Choice Hotels International, Inc. and Subsidiaries

Foreign Operations

The Company accounts for foreign currency translation in accordance with SFAS No. 52, “Foreign Currency Translation.” Revenues generated by foreign operations for the years ended December 31, 1999 and 1998, the seven months ended December 31, 1997 and the fiscal year ended May 31, 1997 were $6.9 million, exclusive of $2.5 million of foreign dividends; $5.8 million, exclusive of $2.1 million of foreign dividends; $16.2 million, exclusive of $0.6 million of foreign dividends; and $27.5 million, exclusive of $0.9 million of foreign dividends, respectively. The Company’s foreign operations had net income (loss) of $1.0 million, $0.0 million, $0.5 million, and $(3.1 million) for the years ended December 31, 1999 and 1998, the seven months ended December 31, 1997 and the fiscal year ended May 31, 1997.

Pension, Profit Sharing and Incentive Plans

Bonuses accrued for key executives of the Company under incentive compensation plans were $1.0 million and $0.8 million at December 31, 1999 and 1998, respectively.

During 1999 and 1998, employees of the Company participated in 401(k) retirement plans sponsored by the Company. For the years ended December 31, 1999 and 1998, the Company recorded compensation expense of $1.3 million and $1.2 million, respectively, related to the plans. Prior to the Manor Care Distribution and Sunburst Distribution, employees participated in retirement plans sponsored by Manor Care and Sunburst. Costs allocated to the Company under those plans were based on the size of its payroll relative to the sponsor’s payroll. Costs allocated to the Company were approximately $1.2 million and $1.4 million for the seven months ended December 31, 1997 and the fiscal year ended May 31, 1997, respectively.

Income Taxes

The Company was included in the consolidated federal income tax returns of Manor Care and Sunburst prior to October 15, 1997. Subsequent to October 15, 1997, the Company is required to make its own filings. The income tax provision included in these consolidated financial statements reflects the historical income tax provision and temporary differences attributable to the operations of the Company on a separate return basis. Deferred taxes are recorded for the tax effect of temporary differences between book and tax income.

Income before income taxes were derived from the following:

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