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<SEC-DOCUMENT>0000928385-02-001060.txt : 20020415
<SEC-HEADER>0000928385-02-001060.hdr.sgml : 20020415
ACCESSION NUMBER: 0000928385-02-001060
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 7
CONFORMED PERIOD OF REPORT: 20011231
FILED AS OF DATE: 20020326

FILER:

COMPANY DATA:
COMPANY CONFORMED NAME: CHOICE HOTELS INTERNATIONAL INC /DE
CENTRAL INDEX KEY: 0001046311
STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011]
IRS NUMBER: 521209792
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231

FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-13393
FILM NUMBER: 02587045

BUSINESS ADDRESS:
STREET 1: 10750 COLUMBIA PIKE
CITY: SILVER SPRING
STATE: MD
ZIP: 20901
BUSINESS PHONE: 3015925056

FORMER COMPANY:
FORMER CONFORMED NAME: CHOICE HOTELS FRANCHISING INC
DATE OF NAME CHANGE: 19971118

FORMER COMPANY:
FORMER CONFORMED NAME: CHOICE HOTELS INTERNATIONAL INC/
DATE OF NAME CHANGE: 19971022
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>d10k.txt
<DESCRIPTION>FORM 10-K
<TEXT>
<PAGE>

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

---------------------

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7,
1996].

For the fiscal year ended December 31, 2001
------------------------------------
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED].

For the transition period from to
-------------------- -------------------------

Commission file number 001-13393
---------

CHOICE HOTELS INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)

DELAWARE 52-1209792
------------------------------ ---------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)

10750 Columbia Pike, Silver Spring, Maryland 20901
- ------------------------------------------------ ------------------------
(Address of Principal Executive Offices) Zip Code

Registrant's telephone number, including area code (301) 592-5000
-----------------------------
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class Name of Each Exchange on Which Registered
------------------- ---------------------------------------------
Common Stock, Par Value $.01 per share New York Stock Exchange
- -------------------------------------------- ---------------------------------------------

Preferred Stock Purchase Rights New York Stock Exchange
- -------------------------------------------- ---------------------------------------------

Securities registered pursuant to Section 12(g) of the Act:
</TABLE>

- --------------------------------------------------------------------------------
(Title of Class)

Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed in Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months as for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
--------- --------

<PAGE>

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [_]

The aggregate market value of voting stock of Choice Hotels
International, Inc. held by non-affiliates was $503,618,114 as of March 8, 2002
based upon a closing price of $22.33 per share.

APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.

Yes No
-------------- ------------

(APPLICABLE ONLY TO CORPORATE REGISTRANTS)

The number of shares outstanding of Choice Hotels International, Inc.'s
Common Stock at March 8, 2002 was 41,331,557.

DOCUMENTS INCORPORATED BY REFERENCE.

Certain portions of Registrant's annual report to stockholders for the fiscal
year ended December 31, 2001 are incorporated by reference under Parts I and II.
Certain portions of Registrant's definitive proxy statement, to be filed with
the Securities and Exchange Commission pursuant to Regulation 14A not later than
120 days after the close of the Registrant's fiscal year, are incorporated by
reference under Part III.

<PAGE>

PART I

FORWARD-LOOKING STATEMENTS

Certain statements in this report that are not historical facts constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act. Words such as "believes," "anticipates," "expects,"
"intends," "estimates," "projects," and other similar expressions, which are
predictions of or indicate future events and trends, typically identify
forward-looking statements. Such statements are subject to a number of risks and
uncertainties which could cause actual results to differ materially from those
projected, including: competition within each of our business segments; business
strategies and their intended results; the balance between supply of and demand
for hotel rooms; our ability to obtain new franchise agreements; our ability to
develop and maintain positive relations with current and potential hotel owners;
the effect of international, national and regional economic conditions; the
availability of capital to allow us and potential hotel owners to fund
investments and construction of hotels; the cost and other effects of legal
proceedings; and other risks described from time to time in our filings with the
Securities and Exchange Commission, including those set forth under the heading
"Risk Factors" in our Report on Form 10-Q for the period ended September 30,
2001. Given these uncertainties, you are cautioned not to place undue reliance
on such statements. We also undertake no obligation to publicly update or revise
any forward-looking statement to reflect current or future events or
circumstances.

Item 1. Business

Overview

Choice Hotels International, Inc. (the "Company" or "Choice") is the
world's second largest franchisor of hotel properties with 4,545 hotels open and
operating in 38 countries at December 31, 2001. In addition, at December 31,
2001, we had 689 franchise properties currently under development representing a
total of 56,360 rooms. Choice franchises lodging properties under one of our
proprietary brand names (the "Choice brands"): Comfort(R), Comfort Suites(R),
Quality(R), Clarion(R), Sleep Inn(R), Econo Lodge(R), Rodeway Inn(R) and
MainStay Suites(R). We franchise hotels in all 50 states, Puerto Rico and the
District of Columbia and 36 additional countries, with 97% of our franchising
revenue generated from hotels franchised in the United States. With recognized
brands and a diverse and growing franchisee base, we believe we have a strong
foundation for continued growth.

Choice is a lodging franchisor with low capital expenditure
requirements. Our direct real estate exposure is limited to three company-owned
MainStay Suites(R). With a focus on hotel franchising versus ownership, we
benefit from the economies of scale inherent in the franchising business. The
fee and cost structure of our business provides significant opportunities to
increase profits by increasing the number of franchise properties. Our business
is based on franchise revenues that consist of an initial fee and ongoing
royalty fees, which are based as a percentage of the franchisees' gross room
revenues, partner service revenues and other miscellaneous items.

<PAGE>

In addition to these fees, we also collect marketing and reservation fees to
support centralized marketing and reservation activities.

The principal factors that affect our results are: (i) growth in the
number of hotels under franchise; (ii) occupancies and room rates achieved by
the hotels under franchise; (iii) the number and relative mix of franchised
hotels; (iv) effective royalty rates achieved; and (v) our ability to manage
costs. The number of rooms at franchised properties and occupancies and room
rates at those properties significantly affect our results because royalty fees
are based upon room revenues at franchised hotels. The variable overhead costs
associated with franchise system growth are substantially less than incremental
royalty fees generated from new franchisees, therefore we are able to capture a
significant portion of these royalty fees as operating income. Continued growth
of our franchise business should enable us to capture increasing benefits from
the operating leverage in place which would improve operating margins.

Company History

Prior to becoming a separate, publicly-held company on October 15, 1997
pursuant to the Company Spin-off (as defined below), the Company was known as
Choice Hotels Franchising, Inc. and was a wholly-owned subsidiary of Choice
Hotels International, Inc. ("Former Choice"). On October 15, 1997, Former Choice
distributed to its stockholders its hotel franchising business (which had
previously been primarily conducted by the Company) and its European hotel
ownership and franchising business through a pro rata distribution to its
stockholders of all of the stock of the Company (the "Company Spin-off"). At the
time of the Company Spin-off, the Company changed its name to "Choice Hotels
International, Inc.," and Former Choice changed its name to "Sunburst
Hospitality Corporation." References herein to the Company's former parent
corporation prior to the Company Spin-off are to "Former Choice," and reference
to such corporation after the Company Spin-off are to "Sunburst."

Prior to November 1996, Former Choice was a subsidiary of Manor Care,
Inc. ("Manor Care") which, directly and through its subsidiaries, engaged in the
hotel franchising business currently conducted by the Company as well as the
ownership and management of hotels (together with the hotel franchising
business, the "Lodging Business") and the health care business. On November 1,
1996, Manor Care separated the Lodging Business from its health care business
through a pro rata distribution to the holders of Manor Care's common stock of
all of the stock of Former Choice (the "Former Choice Spin-off"). In connection
with the Former Choice Spin-off, the Company became a wholly-owned subsidiary of
Former Choice and remained as such until consummation of the Company Spin-off.

The Lodging Industry/(1)/

As of December 31, 2001, there were approximately 4.1 million hotel
rooms in the United States in hotels/motels containing twenty or more rooms. Of
those rooms, approximately

- --------------
/(1)/ Source: Smith Travel Research

<PAGE>

1.2 million rooms were not affiliated with a national or regional brand, while
the remaining approximately 2.9 million rooms were affiliated with a brand
either through franchise or the ownership/management of a national or regional
chain.

Historically, the industry added hotel rooms to its inventory due
largely to a favorable hotel lending environment, the ability of hotel operators
to regularly increase room rates and the deductibility of passive tax losses,
which encouraged hotel development. As a result, the lodging industry saw an
oversupply of rooms and a decrease in industry performance.

Industry performance recovered sharply in the mid-1990's and continued
positive growth until 2001. The recession of 2001 coupled with the events of
September 11, 2001 caused profitability in the industry to decline for the first
time in nearly a decade. Nonetheless, the industry remained profitable through
this most difficult period.

Prior to 2001, the industry had seen consistent gains in RevPAR, a key
operating statistic for the industry. RevPAR is calculated by multiplying the
percentage of occupied rooms by the average daily room rate realized. From 1993
through 2000, the lodging industry was able to increase its average daily rate
("ADR") at a pace faster than the increase in the Consumer Price Index ("CPI"),
a common measure of inflation published by the US Department of Labor. The
following chart demonstrates these trends:

The US Lodging Industry's Trends From 1995 - 2001

<TABLE>
<CAPTION>
Increases in Average
Room Daily Increase Increase Revenue Per
Revenue Room in ADR in CPI Available New
Versus Occupancy Rates Versus Versus Room Profits Rooms
Year Prior Year Rates (ADR) Prior Year Prior Year (RevPAR) (in billions) Added
- ---- ------------ ---------- ---------- ------------ ----------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 ..... 6.7% 65.1% $65.81 4.7% 2.9% $42.83 $8.5 64,000
1996 ..... 8.9% 65.0% $70.81 7.6% 2.9% $46.06 $12.5 101,000
1997 ..... 8.8% 64.5% $75.16 6.1% 1.9% $48.50 $17.0 128,000
1998 ..... 7.7% 64.0% $78.62 4.4% 2.3% $50.29 $22.0 143,000
1999 ..... 7.4% 63.3% $81.27 4.0% 2.7% $51.44 $23.0 143,148
2000 ..... 8.6% 63.5% $85.24 4.7% 3.4% $54.13 $24.0 121,476
2001 ..... -4.7% 60.1% $84.85 -0.5% 2.9% $50.99 $16.7 101,279
</TABLE>

However, due to a downturn in the worldwide economy experienced during
2001, coupled with the terrorist attacks of September 11, industry and RevPAR
performance has suffered, which has led to reduced royalties and decreased hotel
development. Development of newly constructed hotels is expected to decline
further as funding from the hotel development lending market has significantly
decreased due to market uncertainty and an inability to effectively value
properties.

The lodging inventory has begun to show signs of economic recovery
during the first two months of 2002. Although occupancy and RevPAR figures for
2002 remain below 2001 levels, these factors are showing a return to more normal
and predictable levels of business.

We believe the lodging industry can be divided into three price
categories: luxury or upscale, mid-scale and economy. Typically, the luxury
category generally has room rates above

<PAGE>

$80 per night, the mid-scale category generally has room rates between $50 and
$79 per night and the economy category generally has room rates less than $50
per night. Additionally, a new category has emerged of extended-stay hotels that
primarily serve guests who stay at a hotel five consecutive nights. These hotels
span the industry's three price categories.

Service is a distinguishing characteristic in the lodging industry.
Generally, there are three levels of service: full-service hotels (which offer
food and beverage services, meeting rooms, room service and similar guest
services); limited-service hotels (which offer amenities such as swimming pools,
continental breakfast, or similar services); and all-suites hotels (which
usually have limited public areas, but offer guests two rooms or one room with
distinct areas, and which may or may not offer food and beverage services).

Our Econo Lodge(R) and Rodeway Inn(R) brands compete primarily in the
limited-service economy market; our Comfort(R), Comfort Suites(R), Quality(R)
and Sleep Inn(R) brands compete primarily in the limited-service middle-market.
Our MainStay Suites(R) brand competes primarily in the all-suites middle-market.
Our Clarion(R) brand competes primarily in the full-service upscale market.

New hotels opened in recent years typically have been hotels without
on-premise food and beverage, as these hotels are less costly to develop, enjoy
higher gross margins, and tend to have better access to financing. These hotels
typically operate in the economy and mid-scale categories and are located in
suburban or highway locations. From 1991 to 2001, the average room count in new
hotels declined from 122 to 101 primarily because hotel developers found it
difficult to obtain financing of more than $3 million from their primary lending
sources (local banks and Small Business Administration-guaranteed loan
programs).

In recent years, operators of hotels not owned or managed by major
lodging companies have increasingly joined national hotel franchise chains as a
means of remaining competitive with hotels owned by or affiliated with national
lodging companies. Because the costs of owning and operating a hotel are
generally fixed, increases in revenues generated by affiliation with a franchise
lodging chain can improve a hotel's financial performance. Of approximately
1,258 hotel properties that changed their affiliation in 2001, 60% converted
from independent status to affiliation with a chain or converted from one chain
to another, while only 387 converted from affiliation with a chain to
independent status. A total of 365 independent properties switched to a
franchise chain in 2001.

The large franchise lodging chains, including us, generally provide a
number of services to hotel operators to improve the financial performance of
their properties including national reservation systems, marketing and
advertising programs, training and education programs, property systems, revenue
enhancement services, and direct sales programs. We believe that national
franchise chains with a larger number of hotels enjoy greater brand awareness
among potential guests than those with fewer numbers of hotels, and that greater
brand awareness can increase the desirability of a hotel to its potential
guests.

<PAGE>

We believe that hotel operators choose lodging franchisors based
primarily on the perceived value and quality of each franchisor's brand and its
services, and the extent to which affiliation with that franchisor may increase
the franchisee's reservations and profits.

Franchise Business

Economics of Franchise Business. The fee and cost structure of our
business provides significant opportunities for us to increase profits by
increasing the number of franchised properties. As a hotel franchisor, we derive
substantially all of our franchise revenue from franchise fees. Our franchise
fees consist of an initial fee and ongoing royalty, marketing and reservation
fees which are typically based on a percentage of the franchisee's gross room
revenues. The royalty portion of the franchise fee is intended to cover our
operating expenses, such as expenses incurred in quality assurance,
administrative support and other franchise services and to provide us with
operating profits. The marketing and reservation portion of the franchise fee
are used exclusively by our marketing and reservation funds for the expenses
associated with national marketing and media advertising and providing such
franchise services as the central reservation system.

Much of the variable costs associated with our activities are
reimbursed by the franchisees through the initial fees, and marketing and
reservation fees. The royalty fees generated from franchisees more than cover
the fixed costs of the business at its current level. The variable overhead
costs associated with franchise system growth are substantially less than
incremental royalty fees generated from new franchisees, therefore we are able
to capture a significant portion of these royalty fees as operating income.

Strategy. Our business strategy is designed to create consistent growth
by leveraging Choice's large and well-known global hotel brands, proven
franchise sales capabilities, effective marketing efforts and reservations
delivery, many RevPAR enhancing services and technology, and financial strength
created by our significant free cash flow.

Specific elements of our strategy include building strong brands,
delivering exceptional services, reaching more consumers and leveraging size,
scale and distribution.

Build Strong Brands. Each of our brands has particular attributes and
strengths, including exceptionally high awareness with both consumers and
developers. Our strategy is to utilize the strengths of each brand for both unit
growth and RevPAR gains that create royalty growth.

We have a wide array of well-known and established brands that meet the
needs of many types of guests and can be developed at various price points and
can be applied to both new and existing hotels. This ensures that we have
opportunities for creating unit growth in various types of markets, with various
types of customers, and during both industry contraction and growth cycles.
During times of lower industry supply growth and tighter capital markets, we can
rely on gaining conversions from hotels seeking the awareness and proven
performance provided by our brands. Over the past 10 years, the industry has
seen a significant movement of hotels from independent to chain affiliation,
with affiliated hotels increasing from 46% of the market in 1990

<PAGE>

to 60% of the market in 2000 and 2001. This trend is likely to continue, as
industry RevPAR growth remains soft. When industry conditions become more
favorable, a greater portion of our unit growth will come from our new
construction brands. We believe that a large number of markets can still support
our hotel brands, and the growth potential for our brands remains strong.

To keep our brand images contemporary and communicate positive changes
to our brands, including new prototypes and enhanced system quality, Choice
announced new brand logos for its Quality(R), Sleep Inn(R) and Comfort Suites(R)
brands during 2001. Expected to be complete during 2002, these new logos signal
Choice's commitment to enhancing our brands to both developers and consumers
alike.

We will ensure each of our brands remain appealing to hotel owners and
guests alike by continuing to create integrated brand and development strategies
for our brands that leverage each brands' unique strengths and identify the most
appropriate methods for both system growth and RevPAR improvement. We will also
focus on creating a customer-driven quality assurance program across all of our
brands to ensure each hotel is consistently and effectively meeting guest needs.

Deliver Exceptional Services. We have successfully created a wide array
of services and local customer touch points to help franchisees improve
performance. Our field staff, in combination with strong technology products,
directly helps property owners effectively manage their properties to improve
RevPAR performance. Marketing services help create effective positioning for
brands and drive guest stays. Reservations services deliver a high percentage of
guests directly to properties. These services create revenue gains for hotel
owners and translate into both higher royalty rates for Choice and improved
returns for owners, leading to further unit growth. These services also make
Choice brands attractive to both experienced hotel owners and developers new to
the industry. We will continue to align these services directly on customer
needs, focus on those activities that generate the highest revenue for our
customers, and ensuring efficient, effective, and coordinated service delivery
minimizes overhead costs.

Reach More Consumers. Hotel owners greatly value the large delivery of
guests we provide through corporate and brand marketing, reservations, key
account sales, and Choice's loyalty programs, Choice Privileges and EA$Y Choice.
Our strategy is to continue to maximize the effectiveness of these services and
programs to deliver both leisure and business travelers to Choice-branded
hotels. Our emphasis will be on stressing our very powerful leisure market,
while improving overall contributions from business travelers.

Choice will continue to increase awareness of its hotels through its
multi-branded national marketing campaign using re-imaged signs and our "Power
of Being There. Go" tagline. This campaign is intended to generate the most
compelling voice in the limited service segment and utilize Choice's significant
size to create even greater awareness for our brands. Local and regional co-op
marketing campaigns will continue to leverage the national marketing programs to
drive business to Choice properties at a local level. The Choice Privileges
program has also been enhanced through the introduction of airline mile options.
Our continued focus on overall

<PAGE>

brand quality coupled with these new initiatives is designed to stimulate room
demand for our franchised hotels through improved guest satisfaction.

Leverage Size, Scale and Distribution. We will focus on identifying
methods for utilizing the significant number of hotels in our system using our
size to reduce costs, and increase returns, for hotel owners. We will continue
to create partnerships with endorsed vendors that both make low-cost products
available to our franchisees and streamline the purchasing process through the
use of effective purchasing technology. These efforts also benefit the company
in enhancing brand quality, creating enhanced cash flows for Choice, and making
the selection of a Choice brand even more compelling. We intend to continue to
expand this business and identify new methods for decreasing hotel operating
costs by increasing penetration internally, creating new vendor relationships,
and identifying opportunities for external growth.

Over the past year, Choice has taken aggressive steps to improve the
efficiency of its operations, including a reorganization and consolidation of
reservation centers in November 2001. Management will continue to revise our
structure, create more efficient internal processes and use technology to lower
cost and improve results.

Franchise System

Our franchise hotels operate under one of the Choice brand names:
Comfort(R), Comfort Suites(R), Quality(R), Clarion(R), Sleep Inn(R), Econo
Lodge(R), Rodeway Inn(R) and MainStay Suites(R). The following table presents
key statistics relative to our domestic franchise system over the fiscal year
ended May 31, 1997, for the seven-month period ended December 31, 1997 and for
the five fiscal years ended December 31, 2001.

COMBINED DOMESTIC FRANCHISE SYSTEM

<TABLE>
<CAPTION>
As of and
As of and For For the Seven
the Year Ended Months Ended As of and For the Year Ended
May 31, December 31, December 31,
----------------------------------------------------------------------------------------
1997 1997 1997 1998 1999 2000 2001
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of period .. 2,781 2,880 2,880 3,039 3,123 3,244 3,327
Number of rooms, end of period ....... 235,431 242,161 242,161 252,357 258,120 265,962 270,514
Royalty fees ($000) .................. $ 91,724 $ 65,271 $ 99,144 $109,240 $120,932 $131,702 $133,244
Average Royalty Rate/(1)/ ............ 3.4% 3.5% 3.5% 3.6% 3.7% 3.8% 3.9%
Average occupancy percentage ......... 62.6% 66.2% 62.3% 61.0% 60.5% 59.8% 57.5%
Average daily room rate (ADR) ........ $ 51.92 $ 54.97 $ 53.89 $ 56.23 $ 58.42 $ 61.45 $ 62.31
RevPAR/(2)/ .......................... $ 32.52 $ 36.39 $ 33.56 $ 34.30 $ 35.33 $ 36.72 $ 35.83
</TABLE>

- ----------
/(1)/ Represents domestic royalty fees as a percentage of aggregate gross room
revenues of all of the domestic Choice brand franchised hotels.

/(2)/ The Company's RevPAR figure for each fiscal year is an average of the
RevPAR calculated for each month in the fiscal year. The Company
calculates RevPAR each month based on information actually reported by
franchisees on a timely basis to the Company.

We have approximately 2,400 domestic franchisees and operate in all 50
states and the District of Columbia. Approximately 97% of the total royalty
income is generated from domestic franchise operations. Consequently, our
analysis of our franchise system is focused on

<PAGE>

the domestic operations. Currently, no master franchisee or other franchisee
accounts for 5% or more of Choice's royalty revenues or total revenues.

Brand Positioning

Our brands offer consumers a wide range of choices from economy hotels
to upscale, full service properties.

Comfort. Our largest brand is Comfort. Comfort Inns offer rooms in the
mid-scale without food and beverage category and is targeted to business and
leisure travelers. Principal competitor brands include Baymont, Fairfield Inn,
Hampton Inn, Holiday Express and LaQuinta. Comfort Suites offer business and
leisure guests a large room with separate living and sleeping areas. This
product competes in the upper portion of the mid-scale without food and beverage
category against brands such as AmeriSuites, Hampton Inn and Suites and Spring
Hill. At December 31, 2001, there were 1,713 Comfort Inn properties and 319
Comfort Suites properties with a total of 131,647, and 25,472 rooms,
respectively, open and operating worldwide. An additional 281 Comfort Inn and
Comfort Suites properties with a total of 20,255 rooms were under development.
During 2001, we added 140 Comfort properties while terminating 48.

Comfort properties are located in the United States and in Argentina,
Australia, the Bahamas, Belgium, Brazil, Canada, Cayman Islands, Costa Rica,
Czech Republic, Denmark, Egypt, El Salvador, Finland, France, Germany, India,
Ireland, Italy, Jamaica, Japan, Lebanon, Norway, Portugal, Puerto Rico, Sweden,
Switzerland, Thailand, Turks & Caicos, the United Kingdom and the United Arab
Emirates. The following chart summarizes the Comfort system in the United
States:

COMFORT DOMESTIC SYSTEM

<TABLE>
<CAPTION>
As of and
As of and For For the Seven
the Year Ended Months Ended As of and For the Year Ended
May 31, December 31, December 31,
------------------------------------------------------------------------------------
1997 1997 1997 1998 1999 2000 2001
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of period............ 1,255 1,304 1,304 1,394 1,470 1,568 1,621
Number of rooms, end of period................. 102,722 105,384 105,384 110,682 112,727 122,761 126,998
Royalty fees ($000)............................ $ 50,758 $36,446 $55,261 $ 61,153 $68,177 $75,968 $78,690
Average occupancy percentage................... 67.2% 71.3% 66.6% 65.4% 64.8% 63.7% 61.3%
Average daily room rate (ADR).................. $ 54.17 $57.15 $55.74 $ 58.19 $ 60.57 $ 63.77 $ 65.30
RevPAR......................................... $ 36.39 $40.75 $37.15 $ 38.03 $ 39.26 $ 40.60 $ 40.01
</TABLE>

Quality. Certain Quality Inns, Quality Inns and Suites, and Quality
Suites hotels compete in the mid-scale with food and beverage category. Quality
Inns, Quality Inns and Suites, and Quality Suites are targeted to business and
leisure travelers. Principal competitor brands include Best Western, Holiday
Inn, Howard Johnson and Ramada Inn. At December 31, 2001, there were 746 Quality
Inn and Quality Inns and Suites properties with a total of 78,918 rooms, and 53
Quality Suites properties with a total of 5,842 rooms open worldwide. An
additional 178 Quality Inn, Quality Inns and Suites and Quality Suites
properties with a total of 18,028 rooms were

<PAGE>

under development. During 2001, a total of 82 Quality properties were added
while 49 were terminated.

