CHOICE HOTELS INTERNATIONAL INC /DE, 10-K, 1999-03-29

CHOICE HOTELS INTERNATIONAL INC /DE
10-K, 1999-03-29
HOTELS & MOTELS

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<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, 1998

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:

________________________________________________________________________________
(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 $495,884,280 as of March 10, 1999 based upon a
closing price of $ 14.1875 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 10, 1999 was 55,336,553.

DOCUMENTS INCORPORATED BY REFERENCE.

PART I 1998 Annual Report to Stockholders
Proxy Statement dated March 29, 1999

PART II 1998 Annual Report to Stockholders
Proxy Statement dated March 29, 1999

PART III Proxy Statement dated March 29, 1999

2
<PAGE>

PART I

ITEM 1. BUSINESS

Overview

Choice Hotels International, Inc. (the "Company" or "Choice") is the
world's second largest franchisor of hotel properties with 3,671 hotels open and
operating in 36 countries at December 31, 1998. In addition, at December 31,
1998, the Company had 1,477 franchise properties currently under development
representing a total of 115,607 rooms. Choice franchises lodging properties
under one of the Company's proprietary brand names (the "Choice brands"):
Comfort(R), Quality(R), Clarion(R), Sleep(R), Rodeway(R), Econo Lodge(R) and
MainStay/SM/. The Company has over 2,300 franchisees in the franchise system
with no single franchisee accounting for more than 5% of its royalty or total
revenues. The Company franchises hotels in all 50 states, Puerto Rico and the
District of Columbia and 35 additional countries, with 95% of its franchising
revenue generated from hotels franchised in the United States. With recognized
brands and a diverse and growing franchisee base, the Company believes it has a
strong foundation for continued growth.

Choice is a "pure-play" lodging franchisor with limited real estate
exposure and low capital expenditure requirements. With a focus on hotel
franchising versus ownership, the Company benefits from the economies of scale
inherent in the franchising business. The fee and cost structure of the
Company's business provides significant opportunities to increase profits by
increasing the number of franchise properties. The Company derives
substantially all of its revenues from franchise fees which consist of an
initial fee and ongoing royalty, marketing, and reservation fees that are based
as a percentage of the franchisees' gross room revenues.

The principal factors that affect the Company's 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 and (iv) 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 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 the Company is able to
capture a significant portion of these royalty fees as operating income. The
Company believes that the continued growth of its franchise business should
enable it to capture increasing benefits from the operating leverage in place
thereby improving operating margins. The Company's franchising operating
margins/1/ have improved from 52.5% as of May 31, 1995 to 64.6% as of December
31, 1998. Furthermore, the Company has generated steady royalty fee income from
its increasing franchisee base growing from $50.9 million for the year ended May
31, 1992 to $ 115.4 million for the year ended December 31, 1998. Earnings
before interest, taxes, depreciation and amortization has grown from $32.2
million for the year ended May 31, 1992 to $ 93.8 million for the year end
December 31, 1998.

__________________________
/1/ Franchising operating margin is calculated by deducting selling,
general and administrative expenses from net franchising revenues.

3
<PAGE>

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 pursuant to 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, 1998, there were approximately 3.7 million hotel
rooms in the United States in hotels/motels containing twenty or more rooms. Of
those rooms, approximately 1.1 million rooms were not affiliated with a national
or regional brand, while the remaining approximately 2.6 million rooms were
affiliated with a brand either through franchise or the ownership/management of
a national or regional chain.

During the late 1980s, the industry added approximately 500,000 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.

The lodging industry in recent years has recovered, demonstrating
strong performance, based on year-to-year increases in room revenues, average
daily rates, revenue per available room ("RevPAR"), and lodging industry
profitability. RevPAR is calculated by multiplying the percentage of occupied
rooms by the average daily room rate realized. Since 1993, the lodging industry
has been 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 the
recent trends:

________________________
/1/ Source: Smith Travel Research

4
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THE US LODGING INDUSTRY'S GROWTH TRENDS SINCE 1991

<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>
1992......... 3.5% 62.6% $58.91 1.4% 2.9% $36.87 break-even 36,000
1993......... 4.6% 63.5% $60.53 2.7% 2.7% $38.42 $ 2.4 40,000
1994......... 7.1% 64.7% $62.86 3.8% 2.7% $40.70 $ 5.5 45,000
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
</TABLE>

The Company believes the lodging industry can be divided into three
categories: luxury or upscale, middle-market and economy. The Company believes
the luxury category generally has room rates above $70 per night, the middle-
market category generally has room rates between $46 and $70 per night and the
economy category generally has room rates less than $46 per night.

Service is a distinguishing characteristic in the lodging industry.
Generally, the Company believes 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).

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

New hotels opened in recent years typically have been limited-service
hotels, as limited-service 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 middle-market categories and are located in suburban
or highway locations. From 1991 to 1998, the average room count in new hotels
declined from 122 to 95 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
1,104 hotel properties that changed their affiliation in 1998, 82% converted
from independent status to affiliation with a chain or converted from one chain
to another, while only

5
<PAGE>

18% canceled or were required to cancel their chain affiliation. A total of 204
independent properties switched to a franchise chain in 1998.

The large franchise lodging chains, including the Company, 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 and direct sales programs. The Company
believes 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.

The Company believes 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 the Company's
business provides significant opportunities for the Company to increase profits
by increasing the number of franchised properties. As a hotel franchisor, the
Company derives substantially all of its revenue from franchise fees. The
Company's franchise fees consist of an initial fee and ongoing royalty,
marketing and reservation fees which are based on a percentage of the
franchisee's gross room revenues. The royalty portion of the franchise fee is
intended to cover the Company's operating expenses, such as expenses incurred in
quality assurance, administrative support and other franchise services and to
provide the Company with operating profits. The marketing and reservation
portion of the franchise fee is intended to reimburse the Company for the
expenses associated with providing such franchise services as the central
reservation system and national marketing and media advertising.

Much of the variable costs associated with the Company's 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 the Company
is able to capture a significant portion of these royalty fees as operating
income.

Strategy. The Company's business strategy is designed to maximize the value of
its extensive distribution channels (which include the hotels under franchise
and the hotel guests) by expanding and enhancing those relationships. The
strategy is effectuated through an emphasis on the following key components: (1)
optimizing the brand portfolio, (2) strategically growing the franchise system,
(3) leveraging the franchise system, (4) improving its and its franchisees'
margins, (5) growing profitability internationally, and (6) pursuing
complementary business opportunities.

. Optimizing the Brand Portfolio. The Company believes that each of its brands
has particular attributes and strengths. The Company's strategy is to leverage
the strengths of each brand for profit growth and for identifying new niches
into which the company may expand. This

6
<PAGE>

will be effectuated through a raising of the Company's brand standards
strictly enforced through consumer-driven quality assurance.

. Increasing Market Penetration on a Strategic Basis. The Company is taking
advantage of its regional structure to analyze key markets in the U.S. and, in
conjunction with its franchisees, identifying the best opportunities for new
development or conversion to one of the Company's brands.

. Expanding Partner Services Programs. The Company believes there is significant
opportunity to leverage its size by entering into arrangements with national
and multi-national companies that want to gain exposure to the Company's
franchised hotels and to the millions of guests who patronize the Company's
franchised hotels each year. In practice, the guest enjoys brand-name products
and services that help build guest loyalty and the franchisee benefits from
competitively priced products. Vendor partners gain access to a critical mass
of franchisees, which in turn generates residual income for the Company.

. Improving Margins Through Increased Productivity. The Company addresses the
competitiveness of its own and its franchisees' profitability by initiating
revenue generating programs and improving cost productivity. A key component
of this strategy is the roll out of the Company's proprietary property and
yield management system "Profit Manager by Choice", which the Company believes
will improve the RevPAR of its franchisees. This is supplemented by continued
enforcement of the Company's contracts (including licensee audits).

. Growing Profitably Internationally. During the eleven fiscal years ended
December 31, 1998, the number of properties (including those under
construction) in the Company's international franchise system increased to
1,243 properties with 93,470 rooms, from 81 properties with 8,330 rooms. The
Company's international franchise system includes hotels in 35 countries
outside the United States. The Company plans to continue to profitably grow
its brands internationally through a strategic pursuit of joint ventures,
master franchising agreements and brand specific area development agreements.

. Pursuing Complementary Business Opportunities. The separation of Choice from
Former Choice allows the Company to focus solely on franchising, including
potential acquisition opportunities that are complementary to the Company's
core business and unique operating skills. Choice's acquisition strategy
includes the potential purchase of lodging brands that would enhance the
offerings the Company currently makes to its franchisees and hotel consumers.

Franchise System

The Company's franchise hotels operate under one of the Choice brand
names: Comfort(R), Quality(R), Clarion(R), Sleep(R), Rodeway(R), Econo Lodge(R)
and MainStay(SM). The following table presents key statistics relative to
Choice's domestic franchise system over the three fiscal years ended May 31,
1997, for the seven-month period ended December 31, 1997 and for the two fiscal
years ended December 31, 1998.

7
<PAGE>

COMBINED DOMESTIC FRANCHISE SYSTEM

<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE SEVEN
MAY 31, MONTHS ENDED DECEMBER 31,
------------------------------------------------------------
1995 1996 1997 1997
------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of properties, end of period.............. 2,311 2,495 2,781 2,880
Number of rooms, end of period................... 200,792 214,613 235,431 242,161
Royalty fees ($000).............................. $ 71,665 $ 82,239 $ 91,724 $ 65,271
Average Royalty Rate(1).......................... 3.2% 3.3% 3.4% 3.5%
Average occupancy percentage..................... 63.8% 63.9% 62.6% 66.2%
Average daily room rate (ADR).................... $ 47.13 $ 49.49 $ 51.92 $ 54.97
RevPAR(2)........................................ $ 30.08 $ 31.60 $ 32.52 $ 36.39

<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------------
1997 1998
---------------------------------------
<S> <C> <C>
Number of properties, end of period.............. 2,880 3,039
Number of rooms, end of period................... 242,161 252,357
Royalty fees ($000).............................. $ 99,144 $109,240
Average Royalty Rate(1).......................... 3.5% 3.6%
Average occupancy percentage..................... 62.3% 60.9%
Average daily room rate (ADR).................... $ 53.89 $ 56.39
RevPAR(2)........................................ $ 33.56 $ 34.35
</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.

The Company has over 2,300 domestic franchisees and operates in all 50
states and the District of Columbia. Approximately 95% of the total royalty
income is generated from domestic franchise operations. Consequently, the
Company's analysis of its franchise system is focused on the domestic
operations. Currently, no master franchisee or other franchisee accounts for 5%
or more of Choice's royalty revenues or total revenues. Sunburst is the
Company's largest franchisee with a portfolio of 88 hotels containing 11,911
rooms located in 27 states as of December 31, 1998.

Brand Positioning

The Company's hotels are primarily limited-service hotels (offering
amenities such as swimming pools and continental breakfast) or limited-to-full
service (offering amenities such as food and beverage services, meeting rooms
and room service).

Comfort. The Comfort brand is the Company's largest. Comfort Inns and Comfort
Suites hotels offer rooms in the limited-service, middle market category.
Comfort Inns and Comfort Suites are targeted to business and leisure travelers.
Principal competitor brands include Days Inn, Fairfield Inn, Hampton Inn,
Holiday Express and LaQuinta. At December 31, 1998, there were 1,526 Comfort
Inn properties and 192 Comfort Suites properties with a total of 117,405, and
15,660 rooms, respectively, open and operating worldwide. An additional 385
Comfort Inn and Comfort Suites properties with a total of 33,061 rooms were
under development.

Comfort properties are located in the United States and in Argentina,
Australia, the Bahamas, Belgium, Brazil, Canada, Denmark, France, Germany,
India, Italy, Jamaica, Lebanon, Mexico, 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:

8
<PAGE>

COMFORT DOMESTIC SYSTEM

<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE SEVEN
MAY 31, MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997 1997
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of properties, end of period.............. 1,015 1,129 1,255 1,304
Number of rooms, end of period................... 87,551 94,160 102,722 105,384
Royalty fees ($000s)............................. $37,635 $44,657 $ 50,758 $ 36,446
Average occupancy percentage..................... 69.5% 68.7% 67.2% 71.3%
Average daily room rate (ADR).................... $ 48.24 $ 51.13 $ 54.17 $ 57.15
RevPAR........................................... $ 33.54 $ 35.11 $ 36.39 $ 40.75

<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------------
1997 1998
---------------------------------------
<S> <C> <C>
Number of properties, end of period.............. 1,304 1,394
Number of rooms, end of period................... 105,384 110,682
Royalty fees ($000s)............................. $ 55,261 $ 61,153
Average occupancy percentage..................... 66.6% 65.4%
Average daily room rate (ADR).................... $ 55.74 $ 58.19
RevPAR........................................... $ 37.15 $ 38.03
</TABLE>

Sleep Inn. Established in 1988, Sleep Inn is a new-construction hotel brand in
the limited-service, economy category. Sleep Inns are targeted to the business
and leisure traveler. Principal competitor brands include Days Inn, Fairfield
Inn, Holiday Express, LaQuinta Inn, Ho-Jo Inn and Ramada Inn.

