Choice Hotels International, Inc. and Subsidiaries

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

Cash paid for state income taxes was $2.3 million, $3.4 million, $0.2 million and $1.3 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, respectively. Federal income taxes were paid by Manor Care for the period ending October 31, 1996. Federal income taxes were paid by Sunburst for the period beginning November 1, 1996 through October 15, 1997. The Company paid $15.5 million, $18.9 million, and $9.1 million for the years ended December 31, 1999 and 1998 and for the seven months ended December 31, 1997, respectively.

Capital Stock

In 1999, the Company granted key employees and non-employee directors 70,260 restricted shares of common stock with a value of $1.0 million on the grant date. The restricted stock vests over a three to five year period with 11,016 shares of the restricted stock 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. In 1998, the Company granted key employees and non-employee directors 160,212 restricted shares of common stock with a value of $2.3 million on the grant date. These restricted shares vest over a one to five year period with 22,665 shares of the restricted stock vesting over a one year period, 78,547 shares vesting over a three year period, 40,250 shares vesting over a four year period, and 18,750 shares vesting over a five year period. A total of 46,275 shares of restricted stock were forfeited in 1999 and 1998.

On February 19, 1998, the Board of Directors adopted a shareholder rights plan under which a dividend of one preferred stock purchase right was distributed for each outstanding share of the Company’s common stock to shareholders of record on April 3, 1998. Each right will entitle the holder to buy 1/100th of a share of a newly issued series of a junior participating preferred stock of the Company at an exercise price of $75 per share. The rights will be exercisable, subject to certain exceptions, 10 days after a person or a group acquires beneficial ownership of 10% or more of the Company’s common stock. Shares owned by a person or group on February 19, 1998, and held continuously thereafter are exempt for purposes of determining beneficial ownership under the rights plan. The rights will be non-voting and will expire on January 31, 2008, unless exercised or previously redeemed by the Company for $.001 each. If the Company is involved in a merger or certain other business combinations not approved by the Board of Directors, each right will entitle its holder, other than the acquiring person or group, to purchase common stock of either the Company or the acquiror or having a value of twice the exercise price of the right.

The Company has stock option plans for which it is authorized to grant options to purchase up to 7.1 million shares of the Company’s common stock, of which 0.8 million shares remain available for grant. Stock options may be granted to officers, key employees and non-employee directors with an exercise price not less than the fair market value of the common stock on the date of grant. In connection with the Sunburst Distribution, the outstanding options held by current and former employees of the Company were redenominated in stock of the newly separated companies and the number and exercise prices of the options were adjusted based on the relative trading prices of the common stock of the two companies in order to retain the intrinsic value of the options.