Quality properties are located in the United States and in Australia,
Brazil, Canada, Chile, Costa Rica, the Czech Republic, Denmark, Egypt, Finland,
France, Germany, Honduras, India, Indonesia, Ireland, Italy, Lebanon, Malaysia,
New Zealand, Norway, Portugal, Sweden, Thailand, the United Kingdom and the
United Arab Emirates. The following chart summarizes the Quality system in the
United States:

QUALITY DOMESTIC SYSTEM

<TABLE>
<CAPTION>
As of and
As of and For For the Seven
the Year Ended Months Ended As of and For the Year Ended
May 31, December 31, December 31,
------------------------------------------------------------------------------------
1997 1997 1997 1998 1999 2000 2001
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of period............ 409 419 419 430 431 436 430
Number of rooms, end of period................. 50,487 50,674 50,674 50,151 49,331 49,191 48,014
Royalty fees ($000)............................ $17,623 $14,459 $18,488 $20,187 $21,034 $21,753 $20,605
Average occupancy percentage................... 61.3% 63.8% 60.2% 58.9% 58.0% 57.6% 55.3%
Average daily room rate (ADR).................. $ 54.61 $ 57.58 $56.79 $ 60.02 $ 61.89 $64.05 $64.72
RevPAR......................................... $ 33.46 $ 36.73 $34.19 $ 35.35 $ 35.90 $36.86 $35.80
</TABLE>

Clarion. Clarion Inns, Clarion Hotels, Clarion Resorts and Clarion
Suites hotels are full-service properties with on-premise food and beverage
facilities and operate in the upscale category. Clarion properties are targeted
to business and leisure travelers. Principal competitor brands include Crowne
Plaza, Four Points by Sheraton, Radisson, Courtyard by Marriott and Doubletree.

At December 31, 2001, there were 160 Clarion properties with a total of
23,658 rooms open and operating worldwide and an additional 28 properties with a
total of 4,082 rooms under development. During 2001, 25 Clarion properties were
added while 18 were terminated. The properties are located in the United States,
Argentina, Australia, Canada, China, Costa Rica, Denmark, France, Germany,
Guatemala, Honduras, Indonesia, Ireland, Italy, Japan, Norway and the United
Kingdom. The following chart summarizes the Clarion system in the United States:

CLARION DOMESTIC SYSTEM

<TABLE>
<CAPTION>
As of and
As of and For For the Seven
the Year Ended Months Ended As of and For the Year Ended
May 31, December 31, December 31,
------------------------------------------------------------------------------------
1997 1997 1997 1998 1999 2000 2001
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of period........... 92 96 96 105 112 114 119
Number of rooms, end of period................ 14,721 16,161 16,161 17,878 18,815 18,537 18,032
Royalty fees ($000)........................... $ 4,081 $ 2,957 $ 5,061 $ 5,447 $ 6,491 $ 7,796 $ 7,189
Average occupancy percentage.................. 63.3% 64.7% 62.3% 60.5% 59.0% 58.8% 54.3%
Average daily room rate (ADR)................. $ 67.76 $ 71.53 $ 70.67 $ 72.25 $ 74.17 $ 81.37 $ 78.14
RevPAR........................................ $ 42.86 $ 46.29 $ 44.05 $ 43.73 $ 43.74 $ 47.86 $ 42.46
</TABLE>

<PAGE>

Sleep Inn. Established in 1988, Sleep Inn is a new-construction hotel
brand in the lower portion of the mid-scale without food and beverage category.
Sleep Inns are targeted to the business and leisure traveler. Principal
competitor brands include Fairfield Inn, Holiday Express, LaQuinta and Red Roof.

At December 31, 2001, there were 295 Sleep Inn properties with a total
of 22,731 rooms open and operating worldwide. An additional 73 properties with a
total of 5,261 rooms were under development. During 2001, 29 Sleep Inn
properties were added while 2 were terminated. The properties are located in the
United States, Brazil, Canada, Japan and the United Kingdom. The following chart
summarizes the Sleep system in the United States:

SLEEP DOMESTIC SYSTEM
<TABLE>
<CAPTION>
As of and
As of and For For the Seven
the Year Ended Months Ended As of and For the Year Ended
May 31, December 31, December 31,
------------------------------------------------------------------------------------
1997 1997 1997 1998 1999 2000 2001
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of period............ 131 156 156 197 224 261 285
Number of rooms, end of period................. 9,635 11,538 11,538 14,924 17,199 20,158 21,945
Royalty fees ($000)............................ $ 3,343 $2,630 $ 3,926 $5,337 $ 7,241 $ 8,713 $ 9,635
Average occupancy percentage................... 63.9% 66.5% 63.0% 62.0% 60.6% 59.6% 57.5%
Average daily room rate (ADR).................. $ 48.11 $50.54 $ 49.41 $51.32 $ 53.91 $ 55.82 $ 57.02
RevPAR......................................... $ 30.75 $33.60 $ 31.11 $31.82 $ 32.66 $ 33.25 $ 32.79
</TABLE>

Econo Lodge. Econo Lodge hotels operate in the economy category of the
lodging industry. Econo Lodges are primarily targeted to senior citizens and
rely to a large extent on strong roadside name recognition. Principal competitor
brands include Days Inn, Motel 6, Ramada Limited, Red Carpet Inn, Super 8 and
Travelodge.

At December 31, 2001, there were 730 Econo Lodge properties with a
total of 44,788 rooms open and operating in the United States and Canada, and an
additional 66 properties with a total of 4,298 rooms under development in those
two countries. During 2001, 42 Econo Lodge properties were added while 28 were
terminated. The following chart summarizes the Econo Lodge system in the United
States:

ECONO LODGE DOMESTIC SYSTEM

<TABLE>
<CAPTION>
As of and
As of and For For the Seven
the Year Ended Months Ended As of and For the Year Ended
May 31, December 31, December 31,
------------------------------------------------------------------------------------
1997 1997 1997 1998 1999 2000 2001
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of period............ 682 692 692 698 691 684 691
Number of rooms, end of period................. 44,636 45,050 45,050 44,458 43,754 42,611 42,936
Royalty fees ($000)............................ $13,288 $ 8,991 $13,687 $13,975 $14,313 $14,490 $14,100
Average occupancy percentage................... 56.4% 60.7% 56.1% 54.3% 54.0% 52.9% 51.4%
Average daily room rate (ADR).................. $ 41.33 $ 43.86 $ 42.35 $ 43.55 $ 45.01 $ 46.33 $47.30
RevPAR......................................... $ 23.30 $ 26.63 $ 23.75 $ 23.65 $ 24.32 $ 24.51 $24.30
</TABLE>

<PAGE>

Rodeway Inn. The Rodeway Inn brand competes in the economy category and
is primarily targeted to senior citizens. Principal competitor brands include
Ho-Jo Inn, Ramada Limited, Red Roof Inn, Shoney's Inn, Super 8 and Motel 6. At
December 31, 2001, there were 142 Rodeway Inn properties with a total of 9,179
rooms open and operating in the United States and an additional 19 properties
with a total of 1,231 rooms under development in the United States and Canada.
During 2001, 12 Rodeway properties were added while 21 were terminated. The
following chart summarizes the Rodeway system in the United States:

RODEWAY DOMESTIC SYSTEM

<TABLE>
<CAPTION>
As of and
As of and For For the Seven
the Year Ended Months Ended As of and For the Year Ended
May 31, December 31, December 31,
------------------------------------------------------------------------------------
1997 1997 1997 1998 1999 2000 2001
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of properties, end of period............ 217 209 209 196 166 147 142
Number of rooms, end of period................. 13,509 12,997 12,997 12,447 10,613 9,605 9,179
Royalty fees ($000)............................ $2,631 $1,756 $2,671 $2,678 $2,552 $2,391 $2,171
Average occupancy percentage................... 52.7% 54.7% 51.4% 50.1% 50.7% 50.3% 47.2%
Average daily room rate (ADR).................. $41.15 $44.11 $43.15 $44.03 $45.57 $48.25 $48.94
RevPAR......................................... $21.68 $24.13 $22.20 $22.04 $23.09 $24.25 $23.11
</TABLE>

MainStay Suites. MainStay Suites, our newest hotel brand, is a midscale
extended-stay lodging product targeted to travelers who book hotel rooms for
five nights or more. As of December 31, 2001, there were 39 open hotels with
3,410 rooms and an additional 26 properties with 2,097 rooms under development.
During 2001, 6 MainStay Suites properties were added while 1 was terminated.

The MainStay Suites brand is designed to fill the gap in the midscale
category between existing upscale and economy extended-stay lodging products.
Principal competitors brands include Candlewood Suites, Homestead Village,
Sierra Suites and TownePlace Suites. The following chart summarizes the MainStay
Suites system in the United States:

MAINSTAY DOMESTIC SYSTEM

As of and For the Year Ended
December 31,
-------------------------------
1999 2000 2001
-------------------------------

Number of properties, end of period...... 29 34 39
Number of rooms, end of period........... 2,681 3,099 3,410
Royalty fees ($000)...................... $1,124 $ 586 $ 853
Average occupancy percentage............. 66.0% 70.0% 65.8%
Average daily room rate (ADR)............ 58.87 $ 63.69 $ 64.09
RevPAR................................... $38.88 $ 44.59 $ 42.20

<PAGE>

International Franchise Operations

We conduct our international business through master franchise
arrangements, direct franchise agreements, and investments in overseas
hospitality companies that are involved with both hotel management and
franchising. The use of our brands by third parties overseas are governed by
master franchising agreements which generally provide the master franchisee with
the right to the brands in a specific geographic region, usually for a fee. As
of December 31, 2001, we had 1,218 franchise hotels in 37 countries outside of
the United States. The following table illustrates the growth of our
international operations over the fiscal year ended May 31, 1997, for the seven
month period ended December 31, 1997 and for the five fiscal years ended
December 31, 2001.

COMBINED INTERNATIONAL FRANCHISE SYSTEM(1)

/(1)/ Master franchise contracts do not currently require the reporting of
operating statistics (e.g. average occupancy percentage and average daily
room rate) of the underlying hotels, thus RevPAR is not calculated for
foreign hotels.

Europe. Through our relationships with Friendly Hotels PLC (Currently
known as C.H.E. Group PLC) ("Friendly") and Choice Hotels Scandinavia ("CHS"),
we are the second largest branded hotel chain in Europe. As of December 31,
2001, Friendly's portfolio consisted of 338 properties which were owned, managed
or franchised. CHS had 135 open properties at December 31, 2001.

In May 1996, we granted to Friendly a master franchise agreement for
the United Kingdom and Ireland. In January 1998, we also granted Friendly the
master franchise rights for continental Europe (excluding Scandinavia). Both
agreements include the Comfort, Quality and Clarion brands for a ten-year
period. In exchange, we received shares of common stock and were to receive an
$8.0 million payment, payable in eight equal annual installments. As of December
31, 2001, we held 1,227,622 shares of common stock and 31,097,755 shares of
5.75% convertible preferred stock in Friendly.

On January 19, 2001, the shareholders of Friendly approved a capital
reorganization intended to provide Friendly with a stronger balance sheet and
improve its operations. Pursuant to the capital reorganization, we waived
certain royalty and marketing fees due from Friendly for the period between
December 27, 1999 and December 31, 2005, waived the then five remaining annual
installments of the master franchise agreement and provided Friendly with a
(pound)7.8 million (approximately US $11.4 million) secured letter of credit, in
consideration for, among other things, a reduction in the conversion price of
our convertible preferred shares from 150 pence to

<PAGE>

60 pence. Other modifications to our convertible preferred shares include a
change in the dividend rate from 5.75% (payable in cash) to 2% per annum, if
payable in additional convertible preferred shares. Friendly may alternatively
elect to pay cash dividends at the rate of 3.5% per annum up until January 30,
2013 and thereafter at the rate of 5.75%. In addition, accrued dividends due to
us as of February 7, 2001 were converted to additional convertible preferred
shares of Friendly. As of December 31, 2001, Friendly had drawn (pound)5.3
million (approximately US $7.7 million) of the available letter of credit and
the balance available on the letter of credit was reduced to (pound)5.0 million
(approximately US $7.3 million) as of January 21, 2002. The letter of credit
will expire on June 30, 2002.

During 2001, Friendly settled a $4.0 million deferred consideration due
to us through the issuance of 2,404,013 convertible preferred shares. The effect
of the reduction in the conversion price together with the conversion of
dividend arrearage to additional convertible preferred shares of Friendly and
the settlement of the deferred consideration, both resulting in the issuance of
convertible preferred shares, on a fully converted basis, the Company's
ownership in Friendly would have been approximately 71%. No dividends were
accrued during 2001 or 2000.

We did not control Friendly nor have the requirement to consolidate
Friendly for financial reporting purposes. Our fully converted holding in
Friendly was 71%, but voting rights in that percentage would only have been
granted to us if we had converted the convertible preferred shares to ordinary
shares. As of December 31, 2001, we only had 5.4% of the voting rights.
Additionally, we had appointed three of the eight existing directors to the
board of Friendly, and therefore could not control any vote. These appointed
directors did not have the legal right under English law to vote on resolutions
regarding matters where we were a related party.

In addition to the capital reorganization, Friendly commenced a
non-core real estate asset disposal program to de-leverage its balance sheet. In
order to enable its disposal program, Friendly revalued its real estate
portfolio at December 31, 2000 and recognized a non-cash write-down of
(pound)49.1 million. We recognized equity losses of $(16.4 million) and $(12.1
million) for the years ended December 31, 2001 and 2000 related to mid-year
adverse fixed asset valuation adjustments due to a decline in economic
conditions and incremental professional fees associated with the reorganization.

On February 21, 2002, Friendly announced that it had been unable to
find an acceptable buyer for its business and would terminate such efforts at
this time. Given the bid period termination and the adverse economic conditions
of Friendly, we disposed of our entire preferred and common equity interest in
Friendly on March 20, 2002, and immediately relinquished our three seats on
Friendly's board of directors. Accordingly, we reduced its investment in
Friendly to zero through a $22.7 million charge to reflect the permanent
impairment of our asset as of December 31, 2001.

Canada. We conduct our operation in Canada through Choice Hotels
Canada, Inc. a joint venture owned 50% by us and 50% by W-westmont, a subsidiary
of Westmont Hospitality.

<PAGE>

Choice Hotels Canada is the largest lodging organization in Canada with 240
franchised properties open as of December 31, 2001.

Australia. In June 1998, we entered into a strategic alliance with Flag
International Limited ("FIL"). Pursuant to the transaction, a subsidiary of FIL,
Flag Choice Hotels ("FCH"), was formed to conduct franchise operations in
Australia. Through July 2002, we are obligated to provide a loan facility to FCH
in an amount up to A$5.0 million, of which A$3.75 million may be converted to an
additional 30% equity holding in FCH. As of December 31, 2001, we held 15% of
FCH through the conversion of A$1.875 million in notes and held one seat on
FCH's board of directors. Upon conversion of the remaining 15%, we will be
entitled to an additional board seat. As of December 31, 2001, FCH had 65
franchised properties opened under the Choice brands and 346 franchised hotels
under the Flag brands. Through ongoing discussions with individual property
owners, FCH will continue its efforts to convert appropriate Flag branded
properties to the appropriate Choice brands.

Other International Relationships. We have various master franchise and
area representative arrangements in place with local hotel management and
franchising companies located in South America, India, New Zealand, Central
America, Japan, Indonesia, and Egypt. In addition, the Company has direct
franchise relationships with four properties in the Caribbean, two properties
each in Thailand, Malaysia, and Lebanon, and one property each in China, Dubai,
and Tunisia.

Franchise Sales

We have identified key market areas for hotel development based on
supply/demand relationships and strategic objectives. Development opportunities
are typically first offered; (i) to existing franchisees; and then to (ii)
developers of hotels; (iii) owners of independent hotels and motels; (iv) owners
of hotels affiliated with other franchisors' brands; and; (v) contractors who
construct any of the foregoing. In considering hotels for conversion to one of
the Choice brands, or sites for development of new hotels, we consider locations
which are close to major highways, airports, tourist attractions and business
centers that attract travelers.

At December 31, 2001, we employed approximately 22 sales directors,
each of whom is responsible for a particular region or geographic area. Sales
directors contact potential franchisees directly and receive compensation based
on sales generated. Franchise sales efforts emphasize the benefits of
affiliating with one of the Choice brands, our commitment to improving RevPAR,
our television, radio and print brand advertising campaigns, the Choice
reservation system, our training and support systems (including our proprietary
property management system) and our history of growth and profitability. Because
the Choice brands cover a broad spectrum of the lodging marketplace, we are able
to offer each prospective franchisee a brand that fits its needs, lessening the
chances that the prospective franchisee would need to consider a competing
franchise system.

Because retention of existing franchisees is important to our growth
strategy, we created a formal Impact Policy in 1992, which was revised in July
1999, which offers existing franchisees

<PAGE>

the right to object to a same-brand property within a 15 mile radius. The Impact
Policy protects franchisees from the opening of a same-brand property within a
specific distance, which can range from one to seven miles, depending upon the
market in which the property is located.

During fiscal 2001, Choice received 756 franchise applications for new
additions and relicensing of existing hotels, signed 300 new addition franchise
agreements and placed 225 new properties into operation in the United States
under the Choice brands. Of those placed into operations, 107 were newly
constructed hotels. By comparison, during the twelve month period ended December
31, 2000, we received 801 franchise applications for new additions and
relicensing of existing hotels, signed 298 new addition franchise agreements and
added 274 new properties into operation in the U.S. An application received may
not always result in a signed franchise agreement during the year received or at
all due to an applicant being unable to obtain financing or because the Company
and the applicant are unable to agree on the financial terms of the franchise
agreement.

Franchise Agreements

Our standard franchise agreement grants a franchisee the right to
non-exclusive use of our franchise system in the operation of a single hotel at
a specified location, typically for a period of 20 years, with certain rights to
each of the franchisor and franchisee to terminate the franchise agreement
before the twentieth year. When the responsibility for development is sold to a
master franchisee, that party has the responsibility to sell to local
franchisees the Choice brands and the master franchisee generally must manage
the delivery of necessary services (such as training, quality assurance,
reservations and marketing) to support the franchised hotels in the master
franchise area. The master franchisee collects the fees paid by the local
franchisee and remits an agreed share to us. Master franchise agreements
generally have a term of at least 10 years. We have only entered into master
franchise agreements with respect to franchise hotels outside the United States.

Either party to a franchise agreement, other than master franchise
agreements, can terminate a franchise agreement prior to the conclusion of their
term under certain circumstances, such as at certain anniversaries of the
agreement. Early termination options give us flexibility in eliminating or
re-branding properties which become weak performers for reasons other than
contractual failure by the franchisee. We also have the right to terminate a
franchise agreement if a franchisee fails to bring properties into compliance
with contractual or quality standards within specified periods of time. Master
franchise agreements typically contain provisions permitting us to terminate the
agreement for failure to meet a specified development schedule.

In 2001, we continued to place great focus on enforcing quality
standards. Terminations of open properties that failed to meet quality assurance
standards or contractual obligations were 142 properties in 2001 (28 of which
were mutually agreed upon terminations) and 161 properties in 2000 (36 of which
were mutual terminations).

Franchise fees vary among the different Choice brands, but generally
are competitive with the industry average within their market group. Franchise
fees usually have four

<PAGE>

components: an initial, one-time affiliation fee; a royalty fee; a marketing
fee; and a reservation fee. Proceeds from the marketing fee and reservation fee
are used exclusively to fund marketing programs and the Company's central
reservation system, respectively. Most marketing fees support marketing programs
designed to support all of the Choice brands, while some contribute to
brand-specific marketing programs. Royalty fees and affiliation fees are the
principal sources of profits for us.

The standard franchise agreements typically require our franchisees to
pay the following fees:

QUOTED FEES BY BRAND
<TABLE>
<CAPTION>
Initial Fee On-Going Fees as a Percentage of Gross Room Revenues
Per Room/ --------------------------------------------------------
Brand Minimum Royalty Fees Marketing Fees Reservation Fees
----- ----------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Comfort Inn............................. $300/$50,000 5.25% 2.1% 1.75%
Comfort Suites.......................... $300/$50,000 5.25% 2.1% 1.75%
Quality Inn............................. $300/$35,000 4.0% 2.1% 1.75%
Quality Suites.......................... $300/$50,000 4.0% 2.1% 1.25%
Sleep Inn............................... $300/$40,000 4.5% 2.1% 1.75%
Clarion................................. $300/$40,000 3.75% 1.0% 1.25%
Econo Lodge............................. $250/$25,000 4.0% 3.5%(1) --
MainStay Suites......................... $300/$30,000 4.5% 2.5%(1) --
Rodeway................................. $250/$25,000 3.5% 1.25% 1.25%
</TABLE>
- -------------
/(1)/ Fee includes both Marketing and Reservation Fees.

We have increased our average royalty rate since fiscal year 1993,
primarily by increasing the number of higher royalty fee contracts in the
franchise system and due to the escalation of royalty fees as franchise
agreements mature. For the twelve months ended December 31, 2001, our average
royalty rate for all Choice domestic brand hotels was 3.95%.

Franchise Operations

Our operations are designed to improve RevPAR for our franchisees, as
this is the measure of performance that most directly impacts franchisee
profitability. We believe that by helping our franchisees to become more
profitable we will enhance our ability to both retain our existing franchisees
and attract new franchisees. The key aspects of our franchise operations are:

Central Reservation System. On average, approximately 25% of the room
nights booked at franchisees' properties are reserved through a central
reservation system, which is supported by our toll-free telephone reservation
system, our proprietary Internet site, and global distribution systems. Our
reservation system consists of a computer reservation system known as CHOICE
2001, three reservation centers in North America and several international
reservation centers run by us or our master franchisees. Operators trained on
the CHOICE 2001 system can match each caller with a Choice-branded hotel meeting
the caller's needs. It provides an instant data link to our franchised
properties as well as to the Amadeus, Galileo, SABRE and Worldspan airline
reservation systems that facilitates the reservation process for travel agents.
We also offer our

<PAGE>

rooms for sale on our own proprietary Internet site (choicehotels.com) as well
as those of other travel companies.

To define more sharply the market and image for each of our brands, we
began advertising separate toll-free reservation numbers for all of our brands
in fiscal year 1995, although we allow our reservation agents to cross-sell the
Choice brands. If a room in the Choice hotel brand requested by a customer is
not available in the location or price range that the ustomer desires, the agent
may offer the customer a room in another Choice-branded hotel that meets the
customer's needs. Cross-selling enables Choice and its franchisees to capture
additional business.

On-line reports generated by the CHOICE 2001 system enable franchisees
to analyze their reservation patterns over time. In addition, we provide a yield
management product for our franchisees to allow them to improve the management
of their mix of rates and occupancy based on current and forecasted demand on a
property-by-property basis. We also market to our franchisees a property
management product. Such products are designed to manage the financial and
operations information of an individual hotel and improve its efficiency.

Property Management System. Our proprietary property and yield
management system, Profit Manager by Choice Hotels, is designed to help
franchisees maximize profitability and compete more effectively by managing
their rooms inventory, rates and reservations. The Profit Manager system
synchronizes each hotel's inventory with the CHOICE 2001 system, giving
reservation sales agents last room sell capabilities at every hotel. Profit
Manager includes a revenue management feature that calculates and suggests
optimum rates and length of stays based on each hotel's past performance and
projected occupancy. We believe that Profit Manager provides Choice Hotels with
a competitive advantage over hotels and franchise systems that do not have
standardized property and yield management systems.

As of March 15, 2002, approximately 2,600 hotels in the United States
and Canada are using Profit Manager, with approximately 1,700 of those hotels
utilizing the revenue management function.

Brand Name Marketing and Advertising. Our marketing and advertising
programs are designed to heighten consumer awareness and preference for the
Choice brands. Marketing and advertising efforts include national television and
radio advertising, print advertising in consumer and trade media and promotional
events, including joint marketing promotions with vendors and corporate
partners.

In May 2001, a new multi-branded national marketing campaign, "The
Power of Being There, Go", was introduced. Choice also took a leadership
position in the marketplace by rapidly introducing the "Thanks for Traveling"
theme which became an industry "rallying cry" immediately after September 11,
2001.

