Normally do the apartment thing and eat out all the time. As kids are getting older checked out prices of 2 bedroom apartments for summer 2005, the cost of this in School hols plus say a minimum of £80 per day spends for the fortnight was going to be prohibitive.
Ended up going all inc in Crete, yes we were all cramed in a 'family room' which is a different experience from even a one bed apartment let alone a two bed, but in terms of value for money it was excellent. Only paid a couple of hundred pounds more than I would have for an apartment holiday, but got endless amount of (not bad quality) food and drink included. Guess we might have been lucky with our choice of hotel.
Didn't go stir crazy, hired a car for the odd bit of sight seeing, knossos, shopping etc and had 4 evening meals out and a few lunches.
The key seems to be to do AI when your children are old enough to benefit from all the included food and drink, but before you have to start paying adult prices for them.