Net income for fiscal 2003 increased by 18.1% to $71.9 million, and diluted earnings per share increased 28.9% to $1.96 in 2003 from $1.52 reported for 2002. A portion of the increase in diluted earnings per share is attributable to stock repurchases made by the Company in 2003 and prior years.

Liquidity and Capital Resources

     Net cash provided by operating activities was $107.8 million and $115.5 million for the years ended December 31, 2004 and 2003, respectively. The decrease is attributable to higher payments related to income taxes and lower cash flow from marketing and reservation activities partially offset by improvements in operating results.

     During 2002 and 2001, the Company realigned its corporate structure to increase its strategic focus on delivering value-added services and support to franchisees, including centralizing the Company’s franchise service and sales operations, consolidating its brand management functions and realigning its call center operations. The Company recorded a $1.6 million restructuring charge in 2002 of which approximately $0.9 million and $0.4 million was paid in 2003 and 2002, respectively. Approximately $0.3 million of the expense was related to stock compensation for severed employees and was credited directly to additional paid-in capital. The restructuring was initiated and completed in 2002. The Company recorded a $5.9 million restructuring charge in 2001 of which approximately $0.9 million of the expense was related to stock compensation for severed employees and was credited directly to additional paid-in capital. Through December 31, 2002 the Company paid $4.4 million and during 2003 the Company paid an additional $0.5 million related to this restructuring. As a result of these payments, the Company’s obligations related to the 2001 restructuring were satisfied and approximately $0.1 million was recorded as a reduction of selling, general and administrative expense in 2003. As of December 31, 2003, the Company’s obligations related to the 2002 and 2001 restructurings were satisfied resulting in no liability remaining at December 31, 2003. The restructuring charges for 2002 and 2001 are included in selling, general and administrative expenses in the accompanying consolidated statements of income.

     Net cash repayments related to marketing and reservation activities totaled $19.7 million during the year ended December 31, 2004, compared to net repayments of $24.7 million during the year ended December 31, 2003. The decline in cash flows from marketing and reservation activities is attributable to an increase in advertising and promotional costs during the year. The Company expects marketing and reservation activities to generate positive cash flows of between $18.0 million and $21.0 million in 2005.

     Cash provided by (used in) investing activities for the years ended December 31, 2004, 2003 and 2002 was ($13.7 million), $27.8 million and ($14.7 million), respectively. As a lodging franchisor, Choice has relatively low capital expenditure requirements. During the years ended December 31, 2004, 2003 and 2002, capital expenditures totaled $6.9 million, $8.5 million, and $12.2 million, respectively. Capital expenditures include the installation of system-wide property and yield management systems, upgrades to financial and reservation systems, computer hardware and renovations to the Company’s corporate headquarters. During 2003, the Company received a cash payment of $44.7 million from Sunburst related to the prepayment of a note receivable due to the Company. During 2003, approximately $4.5 million of interest income related to this note was included in net income. As a result of the prepayment, no interest income related to this note will be realized in future periods.

     Financing cash flows relate primarily to the Company’s borrowings under its credit lines, treasury stock purchases and dividends. In June 2001, the Company entered into a five-year $265 million competitive advance and multi-currency credit facility (“Old Credit Facility”). The Old Credit Facility provided for a term loan of $115 million and a revolving credit facility of $150 million. The term loan was scheduled to partially amortize over the three years ending June 30, 2006. The unamortized balance of the term loan and all outstanding revolving loans were scheduled to mature in June 2006. Borrowings under the Old Credit Facility bore interest at one of several rates, at the option of the Company, including LIBOR plus .60% to 2.0%, based upon the credit rating of the Company and the loan type. The Old Credit Facility required the Company to pay annual fees ranging, based upon the credit rating of the Company, between 1/15 of 1% to 1/2 of 1% of the aggregate available commitment under the revolving credit facility.