At December 31, 1998, there were 200 Sleep Inn properties with a total
of 15,214 rooms open and operating worldwide. An additional 193 properties with
a total of 14,979 rooms were under development. The properties are located in
the United States, Canada, the Cayman Islands and Thailand. The following chart
summarizes the Sleep system in the United States:

SLEEP DOMESTIC SYSTEM

<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE SEVEN
MAY 31, MONTHS ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1996 1997 1997
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Number of properties, end of period.............. 51 87 131 156
Number of rooms, end of period................... 3,672 6,396 9,635 11,538
Royalty fees ($000s)............................. $2,080 $2,108 $3,343 $ 2,630
Average occupancy percentage..................... 65.3% 65.5% 63.9% 66.5%
Average daily room rate (ADR).................... $41.89 $45.11 $48.11 $ 50.54
RevPAR........................................... $27.37 $29.56 $30.75 $ 33.60

<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------
1997 1998
---------------------------------
<S> <C> <C>
Number of properties, end of period.............. 156 197
Number of rooms, end of period................... 11,538 14,924
Royalty fees ($000s)............................. $ 3,926 $ 5,337
Average occupancy percentage..................... 63.0% 62.0%
Average daily room rate (ADR).................... $ 49.41 $ 51.41
RevPAR........................................... $ 31.11 $ 31.88
</TABLE>

Quality. Certain Quality Inns and Quality Suites hotels compete in the limited-
service, middle market category while others compete in the full-service, middle
market category. Quality Inns and Quality Suites are targeted to business and
leisure travelers. Principal competitor brands include Best Western, Holiday
Inn, Howard Johnson, Ramada Inn and Days Inn. At December 31, 1998, there were
554 Quality Inn properties with a total of 61,542 rooms, and 125 Quality Suites
properties with a total of 13,930 rooms open worldwide. An additional 177
Quality Inn and Quality Suites properties with a total of 18,782 rooms were
under development.

Quality properties are located in the United States and in Australia,
Canada, Chile, Costa Rica, the Czech Republic, Denmark, France, Germany, India,
Indonesia, Ireland, Italy, Jamaica, Malaysia, Mexico, New Zealand, Norway,
Portugal, Russia, Spain, Sweden, Thailand, the United Kingdom and the United
Arab Emirates.

The following chart summarizes the Quality system in the United
States:

9
<PAGE>

QUALITY DOMESTIC SYSTEM

<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE SEVEN
MAY 31, MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997 1997
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of properties, end of period.............. 341 362 409 419
Number of rooms, end of period................... 43,281 45,967 50,487 50,674
Royalty fees ($000s)............................. $15,632 $16,606 $17,623 $14,459
Average occupancy percentage..................... 63.1% 62.5% 61.3% 63.8%
Average daily room rate (ADR).................... $ 50.94 $ 52.90 $ 54.61 $ 57.58
RevPAR........................................... $ 32.16 $ 33.08 $ 33.46 $ 36.73

<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------
1997 1998
-------------------------------------
<S> <C> <C>
Number of properties, end of period.............. 419 430
Number of rooms, end of period................... 50,674 50,151
Royalty fees ($000s)............................. $18,488 $20,187
Average occupancy percentage..................... 60.2% 58.7%
Average daily room rate (ADR).................... $ 56.79 $ 60.19
RevPAR........................................... $ 34.19 $ 35.35
</TABLE>

Clarion. Clarion Inns, Clarion Hotels, Clarion Resorts and Clarion Suites
hotels are full-service properties which operate in the upscale category.
Clarion properties are targeted to business and leisure travelers. Principal
competitor brands include Holiday Inn, Holiday Select, Crowne Plaza, Four Points
by Sheraton, Radisson, Courtyard by Marriott and Doubletree.

At December 31, 1998, there were 130 Clarion properties with a total
of 21,355 rooms open and operating worldwide and an additional 45 properties
with a total of 7,037 rooms under development. The properties are located in the
United States, Australia, the Bahamas, Canada, Chile, France, Germany,
Guatemala, Indonesia, Ireland, Japan, Mexico, Norway, Russia and Uruguay. The
following chart summarizes the Clarion system in the United States:

CLARION DOMESTIC SYSTEM

<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE SEVEN
MAY 31, MONTHS ENDED DECEMBER 31,
---------------------------------------------------------------
1995 1996 1997 1997
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of properties, end of period.............. 63 75 92 96
Number of rooms, end of period................... 10,420 12,817 14,721 16,161
Royalty fees ($000s)............................. $ 2,995 $ 3,602 $ 4,081 $ 2,957
Average occupancy percentage..................... 63.7% 63.3% 63.3% 64.7%
Average daily room rate (ADR).................... $ 63.71 $ 64.36 $ 67.76 $ 71.53
RevPAR........................................... $ 40.58 $ 40.74 $ 42.86 $ 46.29

<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------------
1997 1998
-------------------------------------------
<S> <C> <C>
Number of properties, end of period.............. 96 105
Number of rooms, end of period................... 16,161 17,878
Royalty fees ($000s)............................. $ 5,061 $ 5,447
Average occupancy percentage..................... 62.3% 60.4%
Average daily room rate (ADR).................... $ 70.67 $ 72.37
RevPAR........................................... $ 44.05 $ 43.73
</TABLE>

Econo Lodge. Econo Lodge hotels operate in the limited-service, 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, Ho-Jo Inn, Motel 6, Ramada Limited, Red
Carpet Inn, Red Roof Inn, Super 8 and Travelodge.

At December 31, 1998, there were 723 Econo Lodge properties with
a total of 45,656 rooms open and operating in the United States and Canada, and
an additional 132 properties with a total of 9,636 rooms under development in
those two countries. The following chart summarizes the Econo Lodge system in
the United States:

10
<PAGE>

ECONO LODGE DOMESTIC SYSTEM

<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE SEVEN
MAY 31, MONTHS ENDED DECEMBER 31,
-------------------------------------------------------------
1995 1996 1997 1997
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of properties, end of period.............. 633 641 682 692
Number of rooms, end of period................... 42,801 42,726 44,636 45,050
Royalty fees ($000s)............................. $12,021 $12,760 $13,288 $ 8,991
Average occupancy percentage..................... 57.5% 58.0% 56.4% 60.7%
Average daily room rate (ADR).................... $ 38.31 $ 39.97 $ 41.33 $ 43.86
RevPAR........................................... $ 22.04 $ 23.17 $ 23.30 $ 26.63

<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------
1997 1998
--------------------------------------
<S> <C> <C>
Number of properties, end of period.............. 692 698
Number of rooms, end of period................... 45,050 44,458
Royalty fees ($000s)............................. $13,687 $13,975
Average occupancy percentage..................... 56.1% 54.2%
Average daily room rate (ADR).................... $ 42.35 $ 43.69
RevPAR........................................... $ 23.75 $ 23.70
</TABLE>

Rodeway. The Rodeway brand competes in the limited-service, economy category
and is primarily targeted to senior citizens. Principal competitor brands
include Ho-Jo Inn, Ramada Limited, Red Roof Inn, Budgetel, Shoney's Inn, Super 8
and Motel 6. At December 31, 1998, there were 202 Rodeway Inn properties with a
total of 12,873 rooms, open and operating in the United States and Canada, and
an additional 51 properties with a total of 3,532 rooms under development in
those two countries. The following chart summarizes the Rodeway system in the
United States:

RODEWAY DOMESTIC SYSTEM

<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE SEVEN
MAY 31, MONTHS ENDED DECEMBER 31,
---------------------------------------------------------------
1995 1996 1997 1997
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of properties, end of period.............. 208 201 217 209
Number of rooms, end of period................... 13,067 12,547 13,509 12,997
Royalty Fees ($000s)............................. $ 2,302 $ 2,506 $ 2,631 $ 1,756
Average occupancy percentage..................... 50.5% 52.7% 52.7% 54.7%
Average daily room rate (ADR).................... $ 38.93 $ 40.66 $ 41.15 $ 44.11
RevPAR........................................... $ 19.64 $ 21.48 $ 21.68 $ 24.13

<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------------
1997 1998
----------------------------------------
<S> <C> <C>
Number of properties, end of period.............. 209 196
Number of rooms, end of period................... 12,997 12,447
Royalty Fees ($000s)............................. $ 2,671 $ 2,678
Average occupancy percentage..................... 51.4% 49.9%
Average daily room rate (ADR).................... $ 43.15 $ 44.31
RevPAR........................................... $ 22.20 $ 22.12
</TABLE>

MainStay Suites. MainStay Suites, the Company's newest hotel brand, is a middle-
market, extended-stay lodging product targeted to travelers who book hotel rooms
for five nights or more. The first MainStay Suites hotel, which Sunburst owns
and manages, opened in Plano, Texas, in November 1996. As of December 31, 1998,
there were 19 open hotels with 1,817 rooms and an additional 22 properties with
1,917 rooms under development.

The MainStay/(SM)/ Suites brand is designed to fill the gap in the
middle-market category between existing upscale and economy extended-stay
lodging products. Principal competitors brands include Candlewood hotels,
TownePlace Suites, as well as competition from all-suite hotel properties and
traditional extended stay operators in both the upscale market (Hawthorne
Suites, Homewood Suites, and Summerfield Suites) and the economy market
(Extended Stay America, Studio Plus and Oakwood).

International Franchise Operations

The Company's international franchise operations are primarily
conducted through master franchise arrangements. These agreements provide the
master franchisee the

11
<PAGE>

right to develop Choice branded hotels in a specific geographic region, usually
for a fee. The agreements govern the relationship between the Company and the
master franchisee, who share the royalties generated by the underlying
franchised hotels. At December 31, 1998, the Company had 632 franchise hotels
open in 35 countries outside the United States. The following table illustrates
the growth of the Company's international franchise system over the three fiscal
years ended May 31, 1997 for the seven-month period ended December 31, 1997 and
the two fiscal years ended December 31, 1998.

COMBINED INTERNATIONAL FRANCHISE SYSTEM(1)

<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED AS OF AND FOR THE SEVEN
MAY 31, MONTHS ENDED DECEMBER 31,
----------------------------------------------------------
1995 1996 1997 1997
----------------------------------------------------------
<S> <C> <C> <C> <C>
Number of properties, end of period.............. 524 557 563 605
Number of rooms, end of period................... 44,877 46,843 47,603 50,639
Royalty fees $000s).............................. $ 1,998 $ 1,586 $ 1,672 $ 958

<CAPTION>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
------------------------------------
1997 1998
------------------------------------
<S> <C> <C>
Number of properties, end of period.............. 605 632
Number of rooms, end of period................... 50,639 53,095
Royalty fees $000s).............................. $ 2,303 $ 4,902
</TABLE>

(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. The Company is the second-largest international franchised hotel chain
in Europe, with 242 hotels open in 10 countries at December 31, 1998.

In order to realign and streamline its European operations, in May
1996, the Company, through its subsidiary, ManorCare Hotels (France) S.A.,
acquired 750,000 ordinary (common) shares and 10,000,000 convertible preferred
shares of Friendly Hotels, PLC ("Friendly") for approximately $17.1 million. The
proceeds from this investment have been used by Friendly to finance the
development of ten new Comfort Inn or Quality Inn hotels in the United Kingdom
and Ireland. Additionally, the Company granted to Friendly a master franchise
for the United Kingdom and Ireland in exchange for an additional 333,333
Friendly ordinary shares. Each 5.75% convertible preferred share is immediately
convertible into one Friendly ordinary share for every 150p nominal value of the
5.75% convertible preferred shares.

In January 1998, the Company and Friendly concluded a second
transaction in which Friendly acquired from the Company the master franchise
rights for the Comfort(R), Quality(R) and Clarion(R) brands for all of Europe
with the exception of Scandinavia for a period of 10 years, for a payment of $8
million, payable in eight equal annual installments. As part of the transaction,
Friendly acquired from the Company 10 hotels in France, two in Germany and one
in the United Kingdom in exchange for 13,624,742 additional 5.75% convertible
preferred shares with a value of $22.2 million. Each such 5.75% convertible
preferred share is convertible on or after the announcement by Friendly of its
1998 financial results (which is expected to occur in April 1999) into one
Friendly ordinary share for each 150p nominal value of the 5.75% convertible
preferred shares. In addition, Friendly will pay the Company deferred
compensation of $4 million in cash, payable by the fifth anniversary of the
transaction or sooner depending on the level of future profits of the hotels
acquired. After consummation of this transaction (and the receipt of additional
ordinary shares resulting from the payment of dividends in ordinary shares), the
Company holds 1,139,888 Friendly ordinary shares and 23,624,742 5.75%
convertible preferred shares of Friendly. Assuming conversion to Friendly
ordinary shares of all Friendly convertible preferred shares (including those
held by the Company), the Company would hold approximately 46.5% of the
outstanding Friendly ordinary shares. Under the terms of its

12
<PAGE>

investment, the Company currently has the right to appoint three of the
directors to the Friendly board.

There is also a master franchise arrangement in Scandinavia that has
84 open properties as of December 31, 1998.

