2. Property and Equipment

     The components of property and equipment in the consolidated balance sheets are:

	December 31,
		2002			2001
	(In thousands)
Land	$	4,117		$	4,090
Facilities in progress		1,631			735
Building and improvements		35,861			34,210
Furniture, fixtures and equipment		94,691			86,301
		136,300			125,336
Less: Accumulated depreciation		(71,650)			(54,878)
	$	64,650		$	70,458

     As facilities in progress are completed and placed in service, they are transferred to appropriate fixed asset categories and depreciation begins. Depreciation expense, excluding amounts attributable to marketing and reservation activities, for the years ended December 31, 2002, 2001 and 2000 was $5.6 million, $4.6 million and $3.0 million, respectively. Depreciation has been computed for financial reporting purposes using the straight- line method. A summary of the ranges of estimated useful lives upon which depreciation rates is based follows:

3. Goodwill

     Goodwill primarily relates to the excess of the purchase price of the Company's stock in excess of the recorded minority interest acquired. Prior to January 1, 2002, the Company amortized goodwill on a straight-line basis over 40 years. Such amortization amounted to $2.0 million and $2.3 million for the years ended December 31, 2001 and 2000, respectively.

     On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets,"pursuant to which the Company is no longer permitted to amortize goodwill. The impact of the adoption of SFAS No. 142 on net income, basic EPS and diluted EPS for the years ended December 31, 2001 and 2000, as if the adoption had taken place on January 1, 2000 is as follows:

	Years Ended December 31,
		2001			2000
	(In thousands, except per share amounts)
Reported net income	$	14,327		$	42,445
Add back: Goodwill amortization		1,995			2,290
Adjusted net income	$	16,322		$	44,735
Basic earnings per share:
Reported net income	$	0.32		$	0.80
Goodwill amortization		0.05			0.04
Adjusted basic earnings per share	$	0.37		$	0.84
Diluted earnings per share:
Reported net income	$	0.32		$	0.80
Goodwill amortization		0.04			0.04
Adjusted diluted earnings per share	$	0.36		$	0.84

4. Franchise Rights and Other Intangibles

     Franchise rights represent the unamortized purchase price assigned to acquired long-term franchise contracts. As of December 31, 2002 and 2001, the unamortized balance relates primarily to the Econo Lodge and Flag franchise rights. The franchise rights are being amortized over lives ranging from 5 to 15 years. Amortization expense for the years ended December 31, 2002, 2001 and 2000 amounted to $3.1 million, $3.0 million and $3.9 million, respectively. Franchise rights are net of accumulated amortization of $35.1 million and $32.0 million at December 31, 2002 and 2001, respectively. The estimated annual amortization expense related to the Company's franchise rights for 2003 through 2007 is $3.0 million for each of the years then ended.

     Other assets includes approximately $5.1 million and $4.8 million of intangible assets related to trademarks at December 31, 2002 and 2001, respectively. The trademarks are being amortized over ten years. Amortization expense for each of the three years ended December 31, 2002 was $0.4 million. The estimated annual amortization expense related to the Company's trademarks for 2003 through 2007 is $0.3 million for each of the years they ended.

5. Investment in Friendly Hotels

     As of December 31, 2001, the Company had 1,227,622 shares of common stock and 31,097,755 shares of 5.75% convertible preferred stock in Friendly Hotels PLC (currently known as C.H.E. Group PLC) ("Friendly"), the Company's master franchisor for the United Kingdom, Ireland and continental Europe.

     The Company appointed three directors to the board of Friendly giving the Company ability to exercise significant influence over the operations of Friendly. Accordingly, the Company was required to apply the equity method of accounting.

     Friendly holds the master franchise rights for the Company's Comfort, Quality and Clarion brand hotels in the United Kingdom, Ireland and throughout Europe (with the exception of Scandinavia) for a 10-year period. In exchange for granting the master franchise rights to Friendly, the Company received Friendly common stock and was to receive $8.0 million payable in cash in eight equal annual installments from Friendly.

