		303,244		273,235

Costs and expenses
	Franchise expenses			64,265		55,139		48,269		44,699		40,956
	Rental expenses			86,620		73,812		59,882		48,026		41,665
	Company restaurant expenses			81,737		78,422		72,819		76,961		72,380
	Financing expenses			43,619		38,185		33,442		33,998		26,455
	General and administrative expenses			54,575		49,526		41,964		37,991		35,889
	Other (income) expense, net			6,054		5,433		3,599		4,109		3,654
	Reorganization charges			9,085		—		—		—		—

		Total costs and expenses		345,955		300,517		259,975		245,784		220,999

Income before income taxes				58,850		65,357		64,461		57,460		52,236
Provision for income taxes				22,068		24,509		24,173		22,122		20,111

Net income			$	36,782	$	40,848	$	40,288	$	35,338	$	32,125

Net income per share
	Basic		$	1.72	$	1.95	$	1.98	$	1.77	$	1.61

	Diluted		$	1.70	$	1.92	$	1.94	$	1.74	$	1.58

Weighted average shares outstanding
	Basic			21,424		20,946		20,398		20,017		19,983

	Diluted			21,614		21,269		20,762		20,263		20,358

Dividends declared per share(a)			$	..75		—		—		—		—

Dividends paid per share(a)			$	.75		—		—		—		—

Balance Sheet Data (end of period)
	Cash and cash equivalents		$	27,996	$	98,739	$	6,252	$	7,208	$	4,176
	Marketable securities			45,537		—		—		—		—
	Property and equipment, net			314,221		286,226		238,026		193,624		177,743
	Total assets			843,004		819,800		641,429		562,212		520,402
	Long-term debt			139,615		145,768		50,209		36,363		41,218
	Capital lease obligations			177,664		171,170		168,105		167,594		165,557
	Stockholders' equity(a)			382,360		364,389		312,430		259,995		226,480

	Principal Receipts Due By Period
	2004		2005		2006		2007		2008		Thereafter		Total
	(In thousands)
Equipment leases(1)	$	5,368	$	5,806	$	6,220	$	6,342	$	6,338	$	150,031	$	180,105
Direct financing leases(2)		1,425		1,802		2,138		2,534		3,129		120,226		131,254
Franchise notes and other(3)		13,569		11,382		9,927		8,886		7,541		11,734		63,039

Total	$	20,362	$	18,990	$	18,285	$	17,762	$	17,008	$	281,991	$	374,398

		Scheduled Opening of Restaurants by
	Number of Signed Agreements at 12/31/03	2004	2005	2006	2007 and thereafter	Total
Single-store development agreements	11	11	0	0	0	11
Multi-store development agreements	20	21	19	19	67	126

	31	32	19	19	67	137

	Payments Due By Period
Contractual Obligations	Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years		Total
	(in thousands)
Debt excluding capital leases	$	5,731	$	25,397	$	39,660	$	74,558	$	145,346
Operating leases		59,152		117,118		117,642		888,706		1,182,618
Capital leases		22,537		45,803		46,033		298,599		412,972
Purchase commitments		2,416		—		—		—		2,416

Total	$	89,836	$	188,318	$	203,335	$	1,261,863	$	1,743,352

			December 31,
			2003			2002
Assets
Current assets
	Cash and cash equivalents		$	27,996		$	98,739
	Marketable securities			45,537			—
	Receivables, net			47,116			46,740
	Reacquired franchises and equipment held for sale, net			1,597			2,619
	Inventories			556			889
	Prepaid expenses			4,279			10,114

		Total current assets		127,081			159,101

Long-term receivables				354,036			332,792
Property and equipment, net				314,221			286,226
Reacquired franchises and equipment held for sale, net				9,153			14,842
Excess of costs over net assets acquired				10,767			10,767
Other assets				27,746			16,072