Canada. Choice Hotels Canada is Canada's largest lodging organization with 212
properties open at December 31, 1998. Choice Hotels Canada is a joint venture,
owned 50% by the Company and 50% by UniHost Corporation ("UniHost"), which was
formed in 1993 when UniHost converted substantially all of its controlled hotels
to Choice's brands and Choice contributed its operations in Canada to form
Choice Hotels Canada.

Other International Relationships. The Company has master franchise arrangements
with developers in various countries, including Australia, New Zealand, Mexico
and Brazil. At December 31, 1998, 939 hotels were open and operating under these
master franchise arrangements (exclusive of Europe and Canada), generating
annual royalty fees to the Company of approximately $2.5 million.

In July 1998, the Company and Flag International Limited ("Flag"),
Australia's largest lodging chain, formed a strategic alliance. Flag Choice
Hotels, a wholly-owned subsidiary of Flag, acquired a 20-year master franchise
from the Company. Under the agreement, a number of Flag properties were re-
branded with Company brands which best serve their market segment. The agreement
also provides the Company with the opportunity to acquire, within the first four
years of the agreement, up to 30 percent of the equity of Flag Choice Hotels
with proportionate board representation.

Franchise Sales

The Company has identified key market areas for hotel development
based on supply/demand relationships and strategic objectives. Development
opportunities are first offered to existing franchisees and then to (i)
developers of hotels, (ii) owners of independent hotels and motels, (iii) owners
of hotels affiliated with other franchisors' brands, and (iv) 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, the Company considers
locations which are close to major highways, airports, tourist attractions and
business centers that attract travelers.

At December 31, 1998, the Company employed approximately 40 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, the Company's commitment
to improving RevPAR, the Company's television, radio and print brand advertising
campaigns, the Choice reservation system, the Company's training and support
systems, and the Company's history of growth and profitability. Because the
Choice brands cover a broad spectrum of the lodging marketplace, the Company is
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.

13
<PAGE>

Because retention of existing franchisees is important to the
Company's growth strategy, existing franchisees are offered the right to object
to a same-brand property within 15 miles, and are protected from the opening of
a same-brand property within a specific distance, generally two to five miles,
depending upon the size of the property and the market size. The Company
believes that it is the only major franchise company to routinely offer such
territorial protection to its franchisees.

During fiscal 1998, Choice received 919 franchise applications,
approved 749 applications, signed 619 franchise agreements and placed 318 new
properties into operation in the United States under the Choice brands. Of
those placed into operations, 198 were newly constructed hotels. By comparison,
during the twelve month period ended December 31, 1997, the Company received 976
franchise applications, approved 807 applications, signed 576 franchise
agreements and added 430 new properties into operation in the U.S. Applications
received or approved may not always result in signed franchise agreements 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.

In 1998, the Company placed greater focus on quality standards, which
were more rigidly enforced. Terminations for properties that failed to meet
quality assurance standards and contractual obligations were 258 properties
(including properties not yet open) in 1998 versus 183 properties in 1997.

Franchise Agreements

The Company's standard franchise agreement grants a franchisee the
right to non-exclusive use of the Company's 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 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 the Company. Master franchise
agreements generally have a term of at least 10 years. The Company has 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 or if a franchisee fails to bring properties into compliance with
contractual quality standards within specified periods of time. Early
termination options give the Company flexibility in eliminating or re-branding
properties which become weak performers for reasons other than contractual
failure by the franchisee. Master franchise agreements typically contain
provisions permitting the Company to terminate the agreement for failure to meet
a specified development schedule.

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

14
<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 brand-specific
marketing programs, although the Company occasionally contributes a portion of
such fees to marketing programs designed to support all of the Choice brands.
Royalty fees and affiliation fees are the principal sources of profits for the
Company.

The standard franchise agreements typically require the Company's
franchisees to pay the following fees:

QUOTED FEES BY BRAND

<TABLE>
<CAPTION>
INITIAL FEE
PER ROOM/ ON-GOING FEES AS A PERCENTAGE OF GROSS ROOM REVENUES
-----------------------------------------------------------
BRAND MINIMUM ROYALTY FEES MARKETING FEES RESERVATION FEES
----- ------------------- ----------------- -------------------- -----------------
<S> <C> <C> <C> <C>
Comfort Inn............................... $300/$45,000 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.

For a description of the franchising agreements between the Company
and Sunburst, see "Relationship Between the Company and Sunburst--Franchise
Agreements," on the Proxy Statement dated March 29, 1999, incorporated herein by
reference.

The Company has increased its average royalty rate since fiscal year
1993, primarily by raising the quoted royalty fee for Comfort Inn franchisees to
5.25% of annual gross room revenues ("GRR") from 4.0% of GRR in 1993, and by
increasing the number of higher royalty fee contracts in the franchise system.
For the twelve months ended December 31, 1998, the Company's average royalty
rate for all Choice domestic brand hotels was 3.6%. The Company believes that
its average royalty rate will continue to increase as new franchisees are added
and as older franchise agreements expire, terminate or are amended.

At December 31, 1998, the Company had 3,894 franchise agreements in
effect in the United States and 1,253 franchise agreements in effect in other
countries. The average age of the franchise agreements was 4.6 years. Seven
hundred ninety-five of the franchise agreements are scheduled to expire during
the five-year period beginning December 31, 1998; however, franchise agreements
generally contain early termination provisions.

Franchise Operations

The Company's operations are designed to improve RevPAR for its
franchisees, as this is the measure of performance that most directly impacts
franchisee profitability. The Company believes that by helping its franchisees
to become more profitable it will enhance its

15
<PAGE>

ability to both retain its existing franchisees and attract new franchisees. The
key aspects of the Company's franchise operations are:

Central Reservation System. On average, approximately 30.0% of the room nights
booked at franchisees' properties are reserved through the toll-free telephone
reservation system operated by the Company. The Company's reservation system
consists of a computer reservation system known as CHOICE 2001, five reservation
centers in North America and several international reservation centers run by
the Company or its 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 the Company's franchised properties
as well as to the Amadeus, Galileo, SABRE and Worldspan airline reservation
systems that facilitates the reservation process for travel agents.

To define more sharply the market and image for each of its brands,
the Company began advertising separate toll-free reservation numbers for all of
its brands in fiscal year 1995, although Choice allows its 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 customer
desires, the agent may offer the customer a room in another Choice-branded hotel
that meets the customer's needs. The Company believes that 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, the Company
provides and is currently improving a yield management product for its
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. The Company also markets to its 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; Technical Services Program. The Company's
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.

As of March 1, 1999, Profit Manager was installed in 884 hotels in the
United States and Canada, with 225 of those hotels utilizing the revenue
management function.

To encourage the deployment of Profit Manager, the Company has
developed a Technology Support Program ("TSP"), which allows hotels to pay for
all aspects of the Profit Manager system (software, hardware, maintenance,
training and support) with one monthly payment. A core component of the TSP is
a hardware leasing arrangement for Dell Computers equipment under which a
subsidiary of the Company, Choice Hotels International Services Corp.

16
<PAGE>

("CHI Services"), leases the hardware and then subleases it to franchisees. The
benefits to franchisees are no initial up-front costs and periodic technology
updating.

Under the leasing arrangement, the Company has provided to Dell
Financial Services, the equipment lessor, a guarantee of up to 25 percent of the
value of the leased equipment and a security interest in management fees payable
by the Company to CHI Services.

Brand Name Marketing and Advertising. The Company's marketing and advertising
programs are designed to heighten consumer awareness of the Choice brands.
Marketing and advertising efforts are focused primarily in the United States and
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 fiscal year 1996, the Company began
using brand-specific marketing and largely discontinued the strategy of
advertising its multiple brands under the Choice umbrella. As a result, each
brand employs a more focused approach to its target audiences.

The Company conducts numerous marketing programs targeting specific
groups, including senior citizens, motorist club members, families, government
and military employees, and meeting planners. Other marketing efforts include
telemarketing and telesales campaigns, domestic and international trade show
programs, publication of group and tour rate directories, direct-mail programs,
discounts to holders of preferred credit cards, centralized commissions for
travel agents, fly-drive programs in conjunction with major airlines, and twice-
yearly publication of a Travel and Vacation Directory.

Marketing and advertising programs are directed by the Company's
marketing department, which utilizes the services of independent advertising
agencies. The Company also employs sales personnel at its Silver Spring,
Maryland, headquarters and in its Phoenix, Arizona office. These sales personnel
use telemarketing to target specific customer groups, such as potential
corporate clients in areas where the Company's franchised hotels are located,
the motor coach market, and meeting planners. Most of these sales personnel sell
reservations and services for all of the Choice brands.

The Company's regional sales directors work with franchisees to
maximize RevPAR. These directors advise franchisees on topics such as marketing
their hotels 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. The Company has established quality standards for
all of its franchised brands which cover housekeeping, maintenance, brand
identification and level of services offered. The Company inspects properties
for compliance with its 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 at least once 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.

17
<PAGE>

To encourage compliance with quality standards, the Company offers
various brand-specific incentives to franchisees who maintain consistent quality
standards. The Company identifies franchisees whose properties operate below
minimum quality standards and assists 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, 1998, the Company terminated 159 domestic properties for failure to maintain
minimum quality assurance scores.

Training. The Company maintains a training department which conducts mandatory
training programs for all franchisees and their employees. The Company also
conducts regularly scheduled regional and national training meetings 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. The Company is developing 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 the Company.

Purchasing. The Company's product services department negotiates volume
purchases of various products needed by franchisees to run their hotels,
including furniture, fixtures, carpets and bathroom amenities. The department
also helps to ensure consistency in such products across its exclusively new-
construction brands, Sleep Inn and MainStay/SM/ Suites brands. Sales to
franchisees by the Company were approximately $21.3 million during the twelve
months ended December 31, 1998. The group purchasing program consists of the
Company's utilization of bulk purchases to obtain favorable pricing from third-
party vendors for franchisees ordering similar products. The Company acts as a
clearinghouse between the franchisee and the vendor, and most orders are shipped
directly to the franchisee. In the fourth quarter of 1998, the Company
discontinued the group purchasing program as previously operated.

Design and Construction. The Company maintains 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 the Company's brand specifications by providing
technical expertise and cost-savings suggestions.

Financial Assistance Programs. From time to time, the Company establishes
programs or helps 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.
In March 1999, the Company established a program that awards a cash incentive of
$125,000 each to the first 100 MainStay Suites projects that meet program
standards. The program, which will expire November 15, 1999, will provide for
cash incentives, taking the form of 10-year development loans forgivable at the
end of the term. To be eligible for the incentive, properties must be in a
predefined target area and franchisees must adhere to all specified brand
standards. Groundbreaking must occur within six months of deal acceptance.

18
<PAGE>

Some of the past programs include: (i) a Second Mortgage Financing
program under which the Company offered second mortgage financing for the
development and construction of Quality Inn, Quality Suites, Quality Inn and
Suites, Main Stay Suites and Sleep Inns; (ii) an Econo Lodge exterior renovation
program under which forgivable loans up to an amount of $17,500 per property
were given to qualified Econo Lodge franchisees for standardized exterior
renovation; and (iii) a "Construction to Permanent Financing" program under
which Salomon 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, 1998, loans outstanding under the above programs were $2.5 million,
$3.1 million and $18.4 million, respectively, and the Company's guarantee
covered $9.2 million in loans.

Competition

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

The Company believes 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. The Company believes that
hotel operators select a franchisor in part based on the franchisor's reputation
among other franchisees, and the success of its existing franchisees.

The Company is the second largest hotel franchisor in the world. The
largest, Cendant Corporation (formerly HFS, Inc.), has over 5,500 franchised
hotels. Bass Hotels & Resorts has 2,621, Accor has 2,577, Marriott
International, Inc. has 1,477, Promus has 1,119, Starwood Hotels and Resorts has
653, Carlson Hospitality has 437, Hilton Hotels has 255 and Hospitality
International has 236. The figures in this paragraph are with respect to U.S.
hotel properties as indicated in the July 1998 issue of Hotels Magazine.

The Company's prospects for growth are largely dependent upon the
ability of its franchisees to compete in the lodging market, since the Company's
franchise system revenues are based on franchisees' gross room revenues.

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 the Company's results is substantially reduced by the
geographic diversity of the Company's franchised properties, which are located
in all 50 states and in 35 other countries, as well as its range of products and
room rates.

Service Marks and Other Intellectual Property

The service marks Quality, Comfort, Clarion, Sleep, Econo Lodge,
Rodeway, MainStay and related marks and logos are material to the Company's
business. The Company, directly and through its franchisees, actively uses
these marks. All of the material marks are registered with the United States
Patent and Trademark Office. In addition, the Company has

19
<PAGE>

registered certain of its marks with the appropriate governmental agencies in
over 100 countries where it is doing business or anticipates doing business in
the foreseeable future. The Company seeks to protect its brands and marks
throughout the world, although the strength of legal protection available varies
from country to country.

Seasonality

The Company's principal sources of revenues are franchise fees based
on the gross room revenues of its franchised properties. The Company experiences
seasonal revenue patterns similar to those of the lodging industry in general.
This seasonality can be expected to cause quarterly fluctuations in the
Company's revenues, profit margins and net income of Choice.