     On January 19, 2001, the shareholders of Friendly approved a capital reorganization intended to provide Friendly with a stronger balance sheet and improve its operations. Pursuant to the capital reorganization, the Company waived certain royalty and marketing fees due from Friendly for the period between December 27, 1999 and December 31, 2005, waived the then five remaining annual installments related to the master franchise agreement and provided Friendly with a ?7.8 million (approximately US $11.4 million) secured letter of credit in consideration for, among other things, a reduction in the conversion price of the Company's convertible preferred shares from 150p to 60p. The letter of credit was secured by substantially all of Friendly's assets in France, valued in excess of ?4.2 million (approximately US $6.1 million). Other modifications to the Company's convertible preferred shares included a change in the dividend rate from 5.75% (payable in cash) to 2% per annum, (payable in additional convertible preferred shares). Friendly was also permitted to elect to pay cash dividends at the rate of 3.5% per annum up until January 13, 2013 and thereafter at the rate of 5.75%. In addition, accrued dividends due to the Company as of February 7, 2001 were converted to additional convertible preferred shares of Friendly. As of December 31, 2001, Friendly had drawn ?5.3 million (approximately US $7.7 million) of the available letter of credit and the balance available on the letter of credit was reduced to ?5.0 million (approximately US $7.3 million) as of January 21, 2002. The letter of credit was terminated on January 28, 2003.

     During 2001, Friendly settled a $4.0 million deferred consideration due to the Company through the issuance of 2,404,013 convertible preferred shares. The effect of the reduction in the conversion price together with the conversion of dividend arrearage to additional convertible preferred shares of Friendly and the settlement of the deferred consideration, both resulting in the issuance of convertible preferred shares, on a fully converted basis, the Company's ownership in Friendly would have been approximately 71%. Due to the restructuring program, the Company recorded equity losses on Friendly of $16.4 million and $12.1 million for the years ended December 31, 2001 and 2000, respectively, in accordance with EITF 99-10, "Percentage Used to Determine the Amount of Equity Method Losses". Mid-year adverse fixed asset valuation adjustments due to a decline in economic conditions and incremental professional fees associated with the reorganization primarily account for the $16.4 million charge in 2001.

     The Company also recognized $1.1 million in royalty revenue from Friendly for the year ended December 31, 2000. The Company waived its royalty fees from Friendly for the periods from 2001 through 2005 as part of Friendly's restructuring. No dividends were accrued during 2001 or 2000.

     The Company owned approximately 5.4% of Friendly's outstanding ordinary shares at December 31, 2001 and 2000. The fair market value of the ordinary shares at December 31, 2001 and 2000 was $0.3 million and $0.7 million, respectively. Summarized unaudited balance sheet data for Friendly is as follows:

	December 31, 2001
	Unaudited (In thousands)
Current assets	$	20,530
Non-current assets		107,744
Current liabilities		59,114
Non-current liabilities		45,573
Preferred stock		23,104
Shareholders’ equity		23,587

     Summarized unaudited income statement data for Friendly is as follows:

	For the Years Ended December 31,
		2001			2000
	Unaudited (In thousands)
Net revenues	$	124,845		$	138,135
Gross profit		69,167			76,032
Loss from continuing operations		(5,023)			(40,193)
Net loss after preferred dividends		(8,036)			(50,640)

     On February 21, 2002, Friendly announced that it had been unable to find an acceptable buyer for its business and would terminate efforts to sell its business. Given this termination and the adverse economic conditions of Friendly, the Company disposed of its entire preferred and common equity interest in Friendly on March 20, 2002, and immediately relinquished its three seats on Friendly's board of directors. Accordingly, the Company wrote-off its entire investment in Friendly through a $22.7 million charge to reflect the permanent impairment of this asset as of December 31, 2001.