		Total assets	$	843,004		$	819,800

Liabilities and Stockholders' Equity
Current liabilities
	Current maturities of long-term debt		$	5,731		$	5,949
	Accounts payable			13,840			24,079
	Accrued employee compensation and benefits			11,962			7,625
	Other accrued expenses			8,924			11,936
	Deferred income taxes			1,760			1,370
	Capital lease obligations			3,156			2,605

		Total current liabilities		45,373			53,564

Long-term debt				139,615			145,768
Deferred income taxes				72,225			69,606
Capital lease obligations				177,664			171,170
Other liabilities				25,767			15,303
Commitments and contingencies (Notes 7 and 13)
Stockholders' equity
	Preferred stock, $1 par value, 10,000,000 shares authorized; no shares issued and outstanding			—			—
	Common stock, $.01 par value, 40,000,000 shares authorized; 2003: 21,994,068 shares issued and 21,389,939 shares outstanding; 2002: 21,427,287 shares issued and 21,279,500 shares outstanding			220			214
Additional paid-in-capital				104,661			90,770
Retained earnings				295,448			274,768
Deferred compensation				(191	)		(434	)
Accumulated other comprehensive loss				(545	)		(680	)
Treasury stock, at cost (2003: 604,129 shares; 2002: 147,787 shares)				(19,443	)		(2,247	)
Contribution to ESOP				2,210			1,998

	Total stockholders' equity			382,360			364,389

	Total liabilities and stockholders' equity		$	843,004		$	819,800

		Common Stock
		Common Stock													Accumulated Other Comprehensive (Loss)
		Shares Issued		Amount		Additional Paid-in Capital			Retained Earnings			Deferred Compensation			Accumulated Other Comprehensive (Loss)			Treasury Stock			Contribution To ESOP			Total
	Balance, December 31, 2000	20,299,091		$	203	$	69,655		$	193,632		$	—		$	—		$	(5,170	)	$	1,675		$	259,995

Net income		—			—		—			40,288			—			—			—			—			40,288
Repurchase of treasury shares		—			—		—			—			—			—			(23	)		—			(23	)
Reissuance of treasury shares to ESOP		—			—		(132	)		—			—			—			1,807			(1,675	)		—
Issuance of shares pursuant to stock plans		619,192			6		7,123			—			—			—			—			—			7,129
Tax benefit from stock options Exercised		—			—		3,191			—			—			—			—			—			3,191
Contribution to ESOP		—			—		—			—			—			—			—			1,850			1,850

	Balance December 31, 2001	20,918,283			209		79,837			233,920			—			—			(3,386	)		1,850			312,430

Net income		—			—		—			40,848			—			—			—			—			40,848
Unrealized (loss) on interest rate swap, net of tax		—			—		—			—			—			(680	)		—			—			(680	)

Comprehensive income																									40,168
Reissuance of treasury shares to ESOP		—			—		711			—			—			—			1,139			(1,850	)		—
Issuance of shares pursuant to stock plans		509,004			5		7,556			—			—			—			—			—			7,561
Tax benefit from stock options Exercised		—			—		2,000			—			—			—			—			—			2,000
Deferred compensation resulting from grant of options		—			—		666			—			(666	)		—			—			—			—
Amortization of deferred Compensation		—			—		—			—			232			—			—			—			232
Contribution to ESOP		—			—		—			—			—			—						1,998			1,998

	Balance, December 31, 2002	21,427,287			214		90,770			274,768			(434	)		(680	)		(2,247	)		1,998			364,389

Net income		—			—		—			36,782			—			—			—			—			36,782
Unrealized gain on interest rate swap, net of tax		—			—		—			—			—			135			—			—			135