Numerous marketing and sales programs are conducted which target
specific groups, including corporate travelers, senior citizens, motorist club
members, families, government and

<PAGE>

military employees, and meeting planners. Other marketing efforts include
domestic and international trade show programs, publication of group and tour
rate directories, direct-mail programs, electronic direct marketing e-mail
programs, centralized commissions for travel agents, fly-drive programs in
conjunction with major airlines, and annual publication of a Travel and Vacation
Directory.

In 1998, we launched a loyalty program called Guest Privileges at four
of our brands (Comfort, Clarion, Quality and Sleep) to attract and retain
frequent travelers. As of December 31, 2001, the program had 1.2 million
members. In 2001, Choice renamed the program Choice Privileges in order to
communicate the link of the program to Choice Hotels. In 2001, we launched a
promotion called EA$Y CHOICE at our Econo Lodge and Rodeway Inn brands. The EA$Y
CHOICE promotion is a stamp redemption program and requires no program to join.
Additionally, Choice now offers all guests the ability to earn airline miles in
American AAdvantage(R) and US Airways Dividend Miles(R). As of February 1, 2002,
Delta and Northwest became airline partners. It is anticipated that additional
airlines will be added in 2002. Choice Privileges and EA$Y CHOICE participants
can earn airline miles or points/ stamps.

Marketing and advertising programs are directed by our marketing
department, which utilizes the services of independent advertising agencies. We
also employ home-based sales personnel geographically located across the United
States using personal sales calls, telemarketing and other techniques to target
specific customer groups, such as potential corporate clients in areas where our
franchised hotels are located, the motor coach market, and meeting planners. All
sales personnel sell business for all of the Choice brands.

Our franchise service directors work with franchisees to maximize
RevPAR. These directors advise franchisees on topics such as marketing their
hotels, improving quality and maximizing the benefits offered by the Choice
reservations system.

Quality Assurance Programs. Consistent quality standards are critical
to the success of a hotel franchise. We have established quality standards for
all of our franchised brands which cover housekeeping, maintenance, brand
identification and level of services offered. We inspect properties for
compliance with our quality standards when application is made for admission to
the franchise system. The compliance of existing franchisees with quality
standards is monitored through scheduled and unannounced Quality Assurance
Reviews conducted optimally twice per year at each property. Properties which
fail to maintain a minimum score are reinspected on a more frequent basis until
deficiencies are cured, or until such properties are terminated.

To encourage compliance with quality standards, various brand-specific
incentives and awards are used to reward franchisees who maintain consistent
quality standards. We identify franchisees whose properties operate below
minimum quality standards and assist them in complying with brand
specifications. Franchisees who fail to improve on identified quality matters
may be subject to consequences ranging from written warnings to termination of
the franchisee's franchise agreement. During the twelve months ended December
31, 2001, 72 domestic properties were terminated for failure to maintain minimum
quality assurance scores.

<PAGE>

Training. We maintain a training department which conducts mandatory
training programs for all franchisees and their employees. Regularly scheduled
regional and national training meetings are also conducted for both
property-level staff and managers. Training programs teach franchisees how to
take advantage of the Choice reservation system and marketing programs, and
fundamental hotel operations such as housekeeping, maintenance, and inventory
yield management.

Training is conducted by a variety of methods, including group
instruction seminars and video programs. We have developed an interactive
computer-based training system that will train hotel employees at their own
pace. Franchisees will be required to purchase hardware to operate the training
system, and will use software developed by us.

Design and Construction. We maintain a design and construction
department to assist franchisees in refurbishing, renovating, or constructing
their properties prior to or after joining the system. Department personnel
assist franchisees in meeting our brand specifications by providing technical
expertise and cost-savings suggestions.

Financial Assistance Programs. From time to time, we establish programs
or help franchisees obtain financing through; (i) a wholly owned subsidiary;
(ii) strategic partnerships with hotel lenders; and (iii) by referral to hotel
lenders for hotel refinancing, acquisition, renovation and development.

One of the past programs was a "Construction to Permanent Financing"
program under which Saloman Smith Barney together with Suburban Capital Markets,
Inc. offered $100 million in financing per year to qualified franchises and the
Company guaranteed such loans with a maximum guarantee amount of $10 million. At
December 31, 2000, loans outstanding under this program were $6.0 million and
the Company's guarantee covered $3.0 million of these loans. In 2001, the $6.0
million loan was settled, removing the Company's open guarantee of $3.0 million.
The program had been terminated in 1999.

During 2001, the Company implemented a low-cost signage leasing program
to assist franchisees with costs related to the reimaging of the Quality,
Comfort Suites and Sleep brands. The company expects to meet its goal of having
the re-imaging project completed by May 31, 2002.

Competition

Competition among franchise lodging chains is intense, both in
attracting potential franchisees to the system and in generating reservations
for franchisees.

We believe that hotel operators choose lodging franchisors based
primarily on the perceived value and quality of each franchisor's brand and
services, and the extent to which affiliation with that franchisor may increase
the franchisee's reservations and profits. We believe that hotel operators
select a franchisor in part based on the franchisor's reputation among other
franchisees, and the success of its existing franchisees.

<PAGE>

Choice is the second largest hotel franchisor in the world in terms of
number of open hotels. In the United States, Cendant Corporation (formerly HFS,
Inc.), with over 6,275 franchised hotels, is the largest franchisor. Six
Continents (formerly Bass Hotels & Resorts) has 2,314, Hilton has 1,935,
Marriott International, Inc. has 1,916, Accor has 1,219, Carlson Hospitality has
554, and Starwood Hotels and Resorts has 377 properties.(1)

Our prospects for growth are largely dependent upon the ability of our
franchisees to compete in the lodging market, since our franchise system
revenues are based on franchisees' gross room revenues and the ability of our
franchisees to obtain financing to construct new hotels.

The ability of a hotel to compete may be affected by a number of
factors, including the location and quality of its property, the number and
quality of competing properties nearby, its affiliation with a recognized name
brand, and general regional and local economic conditions. The effect of local
economic conditions on our results is substantially reduced by the geographic
diversity of our franchised properties, which are located in all 50 states and
in 37 other countries, as well as its range of products and room rates.

Service Marks and Other Intellectual Property

The service marks Quality, Comfort, Comfort Suites, Clarion, Sleep Inn,
Econo Lodge, Rodeway Inn, MainStay Suites and related marks and logos are
material to our business. We, directly and through our franchisees, actively use
these marks. All of the material marks are registered with the United States
Patent and Trademark Office. In addition, we have registered certain of our
marks with the appropriate governmental agencies in over 100 countries where we
are doing business or anticipate doing business in the foreseeable future. We
seek to protect our brands and marks throughout the world, although the strength
of legal protection available varies from country to country.

Seasonality

Our principal sources of revenues are franchise fees based on the gross
room revenues of our franchised properties. We experience seasonal revenue
patterns similar to those of the lodging industry in general. This seasonality
can be expected to cause quarterly fluctuations in our revenues, profit margins
and net income.

Regulation

Our franchisees are responsible for compliance with all laws and
government regulations applicable to the hotels they own or operate. The lodging
industry is subject to numerous federal, state and local government regulations,
including those relating to the preparation and sale of food and beverage (such
as health and liquor license laws), building and zoning requirements and

- -----------------
/(1)/ Source: Smith Travel Research

<PAGE>

laws governing employee relations, including minimum wage requirements,
overtime, working conditions and work permit requirements.

The Federal Trade Commission (the "FTC"), various states and certain
other foreign jurisdictions (including France, Province of Alberta, Canada, and
Mexico) regulate the sale of franchises. The FTC requires franchisors to make
extensive disclosure to prospective franchisees but does not require
registration. A number of states in which our franchises operate require
registration or disclosure in connection with franchise offers and sales. In
addition, several states have "franchise relationship laws" or "business
opportunity laws" that limit the ability of the franchisor to terminate
franchise agreements or to withhold consent to the renewal or transfer of these
agreements. While our franchising operations have not been materially adversely
affected by such regulation, we cannot predict the effect of future regulation
or legislation.

Impact of Inflation and Other External Factors

Our principal sources of revenues are franchise fees. Franchise fees
can be impacted by external factors, including, in particular: the supply of
hotel rooms within the lodging industry relative to the demand for rooms by
travelers, and inflation.

Although we believe industry-wide supply and demand for hotel rooms
recently has been fairly balanced, any excess in supply that might develop in
the future could unfavorably impact room revenues at our franchised hotels
either by reducing the number of rooms reserved at such franchised properties or
by restricting the rates hotel operators can charge for their rooms. In
addition, an excess supply of hotel rooms may discourage potential franchisees
from opening new hotels, reducing the franchise fees received by us. However, we
benefit from an increasing supply of hotels as it serves to increase franchise
fees.

Although we believe that increases in the rate of inflation will
generally result in comparable increases in hotel room rates, severe inflation
could contribute to a slowing of the national economy. Such a slowdown could
result in reduced travel by both business and leisure travelers, potentially
resulting in less demand for hotel rooms, which could result in a temporary
reduction in room rates and fewer room reservations, negatively impacting our
revenues. A weak economy could also reduce demand for new hotels, negatively
impacting the franchise fees received by us.

Among the other unpredictable external factors which may affect our fee
stream are wars, terrorist incidents, airline strikes, gasoline shortages and
severe weather.

Employees

We employ domestically approximately 1,446 people as of December 31,
2001. None of our employees are represented by unions or covered by collective
bargaining agreements. We consider our relations with our employees to be
satisfactory.

<PAGE>

Item 2. Properties

Our principal executive offices are located at 10750 Columbia Pike,
Silver Spring, Maryland 20901. The offices are leased from a third party. We own
our reservation and property yield system office in Phoenix, AZ, and our
reservation centers in Minot, ND and Grand Junction, CO, which we had previously
leased. We also occupy additional space in Toronto, Canada, on a month-to-month
basis. In 2001, we closed four leased regional offices. We remain obligated
under three of these leases. In addition, we lease 5 sales offices across the
United States. Management believes that its executive, reservation systems and
sales offices are sufficient to meet its present needs and does not anticipate
any difficulty in securing additional or alternative space, as needed, on terms
acceptable to the Company.

In September 2000, we acquired three MainStay Suites hotels from
Sunburst. The hotels are located in Brentwood, TN, Pittsburgh, PA and Greer, SC.

Item 3. Legal Proceedings

The Company is not a party to any litigation, other than routine
litigation incidental to its business. None of such litigation, either
individually or in the aggregate, is expected to be material to the business,
financial condition or results of operations of the Company.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 2001.

EXECUTIVE OFFICERS OF CHOICE HOTELS INTERNATIONAL, INC.

The name, age, title, present principal occupation, business address
and other material occupations, positions, offices and employment of each of the
executive officers of the Company are set forth below. The business address of
each executive officer is 10750 Columbia Pike, Silver Spring, Maryland 20901,
unless otherwise indicated.

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Stewart Bainum, Jr. .................... 55 Chairman of the Board of Directors
Charles A. Ledsinger, Jr. .............. 52 Chief Executive Officer and President
Steven T. Schultz....................... 55 Executive Vice President, Franchise Operations
Joseph M. Squeri ....................... 36 Senior Vice President, Development and Chief Financial
Officer
Michael J. DeSantis .................... 43 Senior Vice President, General Counsel and Secretary
Bruce N. Haase ......................... 41 Senior Vice President, International
Thomas Mirgon .......................... 45 Senior Vice President, Administration
Daniel Rothfeld ........................ 42 Senior Vice President, E-Commerce & Emerging Business
Gary Thomson ........................... 47 Senior Vice President, Chief Information Officer
Wayne Wielgus .......................... 47 Senior Vice President, Marketing
Gregory A. Bublitz ..................... 46 Vice President, Finance and Controller
</TABLE>

<PAGE>

Background of Executive Officers:

Stewart Bainum, Jr., Chairman of the Board of the Company from March
1987 to November 1996 and since October 1997; Director of the Company since
1977; Chairman of the Board of Sunburst since November 1996; Chairman of the
Board of Manor Care, Inc. since September, 1998; Chairman of the Board and Chief
Executive Officer of Manor Care, Inc. from March 1987 to September, 1998; Chief
Executive Officer of Manor Care, Inc. and its subsidiary ManorCare Health
Services, Inc. ("MCHS") from March 1987 to September, 1998 and President from
June 1989 to September, 1998; Vice Chairman of the Board of Vitalink Pharmacy
Services, Inc. ("Vitalink") from December 1994 to September, 1998; Vice Chairman
of the Board of Manor Care and subsidiaries from June 1982 to March 1987;
Director of Manor Care from August 1981 to September 1998, of Vitalink from
September 1991 to September, 1998, of MCHS from 1976 to September 1998; Chairman
of the Board and Chief Executive Officer of Vitalink from September 1991 to
February 1995 and President and Chief Executive Officer from March 1987 to
September 1991.

Charles A. Ledsinger, Jr., President, Chief Executive Officer and
Director of the Company since August, 1998; President and Chief Operating
Officer of St. Joe Company from February 1998 to August 1998, Senior Vice
President and Chief Financial Officer of St. Joe Company from May 1997 to
February 1998; Senior Vice President and Chief Financial Officer of Harrah's
Entertainment, Inc. from June 1995 to May 1997; Senior Vice President and Chief
Financial Officer of Promus Companies Incorporated from August 1990 to June
1995. Director: FelCor Lodging Trust, Inc., Friendly's Ice Cream Corporation and
TBC.

Steven T. Schultz. Executive Vice President, Domestic Hotels of
the Company since May 1999; Executive Vice President and Chief Development
Officer of La Quinta Inns, Inc. from 1997 to April 1999; Senior Vice
President-Development of La Quinta Inns, Inc. from 1992 to 1997.

Joseph M. Squeri. Senior Vice President, Development and Chief
Financial Officer since March 2002. He was Senior Vice President and Chief
Financial Officer of the Company since June 1999; Treasurer of the Company since
April 1998; Vice President, Finance and Controller of the Company from March
1997 to June 1999 and of Former Choice from March 1997 to October 1997.

Michael J. DeSantis. Senior Vice President, General Counsel and
Secretary of the Company since June 1997 and of Former Choice from June 1997 to
October 1997; Senior Attorney for Former Choice from November 1996 to June 1997;
Senior Attorney for Manor Care from January 1996 to October 1996; Vice
President, Associate General Counsel and Assistant Secretary for Caterair
International Corporation from April 1994 to December 1995; Assistant General
Counsel of Caterair International from May 1990 to March 1994.
25

<PAGE>

Bruce N. Haase, Senior Vice President, International of the Company
since October 2000. He was Vice President - Finance and Treasurer from April
2000 until October 2000. He was Vice President, Finance and Treasurer of The
Ryland Group, Inc., in Columbia, Maryland, from August 1999 until March 2000 and
Vice President and Treasurer from October 1995 until August 1999.

Thomas Mirgon. Senior Vice President, Administration since April 1998;
Senior Vice President, Human Resources of the Company from March 1997 to April
1998 and of Former Choice from March 1997 to October 1997; Vice President,
Administration of Interim Services from August 1993 to February 1997; employed
by Taco Bell Corp. from January 1986 to August 1993, last serving as Senior
Director, Field Human Resources from February 1992 to August 1993.

Daniel Rothfeld. Senior Vice President, E-Commerce and Emerging
Business Opportunities since December 2000. He was Vice President - Partner
Services from December 1997 until December 2000 and Vice President of Corporate
Services of Interim Services, Inc., in Ft. Lauderdale, Florida, from January
1987 until December 1997.

Gary Thomson. Senior Vice President and Chief Information
Officer of Choice since August 2000. He was Vice President - Information Systems
Technologies from November 1993 until August 2000.

Wayne Wielgus. Senior Vice President, Marketing of Choice September
2000. He was Vice President, Marketing of Best Western International, Inc., in
Phoenix, Arizona, from 1996 until September 2000.

Gregory A. Bublitz. Vice President, Finance and Controller of
Choice since December 2000. He was Vice President - Finance from January 2000
until December 2000. He was an independent business consultant in Columbia,
Maryland, from February 1999 until December 1999. He was Vice President and CFO
of Wise Metals Co., Inc., in Linthicum, Maryland, from October 1996 until
January 1999 and Vice President, Marketing & Customer Service for Alumax Primary
Aluminum Corporation, in Norcross, Georgia, from August 1995 until September
1996.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.

Prior to the Spin-off, the Company was a wholly-owned subsidiary of
Former Choice. In the Spin-off, Former Choice distributed to its shareholders
all of its interest in the Company on the basis of one share of Company common
stock for each share of Former Choice common stock. The Spin-off resulted in
approximately 60 million shares of Company common stock outstanding as of
October 16, 1997.

<PAGE>

The shares of the Company's Common Stock are listed and traded on the
New York Stock Exchange. The following table sets forth information on the high
and low prices of the Company's Common Stock for the two most recent fiscal
years.

QUARTERLY MARKET PRICE RANGE OF COMMON STOCK
(Unaudited)

Quarters Ended Market Price Per Share
-----------------------------------------------------------
High Low
-----------------------------------------------------------

FISCAL 2001
March $15.50 $11.00
June 16.00 11.90
September 23.80 13.48
December 23.98 16.00

FISCAL 2000
March $17.375 $13.50
June 15.9375 9.9375
September 11.1875 7.50
December 14.25 8.875

The Company paid no dividends during the twelve month period ended
December 31, 2001. The Company does not anticipate the payment of any cash
dividends on its common stock in the foreseeable future. Payment of dividends on
Company common stock will also be subject to limitations as may be imposed by
the Company's credit facilities from time to time. The declaration of dividends
will be subject to the discretion of the Board of Directors.

As of March 10, 2002, there were 1,606 record holders of Company common stock.

Item 6. Selected Financial Data.

<TABLE>
<CAPTION>
As Revised (See Note 1 to the Consolidated Financial Statements)
Seven Months Fiscal Year
Years ended December 31, Ended December 31, Ended May 31,
2001 2000 1999 1998 1997 1997
---------- --------- ---------- --------- --------------------- ----------------

Company Results (In millions, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Total Assets $321.2 $484.1 $464.7 $398.2 $386.4 $573.1
Long-term Debt 281.3 297.2 307.4 279.2 282.8 372.0
Franchise Revenues (a) 165.1 160.2 151.6 138.1 82.4 118.2
Total Revenues 341.4 352.8 324.2 295.4 183.1 274.4
Net Income 14.3 42.4 57.2 55.3 27.3 34.7
Basic Earnings per Share $0.32 $0.80 $1.04 $0.94 $0.46 $0.55
Diluted Earnings per Share $0.32 $0.80 $1.03 $0.93 $0.45 $0.55
</TABLE>

<PAGE>

(a) Reflects franchise revenues exclusive of marketing and reservation
pass through fees.

Item 7. Management's Discussion and Analysis of Financial Conditions and
Results of Operations.

The required information is included in the 2001 Annual Report and is
incorporated here by reference.

Item 7A. Quantitative and Qualitative Disclosures About Market Risks.

The Company is exposed to market risk from changes in interest rates
and the impact of fluctuations in foreign currencies on the Company's foreign
investments. The Company manages its exposure to this market risk through the
monitoring of its available financing alternatives including in certain
circumstances the use of derivative financial instruments. The Company's
strategy to manage exposure to changes in interest rates and foreign currencies
remains unchanged from 1997. Furthermore, the Company does not foresee any
significant changes in exposure in these areas or in how such exposure is
managed in the near future.

At December 31, 2001 and 2000, the Company had $281.3 million and
$297.2 million of debt outstanding at effective interest rates of 4.9% and 7.3%,
respectively. A hypothetical change of 10% in the Company's effective interest
rate from year-end 2001 levels would increase or decrease interest expense by
$0.7 million. The Company will refinance the $150 million variable rate term
loan as it amortizes throughout the expected maturity dates. Upon expiration of
the Credit Facility in 2006, the Company expects to refinance its obligations.
For more information related to the Company's use of interest rate instruments,
see Long-Term Debt and Fair Value of Financial Instruments in the Notes to the
Consolidated Financial Statements.

The Company does not have any derivative financial instruments related
to its foreign investments.

<PAGE>

Item 8. Financial Statements and Supplementary Data.

The required information is included in the 2001 Annual Report and is
incorporated here by reference. See Item 14 for the Index to Financial
Statements and Schedules.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

The required information on directors will be contained in the
Company's Proxy Statement, and reference is expressly made to the Proxy
Statement for the specific information incorporated in this Form 10-K. The
required information on executive officers is set forth in Part I of this Form
10-K under an unnumbered item captioned "Executive Officers of Choice Hotels
International, Inc."

Item 11. Executive Compensation.

The required information will be set forth under "Executive
Compensation" and "Board Compensation Committee Report on Executive
Compensation--Compensation of the Chief Executive Officer" in the Company's
Proxy Statement, and reference is expressly made to the Proxy Statement for the
specific information incorporated in this Form 10-K.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

The required information will be set forth under "Security Ownership of
Certain Beneficial Owners and Executive Officers" and "Board of Directors" in
the Company's Proxy Statement, and reference is expressly made to the Proxy
Statement for the specific information incorporated in this Form 10-K.

Item 13. Certain Relationships and Related Transactions.

The required information will be set forth under "Certain Relationships
and Related Transactions" and "Board of Directors--Compensation Committee
Interlocks and Insider Participation" in the Company's Proxy Statement, and
reference is expressly made to the Proxy Statement for the specific information
incorporated in this Form 10-K.

<PAGE>

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a) List of Documents Filed as Part of this Report

1. Financial Statements

The following information is included on the corresponding pages of the
2001 Annual Report:

<TABLE>
<CAPTION>
<S> <C>
Report of Independent Public Accountants ...................... p. F-11
Consolidated Statements of Income.............................. p. F-12
Consolidated Balance Sheets.................................... p. F-13
Consolidated Statements of Cash Flows.......................... p. F-14
Consolidated Statements of
Shareholders' Equity and Comprehensive Income.................. p. F-15
Notes to Consolidated Financial Statements..................... pp. F-16-33

2. Financial Statement Schedules

The following reports are filed herewith.

Report of Independent Public Accountants on Schedule II
Schedule II - Valuation and Qualifying Accounts
Report of Independent Public Accountants

All other schedules are not applicable.

3. Exhibits
</TABLE>

<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.01(a) Restated Certificate of Incorporation of Choice Hotels Franchising, Inc.
3.02(a) Amended and Restated Bylaws of Choice Hotels International, Inc.
4.01(c) Competitive Advance and Multi-Currency Credit Facilities Agreement dated June 29, 2001 among
Choice Hotels International, Inc., Chase Manhattan Bank, as Agent and certain Lenders
("Credit Agreement")
4.02(k) First Amendment to Credit Agreement dated October 1, 2001 among Choice Hotels International,
Inc., Chase Manhattan Bank, as Agent, and certain Lenders.
4.03(h) Registration Agreement dated April 28, 1998 between Choice Hotels International, Inc. and
Salomon Brothers, Inc., Bear Stearns & Co. Inc. and Lehman Brothers Inc.
4.04(h) Indenture dated as of May 4, 1998, by and among the Company, Quality Hotels Europe, Inc., QH Europe
Partnership and Marine Midland Bank, as Trustee, with respect to the 7.125% Senior Notes due 2008
of the Company.
4.05(h) Specimen certificate of 7.125% Senior Note due 2008 (Original Note) (Attached as an exhibit
to the Indenture set forth as Exhibit 4.08)
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
<S> <C>
4.06(h) Specimen certificate of 7.125% Senior Note due 2008 (Exchange Note) (Attached as an exhibit
to the Indenture set forth as Exhibit 4.08).
4.07(b) Guarantee Agreement dated October 15, 1997 between Quality Hotels Europe, Inc. and The Chase
Manhattan Bank.
4.08(b) Supplement No. 1 to the guarantee Agreement dated April 28, 1998 among Choice Hotels
International, Inc., Quality Hotels Europe, Inc., QH Europe Partnership and The Chase
Manhattan Bank.
4.09(b) Indemnity, Subrogation and Contribution Agreement, dated April 28, 1998 among Choice Hotels
International, Inc., Quality Hotels Europe, Inc., QH Europe Partnership and The Chase
Manhattan Bank.
4.10(g) Rights Agreement, dated as of February 19, 1998, between Choice Hotels International, Inc.
and ChaseMellon Shareholder Services, L.L.C., as Rights Agent.
10.01(l) Amended and Restated Employment Agreement between Choice Hotels International, Inc. and
Charles A. Ledsinger, Jr. dated April 13, 1999.
10.02(d) Amended and Restated Employment Agreement dated as of October 15, 1997 by and between Choice
Hotels Franchising, Inc. (renamed Choice Hotels International, Inc.) and Stewart Bainum, Jr.
10.03(i) Amended and Restated Employment Agreement dated April 13, 1999 by and between Choice Hotels
International, Inc. and Thomas Mirgon.
10.04(f) Choice Hotels International, Inc. Non-Employee Director Stock Option and Deferred
Compensation Stock Purchase Plan.
10.05(f) Choice Hotels International, Inc. 1997 Non-Employee Director Stock Compensation Plan.
10.06(f) Choice Hotels International, Inc. 1997 Long-Term Incentive Plan.
10.07(i) Second Amended and Restated Employment Agreement dated April 13, 1999 between Choice Hotels
International, Inc. and Michael J. DeSantis.
10.08(j) Commercial Lease dated May 29, 1998 among Columbia Pike I, LLC and Colesville Road, LLC (each
an assignee of Manor Care, Inc.) and Choice Hotels International, Inc.
10.09(i) Employment Agreement dated June 3, 1999 between Choice Hotels International, Inc. and Joseph
M. Squeri.
10.10(n) Employment Agreement dated May 3, 2000 between Choice Hotels International, Inc. and Daniel
Rothfeld.
10.11(n) Employment Agreement dated August 18, 2000 between Choice Hotels International, Inc. and
Wayne Wielgus.
10.12(o) Amended and Restated Supplemental Executive Retirement Plan.
10.13* Amended and Restated Employment Agreement dated as of November 12, 2001 between Choice Hotels
International, Inc. and Steven T. Schultz.
13.01* Annual Report to Shareholders.
13.02* Schedule II -- Valuation and Qualifying Accounts
21.01* Subsidiaries of Choice Hotels International, Inc.
23.01* Report of Arthur Andersen LLP.
23.02* Letter to the Securities and Exchange Commission regarding representations of Arthur Andersen LLP.

