CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	Years Ended December 31,
	2004				2003				2002
	(In millions, except per
	share amounts)
Net income, as reported	$	74.3		$	71.9		$	60.8
Stock-based employee compensation expense included in reported net
income, net of related tax effects		2.2			1.4			1.2
Total stock-based employee compensation expense determined under
fair value method for all awards, net of related tax effects		(3.5	)		(2.9	)		(3.8	)
Pro forma, net income	$	73.0		$	70.4		$	58.2
Earnings per share:
Basic, as reported	$	2.24		$	2.01		$	1.55
Basic, pro forma	$	2.20		$	1.97		$	1.48
Diluted, as reported	$	2.15		$	1.96		$	1.52
Diluted, pro forma	$	2.12		$	1.92		$	1.45

Notes Receivable.

     From time to time, the Company provides financing to franchisees for property improvements and other purposes in the form of interest free notes. The terms of the notes range from 3 to 10 years and are forgiven and amortized over that time period if the franchisee remains in the system in good standing. As of December 31, 2004 and 2003, other non-current assets included $8.7 million and $7.6 million, respectively, net of allowance, related to the unamortized balance of these notes. As of December 31, 2004 and 2003, other non-current assets include an allowance for doubtful accounts related to these notes of $0.9 million and $0.8 million, respectively. Amortization expense included in the accompanying consolidated statements of income related to the notes was $1.2 million, $0.8 million and $0.4 million for the years ended December 31, 2004, 2003 and 2002, respectively.

Income Taxes.

     The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”. Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or income tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

     The Company does not provide additional United States income taxes on undistributed earnings of consolidated foreign subsidiaries included in retained earnings. Such earnings could become taxable upon the sale or liquidation of these foreign subsidiaries or upon dividend repatriation. The Company’s intent is for such earnings to be reinvested by the subsidiaries or to be repatriated only when required for domestic business operations, tax or cash reasons. On October 22, 2004, the American Jobs Creation Act of 2004 (“AJCA”) was signed into law. The AJCA creates a temporary incentive for United States multinational corporations to repatriate accumulated income of foreign subsidiaries by providing an 85 percent dividends received deduction for qualifying dividends from controlled foreign corporations. In December 2004, the Financial Accounting Standards Board (“FASB”) issued a FASB Staff Position (“FSP”) regarding “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the AJCA” (“FSP 109-2”). FSP 109-2 allows the Company time beyond the fourth quarter of 2004, the period of enactment, to evaluate the effect of the AJCA on our plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. We have begun an evaluation of the effects of the repatriation provision and expect to complete the analysis prior to the end of the third quarter of 2005.