Regulation

The Company's 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 laws governing with 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 the Company 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 the Company's franchising operations have not been materially
adversely affected by such regulation, the Company cannot predict the effect of
future regulation or legislation.

Impact of Inflation and Other External Factors

The Company's 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 the Company believes 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 the Company's
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 the Company. However, the Company benefits from an increasing
supply of hotels as it serves to increase franchise fees.

20
<PAGE>

Although the Company believes 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 the Company's revenues. A weak economy could also reduce demand for
new hotels, negatively impacting the franchise fees received by the Company.

Among the other unpredictable external factors which may affect the
Company's fee stream are wars, airline strikes, gasoline shortages and severe
weather.

Employees

The Company employed domestically approximately 1,850 people as of
December 31, 1998. None of the Company's employees are represented by unions or
covered by collective bargaining agreements. Choice considers its relations
with its employees to be satisfactory.

ITEM 2. PROPERTIES

The principal executive offices of the Company are located at 10750
Columbia Pike, Silver Spring, Maryland 20901. Prior to May, 1998, the offices
were leased from Sunburst; they are currently leased from a third party. The
Company owns its reservation system offices in Phoenix, AZ and Minot, ND. In
1998, a subsidiary of the Company acquired a call center in Grand Junction, CO,
which the Company had previously leased. The Company leases one additional
reservation system office in Grand Junction, CO, pursuant to a lease that
expires in 2000, and occupies additional space in Toronto, Canada, on a month-
to-month basis. In addition, the Company leases 12 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.

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, 1998.

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,

21
<PAGE>

Maryland 20901, unless otherwise indicated.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stewart Bainum, Jr........................ 52 Chairman of the Board of Directors
Charles A. Ledsinger, Jr.................. 49 Chief Executive Officer and President
Thomas Mirgon............................. 42 Senior Vice President, Administration
Mark C. Wells............................. 49 Senior Vice President, Marketing
Michael J. DeSantis....................... 40 Senior Vice President, General Counsel and Secretary
Joseph M. Squeri.......................... 33 Vice President, Treasurer and Controller
</TABLE>

Background of Executive Officers:

Stewart Bainum, Jr., 52, 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 HCR 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., 49, 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.

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.

Mark C. Wells. Senior Vice President-Marketing of the Company since May
1998; Senior Vice President, Franchise Services of Promus Hotel Corporation from
1996 to March 1998; Senior Vice President, Marketing of Promus Hotel Corporation
from 1994 to 1996.

22
<PAGE>

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.

Joseph M. Squeri. Treasurer of the Company since April 1998; Vice
President, Finance and Controller of the Company since March 1997 and of Former
Choice from March 1997 to October 1997; Director of Investment Funds, The
Carlyle Group, from November 1994 to February 1997; various positions with
Arthur Andersen LLP from July 1987 to November 1994, most recently as Manager.

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.

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 since October 16, 1997.

<TABLE>
<CAPTION>
QUARTERLY MARKET PRICE RANGE OF COMMON STOCK
(Unaudited)

Quarters Ended MARKET PRICE PER SHARE
---------------------------------------------------------------
HIGH LOW
---------------------------------------------------------------
<S> <C> <C>
FISCAL 1998
March 18 1/2 14 5/16
June 18 7/16 12
September 14 7/16 11 5/8
December 13 5/16 9 5/8

FISCAL 1997(1)
October 16 --
November 30 $18 $17

CALENDER 1997(1)
October 16 -
December 31 $18 $15 7/8
</TABLE>

23
<PAGE>

_________________________

(1) On September 16, 1997, the Company changed its fiscal year end
from May 31 to December 31. The Spin-off occurred on October 15, 1997,
and no trading occurred prior to that date.

The Company paid no dividends during the twelve month period ended December
31, 1998. 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, 1999, there were 4,037 record holders of Company common
stock.

ITEM 6. SELECTED FINANCIAL DATA.

The required information is included on page 1 of the 1998 Annual
Report and is incorporated herein by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
AND RESULTS OF OPERATIONS.

The required information is included on pages 20-27 of the 1998
Annual Report and is incorporated herein by reference.

ITEM 7A. 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.

The following table summarizes information about derivative
financial information and other financial instruments that are sensitive to
changes in interest rates, including interest rate swap agreements and debt
obligations. For interest rate swap agreements, the table presents notional
amounts and weighted average interest rates by expected (contractual) maturity
date.

24
<PAGE>

EXPECTED MATURITY DATE

<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998 FAIR VALUE
---- ---- ---- ---- ---- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Long-term debt(1)
Fixed rate 100,0000 100,000 100,000 100,000 100,000 100,000 100,000 97,561
Average 7.13% 7.13% 7.13% 7.13% 7.13%
interest rate
Variable rate(2) 179,210 179,210 179,210 172,210 179,210 179,210 179,210 179,210
Average interest rate(3) 5.06% 5.45% 5.65% 5.73% 5.81%
</TABLE>

INTEREST RATE DERIVATIVES

EXPECTED MATURITY DATE

<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1988 FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notional Amount 115,000 115,000 115,000 115,000
Average interest rate 5.85% 5.85% 5.85% 5.85%
Receivable 0 0 0 0
Payable 909 449 230 138 2,800
</TABLE>

(1) A hypothetical one percentage point change in interest rates would
change the fair value of long-term debt by $6.46 million.

(2) 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 2002, the Company expects to refinance its
obligations.

(3) Weighted average variable rates are based on implied forward rates in
the yield curve at the reporting date.

The Company is also exposed to fluctuations in foreign currency relating to
its preferred stock investment in Friendly Hotels, PLC which is denominated
in British Pounds. The Company does not have any derivative financial
instruments related to its foreign investments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The required information is included on page(s) 29-44 of the 1998
Annual Report and is incorporated herein by reference. See Item 14 for the
Index to Financial Statements and Schedules.

25
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The required information on directors is included on pages 3-4 of the Proxy
Statement dated March 29, 1999 and is incorporated herein by reference. 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 is included on pages 9-14 of the Proxy
Statement dated March 30, 1999 and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The required information is included on pages 6-8 of the Proxy
Statement dated March 29, 1999 and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The required information is included on pages 18-25 of the Proxy
Statement dated March 29, 1999 and is incorporated herein by reference.

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 1998 Annual Report:

Consolidated Statements of Income................... p. 29
Consolidated Balance Sheets......................... p. 30
Consolidated Statements of Shareholders' Equity..... p. 32
Consolidated Statements of Cash Flows............... p. 31
Report of Independent Public Accountants............ p. 28

26
<PAGE>

Notes to Consolidated Financial Statements.......... pp. 33-44

2. FINANCIAL STATEMENT SCHEDULES

The following reports are filed herewith.

Report of Independent Public Accountants on Schedule..............
Consent of Independent Public Accountants.........................
Schedule II: Valuation and Qualifying Accounts...................

All other schedules are not applicable.

3. EXHIBITS

<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) Credit Agreement dated October 15, 1997 among Choice Hotels International, Inc., Chase
Manhattan Bank, as Agent and certain Lenders
4.02(c) First Amendment to Credit Agreement dated February ___, 1998 among Choice Hotels
International, Inc., Chase Manhattan Bank, as Agent, and certain Lenders.
4.03 * Second Amendment to Credit Agreement, dated as of March 30, 1998 among Choice Hotels
International, Inc., Chase Manhattan Bank, as agent, and certain Lenders.
4.04 * Third Amendment to Credit Agreement, dated as of April 9, 1998 among Choice Hotels
International, Inc., Chase Manhattan Bank, as agent, and certain Lenders.
4.05 * Fourth Amendment to Credit Agreement, dated as of December 16, 1998, among Choice Hotels
International, Inc., Chase Manhattan Bank, as agent, and certain Lenders.
4.06(h) Registration Agreement dated April 28, 1998 between Choice Hotels International, Inc. and
Salomon Brothers, Inc., Bear Stearns & Co. Inc. and Lehman Brothers Inc.
4.07(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.
4.08(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)
4.09(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)
4.10(b) Guarantee Agreement dated October 15, 1997 between Quality Hotels Europe, Inc. and The Chase
Manhattan Bank.
4.11(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.
4.12(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.
4.13(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(a) Employment Agreement between Choice Hotels International, Inc. and Charles A. Ledsinger, Jr.
dated July 31, 1998.
10.02(d) Distribution Agreement dated as of October 15, 1997 by and between Choice Hotels
International, Inc. (renamed Sunburst Hospitality Corporation) and Choice Hotels
Franchising, Inc. (renamed Choice Hotels International, Inc.)
10.03(d) Employee Benefits Administration Agreement dated as of October 15, 1997 by and between
</TABLE>

27
<PAGE>

<TABLE>
<S> <C>
Choice Hotels International, Inc. (renamed Sunburst Hospitality Corporation) and Choice
Hotels Franchising, Inc. (renamed Choice Hotels International, Inc.)
10.04(d) Tax Administration Agreement dated as of October 15, 1997 by and between Choice Hotels
International, Inc. (renamed Sunburst Hospitality Corporation) and Choice Hotels
Franchising, Inc. (renamed Choice Hotels International, Inc.
10.05(d) Tax Sharing Agreement dated as of October 15, 1997 by and between Choice Hotels
International, Inc. (renamed Sunburst Hospitality Corporation) and Choice Hotels
Franchising, Inc. (renamed Choice Hotels International, Inc.)
10.09(d) Employee Benefits Allocation Agreement dated as of October 15, 1997 by and between Choice
Hotels International, Inc. (renamed Sunburst Hospitality Corporation) and Choice Hotels
Franchising, Inc. (renamed Choice Hotels International, Inc.)
10.10(d) Strategic Alliance Agreement dated as of October 15, 1997 by and between Choice Hotels
International, Inc. (renamed Sunburst Hospitality Corporation) and Choice Hotels
Franchising, Inc. (renamed Choice Hotels International, Inc.)
10.11(d) Non-Competition Agreement dated as of October 15, 1997 by and between Choice Hotels
International, Inc. (renamed Sunburst Hospitality Corporation) and Choice Hotels
Franchising, Inc. (renamed Choice Hotels International, Inc.)
10.12(d) Omnibus Amendment and Guaranty dated as of October 15, 1997 by and among Choice Hotels
International, Inc. (renamed Sunburst Hospitality Corporation), Choice Hotels Franchising,
Inc. (renamed Choice Hotels International, Inc.) and Manor Care, Inc.
10.13(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.
10.14(d) Assignment of Employment Agreement dated as of October 15, 1997 by and among Choice Hotels
International, Inc. (renamed Sunburst Hospitality Corporation), Choice Hotels Franchising,
Inc. (renamed Choice Hotels International, Inc.) and Thomas Mirgon
10.15 * Omnibus Amendment Agreement dated December 28, 1998 between Choice Hotels International,
Inc. and Sunburst Hospitality Corporation.
10.16(f) Choice Hotels International, Inc. Non-Employee Director Stock Option and Deferred
Compensation Stock Purchase Plan.
10.17(f) Choice Hotels International, Inc. 1997 Non-Employee Director Stock Compensation Plan.
10.18(f) Choice Hotels International, Inc. 1997 Long-Term Incentive Plan.
10.19(h) Employment Agreement dated April 13, 1998 between Choice Hotels International, Inc. and Mark
Wells.
10.20(I) Employment Agreement dated April 29, 1998 between Choice Hotels International, Inc. and
Michael J. DeSantis.
10.21(i) Agreement and Release dated June 16, 1998 between Choice Hotels International, Inc. and
William R. Floyd.
10.22 * 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.
13.01 * Annual Report to Shareholders
21.01 * Subsidiaries of Choice Hotels International, Inc.
23.01 * Consent of Arthur Andersen LLP
27.01 * Financial Data Schedule
99.01 * Proxy Statement dated March 29, 1998.
</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).

28
<PAGE>

(c) Incorporated by reference to the identical document filed as an exhibit to
Choice Hotels International, Inc.'s "Transitional Report on Form 10-k dated
June 1, 1997, to December 31, 1997, filed on March 31, 1998.

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

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

(B) No reports on Form 8-K were filed during the last quarter of the fiscal
year ended December 31, 1998

29
<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 30, 1999

30
<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 30, 1999
- ------------------------------
Stewart Bainum, Jr.

/s/ Barbara Bainum Director March 30, 1999
- ------------------------------
Barbara Bainum

/s/ James H. Rempe Director March 30, 1999
- ------------------------------
James H. Rempe

/s/ Larry R. Levitan Director March 30, 1999
- ------------------------------
Larry R. Levitan

/s/ Frederic V. Malek Director March 30, 1999
- ------------------------------
Frederic V. Malek

/s/ Gerald W. Petitt Director March 30, 1999
- ------------------------------
Gerald W. Petitt

/s/ Jerry E. Robertson Director March 30, 1999
- ------------------------------
Jerry E. Robertson

/s/ Joseph M. Squeri Vice President, March 30, 1999
- ------------------------------ Treasurer and Controller
Joseph M. Squeri
</TABLE>

31
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE

To the Stockholders of Choice Hotels International, Inc.:

We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in Choice Hotels International,
Inc.'s annual report to shareholders incorporated by reference in this Form 10-
K, and have issued our opinion thereon dated January 29, 1999. 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 above under Item
14(a)2 is the responsibility of the Company's management and is presented for
the purpose 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.

