1. Company Information and Significant Accounting Policies Company Information. Choice Hotels International, Inc. (“the Company”) is in the business of hotel franchising. As of December 31, 2000, the Company had franchise agreements with 4,392 hotels open and 703 hotels under development in 43 countries under the following brand names: Comfort, Quality, Econo Lodge, Sleep Inn, Clarion, Rodeway Inn, and MainStay Suites.

Principles of Consolidation and Use of Estimates. The consolidated financial statements include the accounts of Choice Hotels International, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States and require management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Cash and Cash Equivalents. The Company considers all highly liquid investments purchased with a maturity of three months or less at the date of purchase to be cash equivalents.

Capitalization Policies. Major renovations, replacements and interest during construction are capitalized to appropriate property and equipment accounts. Upon sale or retirement of property, the cost and related accumulated depreciation are eliminated from the accounts and the related gain or loss is taken into income. Maintenance, repairs and minor replacements are charged to expense.

Impairment Policy. The Company evaluates the recoverability of long-lived assets, including franchise rights and goodwill, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured based on net, undiscounted expected cash flows. Assets are considered to be impaired if the net, undiscounted expected cash flows are less than the carrying amount of the assets. Impairment charges are recorded based upon the difference between the carrying value of the asset and the expected net cash flows, discounted at an appropriate interest rate.

Deferred Financing Costs. Debt financing costs are deferred and amortized, using the effective interest method, over the term of the related debt.

Investments. The Company accounts for its investments in common stock in accordance with Statements of Financial Accounting Standards (” SFAS”) No. 115 “Accounting for Certain Investments in Debt and Equity Securities” and SFAS No. 130 “Reporting Comprehensive Income.” The Company accounts for its investment in unincorporated joint ventures in accordance with Accounting Principles Board Opinion (“APB”) No. 18 “The Equity Method of Accounting for Investments in Common Stock.”

Revenue Recognition. The Company enters into numerous franchise agreements committing to provide franchisees with various marketing services, a centralized reservation system and limited rights to utilize the Company’s registered tradenames. These agreements are typically for a period of twenty years, with certain rights to the franchisee to terminate after five, ten, or fifteen years. In most instances, initial franchise fees are recognized upon sale because the initial franchise fee is non-refundable and the Company has no continuing obligations related to the franchisee. However, when franchise agreements are entered into which include future potential rebates and/ or incentive payments, the initial franchise fees are deferred and recognized when the incentive criteria are met or the deal is terminated, whichever occurs first. In 2000, ninety-eight franchise agreements were entered into with incentive clauses which resulted in deferred initial franchise fee revenue of $3.3 million. Royalty fees, primarily based on gross room revenues of each franchisee, are recorded when earned. Reserves for uncollectible accounts are charged to bad debt expense and are included in selling, general and administrative expenses in the accompanying consolidated statements of income.