CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Deferred tax assets (liabilities) are comprised of the following:

No provision has been made for U.S. federal deferred income taxes on approximately $9 million of accumulated and undistributed earnings of foreign subsidiaries at December 31, 2001 since these earnings are considered to be permanently invested in foreign operations

A reconciliation of income tax expense at the statutory rate to income tax expense included in the accompanying consolidated statements of income follows:

A certain amount of the Company’s capital loss carryforwards (which are included in the foreign operations deferred tax asset) are not expected to be realized at this time. Accordingly, a valuation allowance of $12.7 million was established in 2001.

14. Capital Stock

In 2001, the Company granted key employees and non-employee directors 155,515 restricted shares of common stock with a fair value of $2.3 million on the grant date. The shares vest over a three to five year period with 10,015 shares vesting over a three year period and 145,500 shares vesting over a five year period. In 2000, the Company granted key employees and non-employee directors 14,052 restricted shares of common stock with a fair value of $0.2 million on the grant date. The shares vest over a three year period. In 1999, the Company granted key employees and non-employee directors 70,260 restricted shares of common stock with a fair value of $1.0 million on the grant date. The shares vest over a three to five year period with 11,016 shares vesting over a three year period, 32,180 shares vesting over a four year period and 27,064 shares vesting over a five year period. A total of 9,130, 11,850 and 6,150 shares of restricted stock were forfeited in 2001, 2000 and 1999, respectively. The Company incurred compensation expense totaling $0.7 million, $0.8 million and $0.7 million related to the vesting of restricted stock during the years ended December 31, 2001, 2000 and 1999, respectively. The Company has recorded $0.3 million of compensation expense related to the vesting of restricted stock as part of its 2001 restructuring accrual related to 46,064 shares.