Arthur Andersen LLP

Washington, D.C.
January 29, 1999

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>
BALANCE AT CHARGES TO BALANCE AT
BEGINNING OF PROFIT END
DESCRIPTION PERIOD AND LOSS WRITE-OFFS OF PERIOD
----------- ------ -------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Allowance for doubtful accounts $7,608 $1,473 $ (999) $8,082
====== ====== ======== ======
Seven months ended December 31, 1997
Allowance for doubtful accounts $6,159 $2,274 $ (825) $7,608
====== ====== ======== ======
Year ended December 31, 1997
Allowance for doubtful accounts $4,515 $2,238 $ (594) $6,159
====== ====== ======== ======
Year ended May 31, 1996
Allowance for doubtful accounts $3,976 $ 685 $ (146) $4,515
====== ====== ======== ======
</TABLE>

<PAGE>

CHOICE HOTELS INTERNATIONAL, INC.
10750 Columbia Pike, Silver Spring, Maryland 20901

PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR ANNUAL MEETING OF SHAREHOLDERS

TO BE HELD APRIL 29, 1999

The undersigned hereby appoints JERRY E. ROBERTSON and CHARLES A. LEDSINGER, JR.
and each of them, the true and lawful attorneys and proxies, with full power of
substitution, to attend the Annual Meeting of Shareholders of Choice Hotels
International, Inc. (The "Company") to be held on April 29, 1999 at 9:00 a.m. at
the Company's Corporate Headquarters, Choice Centre, 10770 Columbia Pike, Silver
Spring, Maryland and at any adjournment thereof, and to vote all shares of
common stock held of record which the undersigned could vote, with all the
powers the undersigned would possess if personally present at such meeting, as
designated below.

All shares of Company common stock that are represented at the Annual Meeting by
properly executed proxies received prior to or at the Annual Meeting and not
revoked will be voted at the Annual Meeting in accordance with the instructions
indicated herein. If no instructions are indicated for the Election of
Directors, such proxies will be voted in accordance with the Board of Directors'
recommendation as set forth herein with respect to such proposal.

CHOICE HOTELS INTERNATIONAL, INC., ANNUAL MEETING, APRIL 29, 1999 AT 9:00 A.M.

DIRECTIONS TO CHOICE CENTRE
10770 Columbia Pike
Silver Spring, MD 20901

From Washington, DC - 16th Street North to Route 29 (Colesville Road). Pass over
the Beltway (495), at which point Colesville Road becomes Columbia Pike. Choice
Centre is on the left side approximately 2 miles past the Beltway.

From National Airport to Headquarters - Take George Washington Parkway
approximately 8 miles to the Beltway I-495 North. Go North and follow Beltway as
it curves East to (2nd Silver Spring Exit 30 North Colesville Road). Go
approximately 2 1/2 miles to Choice Hotels Headquarters on your left side.

From Dulles Airport to Headquarters - Use Dulles Free Access (stay off toll
road). Go East approximately 18 miles to I-495 North Beltway. Go North and
follow Beltway as it curves east to (2nd Silver Spring Exit 30 North Colesville
Road). Go approximately 2 1/2 miles to Choice Hotels Headquarters on your left
hand side.

From BWI to Headquarters - Take 195 west for 4 miles. The take I-95 south for 14
miles to Highway 198 west toward Burtonsville. Go west 3 miles to Route 29
(Colesville Road). Turn left on Route 29 (south) and go approximately 7 miles to
Choice Hotels Headquarters - next to Mobil gas station.

From Baltimore, MD - Take I-95 South to Highway 198 west toward Burtonsville. Go
west 3 miles to Route 29 (Colesville Road). Turn left on Rte. 29 (south) and go
approximately 7 miles to Choice Centre.

<PAGE>

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
ELECTION OF THE PROPOSED DIRECTORS

Election of two Directors:

FOR all nominees WITHHOLD
listed below AUTHORITY
(except as marked to vote for all nominees NOMINEES: Stewart Bainum, Jr.
to the contrary) Listed to the right and James H. Rempe
[ ] [ ]

(Instruction: To withhold authority to vote
for any individual nominee, write that
nominee's name in the space provided
below)

__________________________________________

If you plan to attend the Annual
Meeting of Shareholders, please
mark the following box and
promptly return this Proxy Card.

Dated _____________________ 1999

----------------------------------
Signature

(Signatures should correspond
exactly with the name or names
appearing above. Attorneys,
trustees, Executors,
administrators, guardians and
others signing in a representative
capacity should designate their
full titles. If the signer is a
corporation, please sign the full
corporate name by a duly
authorized officer.)

FOLD AND DETACH HERE

<PAGE>

Ex. 4.03 CONFORMED COPY

SECOND AMENDMENT dated as of March 30, 1998 (this
"Amendment"), among CHOICE HOTELS INTERNATIONAL, INC., a Delaware
---------
corporation (the "Borrower"), the undersigned financial
--------
institutions party to the Credit Agreement referred to below (the
"Lenders"), and THE CHASE MANHATTAN BANK, as agent for the
-------
Lenders (in such capacity, the "Agent").
-----

A. Reference is made to the Competitive Advance and Multi-Currency
Credit Facilities Agreement dated as of October 15, 1997, as amended (the
"Credit Agreement") among the Borrower, the Lenders and the Agent. Capitalized
----------------
terms used but not otherwise defined herein have the meanings assigned to them
in the Credit Agreement.

B. The Borrower has requested that the Lenders amend a certain
provision of the Credit Agreement. The Lenders are willing to do so, subject to
the terms and conditions of this Amendment.

Accordingly, in consideration of the mutual agreements herein
contained and other good and valuable consideration, the sufficiency and receipt
of which are hereby acknowledged, the parties hereto hereby agree as follows:

SECTION 1. Amendment to Section 6.01. Section 6.01 of the Credit
--------------------------
Agreement is hereby amended to (a) delete the "and" after the ";" in clause (h),
(b) insert the following immediately after the ";" in clause (h), "(i)
Indebtedness of the Borrower represented by senior unsecured notes in a
principal amount not to exceed $100,000,000; and" and (c) replacing the
reference to "(i)" in clause (i) with "(j)".

SECTION 2. Representations, Warranties and Agreements. The Borrower
-------------------------------------------
hereby represents and warrants to and agrees with each Lender and the Agent
that:

(a) The representations and warranties set forth in Article III of the
Credit Agreement are true and correct in all material respects with the
same effect as if made on the Amendment Effective Date, except to the
extent such representations and warranties expressly relate to an earlier
date.

(b) The Borrower has the requisite power and authority to execute,
deliver and perform its obligations under this Amendment.

authorized by all requisite action and (ii) will not (A) violate (x) any
provision of law, statute, rule or regulation, or of the certificate or
articles of incorporation or other constitutive documents or by-laws of the
Borrower or any Subsidiary, (y) any order of any Governmental Authority or
(z) any provision of any indenture, agreement or other instrument to which
the Borrower or any Subsidiary is a party or by which any of them or any of
their property is or may be bound, (B) be in conflict with, result in a
breach of or constitute (alone or with notice or lapse of time or both) a
default under any such indenture, agreement for borrowed money or other
agreement or instrument or (C) result in the creation or imposition of any
Lien upon or with respect to any property or assets now owned or hereafter
acquired by the Borrower.

(d) This Amendment has been duly executed and delivered by the Borrower.
Each of this Amendment and the Credit Agreement, as amended hereby,
constitutes a legal, valid and binding obligation of the Borrower,
enforceable against the Borrower in accordance with its terms, except as
enforceability may be limited by (i) any applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and (ii) general principals of equity.

(e) As of the Amendment Effective Date, no Event of Default or Default
has occurred and is continuing.

SECTION 3. Conditions to Effectiveness. This Amendment shall become
----------------------------
effective on the date of the satisfaction in full of the following conditions
precedent (the "Amendment Effective Date"):
------------------------

(a) The Agent shall have received duly executed counterparts hereof
which, when taken together, bear the authorized signatures of the Borrower,
the Agent and the Required Lenders.

(b) All legal matters incident to this Amendment shall be satisfactory
to the Required Lenders, the Agent and Cravath, Swaine & Moore, counsel for
the Agent.

(d) The Agent shall have received such other documents, instruments and
certificates as it or its counsel shall reasonably request.
<PAGE>

SECTION 4. Credit Agreement. Except as specifically stated herein, the
-----------------
Credit Agreement shall continue in full force and effect in accordance with the
provisions thereof. As used therein, the terms "Agreement", "herein",
"hereunder", "hereto", "hereof" and words of similar import shall, unless the
context otherwise requires, refer to the Loan Agreement as modified hereby.

SECTION 5. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
---------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

SECTION 6. Counterparts. This Amendment may be executed in any number
-------------
of counterparts, each of which shall be an original but all of which, when taken
together, shall constitute but one instrument. Delivery of an executed
counterpart of a signature page of this Amendment by telecopy shall be effective
as delivery of a manually executed counterpart of this Amendment.

SECTION 7. Expenses. The Borrower agrees to reimburse the Agent for its
---------
out-of-pocket expenses in connection with this Amendment, including the
reasonable fees, charges and disbursements of Cravath, Swaine & Moore, counsel
for the Agent.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed by their respective authorized officers as of the date first above
written.

CHOICE HOTELS INTERNATIONAL, INC.

by
/s/ Donald H. Dempsey
------------------------------
Name: Donald H. Dempsey
Title: Executive Vice
President and Chief
Financial Officer
<PAGE>

THE CHASE MANHATTAN BANK,
individually and as Issuing Bank
and Agent

by
/s/ Karen M. Sharf
--------------------------------
Name: Karen M. Sharf
Title: Vice President

BANK OF TOKYO - MITSUBISHI TRUST
COMPANY

by
_________________________________
Name:
Title:

CRESTAR BANK

by
/s/ Greg D. Wheeless
--------------------------------
Name: Greg D. Wheeless
Title: Senior Vice President

THE DAI-ICHI KANGYO BANK, LTD.

by
/s/ Bertram Tang
--------------------------------
Name: Bertram Tang
Title: Vice President

FIRST NATIONAL BANK OF MARYLAND

by
/s/ Michael B. Stueck
--------------------------------
Name: Michael B. Stueck
Title: Vice President

FIRST UNION NATIONAL BANK

by
/s/ Barbara Kauffmann Angel
--------------------------------
Name: Barbara Kauffmann Angel
Title: Vice President
<PAGE>

THE FUJI BANK, LIMITED

by
/s/ Raymond Ventura
--------------------------------
Name: Raymond Ventura
Title: Vice President and
Manager

THE INDUSTRIAL BANK OF JAPAN,
LIMITED, NEW YORK BRANCH

by
/s/ John V. Veltri
--------------------------------
Name: John V. Veltri
Title: Joint General Manager

THE LONG TERM CREDIT BANK OF JAPAN,
LTD., NEW YORK BRANCH

by
/s/ Nozomi Moue
--------------------------------
Name: Nozomi Moue
Title: Deputy General Manager

MELLON BANK, N.A.

by
/s/ Laurie G. Dunn
--------------------------------
Name: Laurie G. Dunn
Title: Vice President

NATIONSBANK, N.A.

by
/s/ Michael R. Heredia
--------------------------------
Name: Michael R. Heredia
Title: Senior Vice President

THE SANWA BANK, LIMITED,
NEW YORK BRANCH

by
/s/ Dominic J. Sorresso
--------------------------------
Name: Dominic J. Sorresso
Title: Vice President
<PAGE>

SUMMIT BANK

by
________________________________
Name:
Title:

THE TOYO TRUST & BANKING COMPANY,
LTD., NEW YORK BRANCH

by
/s/ T. Mikumo
--------------------------------
Name: T. Mikumo
Title: Vice President

by
________________________________
Name:
Title:

<PAGE>

Ex. 4.04 CONFORMED COPY

THIRD AMENDMENT dated as of April 9, 1998 (this
"Amendment"), among CHOICE HOTELS INTERNATIONAL, INC., a Delaware
---------
corporation (the "Borrower"), the undersigned financial
--------
institutions party to the Credit Agreement referred to below (the
"Lenders"), and THE CHASE MANHATTAN BANK, as agent for the
-------
Lenders (in such capacity, the "Agent").
-----

B. The Borrower has requested that the Lenders amend certain
provisions of the Credit Agreement. The Lenders are willing to do so, subject
to the terms and conditions of this Amendment.

SECTION 1. Amendment to Article I. (a) The definition of "Change in
----------------------- ---------
Control" contained in Article I of the Credit Agreement is hereby amended by (i)
- -------
inserting "(i)" immediately prior to "such" in the fourteenth line thereof and
(ii) inserting the following immediately prior to the ";" in clause (a) thereof:
"or (ii) in the case of the Baron Entities only, the letter agreement dated
February 4, 1998, between the Borrower and the Baron Entities remains in effect
and the Baron Entities are in compliance therewith".

(b) Article I of the Credit Agreement is hereby amended to add the
following terms in their proper alphabetical order:

"Offering Memorandum Draft" shall have the meaning assigned to such term in
-------------------------
Section 6.01(i).