</TABLE>
- ----------------------------
* Filed herewith

(a) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Registration Statement on Form S-4,
filed August 31, 1998 (Reg. No. 333-62543).

(b) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Amendment No. 1 to Registration
Statement on Form S-4, filed October 14, 1998 (Reg. No. 333-62543).

(c) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2001 filed on August 6, 2001.

<PAGE>

(d) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Current Report on Form 8-K dated
October 15, 1997, filed on October 29, 1997.

(e) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Current Report on Form 8-K dated
October 15, 1997, filed on December 16, 1997.

(f) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Registration Statement filed on Form
S-8, filed on December 2, 1997 (Reg. No. 333-41357).

(g) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Current Report on Form 8-K dated
February 19, 1998, filed on March 11, 1998.

(h) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Quarterly Report on Form 10-Q filed for
the quarterly period ended March 31, 1998, filed on May 15, 1998.

(i) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Quarterly Report on Form 10-Q filed for
the quarter ended June 30, 1998, filed on August 11, 1998.

(j) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1998, filed on March 30, 1999.

(k) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001 filed on November 13, 2001.

(l) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999, filed on August 16, 1999.

(m) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Annual Report on Form 10-k for the year
ended December 31, 1999, filed March 30, 2000.

(n) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2000, filed November 14, 2000.

(o) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 2000, filed April 2, 2001.

(b) No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 2001.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

CHOICE HOTELS INTERNATIONAL, INC.

By: /s/ Charles A. Ledsinger, Jr.
-------------------------------------
Charles A. Ledsinger, Jr.
President and Chief Executive Officer

Dated: March 26, 2002

<PAGE>

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Stewart Bainum, Jr. Chairman, Director March 26, 2002
----------------------------
Stewart Bainum, Jr.

/s/ Charles A. Ledsinger, Jr. President, Chief Executive March 26, 2002
---------------------------- Officer & Director
Charles A. Ledsinger, Jr.

/s/ Barbara Bainum Director March 26, 2002
----------------------------
Barbara Bainum

/s/ Larry R. Levitan Director March 26, 2002
----------------------------
Larry R. Levitan

/s/ William L. Jews Director March 26, 2002
----------------------------
William L. Jews

/s/ Raymond E. Schultz Director March 26, 2002
----------------------------
Raymond E. Schultz

/s/ Jerry E. Robertson Director March 26, 2002
----------------------------
Jerry E. Robertson

/s/ Joseph M. Squeri Senior Vice President, March 26, 2002
---------------------------- Development and Chief
Joseph M. Squeri Financial Officer

</TABLE>
34

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.13
<SEQUENCE>3
<FILENAME>dex1013.txt
<DESCRIPTION>AMENDED AND RESTATED EMPLOY AGREE
<TEXT>
<PAGE>

AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
--------------------

This Amended and Restated Employment Agreement ("Agreement") dated this
12th day of November, 2001, amends and restates that Employment Agreement dated
May 13, 1999 between Choice Hotels International, Inc. ("Employer"), a Delaware
corporation with principal offices at 10750 Columbia Pike, Silver Spring,
Maryland 20901, and Steven T. Schultz ("Employee").

1. Employment. During the term of this Agreement, as hereinafter
----------
defined, Employer hereby employs Employee as Executive Vice President, Domestic
Hotels. Employee hereby accepts such employment upon the terms and conditions
hereinafter set forth and agrees to faithfully and to the best of his ability
perform such duties as may be from time to time assigned by Employer's Board of
Directors and Chief Executive Officer, such duties to be rendered at the
principal office of Employer, subject to reasonable travel. Employee also agrees
to perform his duties in accordance with policies established by Employer's
Board of Directors, which may be changed from time to time.

2. Term. Subject to the provisions for termination hereinafter
----
provided, the term of this Agreement shall begin on November 19, 2001
("Effective Date") and shall terminate on May 31, 2002 (the "Resignation Date").
At the Resignation Date, Employee shall resign as an officer of Employer (and
its respective subsidiaries) and his employment shall cease.

3. Compensation. For all services rendered by Employee under this
------------
Agreement during the term thereof, Employer shall pay Employee the following
compensation:

(a) Salary. From the Effective Date through the Resignation
------
Date, a base salary of Three Hundred Forty-Five Thousand
Dollars ($345,000) per annum payable in equal bi-weekly
installments.

(b) Incentive Bonus. For Fiscal Year 2001, Employee shall have
---------------
the opportunity to earn a bonus with a target of Fifty-Five
Percent (55%) per annum of the base salary set forth in
subparagraph 3(a) above in Employer's bonus plans as adopted
from time to time by Employer's Board of Directors.

(c) Automobile. Employer shall provide Employee with an
----------
allowance for automobile expenses of $1,000 per month, subject
to withholding tax, beginning on the Effective Date.

(d) Other Benefits. Employee shall continue to be entitled to
--------------
participate in all other fringe benefits in which he was a
participant immediately prior to the Effective Date.

<PAGE>

4. Extent of Services. Employee shall devote his full professional
------------------
time, attention, and energies to the business of Employer, and during the term
shall execute against the services outlined in Exhibit A.

5. Disclosure and Use of Confidential Information. Employee
----------------------------------------------
recognizes and acknowledges that information about Employer's and affiliates'
present and prospective clients, franchises, management contracts, acquisitions
and personnel, as they may exist from time to time, and to the extent it has not
been otherwise disclosed, is a valuable, special and unique asset of Employer's
business ("Confidential Information"). Throughout the term of this Agreement and
for a period of two (2) years after its termination or expiration for whatever
cause or reason except as required by applicable law, Employee shall not
directly or indirectly, or cause others to, make use of or disclose to others
any Confidential Information. During the term of this Agreement and for a period
of two years thereafter, Employee agrees not to solicit for employment or
contract for services with, directly or indirectly, on his behalf or on behalf
of any person or entity, other than on behalf of Employer, any person employed
by Employer, or its subsidiaries or affiliates during such period, unless
Employer consents in writing. In the event of an actual or threatened breach by
Employee of the provisions of this paragraph, Employer shall be entitled to
injunctive relief restraining Employee from committing such breach or threatened
breach. Nothing herein stated shall be construed as preventing Employer from
pursuing any other remedies available to Employer for such breach or threatened
breach, including the recovery of damages from Employee. "Affiliate" as used in
this Agreement means a person or entity that is directly or through one or more
intermediates controlling, controlled by or under common control with another
person or entity.

6. Notices. Any notice, request or demand required or permitted to be
-------
given under this Agreement shall be in writing, and shall be delivered
personally to the recipient or, if sent by certified or registered mail or
overnight courier service to his residence in the case of Employee, or to its
principal office in the case of the Employer, return receipt requested. Such
notice shall be deemed given when delivered if personally delivered or when
actually received if sent certified or registered mail or overnight courier.

7. Severance.
---------

(a) Subject to the other provisions of this Section 7, if Employee's
employment terminates on the Resignation Date or if earlier terminated
due to Constructive Termination (the earliest date being the
"Termination Date"), Employee shall be entitled to the following
severance benefits:

1. Discretionary Pay from the Termination Date through May 31,
2003 equal to Employee's base salary and automobile allowance on the
Termination Date, less standard deductions, payable in installments in
accordance with Employer's normal payroll practices. Employee may
continue deductions for medical, dental, life insurance, and pre-tax
spending accounts while receiving Discretionary Pay, and Employee
consents to the

<PAGE>

customary deductions for such benefits from Discretionary Pay.
Employer will continue to pay employer contributions to Employee's
medical, dental, life insurance, and pre-tax spending accounts while
Employee is receiving Discretionary Pay. Employer will stop optional
deductions for items such as retirement plans and deferred
compensation with Employee's last paycheck for regular hours worked
through the Termination Date. Employee will be eligible for COBRA
benefits after the Discretionary Pay ends.

2. Employee will receive a fiscal year 2002 bonus in
accordance with the terms of the bonus plan that Employee was under.
Such bonus shall be payable, if at all, at such time as the employees
of Choice receive their bonus pay out. The EPS portion of the bonus
criteria shall be based on the actual payout used for other Choice
executive officers. The bonus performance target for the management
bonus objective portion shall be deemed to have been met.

3. From the Termination Date through May 31, 2003 (the "Stock
Option Period") previously granted options to acquire Choice Hotels
common stock shall continue to vest on the vesting schedule provided
for under the terms of those options, notwithstanding the termination
of Employee's employment and, for thirty days following the Stock
Option Period, Employee shall have the right to exercise such stock
options, together with all options held by him which have already
vested as of the date of this Agreement. Additionally, all restricted
stock previously granted to Employee shall continue to vest during the
Stock Option Period. Employer agrees that Employee shall be deemed
continuously eligible during the Stock Option Period for purposes of
participation in the Long-Term Incentive Plan; however, Employee shall
not be entitled to any future grants under the Plan. All previously
granted options to acquire Choice Hotels common stock and all
restricted stock grants which vest after the Stock Option Period shall
be deemed forfeited and terminated as of the Termination Date.

(b) "Constructive Termination" shall mean (i) removal or termination of
Employee other than in accordance with Section 10, (ii) a decrease in
Employee's compensation or benefits (unless a similar decrease is
imposed on all senior executive oficers), (iii) a significant reduction
in the scope of Employee's authority, position, duties or
responsibilities, (iv) a significant change in Choice's annual bonus
program which adversely affects Employee, or (v) any other material
breach of this Agreement by Employer provided Employer shall be given
fourteen days advance written notice of such claim of material breach,
which written notice shall specify in reasonable detail the grounds for
such claim of material breach. Except in the case of bad faith,
Employer shall have an opportunity to cure the basis for Constructive
Termination during the fourteen day period after written notice.

(c) Employee upon termination shall not be required to mitigate damages
but nevertheless shall be entitled to pursue other employment, and
Employer shall be entitled to receive as offset and thereby reduce its
payment under Section 7(a)(1) and (2), the amount received by Employee
from any other active employment. As a condition to

<PAGE>

Employee receiving his compensation from Employer, Employee agrees to
permit verification of his employment records and Federal income tax
returns by an independent attorney or accountant, selected by Employer
but reasonably acceptable to Employee, who agrees to preserve the
confidentiality of the information disclosed by Employee except to the
extent required to permit Employer to verify the amount received by
Employee from other active employment. Employer shall receive credit
for unemployment insurance benefits, social security insurance or like
amounts actually received by Employee.

(d) As a condition precedent to Employee receiving the benefits under
Section 7(a), Employee, on or after the Termination Date, shall execute
and deliver to Employer a release in the form attached hereto as
Exhibit B.

(e) During the period that Employee is receiving Discretionary Pay,
Employee shall be reasonably available to provide consulting services
to Employer at no additional compensation, so long as such consulting
services do not interfere with any other active employment of Employee
or Employee's search efforts in pursuit of active employment.

8. Waiver of Breach. The waiver of either party of a breach of any
----------------
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.

9. Assignment. The rights and obligations of Employer under this
----------
Agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of Employer. The obligations of Employee hereunder may not be
assigned or delegated.

10. Termination of Agreement. This Agreement shall terminate upon the
------------------------
following events and conditions:

(a) Upon expiration of its term;

(b) For Cause, which means gross negligence, willful misconduct,
willful nonfeasance, deliberate and continued refusal to carry out
duties and instructions of the Employer's Board of Directors and Chief
Executive Officer consistent with the position, material dishonesty, a
violation or a willful breach of this Agreement or conviction of a
felony involving moral turpitude, fraud or misappropriation of
corporate funds. Employee shall be entitled to fourteen (14) days
advance written notice of termination, except where the basis for
termination constitutes wilful conduct on the part of Employee
involving dishonesty or bad faith, in which case the termination shall
be effective upon the sending of notice. Such written notice shall
specify in reasonable detail the grounds for Cause and Employee shall
have an opportunity to contest to the Board of Directors or cure the
basis for termination during the fourteen day period after written
notice.

(c) Subject to state and federal laws, if Employee is unable to
perform the essential functions of the services described herein,
after reasonable accommodation, for more than

<PAGE>

180 days (whether or not consecutive) in any period of 365 consecutive
days, Employer shall have the right to terminate this Agreement by
written notice to Employee. In the event of such termination, all
non-vested stock option and other non-vested obligations of Employer
to Employee pursuant to this Agreement shall terminate.

(d) In the event of Employee's death during the term of this
Agreement, the Agreement shall terminate as of the date thereof.

(e) Upon voluntary resignation of Employee not due to Constructive
Termination, so long as Employee has given Employer thirty days prior
written notice of such resignation.

11. Entire Agreement. This instrument contains the entire agreement of
----------------
the parties and superceded all previous agreements. It may be changed only by an
agreement in writing signed by the party against whom enforcement of any waiver,
change, modification, extension, or discharge is sought. This Agreement shall be
governed by the laws of the State of Maryland, and any disputes arising out of
or relating to this Agreement shall be brought and heard in any court of
competent jurisdiction in the State of Maryland.

IN WITNESS WHEREOF, the parties have executed this Agreement on
the date first set forth above.

Employer:

CHOICE HOTELS INTERNATIONAL, INC.

By:
---------------------------------
Michael J. DeSantis
Senior Vice President

Employee:

Steven T. Schultz

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13.01
<SEQUENCE>4
<FILENAME>dex1301.txt
<DESCRIPTION>ANNUAL REPORT TO SHAREHOLDERS
<TEXT>
<PAGE>

[PHOTO]

DEAR SHAREHOLDERS I am pleased to report that Choice Hotels International
enjoyed a very successful year in 2001, despite the challenges of a sluggish
economy and the aftershocks of the September terrorist attacks.

The company recorded steady recurring EBITDA growth of 4.6% for the year,
met Wall Street's consensus on recurring earnings of $1.25 per share, achieved
1.8% growth in royalty fees and enjoyed domestic unit growth of 2.6%. These
results demonstrate the power of our franchising business model to perform well
even in uncertain times.

How did we succeed in such an unsettled environment? The bottom line is
that we created a sound strategic platform in 1999, Unlocking the Power of
Choice, and we've stuck with it. We've made modifications along the way, but our
core business model remains sound, our strategy is on target and we've made
significant strides in building the value of the company. We continue to
generate strong cash flow, with a high level of predictability provided by the
annuity nature of our long-term franchise contracts.

As part of our effort to help the company achieve more of its potential, we
created a leaner, more nimble organization that is closer to our customer and
better positioned for future growth. We reinvigorated our already strong brands
through new images for three of them and creation of a new integrated,
multi-brand marketing campaign. By using technology wisely and strategically to
improve all phases of our business, we have given our franchisee partners and
our associates valuable tools to help them drive performance.

Yet, are we satisfied? No. We recognize that significant challenges remain
in the marketplace, and that the economy, though showing encouraging signs of
recovery, is still lagging. So we have to keep up our drive for superior
performance.

Even though Choice's systemwide RevPAR declined overall by 2.4% in 2001, we
fared better than the average industry drop of 7.0%. More importantly, our
average daily rate (ADR) remains above that of the previous year, holding
relatively steady even as occupancy declined markedly in the fourth quarter and
overall for the year.

With a business mix that skews 65% leisure and 35% business, we were not
hit as hard as some other hotel companies more concentrated in urban areas and
more reliant on business travel.

Because about 75% of our business reaches our hotels by car, we are
extremely well-positioned in our highway locations to continue to attract our
regular customers as well as first-time guests whose travel patterns now take
them more in our direction.

CONTINUED UNIT GROWTH IN 2002

We are working off a solid financial base from 2001. Clearly that success is due
in large measure to our business model as a mid-priced franchisor better
positioned to weather down economic cycles.

Unit growth remains at the heart of our business. On the development side,
our plan for 2001 held up very well, helped by a strong fourth quarter. This
success was due in part to the fact that in uncertain economic times,
independent and under-performing branded hotels tend to look at more proven
brands to help them. We clearly benefited because we could offer the
performance, service and support hotels are seeking.

More importantly, we succeeded because of the intense focus we place on
driving unit growth in challenging times. Our associates rallied to the cause,
working hard to help us land new contracts and showing a firm determination to
succeed.

[LOGO] Comfort Inn

COMFORT INN features value-added amenities like a complimentary deluxe
continental breakfast, the Choice Privileges frequent traveler program, pool or
exercise facilities, a 100% satisfaction guarantee and over 1,300 locations
throughout the U.S.

[LOGO] COMFORT SUITES

COMFORT SUITES features separate areas for you to work, live and sleep, a
complimentary breakfast buffet, plus an in-room refrigerator, coffee maker and
microwave, and the Choice Privileges frequent traveler program, all backed by a
100% satisfaction guarantee.

<PAGE>

LETTER TO SHAREHOLDERS (continued)

[LOGO] QUALITY HOTEL

QUALITY For over 60 years, Quality Inns, Hotels and Suites have provided
travelers with great value and a comfortable guest experience. Today, Quality
Sleeper mattresses by Serta, in-room Maxwell House coffee, and the Choice
Privileges frequent traveler program are some of the reasons guests trust
Quality to make everything just right.

[LOGO] SLEEP INN

SLEEP INN Get what you came for--a good night's sleep. Sleep Inn and Suites are
smartly designed and warmly decorated. Add the Choice Privileges frequent
traveler program and a friendly staff whose only talk is to see that you have a
pleasant stay. A promise backed by our 100% satisfaction guarantee.

[LOGO] Econo Lodge

ECONO LODGE At Econo Lodge, we know you're looking for a clean, comfortable
room at a great rate. That's why we've teamed with the most well-known household
cleaning brand in the U.S., Mr. Clean, to let consumers know that cleanliness is
top of mind at all Econo Lodge

At year's end, in a decidedly more difficult environment, we had signed 300
new contracts, representing 25,223 rooms, compared to 298 new deals in 2000,
representing 24,582 rooms. Of our 2001 contracts, 184 were conversions,
substantially up from 124 conversions the year before.

More than ever, we believe our company is well-positioned with our brands
to continue unit growth in the 2%+ range in 2002. We are very satisfied that we
have in place a development effort that can keep producing strong unit growth
for Choice.

STAYING THE STRATEGIC COURSE

So where are we headed in 2002? We still have the same overarching goals of
Reaching More Consumers, Delivering Exceptional Services and Building Strong
Brands. Those keys remain cornerstones of our day-to-day operations. But we need
to bring a sharper focus on objectives that will help us Unlock our True Power
and achieve greater growth. Accordingly, we have added a fourth key goal,
Leveraging Our Size, Scale and Distribution.

Hotel owners greatly value the significant volume of guests we provide
through corporate and brand marketing, reservations, key account sales and our
loyalty programs, Choice Privileges and EA$Y CHOICE.

In the past year, we changed our marketing approach from brand-centered to
the new Choice "Power of Being There, Go" theme. Our initial research shows
consumers are responding well to the change and brand awareness is growing. Our
local and regional co-op marketing campaigns leverage the national marketing
program to drive more business at the local level.

Last fall, the immediate aftershock of the September 11 terrorist attacks
left the travel industry reeling. Business dropped precipitously as Americans
became fearful of traveling. In response, we worked with our franchisees to
launch a nationwide campaign to thank those that were still traveling and
encourage others to resume their normal travel activity. "Thanks for Traveling"
was initially unbranded so that others in the travel industry could join in.

With thousands of banners at our properties across the country and in
hundreds of airports as well, the "Thanks for Traveling" campaign received
enthusiastic support from government leaders and leading organizations such as
AAA, the American Society of Travel Agents and the United States Tour Operators
Association. Most importantly, it earned goodwill with consumers and affirmed
Choice's role as an industry leader.

Early in 2002, the Choice Privileges program for frequent travelers was
enhanced through the addition of airline mile options. Our continued focus on
overall brand quality coupled with these marketing initiatives is designed to
stimulate room demand for our franchised hotels through improved guest
satisfaction. We are Reaching More Consumers.

Choice took on the task of evaluating service delivery, which ultimately
led to the decision to create a more centralized Franchise Services function
that provides more consistency in delivery and a better focus on customer needs.

Our field staff, in combination with effective training programs and strong
technology products, directly helps property owners better manage their
properties to improve RevPAR performance. Marketing services help create
effective positioning for brands and drives guest stays. Reservations services
deliver a high percentage of guests directly to the properties. As a result,
hotel owners enjoy revenue gains that translate into both higher royalty rates
for Choice and improved returns for owners, leading to further unit growth.
These service enhancements help us better Deliver Exceptional Services.

<PAGE>

Another key objective is Building Strong Brands. Brand Management is
creating an integrated strategic plan for our brands that will ensure each brand
leverages its unique strengths for growth, while keeping all Choice brands
intensely focused on customer satisfaction. These plans will go a long way
toward improving Choice's ability to grow the brands.

We are seeing real progress through the re-imaging of our Quality, Comfort
Suites and Sleep Inn brands, which comprise nearly a third of our domestic
system. When we undertook this program in May of 2001, we recognized that more
distinctive images for these brands would help separate them from the
competition and provide these brands with new growth opportunities, both
conversion and new construction.

As we approach the May 31, 2002, deadline to complete re-imaging almost
1,000 hotels, we now have the critical mass needed to effectively use the new
images in all of our advertising and marketing going forward. Already owners who
have made the changeover are seeing the clear benefit of re-imaging, especially
since our advertising and marketing programs now reflect and support the new
images.

Leverageing Our Size, Scale and Distribution is another key to our growth.
The significant number of hotels in our system provides great opportunity to use
that size to reduce costs and improve returns for owners. The excellent results
of our Partner Services group, which works on strategic partnerships with
endorsed vendors, reflect our ability to use our distribution to save hotel
owners money in purchasing, enable better control over brand quality and create
new revenue streams.

We continue to be focused on identifying even more methods to lower
operating costs for our hotel owners, thereby making Choice brands even more
compelling and adding to the size so critical to customer awareness and
reservations activity.

DRIVING FORWARD

We need to ensure that development sales, franchise services and brand
management continue to work in concert to make sure our products meet franchisee
needs both in terms of cost and performance. We have well-known, solid hotel
products now, but by making them better, and by working more in tandem, we can
deliver a superior product that offers great returns for our existing customers
and an attractive proposition for prospective owners.

Choice is well positioned for continued success. We are the only hotel
company that relies solely on pure franchising. We have a focused franchise
services group that provides better delivery of valued services to franchisees.
We offer powerful reservations delivery, highly effective property management
systems, and well-known, established brands backed by strong national
advertising and promotions. Our re-imaged brands strengthen the portfolio, and
our Choice Privileges and EA$Y CHOICE frequent traveler programs give guests
more rewards for loyalty.

Tough challenges lie ahead. With each new year that comes, companies
reassert their determination to succeed. And, with each new year, they encounter
unanticipated challenges that test their resolve. I am especially proud of how
our associates responded to the unique challenges of 2001. Our success in the
face of such a test gives me great confidence that Choice will drive forward in
2002 with greater success.