Comprehensive income																									36,917
Repurchase of treasury shares		—			—		—			—			—			—			(18,634	)		—			(18,634	)
Reissuance of treasury shares to ESOP		—			—		560			—			—			—			1,438			(1,998	)		—
Issuance of shares pursuant to stock plans		588,081			6		10,256			—			—			—			—			—			10,262
Repurchase and retirement of common stock		(21,300	)		—		—			—			—			—			—			—			—
Tax benefit from stock options Exercised		—			—		3,130			—			—			—			—			—			3,130
Deferred compensation resulting from grant/cancellation of options		—			—		(55	)		—			48			—			—			—			(7	)
Dividends—common stock		—			—		—			(16,102	)		—			—			—			—			(16,102	)
Amortization of deferred Compensation		—			—		—			—			195			—			—			—			195
Contribution to ESOP		—			—		—			—			—			—			—			2,210			2,210

	Balance, December 31, 2003	21,994,068		$	220	$	104,661		$	295,448		$	(191	)	$	(545	)	$	(19,443	)	$	2,210		$	382,360

Range of Exercise Prices	Number Outstanding as of 12/31/2003	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable as of 12/31/2003	Weighted Average Exercise Price
$13.50 - $20.31	263,097	5.13	$	17.33	231,783	$	16.95
$21.06 - $24.00	293,116	8.17	$	23.35	74,034	$	22.03
$24.10 - $28.11	258,332	8.37	$	26.73	121,668	$	26.88
$28.75 - $35.25	193,498	8.45	$	30.90	51,841	$	30.41

$13.50 - $35.25	1,008,043	7.48	$	24.09	479,326	$	21.71

		Franchise Operations		Rental Operations		Company Restaurant Operations			Finance Operations		General and Administrative and Other			Consolidated Total
		(In thousands)
	Year Ended December 31, 2003
Revenues from external customers		$	140,131	$	117,258	$	74,880		$	72,536	$	—		$	404,805
Intercompany real estate charges			—		16,096		1,563			—		(17,659	)		—
Depreciation & amortization			—		4,871		3,937			—		9,817			18,625
Interest expense			—		17,911		1,619			7,364		—			26,894
Reorganization charges			—		—		—			—		9,085			9,085
Income tax expense			—		—		—			—		22,068			22,068
Income (loss) before income taxes			75,866		18,172		(7,763	)		28,917		(56,342	)		58,850
	Year Ended December 31, 2002
Revenues from external customers		$	123,050	$	99,595	$	74,433		$	68,796	$	—		$	365,874
Intercompany real estate charges			—		6,045		1,546			—		(7,591	)		—
Depreciation & amortization			—		6,659		4,490			—		4,818			15,967
Interest expense			—		16,591		2,093			2,891		—			21,575
Income tax expense			—		—		—			—		24,509			24,509
Incomes (loss) before income taxes			67,911		19,738		(5,036	)		30,611		(47,867	)		65,357
	Year Ended December 31, 2001
Revenues from external customers		$	111,129	$	84,037	$	68,810		$	60,460	$	—		$	324,436
Intercompany real estate charges			—		6,083		901			—		(6,984	)		—
Depreciation & amortization			—		5,703		4,157			—		4,958			14,818
Interest expense			—		16,311		2,437			2,359		—			21,107
Income tax expense			—		—		—			—		24,173			24,173
Income (loss) before income taxes			62,860		18,073		(4,447	)		27,018		(39,043	)		64,461

	Revenues		Operating Margin		Net Income		Net Income Per Share— Basic(a)		Net Income Per Share— Diluted(a)
	(In thousands, except per share amounts)
2003
1st Quarter	$	93,991	$	30,864	$	5,963	$	0.28	$	0.28
2nd Quarter		103,284		32,808		10,972		0.51		0.51
3rd Quarter		104,762		33,957		11,044		0.51		0.51
4th Quarter		102,768		30,935		8,803		0.41		0.41
2002
1st Quarter	$	81,540	$	27,706	$	9,756	$	0.47	$	0.46
2nd Quarter		84,859		28,534		9,300		0.44		0.44
3rd Quarter		92,083		30,424		9,838		0.47		0.46
4th Quarter		107,392		33,652		11,954		0.57		0.56