"Senior Notes" shall have the meaning assigned to such term in Section
------------
6.01(i).

"Senior Note Documents" shall mean the indenture or indentures under which
---------------------
the Senior Notes are issued and all other instruments, agreements and
documents evidencing, guaranteeing or providing for the terms and
conditions of the Senior Notes.
<PAGE>

SECTION 2. Amendment to Section 6.01. Section 6.01 of the Credit
--------------------------
Agreement is hereby amended by replacing clause (i) thereof with the following:

(i) Indebtedness of the Borrower represented by senior unsecured notes (the
"Senior Notes") in an aggregate principal amount not to exceed $100,000,000
------------
on substantially the terms (including tenor, covenants and events of
default) described in the draft dated April 9, 1998 of the Offering
Memorandum relating to such notes (the "Offering Memorandum Draft") and
-------------------------
Indebtedness of the Subsidiaries consisting of Guarantees of the Senior
Notes; provided that no Subsidiary shall Guarantee the Senior Notes unless
--------
it shall have also Guaranteed the Obligations on a pari passu basis.

SECTION 3. Amendment to Section 6.04. Section 6.04 of the Credit
--------------------------
Agreement is hereby amended by deleting the reference to "(h)" in clause (d)
thereof.

SECTION 4. Amendment to Section 6.12. Section 6.12 of the Credit
--------------------------
Agreement is hereby amended by replacing the "." at the end thereof with
";provided that the foregoing shall not apply to any prohibitions or
--------
requirements set forth in any Loan Document or set forth in the Senior Note
Documents and described in the Offering Memorandum Draft."

SECTION 5. Representations, Warranties and Agreements. The Borrower
-------------------------------------------
hereby represents and warrants to and agrees with each Lender and the Agent
that:

(a) The representations and warranties set forth in Article III of
the Credit Agreement are true and correct in all material respects with the
same effect as if made on the Amendment Effective Date, except to the
extent such representations and warranties expressly relate to an earlier
date.

(b) The Borrower has the requisite power and authority to execute,
deliver and perform its obligations under this Amendment.

by-laws of the Borrower or any Subsidiary, (y) any order of any
Governmental Authority or (z) any provision of any indenture, agreement or
other instrument to which the Borrower or any Subsidiary is a party or by
which any of them or any of their property is or may be bound, (B) be in
conflict with, result in a breach of or constitute (alone or with notice or
lapse of time or both) a default under any such indenture, agreement for
borrowed money or other agreement or instrument or (C) result in the
creation or imposition of any Lien upon or with respect to any property or
assets now owned or hereafter acquired by the Borrower.

(d) This Amendment has been duly executed and delivered by the
Borrower. Each of this Amendment and the Credit Agreement, as amended
hereby, constitutes a legal, valid and binding obligation of the Borrower,
enforceable against the Borrower in accordance with its terms, except as
enforceability may be limited by (i) any applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and (ii) general principals of equity.

(e) As of the Amendment Effective Date, no Event of Default or
Default has occurred and is continuing.

SECTION 6. Conditions to Effectiveness. This Amendment shall become
----------------------------
effective on the date of the satisfaction in full of the following conditions
precedent (the "Amendment Effective Date"):
------------------------

(a) The Agent shall have received duly executed counterparts hereof
which, when taken together, bear the authorized signatures of the Borrower,
the Agent and the Required Lenders.

(b) All legal matters incident to this Amendment shall be
satisfactory to the Required Lenders, the Agent and Cravath, Swaine &
Moore, counsel for the Agent.

(d) The Agent shall have received such other documents, instruments
and certificates as it or its counsel shall reasonably request.

SECTION 7. Credit Agreement. Except as specifically stated herein,
-----------------
the Credit Agreement shall continue in full force and effect in accordance with
the
<PAGE>

provisions thereof. As used therein, the terms "Agreement", "herein",
"hereunder", "hereto", "hereof" and words of similar import shall, unless the
context otherwise requires, refer to the Loan Agreement as modified hereby.

SECTION 8. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
---------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

SECTION 9. Counterparts. This Amendment may be executed in any
-------------
number of counterparts, each of which shall be an original but all of which,
when taken together, shall constitute but one instrument. Delivery of an
executed counterpart of a signature page of this Amendment by telecopy shall be
effective as delivery of a manually executed counterpart of this Amendment.

SECTION 10. Expenses. The Borrower agrees to reimburse the Agent for
---------
its out-of-pocket expenses in connection with this Amendment, including the
reasonable fees, charges and disbursements of Cravath, Swaine & Moore, counsel
for the Agent.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective authorized officers as of the date first
above written.

CHOICE HOTELS INTERNATIONAL, INC.

by
/s/ Michael J. DeSantis
----------------------------
Name: Michael J. DeSantis
Title: Senior Vice President,
General Counsel and
Secretary

THE CHASE MANHATTAN BANK,
individually and as Issuing Bank
and Agent

by
/s/ Karen M. Sharf
----------------------------
Name: Karen M. Sharf
Title: Vice President
<PAGE>

BANK OF TOKYO - MITSUBISHI TRUST COMPANY

---------------------------------
Name:
Title:

CRESTAR BANK

by
/s/ Greg D. Wheeless
---------------------------------
Name: Greg D. Wheeless
Title: Senior Vice President

THE DAI-ICHI KANGYO BANK, LTD.

by
/s/ Bertram Tang
---------------------------------
Name: Bertram Tang
Title: Vice President

FIRST NATIONAL BANK OF MARYLAND

by
/s/ Michael B. Stueck
---------------------------------
Name: Michael B. Stueck
Title: Vice President

FIRST UNION NATIONAL BANK

by
/s/ Monica Sevila
---------------------------------
Name: Monica Sevila
Title: Assistant Vice President

THE FUJI BANK, LIMITED

by
/s/ Raymond Ventura
---------------------------------
Name: Raymond Ventura
Title: Vice President & Manager
<PAGE>

THE INDUSTRIAL BANK OF JAPAN,
LIMITED, NEW YORK BRANCH

by
/s/ John V. Veltri
---------------------------------
Name: John V. Veltri
Title: Joint General Manager

THE LONG TERM CREDIT BANK OF JAPAN,
LTD., NEW YORK BRANCH

by
/s/ Nozomi Moue
---------------------------------
Name: Nozomi Moue
Title: Deputy General Manager

MELLON BANK, N.A.

by
/s/ Laurie G. Dunn
---------------------------------
Name: Laurie G. Dunn
Title: Vice President

NATIONSBANK, N.A.

by
/s/ Michael R. Heredia
---------------------------------
Name: Michael R. Heredia
Title: Senior Vice President

THE SANWA BANK, LIMITED,
NEW YORK BRANCH

by
/s/ Dominic J. Sorresso
---------------------------------
Name: Dominic J. Sorresso
Title: Vice President

SUMMIT BANK

by
/s/ Carter E. Evans
---------------------------------
Name: Carter E. Evans
Title: Vice President
<PAGE>

THE TOYO TRUST & BANKING COMPANY,
LTD., NEW YORK BRANCH

by
_________________________________
Name:
Title:

<PAGE>

Ex. 4.05 CONFORMED COPY

FOURTH AMENDMENT dated as of December 16, 1998 (this
"Amendment"), among CHOICE HOTELS INTERNATIONAL, INC., a Delaware
---------
corporation (the "Borrower"), the undersigned financial
--------
institutions party to the Credit Agreement referred to below (the
"Lenders"), and THE CHASE MANHATTAN BANK, as agent for the
-------
Lenders (in such capacity, the "Agent").
-----

B. The Borrower has requested that the Lenders amend certain
provisions of the Credit Agreement. The Lenders are willing to do so, subject to
the terms and conditions of this Amendment.

SECTION 1. Amendment to Section 6.13. Section 6.13 of the Credit
--------------------------
Agreement is hereby replaced in its entirety with the following:

SECTION 6.13. Minimum Consolidated Net Worth. In the case of the
-------------------------------
Borrower, permit the Consolidated Net Worth at any time to be less
than the sum of (x) $40,000,000, (y) 50% of the Borrower's
Consolidated Net Income accrued during the period (treated as one
accounting period) commencing on October 1, 1998 and ending on the
last day of the most recent fiscal quarter for which financial
statements have been delivered pursuant to Section 5.04 (which amount
shall not include Consolidated Net Income for any fiscal quarter in
which the Borrower's Consolidated Net Income is negative) and (z) the
aggregate net cash proceeds received by the Borrower from the issuance
or sale of its capital stock since the date hereof.

SECTION 2. Amendment to Section 6.14. Section 6.14 of the Credit
--------------------------
Agreement is hereby replaced in its entirety with the following:
<PAGE>

SECTION 6.14. Consolidated Leverage Ratio. In the case of the
----------------------------
Borrower, permit the Consolidated Leverage Ratio as of the last day of
and for any period of four fiscal quarters ending during the period
from and including (a) December 16, 1998 through December 30, 1999,
3.50 to 1.00, (b) December 31, 1999 through December 30, 2000, 3.25 to
1.00 and (c) December 31, 2000 through the Maturity Date, 3.00. The
Consolidated Leverage Ratio shall be calculated as of the end of each
fiscal quarter based on the period of the four consecutive fiscal
quarters ending on such date.

SECTION 3. Representations, Warranties and Agreements. The Borrower
-------------------------------------------
hereby represents and warrants to and agrees with each Lender and the Agent
that:

(a) The representations and warranties set forth in Article III of
the Credit Agreement are true and correct in all material respects with the
same effect as if made on the Amendment Effective Date, except to the
extent such representations and warranties expressly relate to an earlier
date.

(b) The Borrower has the requisite power and authority to execute,
deliver and perform its obligations under this Amendment.

(c) The execution, delivery and performance by the Borrower of this
Amendment (i) have been duly authorized by all requisite action and (ii)
will not (A) violate (x) any provision of law, statute, rule or regulation,
or of the certificate or articles of incorporation or other constitutive
documents or by-laws of the Borrower or any Subsidiary, (y) any order of
any Governmental Authority or (z) any provision of any indenture, agreement
or other instrument to which the Borrower or any Subsidiary is a party or
by which any of them or any of their property is or may be bound, (B) be in
conflict with, result in a breach of or constitute (alone or with notice or
lapse of time or both) a default under any such indenture, agreement for
borrowed money or other agreement or instrument or (C) result in the
creation or imposition of any Lien upon or with respect to any property or
assets now owned or hereafter acquired by the Borrower.

(d) This Amendment has been duly executed and delivered by the
Borrower. Each of this Amendment and
<PAGE>

the Credit Agreement, as amended hereby, constitutes a legal, valid and
binding obligation of the Borrower, enforceable against the Borrower in
accordance with its terms, except as enforceability may be limited by (i)
any applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the enforcement of creditors' rights generally and
(ii) general principals of equity.

(e) As of the Amendment Effective Date, no Event of Default or
Default has occurred and is continuing.

SECTION 4. Conditions to Effectiveness. This Amendment shall become
----------------------------
effective on the date of the satisfaction in full of the following conditions
precedent (the "Amendment Effective Date"):
------------------------

(a) The Agent shall have received duly executed counterparts hereof
which, when taken together, bear the authorized signatures of the Borrower,
the Agent and the Required Lenders.

(b) All legal matters incident to this Amendment shall be satisfactory
to the Required Lenders, the Agent and Cravath, Swaine & Moore, counsel for
the Agent.

(d) The Agent shall have received such other documents, instruments
and certificates as it or its counsel shall reasonably request.

SECTION 5. Credit Agreement. Except as specifically stated herein,
-----------------
the Credit Agreement shall continue in full force and effect in accordance with
the provisions thereof. As used therein, the terms "Agreement", "herein",
"hereunder", "hereto", "hereof" and words of similar import shall, unless the
context otherwise requires, refer to the Loan Agreement as modified hereby.

SECTION 6. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND
---------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

SECTION 7. Counterparts. This Amendment may be executed in any
-------------
number of counterparts, each of which shall be an original but all of which,
when taken together, shall constitute but one instrument. Delivery of an
executed counterpart of a signature page of this Amendment by telecopy shall be
effective as delivery of a manually executed counterpart of this Amendment.
<PAGE>

SECTION 8. Expenses. The Borrower agrees to reimburse the Agent for
---------
its out-of-pocket expenses in connection with this Amendment, including the
reasonable fees, charges and disbursements of Cravath, Swaine & Moore, counsel
for the Agent.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed by their respective authorized officers as of the date first
above written.