/s/ Charles A. Ledsinger, Jr.
Charles A. Ledsinger, Jr.
President and Chief Executive Officer
March 15, 2002

[LOGO] Clarion

CLARION At over 160 locations in 17 countries, Clarion offers a full range of
amenities and services including our unique Clarion Class Business Rooms, BizNet
Centers, meeting facilities, full-service restaurants, the Choice Privileges
frequent traveler program and more.

[LOGO] MainStay Suites

MAINSTAY SUITES is the reasonably priced extended-stay hotel with amenities like
a fully equipped kitchen, free weekday continental breakfast and free local
phone calls. A great place to spend a night, a week or more.

[LOGO] RODEWAY INN

RODEWAY INN With over 140 hotels, you're sure to find us wherever your travel
leads you. Rodeway Inn hotels offer clean, well-maintained and affordable
accommodations at destinations both large and small.

<PAGE>

A CHOICE YEAR IN REVIEW

January . The Quality Assurance Review reporting process is automated,
resulting in a more accurate o tally of QA scores.
. Choice donates $25,001 to an earthquake relief fund to assist
victims of a disastrous o earthquake in the Gujarat region of
India.

February . Arnold Worldwide/Washington is selected as Choice's new
advertising agency.
. The MainStay Suites brand launches its virtual tour allowing
guests to "tour" a typical MainStay Suites hotel via computer.

March . A series of road shows provide information and solicit feedback
from Quality, Sleep Inn and Comfort Suites franchisees on
re-imaging.
. The Sports Marketing and Sales department is launched to help
drive sports travel business to Choice brand hotels.
. A universal chain code is established, called Exclusively Choice
or EC, for booking reservations at any one of the eight brand
hotels through Global Distribution Systems.

April . The Power of Being There. Go. advertising campaign debuts,
featuring a $5 gas card giveaway in partnership with MasterCard.
. The Econo Lodge brand launches its summer campaign, featuring
Coca-Cola and a new o NASCAR racing scratch-off game with
collectible racing celebrity cards and instant prizes.
. Performance Excellence, a mandatory CD-ROM training program, is
created to deliver customer service skills training for guest
service agents.

June . An airline miles program begins, partnering with American
Airlines to offer airline miles to frequent guests.
. Reservations revenue reaches a record $605,484 for one day,
marking the first time ever Choice has done more than $600,000
in a single day.

July . The Econo Lodge brand announces a new hotel prototype, featuring
a tower, a unique mansard copper penny roof and an open
reception area.
. The Rodeway Inn brand donates $25,000 to the Foundation Fighting
Blindness, a national eye research organization that funds
retinal degenerative disease research, which had partnered with
the brand to create a promotion for the senior market.

August . The Sleep Inn brand introduces the Generation IV hotel prototype,
featuring a combination of rooms and suites, a mix of traditional
tub/shower combinations and free standing furniture.
. The Quality Inn Larson's of Gettysburg, Pa., celebrates 60 years
with the Quality brand.

September . The EA$Y CHOICE promotion for Econo Lodge and Rodeway Inn hotels
gives guests airline miles or credit back on their stays.
. The US Airways Dividend Miles program is added to Choice's
airline miles program for frequent guests.

October . The Thanks for Traveling campaign is launched in the aftermath of
the September 11 terrorist attacks to rebuild America's
confidence in traveling, support the national economy and
celebrate the freedom to travel.
. Franchisees, hotel employees and Choice associates in the United
States and Canada raise more than $150,000 for the relief efforts
related to the terrrorist attacks.

November . A new version of Choicehotels.com, the corporate Internet site,
is released featuring the ability to translate the site into
Spanish, French and German.

December . Choice adds two new airline partners--Delta SkyMiles and
Northwest Airlines' WorldPerks programs--to the airline miles
program.

<PAGE>

FINANCIAL TABLE OF CONTENTS

<TABLE>
<S> <C>
Financial Highlights...................... F-1

Management's Discussion and Analysis...... F-2

Report of Independent Public Accountants.. F-11

Consolidated Financial Statements......... F-12

Notes to Consolidated Financial Statements F-16
</TABLE>

<PAGE>

Financial Highlights

As Revised (See Note 1 to the Consolidated Financial Statements)

<TABLE>
<CAPTION>
Seven Fiscal
Months Year
Ended Ended
Years Ended December 31, December 31, May 31,
----------------------------------- ------------ --------
2001 2000 1999 1998 1997 1997
-------- -------- -------- -------- ------------ --------
(In millions, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Company Results
Total Assets.................................... $ 321.2 $ 484.1 $ 464.7 $ 398.2 $ 386.4 $ 573.1
Long-term Debt.................................. 281.3 297.2 307.4 279.2 282.8 372.0
Franchise Revenues (a).......................... 165.1 160.2 151.6 138.1 82.4 118.2
Total Revenues.................................. 341.4 352.8 324.2 295.4 183.1 274.4
Recurring Net Income (b)........................ 55.6 58.4 57.2 46.7 27.3 34.7
Net Income...................................... 14.3 42.4 57.2 55.3 27.3 34.7
Cash Flow from Operations....................... 101.7 53.9 65.0 40.5 29.1 45.5
Basic Earnings per Share (c).................... $ 0.32 $ 0.80 $ 1.04 $ 0.94 $ 0.46 $ 0.55
Diluted Earnings per Share (c).................. $ 0.32 $ 0.80 $ 1.03 $ 0.93 $ 0.45 $ 0.55
Recurring Diluted Earnings
per Share (b)(c).............................. $ 1.25 $ 1.10 $ 1.03 $ 0.78 $ 0.45 $ 0.55
System Results - Domestic Hotels - Unaudited
Revenues (estimated in millions)................ $ 3,375 $ 3,423 $ 3,256 $ 3,063 $ 1,862 $ 2,678
Franchise Hotels................................ 3,327 3,244 3,123 3,039 2,880 2,781
Franchise Hotels Under Development.............. 462 493 596 866 725 710
Franchise Rooms................................. 270,514 265,962 258,120 252,357 242,161 235,431
Revenue Per Available Room...................... $ 35.83 $ 36.72 $ 35.33 $ 34.35 $ 36.39 $ 32.52
</TABLE>
- --------
(a) Reflects franchise revenues exclusive of marketing and reservation pass
through fees (see Note 1).
(b) Recurring income from operations and recurring net income exclude the
impact of restructuring charges, the asset impairment and equity loss on
Friendly Hotels PLC, (gain) loss on sale of investments, write-off of
deferred financing costs and the loss on Sunburst Hospitality Corporation
note.
(c) Note: December 31, 1998 earnings per share includes $0.12 related to the
early extinguishment of certain long-term debt obligations.

F-1

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

The Company is one of the largest hotel franchisors in the world with 4,545
hotels open and 689 hotels under development as of December 31, 2001,
representing 362,549 rooms open and 56,360 rooms under development in 44
countries. The Company franchises hotels under the Comfort, Comfort Suites,
Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn and MainStay Suites brand
names. No single franchisee accounts for more than 5% of the Company's royalty
or total revenues. The Company operates in all 50 states and the District of
Columbia and 37 additional countries with 97% of its franchising revenue
derived from hotels franchised in the United States.

The principal factors that affect the Company's results are: growth in the
number of hotels under franchise; occupancies and room rates achieved by the
hotels under franchise; the number and relative mix of franchised hotels; the
effective royalty rate achieved; and the Company's ability to manage costs. The
number of rooms at franchised properties and occupancies and room rates at
those properties significantly affect the Company's results because franchise
royalty fees are based upon room revenues at franchised hotels. The key
industry standard for measuring hotel operating performance is revenue per
available room (RevPAR), which is calculated by multiplying the percentage of
occupied rooms by the average daily room rate realized. The variable overhead
costs associated with franchise system growth are substantially less than
incremental royalty fees generated from new franchisees; therefore, the Company
is able to capture a significant portion of those royalty fees as operating
income.

The Company revised its presentation of marketing and reservation fees
during the fourth quarter of 2001 to comply with the Emerging Issues Task Force
("EITF") Issue 99-19 "Reporting Revenue Gross as a Principal versus Net as an
Agent". The Company had previously presented these fees net of related expenses
on its Consolidated Statements of Income. EITF 99-19 requires that these fees
be recorded gross and accordingly the Company has revised its financial
statement presentation for all periods presented. In addition, net advances and
repayments of marketing and reservation fees has been reclassified to present
these activities as cash flows from operating activities for all prior periods.
This revision has no effect on the net income or cash flows reported during the
periods presented.

Critical Accounting Policies

Revenue Recognition

The Company enters into numerous franchise agreements committing to provide
franchisees with various marketing services, a centralized reservation system
and limited rights to utilize the Company's registered tradenames. These
agreements are typically for a period of twenty years, with certain rights to
the franchisee to terminate after five, ten, or fifteen years. In most
instances, initial franchise fees are recognized upon sale because the initial
franchise fee is non-refundable and the Company has no continuing obligations
related to the franchisee. However, when the franchise agreements are entered
into which include future potential rebates and/or incentive payments, the
initial franchise fees are deferred and recognized when the incentive criteria
are met or the deal is terminated, whichever occurs first, in compliance with
Statement of Financial Accounting Standards ("SFAS") No. 45, "Accounting for
Franchise Fee Revenue". Royalty fees, primarily based on a percentage of gross
room revenues of each franchisee, are recorded when earned. Reserves for
uncollectible accounts are charged to bad debt expense and are included in
selling, general and administrative expenses in the accompanying consolidated
statements of income.

The Company's franchise agreements require the payment of franchise fees
which include marketing and reservation fees, which are used exclusively by the
Company's marketing and reservation funds for expenses associated with
providing such franchise services as central reservation systems, national
marketing and media advertising. The Company is contractually obligated to
expend the marketing and reservation fees it collects from

F-2

<PAGE>

franchisees in accordance with the franchise agreements; as such, no income or
loss to the Company is generated. As noted above, the Company changed its
presentation of marketing and reservation service arrangements to a gross basis
during the fourth quarter of 2001. Reservation fees and marketing fees not
expended in the current year are carried over to the next fiscal year and
expended in accordance with the franchise agreements. Shortfall amounts are
similarly recovered in subsequent years. Excess or shortfall amounts from the
operation of these programs are recorded as a payable or receivable from the
particular fund. Under the terms of the franchise agreements, the Company may
advance capital as necessary to the marketing and reservation funds and recover
such advances through future fees (see Note 6 to the Consolidated Financial
Statements).

The Company generates partner services revenue from hotel industry vendors
based on the level of goods or services purchased from the vendors by hotel
owners and hotel guests who stay in the Company's franchised hotels. In
accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition," the
Company recognizes partner services revenues (i) upon the completion of service
or delivery of product, assuming reasonable assurance of collectibility; (ii)
upon completion of a specific event; or, failing the previous two conditions,
(iii) over the life of the contract, regardless of whether monies are received
in advance or in arrears, and regardless of whether the monies are
non-refundable.

Impairment Policy

The Company evaluates the collectibility of notes receivable in accordance
with SFAS No. 114, "Accounting by Creditors For Impairment of a Loan". SFAS No.
114 states that a loan is impaired when, based on current information and
events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement. All amounts due
according to the contractual terms means that both the contractual interest
payments and the contractual principal payments of a loan will be collected as
scheduled in the loan agreement. The Company reviews outstanding notes
receivable on a periodic basis to ensure that each is fully collectible by
reviewing the financial condition of its debtors. If the Company concludes that
it will be unable to collect all amounts due, the Company will record an
impairment charge based on the present value of expected future cash flows,
discounted at the loan's effective interest rate.

The Company evaluates the recoverability of long-lived assets, including
franchise rights and goodwill, in accordance with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of". SFAS No. 121 requires that impairment of long-lived assets has occurred
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability is measured based on net,
undiscounted expected cash flows. Assets are considered to be impaired if the
net, undiscounted expected cash flows are less than the carrying amount of the
assets. Impairment charges are recorded based upon the difference between the
carrying value of the asset and the expected net cash flows, discounted at an
appropriate interest rate.

Comparison of 2001 Operating Results and 2000 Operating Results

The Company recorded net income of $14.3 million for the year ended December
31, 2001, a decrease of $28.1 million, compared to net income of $42.4 million
for the year ended December 31, 2000. Operating income of $73.6 million in 2001
was $18.8 million less than 2000 operating income of $92.4 million due to an
impairment charge of $22.7 million associated with the Company's investment in
Friendly Hotels PLC (currently known as C.H.E. Group PLC) ("Friendly"). This
permanent impairment was a result of Friendly's February 21, 2002 announcement
that it had been unable to find an acceptable buyer for its business and that
it would terminate such efforts, coupled with the adverse economic conditions
of Friendly. Net income for 2001 was further adversely affected by a $10.3
million equity loss (net of taxes) in Friendly. The Friendly equity loss was
due to mid-year adverse fixed asset valuation adjustments due to a decline in
economic conditions and other incremental professional fees associated with
Friendly's continuing restructuring program.

F-3

<PAGE>

Summarized financial results for the years ended December 31, 2001 and 2000
are as follows:

<TABLE>
<CAPTION>
As
Revised
2001 2000
-------- --------
(In thousands)
<S> <C> <C>
REVENUES:
Royalty fees............................... $140,185 $137,721
Initial franchise and relicensing fees..... 12,887 12,154
Partner services revenue................... 12,042 10,300
Marketing and reservation revenues......... 168,170 185,367
Hotel operations........................... 3,215 1,249
Other revenue.............................. 4,929 6,050
-------- --------
Total revenues........................... 341,428 352,841
-------- --------
OPERATING EXPENSES:
Selling, general and administrative........ 56,075 57,178
Restructuring charges...................... 5,940 5,637
Impairment of Friendly investment.......... 22,713 --
Depreciation and amortization.............. 12,452 11,623
Marketing and reservation expenses......... 168,170 185,367
Hotel operations expense................... 2,501 609
-------- --------
Total operating expenses................. 267,851 260,414
-------- --------
Operating income.............................. 73,577 92,427
Interest expense.............................. 15,445 18,490
Interest and dividend income.................. (4,329) (15,534)
Equity loss on Friendly....................... 16,436 12,071
Loss on Sunburst note......................... -- 7,565
Other......................................... 608 253
-------- --------
Income before income taxes.................... 45,417 69,582
Income taxes.................................. 31,090 27,137
-------- --------
Net income................................. $ 14,327 $ 42,445
======== ========
</TABLE>

Franchise Revenues. Management analyzes its business based on net franchise
revenue, which is total revenue excluding marketing and reservation revenues
and hotel operations, and franchise operating expenses that are reflected as
selling, general and administrative expenses.

Net franchise revenues were $170.0 million for the year ended December 31,
2001 and $166.2 million for the year ended December 31, 2000. Royalties
increased $2.5 million to $140.2 million from $137.7 million in 2000, an
increase of 1.8%. The increase in royalties is attributable to a 1.7% increase
in the number of domestic franchised hotel rooms and an increase in the
effective royalty rate of the domestic hotel system to 3.95% from 3.85%.
Domestic initial fee revenue generated from franchise contracts signed
increased 20.3% to $7.7 million from $6.4 million for the year ended December
31, 2000. Total domestic franchise agreements signed in 2001 were 300, compared
to 298 total agreements executed in 2000. The number of rooms added increased
2.6% to 25,223 in 2001 from 24,582 in 2000. Revenues generated from partner
service relationships increased 16.5% to $12.0 million from $10.3 million in
2000, related primarily to revenues earned from increased financial service
programs and usage of construction material and service providers available to
franchisees. Under the partner services program, the Company generates revenue
from hotel industry vendors (who have been designated as preferred providers)
based on the level of goods or services purchased from the vendors by hotel
owners and hotel guests who stay in the Company's franchised hotels.

The number of domestic rooms on-line increased to 270,514 from 265,962, an
increase of 1.7% for the year ended December 31, 2001. For 2001, the total
number of domestic hotels on-line grew 2.6% to 3,327 from 3,244 for 2000.
International rooms on-line increased to 92,035 as of December 31, 2001 from
84,389, an increase of

F-4

<PAGE>

9.1%. The total number of international hotels on-line increased to 1,218 from
1,148, an increase of 6.1% for the year ended December 31, 2001. The growth in
international hotels and rooms on-line is primarily due to European growth. As
of December 31, 2001, the Company had 462 franchised hotels with 36,406 rooms
either in design or under construction in its domestic system. The Company has
an additional 227 franchised hotels with 19,954 rooms under development in its
international system as of December 31, 2001.

Franchise Expenses. The cost to operate the franchising business is
reflected in selling, general and administrative expenses. Selling, general and
administrative expenses were $56.1 million for the year ended December 31,
2001, an increase of $1.1 million from the year ended December 31, 2000 total
of $57.2 million. As a percentage of net franchise revenues, selling, general
and administrative expenses declined to 33.0% in 2001 from 34.4% in 2000. This
decline, which increased franchising margins from 65.6% to 67.0%, was largely
due to reductions resulting from the 2000 and 2001 restructurings and the
economies of scale generated from operating a larger franchisee base.

Marketing and Reservations. The Company's franchise agreements require the
payment of franchise fees which include marketing and reservation fees. These
fees, which are based on a percentage of the franchisees' gross room revenues,
are used exclusively by the Company's marketing and reservation funds for
expenses associated with providing such franchise services as central
reservation systems, national marketing and media advertising. The Company is
contractually obligated to expend the marketing and reservation fees it
collects from franchisees in accordance with the franchise agreements; as such,
no income or loss to the Company is generated.

The total marketing and reservation fees received by the Company were $168.2
million and $185.4 million for the years ended December 31, 2001 and 2000,
respectively. Depreciation and amortization incurred by the marketing and
reservation funds was $11.8 million and $10.5 million for the years ended
December 31, 2001 and 2000, respectively. Interest expense incurred by the
reservation fund was $2.0 million and $4.8 million for the years ended December
31, 2001 and 2000, respectively. The marketing and reservation funds provided a
positive cash flow of $20.3 million in 2001, versus a negative cash flow of
$14.5 million in 2000. As of December 31, 2001, the Company's balance sheet
includes a receivable of $49.4 million related to advances made to the
marketing and reservation funds. As of December 31, 2000, the Company's balance
sheet includes a receivable of $57.8 million related to advances made to the
marketing and reservation funds. Advances to the marketing and reservation
funds represent the legal obligation of the franchise system and the Company
has the legal right to demand repayment at any point.

Hotel Operations. In September 2000, the Company received title to three
MainStay properties under a put/call agreement entered into between the Company
and Sunburst Hospitality Corporation ("Sunburst"). The properties were received
by the Company as consideration for $16.3 million of the then $149 million
amount due under a note receivable from Sunburst. Revenue from hotel operations
were $3.2 million and $1.2 million for the years ended December 31, 2001 and
2000, respectively. Selling, general and administrative expenses from hotel
operations were $2.5 million and $0.6 million for those years, respectively.

Depreciation and Amortization. Depreciation and amortization increased to
$12.5 million in the year ended December 31, 2001 from $11.6 million in the
year ended December 31, 2000. This increase was primarily attributable to new
computer systems installations and corporate office renovations.

Friendly. The Company's investment in Friendly resulted in equity losses
associated with Friendly's comprehensive restructuring program totaling $16.4
million and $12.1 million for the years ended December 31, 2001 and 2000,
respectively. Mid-year adverse fixed asset valuation adjustments due to a
decline in economic conditions and incremental professional fees associated
with the reorganization primarily account for the $16.4 million charge.

F-5

<PAGE>

economic conditions of Friendly, the Company disposed of its entire preferred
and common equity interest in Friendly on March 20, 2002, and immediately
relinquished its three seats on Friendly's board of directors. Accordingly, the
Company reduced its investment in Friendly to zero through a $22.7 million
charge to reflect the permanent impairment of this asset as of December 31,
2001.

Interest and Other. Interest expense of $15.4 million in the year ended
December 31, 2001 is down $3.1 million from $18.5 million in the year ended
December 31, 2000 due to lower interest rates. Included in the results for 2001
and 2000 is approximately $4.2 million and $15.2 million, respectively, of
interest income earned on the note receivable from Sunburst. The Company
recognized a $7.6 million loss associated with the monetization of $137.5
million of the Sunburst note during the year ended December 31, 2000.

Comparison of 2000 Operating Results and 1999 Operating Results

The Company recorded net income of $42.4 million for the year ended December
31, 2000, a decrease of $14.8 million, compared to net income of $57.2 million
for the year ended December 31, 1999. Operating income of $92.4 million in
Calendar 2000 was $1.8 million under 1999 operating income of $94.2 million due
to a restructuring charge of $3.5 million (net of taxes) during the year ended
December 31, 2000. A corporate wide reorganization was implemented in 2000 to
improve service and support to the Company's franchisees and to create a more
competitive overhead structure. Net income was further adversely affected in
2000 by a $7.4 million equity loss (net of taxes) in Friendly and a $4.6
million loss (net of taxes) on the note from Sunburst. The Friendly equity loss
was due to a comprehensive restructuring program at Friendly to strengthen its
balance sheet and improve its operations. The Sunburst loss was attributed to
two early payment transactions as Choice moved to monetize the note receivable.

Summarized financial results for the years ended December 31, 2000 and 1999
are as follows:

<TABLE>
<CAPTION>
As Revised
------------------
2000 1999
-------- --------
(In thousands)
<S> <C> <C>
REVENUES:
Royalty fees........................... $137,721 $128,653
Initial franchise and relicensing
fees................................... 12,154 13,910
Partner services revenue............... 10,300 9,055
Marketing and reservation revenues..... 185,367 162,603
Hotel operations....................... 1,249 --
Other revenue.......................... 6,050 6,111
Product sales.......................... -- 3,871
-------- --------
Total revenues....................... 352,841 324,203
-------- --------
OPERATING EXPENSES:
Selling, general and administrative.... 57,178 55,860
Restructuring charges.................. 5,637 --
Depreciation and amortization.......... 11,623 7,687
Marketing and reservation expenses..... 185,367 162,603
Hotel operations expense............... 609 --
Product cost of sales.................. -- 3,883
-------- --------
Total operating expenses............. 260,414 230,033
-------- --------
Operating income....................... 92,427 94,170
Interest expense....................... 18,490 16,398
Interest and dividend income........... (15,534) (17,147)
Equity loss on Friendly................ 12,071 380
Loss on Sunburst note.................. 7,565 --
Other.................................. 253 68
-------- --------
Income before income taxes............. 69,582 94,471
Income taxes........................... 27,137 37,316
-------- --------
Net income........................... $ 42,445 $ 57,155
======== ========
</TABLE>

F-6

<PAGE>

Franchise Revenues. Net franchise revenues were $166.2 million for the year
ended December 31, 2000 and $157.7 million for the year ended December 31,
1999. Royalties increased $9.0 million to $137.7 million from $128.7 million in
2000, an increase of 7.0%. The increase in royalties is attributable to a 3.2%
increase in the number of domestic franchised hotel rooms, an increase in the
effective royalty rate of the domestic hotel system to 3.85% from 3.80%, and an
improvement in domestic RevPAR of 4.4%. Domestic initial fee revenue generated
from franchise contracts signed was $6.4 million down from $9.6 million in
1999. Total domestic franchise agreements signed in 2000 were 298, a decline
from 318 total agreements executed in 1999. The number of domestic rooms added
declined to 24,582 in 2000 from 26,731 in 1999. An increasingly competitive
hotel franchising environment, coupled with stricter hotel brand standards
being enforced by the Company, contributed to the decline in the total
franchise agreements signed in the period. Revenues generated from partner
service relationships increased to $10.3 million from $9.1 million in 1999
related primarily to revenues earned from increased financial service programs
available to franchisees.

The number of domestic rooms on-line increased to 265,962 from 258,120, an
increase of 3.0% for the year ended December 31, 2000. For 2000, the total
number of domestic hotels on-line grew 3.9% to 3,244 from 3,123 for 1999.
International rooms on-line increased to 84,389 as of December 31, 2000 from
80,134, an increase of 5.3%. The total number of international hotels on-line
increased to 1,148 from 1,125, an increase of 2.0% for the year ended December
31, 2000. As of December 31, 2000, the Company had 493 franchised hotels with
39,539 rooms either in design or under construction in its domestic system. The
Company has an additional 210 franchised hotels with 21,388 rooms under
development in its international system as of December 31, 2000.

Franchise Expenses. Selling, general and administrative expenses were $57.2
million for the year ended December 31, 2000, an increase of $1.3 million from
the year ended December 31, 1999 total of $55.9 million. As a percentage of net
franchise revenues, selling, general and administrative expenses declined to
34.4% in 2000 from 35.4% in 1999. This decline, which increased franchising
margins from 64.6% to 65.6%, was largely due to cost control initiatives from
the 2000 restructuring and the economies of scale generated from operating a
larger franchisee base.