3.1		Restated Certificate of Incorporation of IHOP Corp. (Exhibit 3.1 to Registrant's 2002 Form 10-K is incorporated herein by reference).
3.2		Bylaws of IHOP Corp. (Exhibit 3.2 to Registrant's 2002 Form 10-K is incorporated herein by reference).
3.3		Amendment to the bylaws of IHOP Corp. dated November 14, 2000 (Exhibit 3.3 to Registrant's Form 10-Q for the quarterly period ended March 31, 2001 is incorporated herein by reference).
4.1		Senior Note Purchase Agreement, dated as of November 19, 1992, among IHOP Corp., International House of Pancakes, Inc. ("IHOP, Inc.") and Mutual Life Insurance Company of New York and other purchasers (Exhibit 4.1 to Registrant's 2002 Form 10-K is incorporated herein by reference).
4.2		Senior Note Purchase Agreement, dated as of November 1, 1996, among IHOP, Inc., IHOP Corp. and Jackson National Life Insurance Company and other purchasers (Exhibit 4.2 to Registrant's 2002 Form 10-K is incorporated herein by reference).
4.3		First Amendment to Senior Note Purchase Agreement, dated as of October 28, 2002, among IHOP Inc., IHOP Corp., and Jackson National Life Insurance Company and other purchasers (Exhibit 4.3 to Registrant's 2002 Form 10-K is incorporated herein by reference).
4.4		Revolving line of credit note among International House of Pancakes, Inc., a Delaware Corporation and Wells Fargo Bank, N.A. dated as of June 28, 2001 (Exhibit 4.4 to the Registrant's 2001 Form 10-K is incorporated herein by reference).

4.5		First Amendment to Credit Agreement, dated as of May 31, 2002, among International House of Pancakes, Inc., a Delaware Corporation and Wells Fargo Bank, National Association (Exhibit 4.7 to IHOP Corp.'s Form 10-Q for the quarterly period ended June 30, 2002 is incorporated herein by reference).
4.6		Loan Agreement dated as of April 27, 2001, among IHOP Properties, Inc., International House of Pancakes, Inc., IHOP Corp., IHOP Realty Corp., and Bank of America, N.A. (Exhibit 4.5 to Registrant's 2001 Form 10-K is incorporated herein by reference).
4.7		First Addendum to loan agreement, dated as of March 13, 2002, among IHOP Properties, Inc., International House of Pancakes, Inc., IHOP Corp., IHOP Realty Corp., and Bank of America, N.A. (Exhibit 4.6 to Registrant's Form 10-Q for the quarterly period ended March 31, 2003 is incorporated herein by reference).
4.8		Second Addendum to loan agreement, dated as of October 28, 2002, among IHOP Properties, Inc., International House of Pancakes, Inc., IHOP Corp., IHOP Realty Corp., and Bank of America, N.A. (Exhibit 4.8 to Registrant's 2002 Form 10-K is incorporated herein by reference).
4.9		Note Purchase Agreement, dated as of October 28, 2002, among IHOP Corp., International House of Pancakes, Inc. and AIG Annuity Insurance Company and other purchasers (Exhibit 4.1 to Registrant's Form 10-Q for the quarterly period ended September 30, 2002 is incorporated herein by reference).
4.10		Amended and restated Intercreditor Agreement, dated as of October 28, 2002, among Wells Fargo Bank, N.A., MONY Life Insurance Company and other noteholders (Exhibit 4.10 to Registrant's 2002 Form 10-K is incorporated herein by reference).
4.11		Third Addendum to loan agreement, dated as of March 8, 2004, among IHOP Properties, Inc., International House of Pancakes, Inc., IHOP Corp., IHOP Realty Corp., and Bank of America, N.A.
*10.1		Employment Agreement between IHOP Corp. and Gregg Nettleton dated July 15, 2002 (Exhibit 10.1 to Registrant's 2002 Form 10-K is incorporated herein by reference).
*10.2		Employment Agreement between IHOP Corp. and Mark D. Weisberger (Exhibit 10.3 to Registrant's 2002 Form 10-K is incorporated herein by reference).
*10.3		Employment Agreement between IHOP Corp. and Richard C. Celio (Exhibit 10.4 to Registrant's 2002 Form 10-K is incorporated herein by reference).
*10.4		Agreement between IHOP Corp. and Tom Conforti dated March 25, 2003 (Exhibit 10.5 to Registrant's 2002 Form 10-K is incorporated herein by reference).
*10.5		Employment Agreement between IHOP Corp. and Robin S. Elledge (Exhibit 10.1 to Registrant's Form 10-Q for the quarterly period ended June 30, 2001 is incorporated herein by reference).
*10.6		Employment Agreement between IHOP Corp. and Julia A. Stewart (Exhibit 10.10 to the 2001 Form 10-K is incorporated herein by reference).
10.7		Area Franchise Agreement, effective as of May 5, 1988, by and between IHOP, Inc. and FMS Management Systems, Inc. (Exhibit 10.8 to Registrant's 2002 Form 10-K is incorporated herein by reference).
*10.8		International House of Pancakes Employee Stock Ownership Plan as Amended and Restated as of January 1, 2001 (Exhibit 10.12 to Registrant's 2001 Form 10-K is incorporated herein by reference).