CHOICE HOTELS INTERNATIONAL, INC.

by
/s / Michael J. DeSantis
---------------------------
Name: Michael J. DeSantis
Title: Senior Vice President

THE CHASE MANHATTAN BANK,
individually and as Issuing Bank
and Agent

by
/s/ Carol A. Ulmer
---------------------------
Name: Carol A. Ulmer
Title: Vice President

BANK OF TOKYO - MITSUBISHI TRUST
COMPANY

by
____________________________
Name:
Title:

CRESTAR BANK

by
/s/ Diane E. Bauman
----------------------------
Name: Diane E. Bauman
Title: Vice President
<PAGE>

THE DAI-ICHI KANGYO BANK, LTD.

by
/s/ Bertram H. Tang
-----------------------------
Name: Bertram H. Tang
Title: Vice President & Group
Leader

FIRST NATIONAL BANK OF MARYLAND

by
/s/ Michael B. Stueck
-----------------------------
Name: Michael B. Stueck
Title: Vice President

FIRST UNION NATIONAL BANK

by
/s/ Barbara K. Angel
-----------------------------
Name: Barbara K. Angel
Title: Vice President

THE FUJI BANK, LIMITED

by
_____________________________
Name:
Title:

THE INDUSTRIAL BANK OF JAPAN,
LIMITED, NEW YORK BRANCH

by
/s/ William Kennedy
-----------------------------
Name: William Kennedy
Title: Vice President

THE LONG TERM CREDIT BANK OF JAPAN,
LTD., NEW YORK BRANCH

by
_____________________________
Name:
Title:
<PAGE>

MELLON BANK, N.A.

by
/s/ G. B. Mateer
------------------------------
Name: G. B. Mateer
Title: Vice President

NATIONSBANK, N.A.

by
/s/ Michael R. Heredia
------------------------------
Name: Michael R. Heredia
Title: Senior Vice President

THE SANWA BANK, LIMITED,
NEW YORK BRANCH

by
______________________________
Name:
Title:

SUMMIT BANK

by
/s/ Carter Evans
------------------------------
Name: Carter Evans
Title: Vice President

THE TOYO TRUST & BANKING COMPANY,
LTD., NEW YORK BRANCH

by
/s/ Kazuhiko Yamauchi
------------------------------
Name: Kazuhiko Yamauchi
Title: Vice President

by
/s/ Howard Tulley Mott
------------------------------
Name: Howard Tulley Mott
Title: Vice President

<PAGE>

EXHIBIT 10.15

OMNIBUS AMENDMENT AGREEMENT

THIS OMNIBUS AMENDMENT AGREEMENT (this "Agreement") is made this
28/th/ day of December, 1998 by and between CHOICE HOTELS INTERNATIONAL, INC., a
Delaware corporation ("Choice"), and SUNBURST HOSPITALITY CORPORATION, a
Delaware corporation ("Sunburst").

WHEREAS, in connection with the spin-off of Choice by Sunburst (the
"Spin-off"), Choice and Sunburst entered into a Strategic Alliance Agreement
(the "Strategic Alliance Agreement") dated October 15, 1997 pursuant to which,
among other things, the parameters of the operating relationship between Choice
and Sunburst with regard to matters of mutual interest are set forth;

WHEREAS, the Strategic Alliance Agreement contains a form of
Franchising Agreement (the "Franchising Agreement") as Exhibit A to be entered
---------
into by and between Choice and Sunburst whenever Choice is to brand any hotel or
lodging property of any kind that Sunburst develops or acquires and intends to
franchise during the term of the Strategic Alliance Agreement;

WHEREAS, Choice and Sunburst have entered into numerous franchising
agreements substantially in the form of the Franchising Agreement and now desire
to amend the provisions relating to liquidated damages contained in the
aforementioned franchising agreements;

WHEREAS, Choice and Sunburst desire to eliminate the option contained
in the Strategic Alliance Agreement for Sunburst to purchase the Mainstay Suite
Hotels system from Choice in exchange for Choice's forgiveness of $16,900,000 of
the $19,900,000 receivable to Choice from Sunburst currently outstanding
pursuant to the Distribution Agreement;

WHEREAS, in connection with the Spin-off, Choice and Sunburst entered
into a Distribution Agreement (the "Distribution Agreement") dated October 15,
1997 pursuant to which, among other things, Choice agreed to loan to Sunburst
$115,000,000 which was evidenced by a subordinated note (the "Term Note") with
an aggregate principal amount of $115,000,000 and a maturity date of five years;
<PAGE>

-2-

WHEREAS, Choice and Sunburst desire to amend the Term Note;

NOW, THEREFORE, Choice and Sunburst agree as follows:

ARTICLE ONE

AMENDMENTS TO STRATEGIC ALLIANCE AGREEMENT

Section 1.1. Definitions. Any defined term used within this Article
-----------
One and not defined within this Agreement, will have the meaning ascribed to
such term in the Strategic Alliance Agreement.

Section 1.2. Elimination of Option to Purchase Mainstay Suite Hotels
-------------------------------------------------------
System. The Strategic Alliance Agreement is hereby amended such that Sections
- ------
4.3 and 4.4 of the Strategic Alliance Agreement are deleted in their entirety.

Section 1.3. Liquidated Damages Provision in Franchising Agreements.
------------------------------------------------------
Notwithstanding Section 3.1 of the Strategic Alliance Agreement and as long as
Sunburst is not in default under the Term Note:

(a) Any and all franchising agreements entered into prior to the date
hereof by and between Choice and Sunburst (or any of their respective
predecessors or affiliates), except any franchising agreements related to
(i) Mainstay Suites and Sleep Inns or (ii) any other hotels owned by
Sunburst that carried a Choice brand which is not sold by Sunburst within
three years from the date such hotel was reflagged with a different non-
Choice brand (the "Reflagged Hotels"), are hereby amended such that any
references to liquidated damages are deleted and Choice agrees that it
waives any claim it may have against Sunburst for lost future profits
arising from such franchising agreements; and

(b) Section 10.d.2 of the respective franchising agreements entered
into prior to, on or after the date hereof by and between Choice and
Sunburst related to Mainstay Suites and Sleep Inns or any Reflagged Hotel
is hereby amended to include the following:
<PAGE>

-3-

"Any liquidated damages to be paid pursuant to this section will
not exceed a maximum of $100,000."

Section 1.4. Development. Section 4.1 of the Strategic Alliance
-----------
Agreement is hereby amended and restated as follows:

Realco and Franchising are currently in the midst of a program under which
Realco will develop Sleep Inns and Mainstay Suite Hotels franchised by
Franchising. Realco agrees that absent (i) a material change in market
conditions that would render construction of further hotels pursuant to
this program uneconomical (meaning that reasonable projections by Realco
demonstrate that the hotel would provide a return on investment to Realco
that is less than the hurdle rate of return established by Realco for its
investments in similar types of hotels), (ii) Realco's inability to finance
construction or acquisition of such hotels, or (iii) Franchising's
discontinuance of efforts to support the Mainstay Suite Hotel brand, Realco
will continue to develop Sleep Inns and Mainstay Suite Hotels so that it
will have opened no fewer than a total of thirteen Sleep Inns and twenty-
five Mainstay Suite Hotels no later than forty-eight months from the
effective date.

Section 1.5. Other Amendments to Franchising Agreements.
------------------------------------------
Notwithstanding anything contained in any franchising agreements entered into
prior to the date hereof by and between Choice and Sunburst (or any of their
respective predecessors or affiliates), the following terms shall apply from and
after the date hereof to the relevant franchising agreements:

(a) Sunburst shall pay to Choice in cash an application fee of
$20,000 upon execution of a franchise agreement from and after the date
hereof.
<PAGE>

-4-

(b) No royalty, marketing or reservation fees shall be payable for a
period of two years with respect to the first ten such agreements entered
into by Sunburst after the date hereof and at the end of such period, the
initial fee schedule will commence; and such ten agreements shall contain a
provision permitting termination by either party only on the tenth or
fifteenth anniversary of the date of the contract.

(c) Choice agrees that if Sunburst sells any property that is the
subject of an existing franchising agreement, if that property is not past
due on any fees or failing a quality assurance review then Choice will
enter into a new franchise agreement on customary/market terms with the
buyer.

ARTICLE TWO

AMENDMENTS TO TERM NOTE

Section 2.1. Definitions. Any defined term used within this Article
-----------
Two and not defined within this Agreement, will have the meaning ascribed to
such term in the Term Note.

Section 2.2. Interest. Section 1.1 of the Term Note is hereby
--------
amended so that commencing on October 15, 2000 interest payable under the Term
Note shall accrue at a rate of 11.00% per annum compounded daily on both the
principal amount and the amount of unpaid interest outstanding under the Term
Note.

Section 2.3. Asset Sale Proceeds. Section 1 of the Term Note is
-------------------
hereby amended to include the following:

1.6. Asset Sale Proceeds.
-------------------

(a) The Payor will pay to the Payee within fourteen (14)
calendar days after the consummation of an Asset Sale by wire transfer to
the bank account designated by the Payee such aggregate principal amount of
this Note as equals fifty percent (50%) of Asset Sale Proceeds in excess of
the aggregate of amounts required to be used to pay secured Senior Debt and
the Payor shall apply the remaining fifty percent (50%) of Asset Sale
Proceeds to the development of Mainstay Suite Hotels.
<PAGE>

-5-

(b) The Payor will provide the Payee notice in writing at least
fifteen (15) days prior to a proposed Asset Sale and such notice will
include a detailed description of the specific terms of the Asset Sale and
the proposed uses for the portion of the proceeds to be retained by Payor
in accordance with Section 1.6(a).

(c) The Payor will provide to the Payee within fourteen (14)
calendar days after the closing of an Asset Sale a certificate signed by
the Chief Financial Officer certifying the amount and form of consideration
received and the use of the Asset Sale Proceeds received in respect of such
Asset Sale.

Section 5 of the Term Note is hereby amended to include the following:

"Asset Sale" means the sale, transfer or other disposition (other than
----------
to the Payor or a Subsidiary) in any single transaction or series of
related transactions of (a) any capital stock of or other equity interest
in any Subsidiary unless such transfer is to another wholly-owned
Subsidiary or (b) any hotel or any interest in any hotel, the real property
on which any hotel is located, the personal property located at any hotel
(unless sold as part of a refurbishment of a hotel and the proceeds are
reinvested in the hotel), or the earnings or profits generated by any hotel
owned or operated by the Payor or any Subsidiary.

"Asset Sale Proceeds" means, with respect to any Asset Sale, (i) cash
-------------------
received (net of reasonable broker commissions and closing costs) by the
Payor or a Subsidiary from such Asset Sale (including cash received as
consideration for the assumption of liabilities incurred in connection with
or in anticipation of such Asset Sale) and (ii) promissory notes and other
non-cash consideration received (net of reasonable broker commissions and
closing costs) by the Payor or a Subsidiary from such Asset Sale or other
disposition upon the liquidation or conversion of such notes or non-cash
consideration into cash.

Section 2.4. Penalty Interest Payments. Section 1 of the Term Note
-------------------------
is hereby amended to include the following:
<PAGE>

-6-

1.7 Default Payments. Upon the occurrence and during the
----------------
continuation of any Event of Default, the outstanding principal amount
under this Note and, to the extent permitted by applicable law, any
interest payments thereon not paid when due, shall thereafter bear interest
(including post-petition interest in any proceeding under the applicable
bankruptcy laws) at a rate that is 2% per annum in excess of the interest
rate otherwise payable under this Note.

ARTICLE THREE

DISTRIBUTION AGREEMENT

Section 3.1. Satisfaction of Receivable. In consideration for the
--------------------------
termination of Sunburst's option to purchase the Mainstay Suites brand,
$16,900,000 of the $19,900,000 receivable currently owing from Sunburst to
Choice pursuant to Section 3.03 of the Distribution Agreement shall be deemed
satisfied and no longer due and owing. The remaining $3,000,000 of the
receivable is to be paid by Sunburst to Choice by wire transfer to the bank
account designated by Choice no later than three business days after the date
hereof.

ARTICLE FOUR

MISCELLANEOUS PROVISIONS

Section 4.1. Conflicts. In the event of any conflict between the
---------
terms of this Agreement and the terms of the Strategic Alliance Agreement, any
franchising agreement entered into by and between Choice and Sunburst referred
to in this Agreement, the Term Note, the Distribution Agreement and any other
documents related thereto and executed by one or more parties hereto in
connection with any of the aforementioned agreements, the terms and provisions
of this Agreement shall control.

Section 4.2. Agreements Remain in Effect. The Strategic Alliance
---------------------------
Agreement, any franchising agreement entered into by and between Choice and
Sunburst referred to in this Agreement, the Term Note and the Distribution
Agreement shall remain fully effective and are changed only as specifically
provided herein and shall bind the parties to each in all respects as originally
contemplated.
<PAGE>

-7-

Section 4.3. Counterparts. This Agreement may be executed in one or
------------
more counterparts, all of which taken together shall constitute one instrument.

SIGNATURES ON FOLLOWING PAGE
<PAGE>

-8-

IN WITNESS WHEREOF, intending to be legally bound hereby, the parties
hereto have executed this Agreement as of the day and year first written above.

CHOICE HOTELS INTERNATIONAL, INC.