Marketing and Reservations. The total marketing and reservation fees
received by the Company were $185.4 million and $162.6 million for the years
ended December 31, 2000 and December 31, 1999, respectively. Depreciation and
amortization charged to the marketing and reservation funds was $10.5 million
and $9.6 million for the years ended December 31, 2000 and 1999, respectively.
Interest expense incurred by the reservation fund was $4.8 million and $3.3
million for the years ended December 31, 2000 and 1999, respectively. As of
December 31, 2000, the Company's balance sheet includes a receivable of $57.8
million related to advances made to the marketing and reservation funds. As of
December 31, 1999, the Company's balance sheet includes a receivable of $32.8
million related to advances made to the marketing and reservation funds.
Advances to the marketing and reservation funds represent the legal obligation
of the franchise system and the Company has the legal right to demand repayment
at any point.

Product Sales. In the fourth quarter of 1998, the Company discontinued its
group-purchasing program as previously operated. The group purchasing program
utilized bulk purchases to obtain favorable pricing from third party vendors
for franchisees ordering similar products. The Company acted as a clearinghouse
between the franchisee and the vendor, and orders were shipped directly to the
franchisee. Sales made to franchisees through the Company's group purchasing
program were $3.9 million during the year ended December 31, 1999, with product
cost of sales of $3.9 million.

Depreciation and Amortization. Depreciation and amortization increased to
$11.6 million in the year ended December 31, 2000 from $7.7 million in the
corresponding period in 1999. This increase was primarily attributable to new
computer systems installations and corporate office renovations.

Friendly. The Company's investment in Friendly resulted in a $12.1 million
equity loss in the year ended December 31, 2000, associated with Friendly's
comprehensive restructuring program. December 31, 1999 results also included
$12.1 million in dividend income from Friendly.

F-7

<PAGE>

Interest and Other. Interest expense of $18.5 million in the year ended
December 31, 2000 was up $2.1 million from $16.4 million in the year ended
December 31, 1999 due to higher interest rates. Included in 2000 and 1999
results is approximately $15.2 million and $14.2 million, respectively, of
interest income earned on the note receivable from Sunburst. In the year ended
December 31, 2000, the Company recognized a $7.6 million loss associated with
the monetization of $137.5 million of the Sunburst note.

Liquidity and Capital Resources

Net cash provided by operating activities was $101.7 million for the year
ended December 31, 2001, an increase of $47.8 million from $53.9 million for
the year ended December 31, 2000. The increase in cash provided was primarily
due to repayments from the marketing and reservation funds and improved
management of working capital. As of December 31, 2001, the total long-term
debt outstanding for the Company was $281.3 million, $13.6 million of which
matures in the next twelve months.

The Company realigned its corporate structure in November 2001 to increase
its strategic focus on delivering value-added services 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 charged $1.3 million against the 2001 restructuring
liability during the year ended December 31, 2001, and expects the remaining
$4.6 million liability to be substantially paid in 2002. The Company also
implemented a corporate-wide reorganization during 2000 to provide improved
service and support to the Company's franchisees and to create a more
competitive overhead structure. The Company charged $4.8 million against the
2000 restructuring liability for the year ended December 31, 2001 and expects
the remaining $0.3 million liability to be paid in 2002.

The Company received net cash repayments from the marketing and reservation
funds totaling $20.3 million during the year ended December 31, 2001 and made
net cash advances to the marketing and reservation funds totaling $14.5 million
in the year ended December 31, 2000. The 2001 net repayments are associated
with cost reductions from restructured operations, growth in fees from normal
operations and increases in property and yield management fees. The 2000 net
advances are associated with a system-wide property and yield management
systems implementation, the timing of expenditures associated with specific
brand initiatives of the marketing fund and the recognition of costs and the
timing of payments received from franchisees in conjunction with the Company's
frequency stay program. The Company has the legally enforceable right to assess
and collect from its current franchisees fees sufficient to pay for the
marketing and reservation services the Company has procured for the benefit of
the franchise system, including fees to reimburse the Company for past services
rendered. The Company has the contractual authority to require that the
franchisees in the system at any given point repay any deficits in the funds to
reimburse the Company from any advance. The Company expects the marketing and
reservation funds to generate positive cash flows of approximately $20 million
in 2002 due to cost reductions associated with restructured operations,
programmed brand initiatives, growth in fees from normal operations and
increases in property and yield management fees.

Cash provided by (utilized in) investing activities for the years ended
December 31, 2001, 2000 and 1999, was $87.7 million, ($16.6 million) and ($36.0
million), respectively. During the years ended December 31, 2001, 2000 and
1999, capital expenditures totaled $13.5 million, $16.6 million, $30.6 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 (including a franchisee learning and training center).

On September 1, 2000, the Company monetized $16.3 million in principal and
interest of the $115 million principal, five-year Subordinated Term Note (the
"Old Note") to Sunburst issued in October 1997. The Company received three
MainStay Suites properties through the monetization transaction. The Old Note
carried a simple interest rate of 11% per annum. In connection with the
amendment of the strategic alliance agreement, effective October 15, 2000,
interest payable accrued at a rate of 11% per annum compounded daily. The
Company implemented this amendment prospectively beginning on January 1, 1999,
and has recognized interest on the outstanding principal and accrued interest
amounts at an effective rate of 10.58%. Total interest accrued at

F-8

<PAGE>

December 31, 2000 was $42.2 million. On January 5, 2001, the Company received
from Sunburst $101.9 million and an 11 3/8% seven-year senior subordinated note
(the "New Note") in the amount of $35 million in payment of the Old Note (See
Note 7 of Notes to Consolidated Financial Statements).

Financing cash flows relate primarily to the Company's borrowings under its
credit lines and treasury stock purchases. In June 2001, the Company entered
into a five-year $265 million competitive advance and multi-currency credit
facility. The credit facility provides for a term loan of $150 million and a
revolving credit facility of $115 million, $37 million of which is available in
foreign currency borrowings. As of December 31, 2001, the Company had $112
million of term loans and $68 million of revolving loans outstanding. The term
loan is payable over five years, $13.6 million of which is due in 2002. The
credit facility includes customary financial and other covenants that require
the maintenance of certain ratios including maximum leverage and interest
coverage and restrict the Company's ability to make certain investments, incur
debt and dispose of assets. Borrowings under the credit facility are, at the
option of the borrower, at one of several rates including LIBOR plus .60% to
2.0% basis points, based upon the credit rating of the Company and the loan
type. In addition, the Company has the option to request participating banks to
bid on loan participation at lower rates than those contractually provided by
the credit facility. The credit facility requires the Company to pay annual
fees of 1/15 of 1% to 1/2 of 1% based upon the credit rating of the Company.
The proceeds from the credit facility will be used for general corporate
purposes, including working capital, debt repayment, stock repurchases,
investments and acquisitions.

In 1998, the Company completed a $100 million senior unsecured note offering
("the Notes"), bearing a coupon rate of 7.13% with an effective rate of 7.22%.
The Notes will mature on May 1, 2008, with interest on the Notes to be paid
semi-annually. The Company used the net proceeds from the offering of
approximately $99 million to repay amounts outstanding under the Company's
previous credit facility.

Through December 31, 2001, the Company had repurchased 21.1 million shares
of its common stock at a total cost of $314.0 million, including 12.0 million
shares at a cost of $185.7 million during the year ended December 31, 2001. The
Company has received authorization from its Board of Directors to repurchase up
to an additional 5.3 million shares under the terms of the repurchase plan.
Subsequent to December 31, 2001, the Company repurchased 1.3 million shares of
outstanding common stock at a total cost of $28.8 million.

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 of the business for the immediate future.

Impact of Recently Issued Accounting Standards

The Company has adopted SFAS No. 142, "Goodwill and Other Intangible
Assets," effective January 1, 2002, which updates accounting and reporting
standards for the amortization of goodwill and recognition of other intangible
assets. SFAS No. 142 requires goodwill to be assessed on at least an annual
basis for impairment using a fair value basis. Because the Company operates in
one reporting unit in accordance with SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" and EITF 98-3, "Determining Whether a
Nonmonetary Transaction Involves Receipt of Productive Assets or of a
Business", the fair value of the Company's total assets are used to determine
if goodwill may be impaired. According to SFAS No. 142, quoted market prices in
active markets are the best evidence of fair value and shall be used as the
basis for the measurement if available. The Company will no longer be required
to record goodwill amortization expense of approximately $2.0 million per year
and does not expect to recognize any impairment on its goodwill balances as a
result of the adoption of SFAS No. 142. The Company will perform the initial
assessment of the fair value of its goodwill balances during the first quarter
of 2002.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses the accounting and reporting standards for the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The Company will be required to
adopt SFAS No. 143 by January 1, 2003. The Company does not expect the adoption
of SFAS No. 143 to have a material effect on the Company's earnings or
comprehensive income.

F-9

<PAGE>

In September 2001, the FASB issued SFAS No. 144, "Impairment of Long-Lived
Assets to be Disposed of," which updates accounting and reporting standards for
the recognition and measurement of impairment of long-lived assets to be held
and used or disposed of by sale. The Company adopted SFAS No. 144 on January 1,
2002. The Company does not expect the adoption of SFAS No. 144 to have a
material impact on the Company's earnings or other comprehensive income.

Forward-Looking Statements

Certain statements contained in this annual report, including those in the
section entitled Management's Discussion and Analysis, that are not historical
facts constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act. Words such as "believes," "anticipates,"
"expects," "intends," "estimates," "projects," and other similar expressions,
which are predictions of or indicate future events and trends, typically
identify forward-looking statements. Such statements are subject to a number of
risks and uncertainties which could cause actual results to differ materially
from those projected, including: competition within each of our business
segments; business strategies and their intended results; the balance between
supply of and demand for hotel rooms; our ability to obtain new franchise
agreements; our ability to develop and maintain positive relations with current
and potential hotel owners; the effect of international, national and regional
economic conditions; the availability of capital to allow us and potential
hotel owners to fund investments and construction of hotels; the cost and other
effects of legal proceedings; and other risks described from time to time in
our filings with the Securities and Exchange Commission, including those set
forth under the heading "Risk Factors" in our Report on Form 10-Q for the
period ended September 30, 2001. Given these uncertainties, you are cautioned
not to place undue reliance on such statements. We also undertake no obligation
to publicly update or revise any forward-looking statement to reflect current
or future events or circumstances.

F-10

<PAGE>

Report of Independent Public Accountants

Choice Hotels International, Inc. and Subsidiaries

To Choice Hotels International, Inc. and subsidiaries:

We have audited the accompanying consolidated balance sheets of Choice
Hotels International, Inc. and subsidiaries, as of December 31, 2001 and 2000,
and the related consolidated statements of income, shareholders' equity and
comprehensive income and cash flows for each of the three years in the period
ended December 31, 2001. These consolidated financial statements are the
responsibility of Choice Hotels International, Inc.'s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Choice Hotels
International, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.

As explained in Note 1 to the consolidated financial statements, Choice
Hotels International, Inc. and subsidiaries have given retroactive effect to
the change in accounting for the presentation of marketing and reservation fees
and expenses.

/s/ Arthur Andersen LLP

Vienna, Virginia
March 20, 2002

F-11

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
As Revised (See Note 1)
Years Ended December 31,
----------------------------
2001 2000 1999
-------- -------- --------
(In thousands, except
per share amounts)
<S> <C> <C> <C>
REVENUES:
Royalty fees............................. $140,185 $137,721 $128,653
Initial franchise and relicensing fees... 12,887 12,154 13,910
Partner services revenue................. 12,042 10,300 9,055
Marketing and reservation revenues....... 168,170 185,367 162,603
Hotel operations......................... 3,215 1,249 --
Other revenue............................ 4,929 6,050 6,111
Product sales............................ -- -- 3,871
-------- -------- --------
Total revenues....................... 341,428 352,841 324,203
OPERATING EXPENSES:
Selling, general and administrative...... 56,075 57,178 55,860
Restructuring charges.................... 5,940 5,637 --
Impairment of Friendly investment........ 22,713 -- --
Depreciation and amortization............ 12,452 11,623 7,687
Marketing and reservation expenses....... 168,170 185,367 162,603
Hotel operations expense................. 2,501 609 --
Product cost of sales.................... -- -- 3,883
-------- -------- --------
Total operating expenses............. 267,851 260,414 230,033
-------- -------- --------
Operating income............................ 73,577 92,427 94,170
-------- -------- --------
OTHER:
Interest expense......................... 15,445 18,490 16,398
Interest and dividend income............. (4,329) (15,534) (17,147)
Equity loss on Friendly investment....... 16,436 12,071 380
(Gain) loss on sale of investments....... (42) 253 68
Write-off of deferred financing costs.... 650 -- --
Loss on Sunburst note.................... -- 7,565 --
-------- -------- --------
Total other.......................... 28,160 22,845 (301)
-------- -------- --------
Income before income taxes.................. 45,417 69,582 94,471
Income taxes................................ 31,090 27,137 37,316
-------- -------- --------
Net income.................................. $ 14,327 $ 42,445 $ 57,155
======== ======== ========
Weighted average shares outstanding--basis.. 44,174 52,895 54,859
-------- -------- --------
Weighted average shares outstanding--diluted 44,572 53,253 55,667
-------- -------- --------
Basic earnings per share.................... $ 0.32 $ 0.80 $ 1.04
======== ======== ========
Diluted earnings per share.................. $ 0.32 $ 0.80 $ 1.03
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-12

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31, December 31,
2001 2000
------------ ------------
(In thousands, except
share amounts)
<S> <C> <C>
ASSETS:
Current assets.....................................................................
Cash and cash equivalents....................................................... $ 16,871 $ 19,701
Receivables (net of allowance for doubtful accounts of $5,392 and $5,754,
respectively)................................................................. 25,223 31,865
Income taxes receivable and other current assets................................ 889 520
--------- ---------
Total current assets........................................................ 42,983 52,086
Property and equipment, at cost, net............................................... 70,458 72,946
Goodwill, net...................................................................... 60,620 62,663
Franchise rights, net.............................................................. 36,257 39,163
Investment in Friendly............................................................. -- 34,616
Receivable from marketing and reservation funds.................................... 49,358 57,824
Other assets....................................................................... 22,443 27,330
Note receivable from Sunburst...................................................... 39,059 137,492
--------- ---------
Total assets................................................................ $ 321,178 $ 484,120
========= =========

LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY:
Current liabilities................................................................
Current portion of long-term debt............................................... $ 13,563 $ 50,046
Accounts payable................................................................ 24,724 15,964
Accrued expenses and other...................................................... 30,054 27,818
Income taxes payable............................................................ 2,836 --
--------- ---------
Total current liabilities................................................... 71,177 93,828
Long-term debt.................................................................. 267,733 247,179
Deferred income taxes ($35,159 and $39,573, respectively) and other liabilities. 46,807 53,020
--------- ---------
Total liabilities........................................................... 385,717 394,027
--------- ---------

SHAREHOLDERS' (DEFICIT) EQUITY:
Common stock, $ .01 par value, 160,000,000 shares authorized; 62,755,708 and
61,663,624 shares issued; 41,997,637 and 52,561,568 shares outstanding at
December 31, 2001 and 2000, respectively......................................... 420 526
Additional paid-in-capital......................................................... 70,130 55,245
Accumulated other comprehensive loss............................................... (354) (54)
Deferred compensation.............................................................. (2,857) (1,300)
Treasury stock (20,758,071 and 9,102,056 shares at December 31, 2001 and 2000,
respectively).................................................................... (311,053) (129,172)
Retained earnings.................................................................. 179,175 164,848
--------- ---------
Total shareholders' (deficit) equity........................................ (64,539) 90,093
--------- ---------
Total liabilities and shareholders' (deficit) equity........................ $ 321,178 $ 484,120
========= =========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-13

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
As Revised (See Note 1)
Years Ended December 31,
2001 2000 1999
--------- -------- --------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................................................... $ 14,327 $ 42,445 $ 57,155
Reconciliation of net income to net cash provided by
operating activities:
Equity loss on Friendly investment........................... 16,436 12,071 380
Impairment of Friendly investment............................ 22,713 -- --
Depreciation and amortization................................ 12,452 11,623 7,687
Non-cash interest and dividend income........................ (4,219) (15,170) (16,639)
Non-cash stock compensation and other charges................ 2,210 787 633
Write-off of deferred financing costs........................ 650 -- --
Provision for bad debts...................................... 476 (585) 588
Loss on early prepayment of Sunburst note.................... -- 6,520 --
Changes in assets and liabilities:
Receivables.................................................. 6,465 (2,245) (4,006)
Prepaid expenses and other current assets.................... -- 30 1,355
Receivable from marketing and reservation funds, net......... 20,267 (14,532) (5,545)
Current liabilities.......................................... 9,381 1,714 6,086
Income taxes payable/receivable.............................. 6,361 (278) 6,794
Deferred income taxes and other liabilities.................. (5,807) 11,499 10,552
--------- -------- --------
Net cash provided by operating activities.................... 101,712 53,879 65,040
========= ======== ========
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sunburst note..................................... 101,954 -- --
Investment in property and equipment............................ (13,532) (16,590) (30,633)
Other items, net................................................ (684) (27) (5,398)
--------- -------- --------
Net cash provided by (utilized in) investing activities...... 87,738 (16,617) (36,031)
========= ======== ========
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of long-term debt............................ (790,795) (95,757) (59,458)
Proceeds from long-term debt.................................... 772,028 85,500 88,630
Purchase of treasury stock...................................... (185,807) (20,893) (54,166)
Proceeds from exercise of stock options......................... 12,294 1,739 6,143
--------- -------- --------
Net cash utilized in financing activities.................... (192,280) (29,411) (18,851)
--------- -------- --------
Net change in cash and cash equivalents......................... (2,830) 7,851 10,158
Cash and cash equivalents at beginning of period................ 19,701 11,850 1,692
--------- -------- --------
Cash and cash equivalents at end of period...................... $ 16,871 $ 19,701 $ 11,850
========= ======== ========
Supplemental disclosure of cash flow information
Cash payments during the year for:
Income taxes, net of refunds............................. $ 29,013 $ 15,674 $ 17,834
Interest................................................. 18,039 22,145 19,387
Non-cash investing activities:
Properties assumed through the restructuring of
Sunburst note.......................................... $ 1,475 $ -- $ --
Properties assumed through put/call transaction.......... -- 12,233 --
Reduction in Sunburst note from put/call transaction..... -- 16,333 --
Non-cash financing activities:
Income tax benefit realized from employee stock
options exercised...................................... $ 3,895 $ 1,602 $ 1,225
========= ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-14

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands, except share amounts)

<TABLE>
<CAPTION>
Common Accumulated
Stock Common Other
Shares Stock Additional Comprehensive Deferred Treasury
Outstanding Amount Paid-in-capital Income (loss) Compensation Stock
----------- ------ --------------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1998........... 56,726,917 $ 568 $45,097 $ 2,112 $(1,665) $ (54,165)
Comprehensive income
Net income................................ -- -- -- -- -- --
Other comprehensive income.............
Foreign translation adjustments........ -- -- -- -- -- --
Unrealized loss on securities, net of
taxes, net of reclassification
adjustment (Note 15).................. -- -- -- -- -- --

Other comprehensive income............. -- -- -- (907) -- --

Comprehensive income......................

Exercise of stock options/grants, net..... 623,647 6 6,275 -- -- --
Issuance of restricted stock.............. 70,260 1 1,014 -- (1,015) --
Amortization of deferred compensation..... -- -- -- -- 743 --
Treasury purchases........................ (3,586,913) (37) -- -- -- (54,129)
----------- ----- ------- ------- ------- ---------
Balance as of December 31, 1999........... 53,833,911 $ 538 $52,386 $ 1,205 $(1,937) $(108,294)
=========== ===== ======= ======= ======= =========
Comprehensive income
Net income................................ -- $ -- $ -- $ -- $ -- $ --
Other comprehensive income.............
Foreign translation adjustments........ -- -- -- -- -- --
Unrealized gain on securities, net of
taxes, net of reclassification
adjustment (Note 15).................. -- -- -- -- -- --

Other comprehensive income............. -- -- -- (1,259) -- --

Comprehensive income......................

Exercise of stock options/grants, net..... 288,634 3 3,362 -- -- --
Issuance of restricted stock.............. 14,052 -- 182 -- (182) --
Amortization of deferred
compensation............................. -- -- -- -- 819 --
Treasury purchases........................ (1,575,029) (15) -- -- -- (20,878)
Liquidation of foreign subsidiaries....... -- -- (685) -- -- --
----------- ----- ------- ------- ------- ---------
Balance as of December 31, 2000........... 52,561,568 $ 526 $55,245 $ (54) $(1,300) $(129,172)
=========== ===== ======= ======= ======= =========
Comprehensive income
Net income................................ -- $ -- $ -- $ -- $ -- $ --
Other comprehensive income.............
Foreign translation adjustments........ -- -- -- -- -- --
Unrealized loss on securities, net
of taxes, net of reclassification
adjustment (Note 15).................. -- -- -- -- -- --

Other comprehensive loss............... -- -- -- (724) -- --

Comprehensive income......................

Deferred gain on hedge.................... -- -- -- 424 -- --
Exercise of stock options/grants, net..... 1,287,454 13 14,885 -- -- 1,503
Issuance of restricted stock.............. 155,515 1 -- -- (2,304) 2,303
Amortization of deferred
compensation............................. -- -- -- -- 747 --
Treasury purchases........................ (12,006,900) (120) -- -- -- (185,687)
----------- ----- ------- ------- ------- ---------
Balance as of December 31, 2001........... 41,997,637 $ 420 $70,130 $ (354) $(2,857) $(311,053)
=========== ===== ======= ======= ======= =========
</TABLE>
<TABLE>
<CAPTION>

Comprehensive Retained
Income Earnings Total
------------- -------- ---------
<S> <C> <C> <C>
Balance as of December 31, 1998........... $ 64,563 $ 56,510
Comprehensive income
Net income................................ $57,155 57,155 57,155
Other comprehensive income.............
Foreign translation adjustments........ (108) -- (108)
Unrealized loss on securities, net of
taxes, net of reclassification
adjustment (Note 15).................. (799) -- (799)
-------
Other comprehensive income............. (907) -- --
-------
Comprehensive income...................... $56,248
=======
Exercise of stock options/grants, net..... -- 6,281
Issuance of restricted stock.............. -- --
Amortization of deferred compensation..... -- 743
Treasury purchases........................ -- (54,166)
-------- ---------
Balance as of December 31, 1999........... $121,718 $ 65,616
======== =========
Comprehensive income
Net income................................ $42,445 $ 42,445 $ 42,445
Other comprehensive income.............
Foreign translation adjustments........ (1,786) -- (1,786)
Unrealized gain on securities, net of
taxes, net of reclassification
adjustment (Note 15).................. 527 -- 527
-------
Other comprehensive income............. (1,259) -- --
-------
Comprehensive income...................... $41,186
=======
Exercise of stock options/grants, net..... -- 3,365
Issuance of restricted stock.............. -- --
Amortization of deferred
compensation............................. -- 819
Treasury purchases........................ -- (20,893)
Liquidation of foreign subsidiaries....... 685 --
-------- ---------
Balance as of December 31, 2000........... $164,848 $ 90,093
======== =========
Comprehensive income
Net income................................ $14,327 $ 14,327 $ 14,327
Other comprehensive income.............
Foreign translation adjustments........ (414) -- (414)
Unrealized loss on securities, net
of taxes, net of reclassification
adjustment (Note 15).................. (310) -- (310)
-------
Other comprehensive loss............... (724) -- --
-------
Comprehensive income...................... $13,603
=======
Deferred gain on hedge.................... -- 424
Exercise of stock options/grants, net..... -- 16,401
Issuance of restricted stock.............. -- --
Amortization of deferred
compensation............................. -- 747
Treasury purchases........................ -- (185,807)
-------- ---------
Balance as of December 31, 2001........... $179,175 $ (64,539)
======== =========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-15

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Company Information and Significant Accounting Policies

Company Information.

Choice Hotels International, Inc. and subsidiaries (the "Company") is in the
business of hotel franchising. As of December 31, 2001, the Company had
franchise agreements with 4,545 hotels open and 689 hotels under development in
27 countries under the following brand names: Comfort, Comfort Suites, Quality,
Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, and MainStay Suites.

Principles of Consolidation.

The consolidated financial statements include the accounts of Choice Hotels
International, Inc. and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.

Revenue Recognition.

