Choice Hotels International, Inc. and Subsidiaries

The effect of dilutive securities is computed using the treasury stock method and average market prices during the period. In 1999 and 1998, the Company excluded 206,031 and 497,864, respectively, anti-dilutive options from the computation of diluted earnings per share.

The weighted average number of common shares outstanding is based on the Company’s weighted average number of outstanding common shares for the period October 15, 1997 through December 31, 1999, Sunburst’s weighted average number of outstanding common shares for the period November 1, 1996 through October 15, 1997 and Manor Care’s weighted average number of outstanding common shares prior to November 1, 1996.

Leases

Rental expense under non-cancelable operating leases was approximately $5.5 million, $1.7 million, $181,000 and $171,000 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. The Company paid office rent of $51,662, $977,500 and $1.1 million to Sunburst for the years ended December 31, 1999 and 1998 and the seven months ended December 31, 1997 based on the portion of total space occupied by the Company. Future minimum lease payments are as follows:

During 1998, the Company recorded an extraordinary gain from the early extinguishment of debt associated with a capitalized lease obligation. The Company retired $13.7 million in debt and removed related assets of $1.8 million from the consolidated balance sheets. Accordingly, an extraordinary gain of $7.2 million was recognized, after income tax expense of $4.7 million, or $0.12 per diluted share.

Prior to May 31, 1998, the Company was a guarantor of Sunburst’s obligations under leases between Sunburst and Manor Care. Additionally, Sunburst and Choice had entered into a sublease agreement with respect to the Company’s principal executive offices. On May 31, 1998, the Company and Manor Care entered into a new lease for the Silver Spring, Maryland corporate headquarters and the Company’s guarantees of Sunburst lease obligations and the sublease were cancelled. The new lease has a fifteen year term and was subsequently assigned from Manor Care to an unrelated party.

Related Party Transactions

During 1998, the Company entered into an interest free bridge loan agreement with a Company executive approximating $754,000, which is reflected as a receivable at December 31, 1998. The bridge loan was repaid in March 1999.

Reportable Segment Information

The Company has a single reportable segment encompassing its franchising business. Franchising revenues are comprised of royalty fees, initial franchise and relicensing fees, and partner services revenue and other. Marketing and reservation fees and expenses are excluded from reportable segment information as such fees and associated expenses are reported net. Corporate and other revenue consists of product sales and European hotel operations. The Company does not allocate interest income, interest expense or income taxes to its franchising segment.