CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

  Years Ended December 31,
  2004     2003     2002
  (In thousands, except
  per share amounts)
REVENUES:
   Royalty fees    $ 167,151         $ 151,326         $ 142,943     
   Initial franchise and relicensing fees   20,112     16,799     12,881  
   Partner services   12,524     13,227     11,860  
   Marketing and reservation   221,313     195,420   190,145  
   Hotel operations   3,729     3,565     3,331  
   Other   3,977     5,767     4,402  
      Total revenues   428,806     386,104   365,562  
OPERATING EXPENSES:
   Selling, general and administrative   69,654     62,860     56,520  
   Depreciation and amortization   9,947     11,225     11,251  
   Marketing and reservation   221,313     195,420   190,145  
   Hotel operations   2,892     2,616     2,946  
      Total operating expenses   303,806     272,121   260,862  
Operating income   125,000     113,983   104,700  
OTHER INCOME AND EXPENSES:
   Interest expense   11,605     11,597     13,136  
   Interest and other investment income   (1,093 )    (6,185 )    (4,549 ) 
   Gain on prepayment of note receivable from Sunburst   —     (3,383 )    —  
   Equity in net (income) losses of affiliates   (722 )    (582 )    71  
   Loss on extinguishment of debt   696     —     —  
   Other   (10 )    129     224  
      Total other income and expenses   10,476     1,576     8,882  
Income before income taxes   114,524     112,407     95,818  
Income taxes   40,179     40,544     34,974  
Net income $ 74,345   $ 71,863   $ 60,844  
Weighted average shares outstanding-basic   33,203     35,699     39,333  
Weighted average shares outstanding-diluted   34,500     36,674     40,057  
Basic earnings per share $ 2.24   $ 2.01   $ 1.55  
Diluted earnings per share $ 2.15   $ 1.96   $ 1.52  
Cash dividends declared per share $ 0.85   $ 0.20   $ —  

The accompanying notes are an integral part of these consolidated financial statements.