The Company's franchise agreements require the payment of franchise fees,
including marketing and reservation fees, which are used exclusively by the
Company's marketing and reservation funds for expenses associated with
providing such franchise services as central reservation systems, national
marketing and media advertising. The Company is contractually obligated to
expend the marketing and reservation fees it collects from franchisees in
accordance with the franchise agreements; as such, no income or loss to the
Company is generated. As noted below, the Company changed its presentation of
marketing and reservation revenues and expenses to a gross basis during the
fourth quarter of 2001.

Presentation of Marketing and Reservation Fees and Expenses.

F-16

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company has revised its financial statement presentation for all periods
presented. In addition, net advances and repayments of marketing and
reservation fees have been reclassified to present these activities as cash
flows from operating activities for all periods presented. These revisions have
no effect on the net income or cash flows reported during the periods presented.

Advertising Costs.

The Company expenses advertising costs in the marketing fund as the
advertising occurs in accordance with the American Institute of Certified
Public Accountants, Statement of Position 93-7, "Reporting on Advertising
Costs". Advertising expense was $37.4 million, $48.4 million and $38.3 million
for the years ended December 31, 2001, 2000, and 1999, respectively. The
Company includes advertising costs in marketing and reservation expenses on the
accompanying consolidated statements of income.

Cash and Cash Equivalents.

The Company considers all highly liquid investments purchased with a
maturity of three months or less at the date of purchase to be cash equivalents.

Capitalization Policies.

Major renovations, replacements and interest incurred during construction
are capitalized to appropriate property and equipment accounts. Upon sale or
retirement of property, the cost and related accumulated depreciation are
eliminated from the accounts and the related gain or loss is recognized in the
accompanying statements of income. Maintenance, repairs and minor replacements
are charged to expense as incurred.

Impairment Policy.

F-17

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Deferred Financing Costs.

Debt financing costs are deferred and amortized, using the effective
interest method, over the term of the related debt. As of December 31, 2001 and
2000, deferred financing costs were $2.5 million and $0.8 million respectively
and are included in other assets on the accompanying consolidated balance
sheets.

Investments.

The Company accounts for its investments in common stock in accordance with
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities"
and SFAS No. 130 "Reporting Comprehensive Income." The Company accounts for its
investment in unincorporated joint ventures in accordance with Accounting
Principles Board Opinion ("APB") No. 18 "The Equity Method of Accounting for
Investments in Common Stock."

Financial Instruments.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
established accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133 requires the recognition of the fair value of
derivatives in the statement of financial position, with changes in the fair
value recognized either in earnings or as a component of other comprehensive
income dependent upon the hedging nature of the derivative. SFAS No. 133 also
states that any deferred gain on previous hedging activity does not meet the
definition of a liability, due to a lack of expected future cash flows and
therefore should be included in comprehensive income. As of December 31, 2001
and 2000, the Company has no derivative instruments.

Use of Estimates.

The consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States and require
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Reclassifications.

Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.

2. Property and Equipment

The components of property and equipment in the consolidated balance sheets
are:

<TABLE>
<CAPTION>
December 31,
------------------
2001 2000
-------- --------
(In thousands)
<S> <C> <C>
Land............................. $ 4,090 $ 2,593
Facilities in progress........... 735 4,075
Building and improvements........ 34,210 29,474
Furniture, fixtures and equipment 86,301 74,812
-------- --------
125,336 110,954
Less: Accumulated depreciation... (54,878) (38,008)
-------- --------
$ 70,458 $ 72,946
======== ========
</TABLE>

F-18

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

For facilities in progress, as assets are placed in service, they are
transferred to appropriate fixed asset categories and depreciation begins.
Depreciation expense for the years ended December 31, 2001, 2000 and 1999 was
$4.6 million, $3.0 million and $1.7 million, respectively. Depreciation has
been computed for financial reporting purposes using the straight-line method.
A summary of the ranges of estimated useful lives upon which depreciation rates
have been based follows:

<TABLE>
<S> <C>
Building and improvements........ 10-40 years
Furniture, fixtures and equipment 3-20 years
</TABLE>

3. Goodwill

Goodwill primarily represents an allocation of the excess purchase price of
the stock of the Company over the recorded minority interest that was
previously held by members of the Company's former management team. Goodwill is
amortized on a straight-line basis over 40 years. Such amortization amounted to
$2.2 million, $2.0 million and $2.0 million for the years ended December 31,
2001, 2000 and 1999, respectively. Goodwill is net of accumulated amortization
of $14.3 million and $12.1 million at December 31, 2001 and 2000.

The Company adopted SFAS No. 142 on January 1, 2002, which requires goodwill
to be assessed on at least an annual basis for impairment using a fair value
basis.

4. Franchise Rights

Franchise rights are intangible assets and represent an allocation in
purchase accounting for the value of long-term franchise contracts acquired. As
of December 31, 2001 and 2000, the net balance is associated with the Econo
Lodge acquisition made in fiscal year 1991. Franchise rights acquired are
amortized over an average life of 15 years. Amortization expense for the years
ended December 31, 2001, 2000 and 1999 amounted to $3.0 million, $3.9 million
and $4.3 million, respectively. Franchise rights are net of accumulated
amortization of $32.0 million and $29.0 million at December 31, 2000 and 1999,
respectively. Under SFAS No. 142, franchise rights will continue to be
amortized as they are intangibles with definite lives.

5. Investment in Friendly Hotels

As of December 31, 2001, the Company had 1,227,622 shares of common stock
and 31,097,755 shares of 5.75% convertible preferred stock in Friendly Hotels
PLC (currently known as C.H.E. Group PLC) ("Friendly"), the Company's master
franchisor for the United Kingdom, Ireland and continental Europe.

The Company had three directors on the board of Friendly. Given the
Company's ability to exercise significant influence over the operations of
Friendly, the equity method of accounting was applied.

Friendly holds the master franchise rights for the Company's Comfort,
Quality and Clarion brand hotels in the United Kingdom, Ireland and throughout
Europe (with the exception of Scandinavia) for a 10-year period. In exchange,
the Company received Friendly common stock and was to receive from Friendly
$8.0 million payable in eight equal annual installments.

On January 19, 2001, the shareholders of Friendly approved a capital
reorganization intended to provide Friendly with a stronger balance sheet and
improve its operations. Pursuant to the capital reorganization, the Company
waived certain royalty and marketing fees due from Friendly for the period
between December 27, 1999 and December 31, 2005, waived the then five remaining
annual installments of the master franchise agreement and provided Friendly
with a (Pounds)7.8 million (approximately US $11.4 million) secured letter of
credit in

F-19

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

consideration for, among other things, a reduction in the conversion price of
the Company's convertible preferred shares from 150p to 60p. The letter of
credit is secured by substantially all of Friendly's assets in France, valued
in excess of (Pounds)4.2 million (approximately US $6.1 million). Other
modifications to the Company's convertible preferred shares include a change in
the dividend rate from 5.75% (payable in cash) to 2% per annum, if payable in
additional convertible preferred shares. Friendly may alternatively elect to
pay cash dividends at the rate of 3.5% per annum up until January 13, 2013 and
thereafter at the rate of 5.75%. In addition, accrued dividends due to the
Company as of February 7, 2001 were converted to additional convertible
preferred shares of Friendly. As of December 31, 2001, Friendly had drawn
(Pounds)5.3 million (approximately US $7.7 million) of the available letter of
credit and the balance available on the letter of credit was reduced to
(Pounds)5.0 million (approximately US $7.3 million) as of January 21, 2002. The
letter of credit will expire on June 30, 2002.

During 2001, Friendly settled a $4.0 million deferred consideration due to
the Company through the issuance of 2,404,013 convertible preferred shares. The
effect of the reduction in the conversion price together with the conversion of
dividend arrearage to additional convertible preferred shares of Friendly and
the settlement of the deferred consideration, both resulting in the issuance of
convertible preferred shares, on a fully converted basis, the Company's
ownership in Friendly would have been approximately 71%. Due to the
restructuring program, the Company has recorded equity losses on Friendly of
$16.4 million and $12.1 million for the years ended December 31, 2001 and 2000,
respectively, in accordance with EITF 99-10, "Percentage Used to Determine the
Amount of Equity Method Losses". Mid-year adverse fixed asset valuation
adjustments due to a decline in economic conditions and incremental
professional fees associated with the reorganization primarily account for the
$16.4 million charge.

The Company recognized $2.2 million in preferred dividend income from the
Friendly investment for the year ended December 31, 1999. As of December 31,
1999, accrued but unpaid preferred dividends were $5.8 million. No dividends
were accrued during 2001 or 2000. The Company also recognized $1.1 million and
$2.2 million in royalty revenue from Friendly for the years ended December 31,
2000 and 1999, respectively. The Company has waived its royalty fees from
Friendly for the periods from 2001 through 2005 as part of Friendly's
restructuring.

The Company owned approximately 5.4%, 5.4% and 5.3% of Friendly's
outstanding ordinary shares at December 31, 2001, 2000 and 1999, respectively.
The fair market value of the ordinary shares at December 31, 2001, 2000 and
1999 was $0.3 million, $0.7 million and $2.0 million, respectively. Summarized
unaudited balance sheet data for Friendly is as follows:

<TABLE>
<CAPTION>
Unaudited
- -----------------
December 31,
-----------------
2001 2000
-------- --------
(In thousands)
<S> <C> <C>
Current assets......... $ 20,530 $ 27,298
Non-current assets..... 107,744 138,679
Current liabilities.... 59,114 70,541
Non-current liabilities 45,573 60,820
Preferred stock........ 23,104 23,115
Shareholders' equity... 23,587 34,616
</TABLE>

F-20

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Summarized unaudited income statement data for Friendly is as follows:

<TABLE>
<CAPTION>
Unaudited
----------------------------
December 31,
----------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Net revenues...................... $124,845 $138,135 $150,332
Gross profit...................... 69,167 76,032 84,852
Loss from continuing operations... (5,023) (40,193) (8,584)
Net loss after preferred dividends (8,036) (50,640) (31,424)
</TABLE>

On February 21, 2002, Friendly announced that it had been unable to find an
acceptable buyer for its business and would terminate such efforts at this
time. Given the bid period termination and the adverse economic conditions of
Friendly, the Company disposed of its entire preferred and common equity
interest in Friendly on March 20, 2002 and immediately relinquished its three
seats on Friendly's board of directors. Accordingly, the Company reduced its
investment in Friendly to zero through a $22.7 million charge to reflect the
permanent impairment of this asset as of December 31, 2001.

6. Receivable from Marketing and Reservation Funds

The Company's franchise agreements require the payment of franchise fees
which include marketing and reservation fees. Using the marketing and
reservation fees it assesses against the current franchisees comprising its
various hotel brand systems, the Company is obligated under the franchise
agreements to provide marketing and reservation services appropriate for the
successful operation of these various systems. In discharging its obligation to
provide sufficient and appropriate marketing and reservation services, the
Company has the right to expend funds in an amount reasonably necessary to
ensure the provision of such services, whether or not such amount is currently
available to the Company in the marketing and reservation funds for
reimbursement. The franchise agreements provide the Company the right to
advance monies to these funds when the needs of the system surpass the balances
currently available.

The receivable from marketing and reservation funds at December 31, 2001 and
2000 was $49.4 and $57.8 million, respectively. Under the terms of these
agreements, the Company has the legally enforceable right to assess and collect
from its current franchisees fees sufficient to pay for the marketing and
reservation services the Company has procured for the benefit of the franchise
system, including fees to reimburse the Company for past services rendered. The
Company has the contractual authority to require that the franchisees in the
system at any given point repay any deficits in the funds to reimburse the
Company for any advance. Advances to the marketing and reservation funds made
by the Company are the legally enforceable obligation of the constituents of
the Company's franchise system, and those constituents are legally obliged to
pay any assessment the Company imposes on its franchisees to obtain
reimbursement regardless of whether those constituents continue to generate
gross room revenue.

7. Transactions with Sunburst

Effective October 15, 1997, Choice Hotels International, Inc. ("CHI"), which
at that point included both the franchising business and owned hotel business,
separated the businesses via spin-off of the Company (the "Sunburst
Distribution"). CHI changed its name to Sunburst Hospitality Corporation
(referred to hereafter as "Sunburst"). As part of the spin-off, Sunburst and
the Company entered into a strategic alliance agreement, which was amended in
December 1998 and September 2000. Among other things, the strategic alliance
agreement provides for (i) certain commitments by Sunburst for the development
of MainStay Suites hotels; (ii) special procedures associated with liquidated
damages; and (iii) predetermined franchise fee credits based on operating
performance. The strategic alliance agreement extends through October 15, 2002
as it relates to development commitments. Liquidated damage and franchise fee
credit provisions extend through the life of existing franchise agreements.

F-21

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In connection with the spin-off, the Company borrowed $115 million under its
then existing credit facility in order to fund a subordinated term note to
Sunburst (the "Old Note"). The Old Note of $115 million accrued interest
monthly at an initial simple rate of 11% per annum through October 14, 2000. In
connection with an amendment of the strategic agreement discussed above,
effective October 15, 2000 interest accrued at a rate of 11% per annum
compounded daily. On January 1, 1999, the Company began recognizing interest on
the outstanding principal and accrued interest amounts at an effective rate of
10.58%. The Old Note was payable in full, along with accrued interest, on
October 15, 2002. Total interest accrued as of December 31, 2000 was
$42.2 million.

On September 1, 2000, Sunburst transferred title to three MainStay Suites
properties under a put/call agreement entered into between the Company and
Sunburst in March 2000. These properties were received by the Company as
consideration for $16.3 million of then $149 million amount due under the Old
Note. The fair market value of the MainStay Suites properties was approximately
$12.2 million. Accordingly, the Company recognized a $4.1 million pre-tax loss
on the Old Note.

On September 20, 2000, the Company and Sunburst reached agreement on the
terms of a proposed restructuring of the Old Note. Under the terms of the
agreement the Company would receive cash and a newly issued 11 3/8% seven-year
subordinated note. On January 5, 2001, the Company received $101.9 million, a
parcel of land valued at approximately $1.5 million and a $35 million
seven-year senior subordinated note bearing interest at 11 3/8% (the "New
Note") in settlement of the balance of the Old Note. In 2000, the Company
recognized a pre-tax loss of $3.5 million resulting from this transaction. The
New Note accrues interest until June 2002, at which point interest becomes
payable semi-annually in arrears.

During the periods presented, Sunburst operated substantially all of its
hotels pursuant to franchise agreements with the Company. Total fees paid to
the Company included in the accompanying consolidated financial statements for
franchising royalty, marketing and reservation fees were $7.8 million, $10.3
million and $9.1 million for the years ended December 31, 2001, 2000 and 1999,
respectively.

8. Restructuring Programs

During 2001, the Company recognized $5.9 million in restructuring charges.
The restructuring charges include $5.3 million related to a corporate
realignment designed to increase its strategic focus on delivering value-added
services to franchisees, including centralizing the Company's franchise service
and sales operations, consolidating its brand management functions and
realigning its call center operations. Of this $5.3 million, $5.1 million
relates to severance and termination benefits for 64 employees (consisting of
brand management and new hotels support, reservation sales and administrative
personnel and franchise sales and operations support) and $0.2 million relates
to the cancellation of preexisting contracts for termination of domestic
leases. The remaining $0.6 million of the $5.9 million is due to exit costs
related to the termination of a corporate hotel construction project. The
Company has already paid $1.3 million, leaving a $4.6 million liability in
accrued expenses and other on the accompanying consolidated balance sheet as of
December 31, 2001. The Company expects the liability to be substantially paid
in the year of 2002.

During 2000, the Company recognized $5.6 million in restructuring charges.
The restructuring charges include $4.7 million related to a corporate-wide
reorganization to improve service and support to the Company's franchisees and
to create a more competitive overhead structure. Of this $4.7 million, $4.1
million relates to severance and termination benefits for 176 employees
(consisting of property and yield management system installers, reservation
agents and field service administrative support) and $0.6 million relates to
the cancellation of pre-existing contracts for termination of international
leases. The remaining $0.9 million of the $5.6 million is due to the
termination of an in-room internet initiative launched in 1999. As of December
31, 2001, the Company maintains a $0.3 million liability in accrued expenses
and other on the accompanying consolidated balance sheet, for the 2000
reorganization related to severance benefits and international lease agreements.

F-22

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9. Accrued Expenses and Other

Accrued expenses were as follows at:

<TABLE>
<CAPTION>
December 31,
---------------
2001 2000
------- -------
(In thousands)
<S> <C> <C>
Accrued salaries and benefits.......... $13,131 $13,027
Accrued interest....................... 2,616 2,606
Accrued restructuring.................. 4,884 5,100
Deferred loyalty program revenues...... 5,492 4,784
Other.................................. 3,931 2,301
------- -------
Total............................... $30,054 $27,818
======= =======
</TABLE>

10. Long-Term Debt

Debt consisted of the following at:

<TABLE>
<CAPTION>
December 31,
-----------------
2001 2000
-------- --------
(In thousands)
<S> <C> <C>
$265 million competitive advance and multi-currency revolving credit facility with an
effective rate of 3.69% at December 31, 2001........................................ $180,525 $ --
$300 million competitive advance and multi-currency revolving credit facility with an
effective rate of 7.31% at December 31, 2000........................................ -- 189,000
$100 million senior note offering with an effective rate of 7.22% at December 31, 2001
and 2000............................................................................ 99,591 99,526
$15 million line of credit with a rate of 7.53% at December 31, 2000.................. -- 7,400
Other notes with an effective rate of 4.90% and 6.42% at December 31, 2001 and 2000,
respectively........................................................................ 1,180 1,299
-------- --------
Total debt......................................................................... $281,296 $297,225
======== ========
</TABLE>

Maturities of debt as of December 31, 2001 were as follows:

<TABLE>
<CAPTION>
Year (In thousands)
---- --------------
<S> <C>
2002................................... $ 13,563
2003................................... 17,412
2004................................... 21,237
2005................................... 26,503
2006................................... 102,567
Thereafter............................. 100,014
--------
Total.................................. $281,296
========
</TABLE>

On June 29, 2001, the Company refinanced its senior credit facility (the
"New Credit Facility") in the amount of $260 million with a new maturity date
of June 29, 2006. The New Credit Facility provides for a term loan of $150
million and a revolving credit facility of $110 million, $37 million of which
is available for borrowings in foreign currencies. On September 29, 2001, the
Company signed an amendment to the New Credit

F-23

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Facility, for an additional $5 million under the revolving credit facility,
bringing the total amount of available commitments to $265 million. The
amendment also transferred $35 million from the term loan to the revolving
credit facility. The new term loan amount is $115 million and the revolving
credit facility is $150 million. The New Credit Facility includes customary
financial and other covenants that require the maintenance of certain ratios
including maximum leverage and interest coverage and restricts the Company's
ability to make certain investments, incur debt and dispose of assets, among
other restrictions. Management believes that as of December 31, 2001, the
Company is in compliance with all covenants under the New Credit Facility. The
term loan ($112 million of which is outstanding at December 31, 2001) is
payable over five years, $13.6 million of which is due in 2002. Borrowings
under the New Credit Facility are, at the option of the borrower, at one of
several rates including LIBOR plus 0.60% to 2.0%, based upon the credit rating
of the Company and the loan type. In addition, the Company has the option to
request participating banks to bid on loan participation at lower rates than
those contractually provided by the New Credit Facility. The New Credit
Facility requires the Company to pay annual fees of 1/15 of 1% to 1/2 of 1%,
based upon the credit rating of the Company.

The Company previously had entered into a $300 million competitive advance
and multi-currency revolving credit facility (the "Old Credit Facility")
provided by a group of 13 banks. Borrowings under the Old Credit Facility were
at one of several rates including LIBOR plus 0.875% to 2.0%, based upon a
defined financial ratio and the loan type. The Old Credit Facility required the
Company to pay annual fees of 1/10 of 1% to 1/3 of 1%, based upon a defined
financial ratio of the total loan commitment.

On May 1, 1998, the Company issued $100 million of senior unsecured notes
(the "Notes") at a discount of $0.6 million, bearing a coupon rate of 7.13%
with an effective rate of 7.22%. The Notes will mature on May 1, 2008. Interest
on the Notes are paid semi-annually. The Company used the net proceeds from the
offering of approximately $99 million to repay amounts outstanding under the
Old Credit Facility.

On May 31, 2001, the Company's $15 million line of credit expired.

On December 3, 1999, the Company entered into an interest rate swap
agreement with a notional amount of $115 million 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. On average at December 31, 1999, the interest
rate swap agreement had a life of two months with a fixed rate of 5.85% and
variable rate of 6.12%, and a fair market valuation of approximately $0.1
million. On March 3, 2000, the interest rate swap agreement was settled for
approximately $0.1 million. In accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", the Company reclassified a
deferred gain totaling $0.7 million from prior year hedging activity to other
comprehensive income during 2001.

11. 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, 2001, 2000 and 1999 were $5.2
million, $5.3 million and $6.9 million (exclusive of $2.5 million of foreign
dividends), respectively. The Company's foreign operations had net (loss)
income of $(35.2 million), $(12.3 million) and $1.0 million for the years ended
December 31, 2001, 2000 and 1999, respectively.

F-24

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

12. Pension, Profit Sharing, and Incentive Plans

Bonuses accrued for key executives of the Company under incentive
compensation plans were $1.1 million at both December 31, 2001 and 2000.

During 2001, 2000 and 1999, employees of the Company participated in 401(k)
retirement plans sponsored by the Company. For the years ended December 31,
2001, 2000 and 1999, the Company recorded compensation expense of $1.7 million,
$1.6 million and $1.3 million, respectively, related to the plans.

13. Income Taxes

Income before income taxes were derived from the following:

<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
2001 2000 1999
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
Income before income taxes:
Domestic operations................. $ 80,647 $ 80,982 $92,058
Foreign operations.................. (35,230) (11,400) 2,413
-------- -------- -------
Income before income taxes............. $ 45,417 $ 69,582 $94,471
======== ======== =======
</TABLE>

The provisions for income taxes are as follows:

<TABLE>
<CAPTION>
Years ended December 31,
-------------------------
2001 2000 1999
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Current tax expense
Federal............................. $30,890 $20,707 $22,038
State............................... 3,675 2,434 2,723
Foreign............................. 665 886 1,422

Deferred tax (benefit) expense
Federal............................. (3,602) 3,598 10,515
State............................... (597) (481) 618
Foreign............................. 59 (7) --
------- ------- -------
Income taxes........................... $31,090 $27,137 $37,316
======= ======= =======
</TABLE>

F-25

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
December 31,
------------------
2001 2000
-------- --------
(In thousands)
<S> <C> <C>
Depreciation and amortization............... $(21,475) $(21,663)
Prepaid expenses............................ (17,736) (21,247)
Other....................................... (8,950) (6,606)
-------- --------
Gross deferred tax liabilities.............. (48,161) (49,516)
-------- --------
Foreign operations.......................... 19,326 4,352
Accrued expenses............................ 5,723 6,496
Other....................................... 2,578 1,976
-------- --------
Gross deferred tax assets................... 27,627 12,824
-------- --------
Deferred tax liability before valuation
allowance................................. (20,534) (36,692)
Valuation allowance......................... (12,737) --
-------- --------
Net deferred tax liability.................. $(33,271) $(36,692)
======== ========
</TABLE>

No provision has been made for U.S. federal deferred income taxes on
approximately $9 million of accumulated and undistributed earnings of foreign
subsidiaries at December 31, 2001 since these earnings are considered to be
permanently invested in foreign operations

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

<TABLE>
<CAPTION>
Years ended December 31
------------------------------
2001 2000 1999
------ ------ ------
(In thousands,
except Federal income tax rate)
<S> <C> <C> <C>
Federal income tax rate................ 35% 35% 35%
Federal taxes at statutory rate........ $15,896 $24,354 $33,065
State income taxes, net of federal tax
benefit.............................. 1,120 1,269 2,172
Unrealized tax benefits................ 12,737 -- --
Other.................................. 1,337 1,514 2,079
------- ------- -------
Income tax expense.................. $31,090 $27,137 $37,316
======= ======= =======
</TABLE>

A certain amount of the Company's capital loss carryforwards (which are
included in the foreign operations deferred tax asset) are not expected to be
realized at this time. Accordingly, a valuation allowance of $12.7 million was
established in 2001.