*10.9		Third Amendment to the International House of Pancakes Employee Stock Ownership Plan, dated as of December 30, 2002 (Exhibit 10.10 to Registrant's 2002 Form 10-K is incorporated herein by reference).
*10.10		IHOP Corp. 1994 Stock Option Plan for Non-Employee Directors as Amended and Restated February 23, 1999 (Annex "A" to the IHOP Corp. Proxy Statement for Annual Meeting of Stockholders held on Tuesday, May 11, 1999 is incorporated herein by reference).
*10.11		IHOP Corp. 2001 Stock Incentive Plan (the "2001 Plan") (Appendix "B" to the IHOP Corp. Proxy Statement for the Annual Meeting of Stockholders held on May 15, 2001 is incorporated herein by reference).
*10.12		International House of Pancakes 401(k) Plan (Exhibit 10.15 to the Registrant's 2001 Form 10-K is incorporated herein by reference).
*10.13		IHOP Corp. Executive Incentive Plan effective January 1, 2004.
*10.14		Employment Agreement between IHOP Corp. and Patrick Piccininno dated July 14, 2003 (Exhibit 10.1 to IHOP Corp.'s Form 10-Q for the quarterly period ended September 30, 2003 is incorporated herein by reference).
*10.15		IHOP Corp. 2001 Stock Incentive Plan Non-qualified Stock Option Agreement
11.0		Statement Regarding Computation of Per Share Earnings.
14.0		IHOP Corp. Code of Ethics for Chief Executive and Senior Financial Officers.
21.0		Subsidiaries of IHOP Corp.
23.0		Consent of PricewaterhouseCoopers LLP.
31.1		Certification of CEO pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2		Certification of CFO pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1		Certification of CEO pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of CFO pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

		IHOP CORP.
		By:	/s/ JULIA A. STEWART Julia A. Stewart President and Chief Executive Officer

Name		Title

/s/ JULIA A. STEWART Julia A. Stewart		President, Chief Executive Officer and Director
/s/ THOMAS CONFORTI Thomas Conforti		Chief Financial Officer (Principal Financial Officer)
/s/ A. ALLEN ARROYO A. Allen Arroyo		Controller and Assistant Treasurer (Principal Accounting Officer)
/s/ LARRY ALAN KAY Larry Alan Kay		Chairman of the Board
/s/ H. FREDERICK CHRISTIE H. Frederick Christie		Director
/s/ RICHARD J. DAHL Richard J. Dahl		Director
/s/ FRANK EDELSTEIN Frank Edelstein		Director
/s/ MICHAEL S. GORDON Michael S. Gordon		Director
/s/ NEVEN C. HULSEY Neven C. Hulsey		Director
/s/ CAROLINE W. NAHAS Caroline W. Nahas		Director
/s/ PATRICK W. ROSE Patrick W. Rose		Director