Choice Hotels International, Inc. and Subsidiaries

The Company has entered into an interest rate swap agreement with a notional amount of $115 million at December 31, 1999, to fix certain of its variable rate debt in order to reduce the Company’s exposure to fluctuations in interest rates. The interest rate differential to be paid or received on the interest rate swap agreement is accrued as interest rates change and is recognized as an adjustment to interest expense. At December 31, 1999, the interest rate swap agreement had a remaining life of approximately two months with a fixed rate of 5.85% and a variable rate at December 31, 1999 of 6.12%.

As of December 31, 1999, the Company had repurchased 7.5 million shares of its common stock at a total cost of $107.4 million. On February 7, 2000 the Company received authorization from its Board of Directors to repurchase up to an additional 5 million shares.

The Company believes that cash flows from operations and available financing capacity are adequate to meet the expected operating, investing, financing and debt service requirements for the business for the immediate future.

Year 2000 Compliance

The Company has materially remedied the Year 2000 computer problem shared by virtually all companies and businesses. Initially, this Year 2000 problem was associated with two-digit date codes used in many computer programs and embedded chip systems. As an on-going effort, the Company continues to monitor its systems as well as third party vendors and franchisees.

The Company’s exposure to potential Year 2000 problems existed in two general areas: technological operations in the sole control of the Company and technological operations dependent in some way on one or more third parties. With respect to the Company’s internal systems, no material Year 2000 problems have occurred. The Company previously conducted Year 2000 compliance testing on all of its proprietary software, including its reservations and reservations support systems, its franchise support system and its franchisee property management support systems. Except for two DOS based systems, the proprietary software is Year 2000 compliant. The DOS version of ChoiceLINKS is not Year 2000 compliant and the DOS version of the Company’s property management system is only compliant through December 31, 2000. The Company has communicated this to franchisees using these systems and has recommended that they migrate to the Windows based versions of these systems, which are Year 2000 compliant. As of February 7, 2000, 100% have migrated to the Windows version of ChoiceLINKS and 100% have migrated to the Windows version of the Company’s property management system.

The Company’s inventory of third party software, including PC operating systems and word processing and other commercial software, did not disclose any material compliance issues.

During 1999, the Company’s Year 2000 Compliance Committee identified third party vendors and service providers whose non-compliant systems could have a material impact on the Company and undertook an assessment as to such parties’ compliant status. These parties included airline global distribution systems (GDS), utility providers, telephone service providers, banks and data processing services. The GDS companies, which provide databases through which travel agents can book hotel rooms, have assured the Company in writing that they are compliant and the Company conducted tests with three of the four major GDS companies. As of February 7, 2000, no material Year 2000 problems have been experienced with the GDS companies and other third parties. Throughout 2000, the committee will continue to monitor all of its material vendors.

Costs of addressing potential Year 2000 problems have not been material to date. The value of employee time devoted to testing and development has been approximately $400,000 over the past two and one half years. Total costs for replacement of hardware and operating systems were approximately $600,000 over the past two and one half years. The replacements to date and on-going replacements are being implemented primarily as part of the Company’s ongoing technology updating, rather than specifically for Year 2000 compliance reasons. Year 2000 compliance costs have not had a material adverse impact on the Company’s financial position, results of operations or cash flows.