14. Capital Stock

In 2001, the Company granted key employees and non-employee directors
155,515 restricted shares of common stock with a fair value of $2.3 million on
the grant date. The shares vest over a three to five year period with 10,015
shares vesting over a three year period and 145,500 shares vesting over a five
year period. In 2000, the Company granted key employees and non-employee
directors 14,052 restricted shares of common stock with a fair value of $0.2
million on the grant date. The shares vest over a three year period. In 1999,
the Company granted key employees and non-employee directors 70,260 restricted
shares of common stock with a fair value of

F-26

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

$1.0 million on the grant date. The shares vest over a three to five year
period with 11,016 shares 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. A total of 9,130, 11,850 and 6,150 shares of restricted stock were
forfeited in 2001, 2000 and 1999, respectively. The Company incurred
compensation expense totaling $0.7 million, $0.8 million and $0.7 million
related to the vesting of restricted stock during the years ended December 31,
2001, 2000 and 1999, respectively. The Company has recorded $0.3 million of
compensation expense related to the vesting of restricted stock as part of its
2001 restructuring accrual related to 46,064 shares.

The Company has stock option plans for which it is authorized to grant
options to purchase up to 9.0 million shares of the Company's common stock, of
which 1.9 million shares remain available for grant as of December 31, 2001.
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.

A summary of the option activity under the stock option plans is as follows
as of December 31, 2001, 2000 and 1999:

<TABLE>
<CAPTION>
2001 2000 1999
-------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------- ---------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year....... 4,306,584 $12.39 3,907,326 $11.19 3,969,309 $10.31
Granted................................ 348,836 15.08 1,187,845 15.71 732,372 13.19
Exercised.............................. (1,363,050) 9.90 (288,634) 7.22 (695,228) 7.06
Cancelled.............................. (196,781) 15.52 (499,953) 15.10 (99,127) 12.85
---------- ------ --------- ------ --------- ------
Outstanding at end of year.......... 3,095,589 $13.56 4,306,584 $12.39 3,907,326 $11.19
========== ====== ========= ====== ========= ======
Options exercisable at year end........ 1,374,395 $12.52 2,035,332 $10.49 1,727,748 $ 9.25
========== ====== ========= ====== ========= ======
Weighted average fair value of options
granted during the year.............. $ 7.67 $ 3.78 $ 6.20
====== ====== ======
</TABLE>

The following table summarizes information about stock options outstanding
at December 31, 2001:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- -----------------------------
Weighted
Number Average Weighted Number Weighted
Range of Exercise Outstanding at Remaining Average Exercisable at Average
Prices 12/31/01 Contractual Life Exercise Price 12/31/01 Exercise Price
------ -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 5.00 to 9.00.... 193,860 3.8 years $ 7.15 134,953 $ 6.79
9.00 to 13.00.... 1,283,341 6.3 years $12.10 733,255 $11.94
13.00 to 17.65.... 1,598,388 7.4 years $15.46 506,187 $14.88
17.65 to 30.00.... 20,000 9.9 years $17.80 -- --
--------- ---------
3,095,589 1,374,395
========= =========
</TABLE>

SFAS No. 123 "Accounting for Stock-Based Compensation," requires companies
to provide additional note disclosures about employee stock-based compensation
plans based on a fair value method of accounting. As permitted by this
accounting standard, the Company continues to account for these plans under APB
Opinion 25.

F-27

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

For purposes of the pro forma disclosure, compensation cost for the
Company's stock option plan was determined based on the fair value at the grant
dates for awards under those plans consistent with the method of SFAS No. 123.
The fair value of each option grant has been estimated on the date of grant
using an option-pricing model with the following weighted average assumptions
used for grants in 2001, 2000 and 1999:

<TABLE>
<CAPTION>
2001 2000 1999
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate................ 5.03% 5.10% 6.45%
Volatility............................. 43.3% 56.6% 38.0%
Expected Lives......................... 10 years 10 years 10 years
Dividend Yield......................... 0% 0% 0%
</TABLE>

If options had been reported as compensation expense based on their fair
value, pro forma net income would have been $13.4 million, $41.8 million and
$56.4 million for the years ended December 31, 2001, 2000 and 1999,
respectively, and pro forma earnings per share would have been $0.47, $0.79 and
$1.01, respectively.

Through December 31, 2001, the Company had repurchased 21.1 million shares
of its common stock at a total cost of $314.0 million, including 12.0 million
shares at a cost of $185.7 million during the year ended December 31, 2001. The
Company has received authorization from its board of directors to repurchase up
to an additional 5.3 million shares under the terms of the repurchase plan.

15. Comprehensive Income

The components of total accumulated other comprehensive income are as
follows:

<TABLE>
<CAPTION>
December 31,
--------------------
2001 2000 1999
----- ----- ------
(In thousands)
<S> <C> <C> <C>
Unrealized gains (losses) on available-for-sale
securities..................................... $(202) $ 108 $ (419)
Foreign currency translation adjustments......... (576) (162) 1,624
Deferred gain on prior year hedging activity..... 424 -- --
----- ----- ------
Total accumulated other comprehensive income
(loss)......................................... $(354) $ (54) $1,205
===== ===== ======
</TABLE>

F-28

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The related income tax effect allocated to each component of other
comprehensive income (loss) is as follows:

<TABLE>
<CAPTION>
Amount Before Income Tax Amount Net
Taxes (Expense)/Benefit of Taxes
------------- ----------------- ----------
(In thousands)
<S> <C> <C> <C>
2001
Net unrealized losses............................ $ (179) $(131) $ (310)
Foreign currency translation adjustment, net..... (414) -- (414)
------- ----- -------
Total other comprehensive loss................... $ (593) $(131) $ (724)
======= ===== =======
2000
Net unrealized gains............................. $ 844 $(317) $ 527
Foreign currency translation adjustment, net..... (1,786) -- (1,786)
------- ----- -------
Total other comprehensive income (loss).......... $ (942) $(317) $(1,259)
======= ===== =======
1999
Net unrealized losses............................ $(1,024) $ 225 $ (799)
Foreign currency translation adjustment, net..... (108) -- (108)
------- ----- -------
Total other comprehensive income (loss).......... $(1,132) $ 225 $ (907)
======= ===== =======
</TABLE>

Below represents the detail of other comprehensive income:

<TABLE>
<CAPTION>
2001 2000 1999
----- ------- -------
(In thousands)
<S> <C> <C> <C>
Foreign currency translation adjustments......... $(414) $ (291) $ (108)
Plus: reclassification of loss on liquidation of
foreign subsidiaries........................... -- (1,495) --
----- ------- -------
Net foreign currency translation adjustments..... $(414) $(1,786) $ (108)
===== ======= =======
Unrealized holding (losses) gains arising during
the period, net................................ $(352) $ (176) $ 601
Less: reclassification adjustments for gains
(losses) included in net income................ 42 703 (1,400)
----- ------- -------
Net unrealized holding (losses) gains arising
during the period.............................. $(310) $ 527 $ (799)
===== ======= =======
</TABLE>

F-29

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

16. Earnings Per Share

The following table illustrates the reconciliation of the earnings and
number of shares used in the basic and diluted earnings per share calculations.

<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------
2001 2000 1999
----- ----- -----
(In millions, except per share amounts)
<S> <C> <C> <C>
Computation of Basic Earnings Per Share:
Net income....................................... $14.3 $42.4 $57.2
----- ----- -----
Weighted average shares outstanding--basis....... 44.2 52.9 54.9
----- ----- -----
Basic earnings per share......................... $0.32 $0.80 $1.04
===== ===== =====
Computation of Diluted Earnings Per Share:
Net income for diluted earnings per share........ $14.3 $42.4 $57.2
Weighted average shares outstanding--basis....... 44.2 52.9 54.9
Effect of Dilutive Securities:
Employee stock option plan....................... 0.4 0.4 0.8
----- ----- -----
Weighted average shares outstanding--diluted..... 44.6 53.3 55.7
----- ----- -----
Diluted earning per share........................ $0.32 $0.80 $1.03
===== ===== =====
</TABLE>

The effect of dilutive securities is computed using the treasury stock
method and average market prices during the period. In 2000 and 1999, the
Company excluded 2,725,696 and 206,031 anti-dilutive options from the
computation of diluted earnings per share, respectively.

17. Leases

The Company enters into operating leases primarily for office space and
computer equipment. Rental expense under non-cancelable operating leases was
approximately $12.0 million, $10.2 million and $4.6 million for the years ended
December 31, 2001, 2000 and 1999, respectively. The Company received sublease
rental income related to computer equipment leased to franchisees totaling $7.6
million, $5.0 million and $0.6 million during the years ended December 31,
2001, 2000 and 1999, respectively. Future minimum lease payments are as follows:

<TABLE>
<CAPTION>
2002 2003 2004 2005 2006 Thereafter Total
------- ------- ------ ------ ------ ---------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Minimum lease payments....... $ 9,923 $ 6,493 $4,180 $3,423 $3,427 $23,698 $ 51,144
Minimum sublease rentals..... (6,311) (3,111) (849) -- -- -- (10,271)
------- ------- ------ ------ ------ ------- --------
$ 3,612 $ 3,382 $3,331 $3,423 $3,427 $23,698 $ 40,873
======= ======= ====== ====== ====== ======= ========
</TABLE>

18. 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, marketing and reservation fees and partner services
revenue and other. The Company is obligated under its franchise agreements to
provide marketing and reservation services appropriate for the successful
operation of its systems. These funds do not represent separate

F-30

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

reportable segments as their operations are directly related to the Company's
franchising business. The revenues received from franchisees that are used to
pay for part of the Company's central on-going operations are included in
franchising revenues and are offset by the related expenses paid from the
marketing and reservation funds to calculate franchising operating income.
Corporate and other revenue consists of product sales and hotel operations. The
Company does not allocate interest and dividend income, interest expense or
income taxes to its franchising segment.

The following table presents the financial information for the Company's
franchising segment.

<TABLE>
<CAPTION>
Year Ended December 31, 2001
-----------------------------------------------------
Elimination
Franchising Corporate & Other Adjustments Consolidated
----------- ----------------- ----------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Revenues............................... $338,213 $ 3,215 $ -- $341,428
Operating income (loss)................ 138,988 (65,411) -- 73,577
Equity loss on Friendly investment..... -- (16,436) -- (16,436)
Depreciation and amortization.......... 12,485 11,769 (11,802) 12,452
Capital expenditures................... 6,997 6,535 -- 13,532
Total assets........................... 215,381 105,797 -- 321,178

Year Ended December 31, 2000
-----------------------------------------------------
Elimination
Franchising Corporate & Other Adjustments Consolidated
----------- ----------------- ----------- ------------
(In thousands)
Revenues............................... $351,592 $ 1,249 $ -- $352,841
Operating income (loss)................ 136,985 (44,558) -- 92,427
Equity loss on Friendly investment..... -- (12,071) -- (12,071)
Depreciation and amortization.......... 10,584 11,523 (10,484) 11,623
Capital expenditures................... 8,665 7,925 -- 16,590
Investment in Friendly................. -- 34,616 -- 34,616
Total assets........................... 251,586 232,534 -- 484,120

Year Ended December 31, 1999
-----------------------------------------------------
Elimination
Franchising Corporate & Other Adjustments Consolidated
----------- ----------------- ----------- ------------
(In thousands)
Revenues............................... $320,332 $ 3,871 $ -- $324,203
Operating income (loss)................ 124,293 (30,123) -- 94,170
Equity loss on Friendly investment..... -- (380) -- (380)
Depreciation and amortization.......... 10,806 6,957 (10,076) 7,687
Capital expenditures................... 16,515 14,118 -- 30,633
Investment in Friendly................. -- 41,195 -- 41,195
Total assets........................... 248,028 216,630 -- 464,658
</TABLE>

The Company's international operations had revenues of $5.2 million, $5.3
million and $6.9 million for the years ended December 31, 2001, 2000 and 1999,
respectively. Long-lived assets related to international operations were $7.1
million, $10.9 million and $20.7 million as of December 31, 2001, 2000 and
1999, respectively. All other long-lived assets of the Company are associated
with domestic activities. In addition, the Company had a $0.0 million, $34.6
million and $41.2 million investment in Friendly as of December 31, 2001, 2000
and 1999, respectively.

F-31

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

19. Commitments and Contingencies

The Company is a defendant in a number of lawsuits arising in the ordinary
course of business. In the opinion of management and general counsel to the
Company, the ultimate outcome of such litigation will not have a material
adverse effect on the Company's business, financial position, results of
operations or cash flows.

In January 2001, the Company provided Friendly, in association with
Friendly's restructuring (see Note 5 to Consolidated Financial Statements),
with a letter of credit in an amount up to (Pounds)7.8 million (approximately
US$11.4 million) to guarantee additional credit facilities from Friendly's
banks. At December 31, 2001, the balance was $7.6 million. The balance
available on the letter of credit was reduced to (Pounds)5.0 million
(approximately US$7.3 million) during 2002.

From time to time, the Company establishes programs or helps franchisees
obtain financing. One of the past programs was a "Construction to Permanent
Financing" program under which Saloman Smith Barney together with Suburban
Capital Markets, Inc. offered $100 million in financing per year to qualified
franchises and the Company guaranteed such loans with a maximum guarantee
amount of $10 million. At December 31, 2000, loans outstanding under this
program were $6.0 million and the Company's guarantee covered $3.0 million of
these loans. In 2001, the $6.0 million loan was settled, removing the Company's
open guarantee of $3.0 million. The program had been terminated in 1999.

The Company has a $3.0 million letter of credit issued as support for
construction and permanent financing of a Sleep Inn and MainStay Suites located
in Atlanta, Georgia. The letter of credit automatically renews for one year
periods until either the Company or the financial institution elects to
terminate the letter of credit.

20. Fair Value of Financial Instruments

The balance sheet carrying amount of cash and cash equivalents and
receivables approximate fair value due to the short term nature of these items.
Long-term debt consists of bank loans and senior notes. Interest rates on bank
loans adjust frequently based on current market rates; accordingly, the
carrying amount of bank loans is equivalent to fair value. The $100 million
unsecured senior notes have an approximate fair value at December 31, 2001 and
2000 of $95.9 million and $97.9 million, respectively, based on their current
yield to maturity. The New Note from Sunburst has an approximate fair value of
$40.5 million at December 31, 2001 and the Old Note from Sunburst had an
approximate fair value of $139.4 million at December 31, 2000, respectively,
based on its current yield to maturity.

21. Impact of Recently Issued Accounting Standards

F-32

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In September 2001, the FASB issued SFAS No. 144, "Impairment of Long-Lived
Assets to be Disposed Of," which updates accounting and reporting standards for
the recognition and measurement of impairment of long-lived assets to be held
and used or disposed of by sale. The Company adopted SFAS No. 144 on January 1,
2002. The adoption of SFAS No. 144 did not have a material impact on the
Company's earnings or other comprehensive income.

22. Selected Quarterly Financial Data - (Unaudited)

<TABLE>
<CAPTION>
2001 First Second Third Fourth Total Year
---- ------- ------- ------- -------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues............................... $67,755 $84,460 $97,179 $ 92,034 $341,428
Operating income....................... 17,451 26,356 35,409 (5,639) 73,577
Income before income taxes............. 12,132 22,238 20,854 (9,807) 45,417
Net income.......................... 7,400 13,565 12,508 (19,146) 14,327

Per basic share:
Net income.......................... $ 0.16 $ 0.31 $ 0.29 $ (0.45) $ 0.32(a)

Per diluted share:
Net income.......................... $ 0.16 $ 0.30 $ 0.29 $ (0.45) $ 0.32(a)

2000 First Second Third Fourth Total Year
---- ------- ------- ------- -------- ----------
(In thousands, except per share data)
Revenues............................... $81,065 $87,210 $94,267 $ 90,299 $352,841
Operating income....................... 16,915 24,041 32,801 18,670 92,427
Income before income taxes............. 14,439 19,079 31,921 4,143 69,582
Net income.......................... 8,808 11,638 19,472 2,527 42,445

Per basic share:
Net income.......................... $ 0.16 $ 0.22 $ 0.37 $ 0.05 $ 0.80

Per diluted share:
Net income.......................... $ 0.16 $ 0.22 $ 0.37 $ 0.05 $ 0.80
</TABLE>

(a) Quarterly per share numbers do not accumulate to the year end per share
amount due to rounding.

F-33

<PAGE>

BOARD OF DIRECTORS

Stewart Bainum Jr.
Chairman of the Board
Sunburst Hospitality Corporation

Director
Manor Care, Inc.

Barbara Bainum
Vice Chairman
Commonweal Foundation

Vice Chairman
Realty Investment Company, Inc.

William L. Jews
President and Chief Executive Officer
CareFirst BlueCross BlueShield

Director
Ecolab, Inc.
MBNA
Municipal Mortgage and Equity, L.L.C.
Ryland Group, Inc.

Charles A. Ledsinger, Jr.
President and Chief Executive Officer
Choice Hotels International

Director
FelCor Lodging Trust, Inc.
Friendly's Ice Cream Corporation
TBC Corporation

Lawrence R. Levitan
Chairman
IRS Oversight Board

Retired Managing Partner
Andersen Consulting's
Worldwide Communications Industry Group

Jerry E. Robertson, Ph.D.
Retired Executive Vice President
3M Life Sciences Sector and
Corporate Services

Director
Coherent Inc.
Steris Corp.

Raymond E. Schultz
Chairman
RES Investments, L.L.C.

Director
Equity Inns, Inc.
TBC Corporation

CORPORATE EXECUTIVE OFFICERS

Stewart Bainum Jr.
Chairman of the Board

Charles A. Ledsinger, Jr.
President and Chief Executive Officer

Steven T. Schultz*
Executive Vice President, Domestic Hotels

* Mr. Schultz will be leaving the company on May 31, 2002

Michael J. DeSantis
Senior Vice President,
General Counsel and Secretary

Bruce N. Haase
Senior Vice President, International

Thomas Mirgon
Senior Vice President, Administration

Janna Morrison
Senior Vice President, Franchise Services

Daniel Rothfeld
Senior Vice President, E-commerce and
Emerging Business Opportunities

Joseph M. Squeri
Senior Vice President,
Development and Chief Financial Officer

Gary Thomson
Senior Vice President and
Chief Information Officer

Wayne W. Wielgus
Senior Vice President, Marketing

CORPORATE OFFICERS

Don Brockway
Vice President, Reservations Operations

Gregory Bublitz
Vice President, Finance, and Controller

Kevin M. Rooney
Associate General Counsel and
Assistant Secretary

CORPORATE INFORMATION

Stock Listing
Choice Hotels International common stock
trades on the New York Stock Exchange under
the ticker symbol CHH.

Transfer Agent & Registrar
Mellon Investor Services LLC
Overpeck Centre
85 Challenger Road
Ridgefield, NJ 07660
www.chasemellon.com

Independent Auditors
Arthur Andersen LLP
Washington, D.C.

Annual Meeting Date
Choice Hotels International will hold
its Annual Meeting of Stockholders on
Tuesday, April 30, 2002, at 9:00 a.m. in
The Chesapeake Room of the Learning Center,
10720 Columbia Pike, Silver Spring, MD

Form 10-K
A stockholder may receive without charge a
copy of the Form 10-K Annual Report filed
with the Securities and Exchange Commission
by written request to the Corporate Secretary
at the corporate headquarters.

Corporate Headquarters
Choice Hotels International
10750 Columbia Pike
Silver Spring, MD 20901
General Inquiries: (301) 592-5000
Franchise Sales: (800) 547-0007
Investor Inquiries: (800) 404-5050, ext. 5026
or (301) 592-5026
E-mail: investor_relations@choicehotels.com
Media Relations: (301) 592-5032
www.choicehotels.com

Quality, Comfort, Comfort Suites, Clarion,
Sleep Inn, Econo Lodge, Rodeway Inn,
MainStay Suites, Choice Privileges and
ChoiceBuys.com are registered trademarks,
service marks, and trade names owned by
Choice Hotels International, Inc. Choice
Hotels also owns and uses common law
marks, including Profit Manager.

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13.02
<SEQUENCE>5
<FILENAME>dex1302.txt
<DESCRIPTION>SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TEXT>
<PAGE>

EXHIBIT 13.02

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Choice Hotels International, Inc. and subsidiaries:

We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements included in Choice Hotels
International, Inc.'s and subsidiaries (the "Company") annual report to
shareholders incorporated by reference in this Form 10-K, and have issued our
opinion thereon dated March 20, 2002. Our audit was made for the purpose of
forming an opinion on those consolidated financial statements taken as a whole.
The schedule listed in the index under Item 14(a)2 is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.

/s/ Arthur Andersen LLP

Vienna, Virginia
March 20, 2002

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In thousands of dollars)

<TABLE>
<CAPTION>
Charges
Balance at (Credits) to Balance at
Beginning of Profit Write-Offs/ End
Description Period and Loss Deductions of Period
----------- ------ -------- ---------- ----------
<S> <C> <C> <C> <C>
Accounts Receivable:

Year ended December 31, 2001
Allowance for doubtful accounts $5,754 $1,388 $(1,750) $5,392
====== ====== ======== ======

Year ended December 31, 2000
Allowance for doubtful accounts $6,691 $(585) $ (352) $5,754
====== ====== ======== ======

Year ended December 31, 1999
Allowance for doubtful accounts $8,082 $ 588 $(1,979) $6,691
====== ===== ======== ======

<CAPTION>
Balance at Charges to Balance at
Beginning of Profit Write-Offs/ End
Period and Loss Deductions of Period
------ -------- ---------- ----------
<S> <C> <C> <C> <C>
Restructuring Liability:

Year ended December 31, 2001
Restructuring allowance $5,100 $5,940 $(6,156) $4,884
====== ====== ======== ======

Year ended December 31, 2000
Restructuring allowance $ - $5,637 $ (537) $5,100
====== ====== ======== ======

</TABLE>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21.01
<SEQUENCE>6
<FILENAME>dex2101.txt
<DESCRIPTION>SUBSIDIARIES OF CHOICE HOTELS
<TEXT>
<PAGE>

Exhibit 21.01

SUBSIDIARIES

711 West Development Park, LLC, a Delaware limited liability company
Brentwood Boulevard Hotel Development, LLC, a Delaware limited liability company
Capital Horizon Fund, LLC, a Delaware limited liability company
Choice Capital Corp., a Delaware corporation
Choice Hotels Australia Pty. Ltd., an Australian company
Choice Hotels Canada, Inc. (50% owned), a Canadian corporation
Choice Hotels International Asia Pacific, Pty., an Australian company
Choice Hotels International Services Corp., a Delaware corporation
Choice Hotels Limited, a Cayman Islands company
Choice Hotels Netherlands Antilles N.V., a Netherlands Antilles corporation
Choice Hotels Singapore Pte. Ltd., a Singapore company
Choice Hotels Systems, Inc., a Canadian corporation
Choice International Hospitality Services Licensing Co. B.V., a Netherlands
company
Choice International Hospitality Services, Inc., a Delaware corporation
Dry Pocket Road Hotel Development, LLC, a Delaware limited liability company
Park Lane Drive Hotel Development, LLC, a Delaware limited liability company
Quality Hotels Limited, a United Kingdom company

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.01
<SEQUENCE>7
<FILENAME>dex2301.txt
<DESCRIPTION>CONSENT OF ARTHUR ANDERSEN
<TEXT>
<PAGE>

Exhibit 23.01

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of our
reports incorporated by reference in or included in this Form 10-K, into Choice
Hotels International, Inc.'s previously filed Registration Statements File No.
333-36819, No. 333-41355, No. 333-41357 and No. 333-67737.

/s/ Arthur Andersen LLP

Vienna, Virginia
March 25, 2002

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.02
<SEQUENCE>8
<FILENAME>dex2302.txt
<DESCRIPTION>ARTHUR ANDRSEN AUDIT
<TEXT>
<PAGE>

Exhibit 23.02

March 26, 2002

Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549

Ladies and Gentlemen:

Choice Hotels International, Inc. received a manually signed audit report from
Arthur Andersen LLP ("Andersen") dated March 20, 2002, for the consolidated
financial statements of Choice Hotels International, Inc. and subsidiaries as of
December 31, 2001 and 2000, and for the years ended December 31, 2001, 2000 and
1999. In compliance with Release 33-8070, we have received certain
representations from Andersen including that the audit was subject to Andersen's
quality control system for the U.S. accounting and auditing practice to provide
reasonable assurance that the engagement was conducted in compliance with
professional standards and that there was appropriate continuity of Andersen
personnel working on the audits and the availability of national office
consultation. Availability of Andersen personnel at foreign affiliates is not
relevant to our audit, therefore the assurances from Andersen as to foreign
affiliates are not applicable to us.

/s/ Joseph M. Squeri
- --------------------------------------
Joseph M. Squeri
Senior Vice President, Development
and Chief Financial Officer

</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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