_/s/ Michael J. DeSantis______
Name:
Title:

SUNBURST HOSPITALITY CORPORATION

__/s/James A. MacCutcheon_____
Name:
Title:

<PAGE>

Financial Highlights
Choice Hotels International, Inc. and Subsidiaries

<TABLE>
<CAPTION>
Seven months
YEAR ENDED ended Fiscal years ended
DECEMBER 31, December 31, May 31,
1998 1997 1997 1996
---------------------------------------------------
<S> <C> <C> <C> <C>
COMPANY RESULTS (IN MILLIONS, EXCEPT PER SHARE DATA)
Royalty Revenues........................................ $115.4 $ 70.3 $ 97.2 $ 88.0
Total Revenues.......................................... 165.4 107.8 168.0 151.7
Recurring Income from Operations........................ 80.0 46.4 59.6 45.7
Recurring Net Income.................................... 46.7 27.3 34.7 25.4
Net Income.............................................. 55.3 27.3 34.7 11.7
Cash Flow from Operations............................... 44.1 33.6 45.5 32.7
Basic Earnings per Share (a)............................ $ 0.94 $ 0.46 $ 0.55 $ 0.19
Diluted Earnings per Share (a).......................... $ 0.93 $ 0.45 $ 0.55 $ 0.19

SYSTEM RESULTS - DOMESTIC ONLY
Revenue (estimated in millions)......................... $3,063 $1,862 $2,678 $2,381
Franchise Hotels Open................................... 3,039 2,880 2,781 2,495
Franchise Hotels Under Development...................... 866 725 710 616
Revenue Per Available Room.............................. $34.35 $36.39 $32.52 $31.60
</TABLE>

(a) Note: December 1998 earnings per share includes $0.12 related to the early
extinguishment of certain long-term debt obligations.

[GRAPH OF HOTEL PROPERTY APPEARS HERE]

. Properties Under Development Worldwide

. Properties Open Worldwide

[GRAPH OF HOTEL ROOM APPEARS HERE]

. Rooms Under Development Worldwide

. Rooms Open Worldwide
<PAGE>

To Our Shareholders:

[PHOTO APPEARS HERE]

Our company had a terrific year in 1998. Net income increased by 43 percent
to $55.3 million. The number of hotels in operation grew to more than 3,600 in
36 countries. At the same time, we managed the business well, keeping our
selling, general and administrative expense (SGA) virtually flat. As the world's
second largest hotel franchisor, we offer more than 110 million available room
nights to our guests, who continue to show high levels of satisfaction with our
brands.

This strong growth sets the stage for another banner year in 1999. Much of
the past year was dedicated to putting in place a revamped management team to
better define our long-term strategy. Much of our energy this year will be
devoted to enhancing our brand focus to provide our hotel guests and our
franchisees with added value.

We are eagerly moving forward, Building Value Through Brands of Choice -
for guests, for franchisees, for vendors, for our associates and for you, our
shareholders. This year's annual report tells the story of how we are building
that value, and why we believe Choice Hotels will prove a valuable investment
for its many constituents.

As a pure-play franchising company, Choice has no direct real estate
ownership exposure. It has significant, growing free cash flow, an experienced
management team and proven business systems. With more than 2,300 franchisees,
no franchisee accounts for more than 5 percent of total royalty revenues. So the
basic attributes of the business are fundamentally sound.

We have a superb foundation for future growth. And, we have a rich heritage
in the lodging industry as an innovator and a leader, dating back 60 years to
the first meeting of Quality Courts owners.

A Vibrant, Growing Industry

Some of you may wonder about the overall state of our industry. In 1998,
the hotel industry earned record profits of $20 billion, as room demand remained
very strong and new supply came on line in key markets. Some industry observers
raised the possibility of a slowdown in development because supply growth moved
slightly ahead of demand growth. As a result of the perceived slowdown, stock
prices for the industry as a whole endured a drop.

2
<PAGE>

But our experience in the segments we serve shows that the level of demand
remains strong and will continue in a vibrant economy. This demand continues to
encourage sound development in key locations. Our franchised hotels are less
affected by tightening of credit markets because many of our projects are
financed locally and have significant equity in them.

For 1999, many observers are forecasting another strong year for the
industry since the economy shows little sign of slowing down. The surprising
fourth quarter 1998 growth reported for the economy and the growing government
surplus lead most economists to conclude that the risk of any recession is
fading. If these trends hold, we have every expectation that 1999 will be a year
of excellent growth for our branded hotels.

Growth Platforms For The Future

Looking to the future, we have two growth platforms: our organic hotel
growth and the distribution opportunity afforded by those 110 million available
room nights.

By organic hotel growth, I mean the franchise development through which we
continue to add hotels marketed under our brands: Comfort, Quality, Clarion,
Sleep Inn, Econo Lodge, Rodeway Inn and MainStay Suites. These brands enjoy
growing consumer recognition and acceptance. They provide us with new
construction and conversion development opportunities, both domestically and
internationally.

In the past year, we executed 440 new hotel franchise contracts and opened
318 new hotels in the United States. At the beginning of this year, we had 866
domestic projects in design or under development, as well as another 611
international hotels in the pipeline.

Because we already have the infrastructure needed to service these hotels,
such as our reservations system, our regional Market Area support and our
International Regions, each new hotel adds significantly to our bottom line. At
the same time, we are investing substantial resources to improve our
infrastructure, including new computer capability for our central reservations
system in Phoenix, an expanded call center in Minot, N.D., and the rollout of
Profit Manager, our proprietary property management system for our hotels.

This year we also will open THE LEARNING CENTER, a new facility for
training hotel owners, general managers and our associates. A key component of
that training will be Choice Operations and Revenue Enhancement (CORE) training,
which is designed to speed the integration of new properties into the Choice
system and improve performance at the property level.

We also are tightening our brand standards and raising the bar on our
quality assurance inspections. By sharpening our focus on service and quality in
our franchisees' hotels, we help protect their individual investments and give
our guests a more satisfying

3
<PAGE>

stay. Higher brand standards lead to more added value for our guests. And, in a
highly competitive market, the battle for market share will be won by those who
exceed their promises to the public.

Distribution Driving Future Growth

Which leads me to our second growth platform: distribution. With more than
110 million available room nights and 3,600 franchised properties in our system,
we have a tremendous opportunity to take advantage of our scale and create new
revenue streams for a host of products and services.

On our franchise side, we have created a proprietary purchasing system,
ChoiceBuys.com, for our franchisees. Through the Internet, they can purchase
goods and services for their hotels at our volume discounts. This program serves
as a solid business model for other parts of our enterprise.

We believe that we can create a similar service for our guests that will
open up new revenue streams while adding greater value to our room stay
experience and to our franchisees. Discussions are underway with vendors, and we
are hopeful to make this opportunity a reality for us in short order.

What makes this distribution opportunity so attractive is that our hotels
operate in segments that reach about 70 percent of the domestic hotel guests
available. With the sheer number of hotels in our system, the demographics of
our guests and the scope of our operations worldwide, we believe we will have
something truly unique to offer our guest and franchisees.

A World Of Opportunity

The international arena provides us with a promising opportunity - and a
challenge. The opportunity lies in the vast number of markets available to us
for development and expansion of our brands. The challenge comes in finding the
right strategic partners to establish hotel franchising as a valued and viable
business concept in parts of the world where franchising is truly foreign.

In 1998, our partnerships with the Friendly organization in Europe and the
Flag organization in Australia gave us new momentum to spur international
growth. In Great Britain and Europe, our agreement with Friendly brought 250
properties in 10 countries under the Choice Hotels Europe banner into our
system. Down under, our strategic alliance with Flag will bring almost 500
hotels into our system in 1999.

Other territories are opening up as well. Choice Atlantica, our partner in
South America, has announced plans to develop 140

4
<PAGE>

Comfort, Quality, Clarion and Sleep Inn hotels over the next five years. In
Japan, the Vessel Group has unveiled plans to build 20 Sleep Inn hotels
throughout eastern Japan.

A Word Of Thanks

When I joined Choice last September, I found a company with solid
fundamentals - great hotel brands, widespread consumer recognition, successful
reservations and business systems, a strong base of committed franchisees and a
dedicated core of 2,000 associates, many of whom have served our company for two
and three decades.

Having worked for almost two decades in the hospitality industry, I
appreciate the innovation Choice has brought to the industry. I also value the
willingness of our associates to accept new leadership and new ideas. I cannot
thank them enough for the warm reception I have received.

In 1998, two company leaders who played crucial roles in the company's
growth and evolution into an industry leader retired from our Board of
Directors. Stewart Bainum and Bob Hazard gave many years of dedicated service to
Choice. Their legacy is a company that is the second largest hotel franchisor
in the world. We salute them for their achievements and wish them well.

At the company's Annual Meeting this April, Fred Malek, a nine-year member
of our Board, will be stepping down as well. We wish Fred every success in his
future endeavors. Joining our Board on February 1, 1999, was Larry Levitan,
recently retired from a 34-year career with Andersen Consulting, having most
recently served as head of the Worldwide Communications Industry Group. Larry's
vast experience in finance, technology and international business will serve our
company well.

I am very excited about this company, its business prospects and the future
we can create working together with our associates, franchisees and strategic
partners. We enjoy the support of a committed Board of Directors, whose
expertise has proven invaluable in creating a long-term strategy to drive this
company to even higher performance.

Thank you for your continued support as we define an even brighter future
for Choice Hotels.

/s/ Charles A. Ledsinger, Jr

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

5
<PAGE>

Creating Value For Every Occasion

The lodging business is an occasion-driven business. So a hotel
franchising company faces the critical challenge of offering the right choice, A
CHOICE WITH STRONG VALUE, to its prospective guests in order to gain and grow
market share.

"Our seven brands span the widest range of customer segments of any hotel
company, from economy to mid-priced to upscale," said Mark Wells, senior vice
president of marketing. "So we are in a great position to match our offerings
with what guests truly need on any occasion."

[LOGO APPEARS HERE]

For business or leisure travelers, those choices meet a broad range of
price and amenity needs, so that Choice brand hotels can serve more than 70
percent of the total domestic hotel guest market.

Comfort, the company's largest single brand with more than 1,500 Comfort
Inn hotels and almost 200 Comfort Suites hotels, succeeds by delivering on the
promise of its name.

"Our hotels strive to consistently provide a comfortable, high-value stay
for business and leisure travelers," explained Dan Shoen, Comfort brand
management vice president. "Our suites product has given guests another good
reason to seek out the Comfort brand."

In Econo Lodge and Rodeway Inn, the company's economy brands, brand
management provides value-added programs that attract guests from distinct
niches.

[PICTURE APPEARS HERE]

In conjunction with Procter & Gamble's Mr. Clean brand, the Econo Lodge
brand has just launched the first program in the industry to certify
housekeepers, with the goal of providing a clean room guarantee to guests.

[PICTURE APPEARS HERE]

"By teaming up with a recognizable, reputable consumer brand like Mr.
Clean, we provide our Econo Lodge franchisees with a new edge in attracting
value-oriented consumers looking for cleanliness assurance," said Tim Shuy,
Econo Lodge brand management vice president.

Mike Cothran, Rodeway Inn brand management vice president, noted, "We know
that Rodeway Inn hotels have special appeal for value-seeking guests,
particularly senior citizens. That is why we have targeted our marketing to
highlight that 25 percent

6
<PAGE>

[PICTURE APPEARS HERE]

The Clarion Hotel

Pembroke Corporate Center, an upscale hotel in Virginia Beach, Va., relies
on direct sales support and guidance from Choice to help fill its conference and
banquet facilities as well as its 149 guest rooms.

"We have worked well with Choice over the years," said General Manager Tony
Torbati. "They have done a good job of providing information to us about company
programs."

A productive relationship with Choice is especially important to Richard
Wilburn, the hotel's sales director, because the hotel is faced with the
challenge of maximizing revenue in a seasonal destination.

"I meet face-to-face with Kim Ellison, Choice's franchise service director,
several times a year," he said. "She shows us how best to take advantage of
Choice's programs to improve our revenues and occupancy."

The hotel, owned by Sunburst Hospitality Corp. of Silver Spring,
Md., was honored with a Gold Hospitality Award in 1998, signifying that it had
exceeded Choice's quality standards for exceptional service, facilities and
hospitality.
<PAGE>

of our rooms are designated Choice Room for seniors, with special amenities such
as brighter lighting, large-button phones and level-handle doors."

In a different part of the brand spectrum, Clarion brand management vice
president Don Kolodz is working with franchisees to bring better definition to
the brand.

"As our entry in the upscale, full-service market, the Clarion brand gives
us an offering of high value for business customers seeking full-service
amenities," he said. "With meeting space and food and beverage service as brand
hallmarks, we can provide meeting planners with an affordable alternative in the
upscale market."

[GUEST PRIVILEGES LOGO]

As a major step in building both brand identity and brand loyalty, the
company launched Guest Privileges, a frequent stay rewards program, in the fall
of 1998. Guest Privileges members can earn free stays, gifts and travel by
choosing select Choice brand hotels (Comfort, Quality, Clarion, Sleep Inn) for
their lodging. In addition to a free stay after just 10 visits, the program
also allows members to earn points that can be used with such partners as
American Airlines, JC Penney, the Home Depot and Eddie Bauer.

[PICTURE APPEARS HERE]

Rebecca Ferrin, member services coordinator, enrolls another Guest Privileges
member in Choice's new rewards program for frequent guests.
<PAGE>

Building Value In Each Hotel

Given the highly competitive nature of the hotel franchising business,
Choice continues to improve and diversify the products and services it makes
available to franchisees. At the heart of that competition is the drive to stay
on the leading edge of technology.

"Like virtually every other business at the end of this century, the hotel
industry is changing rapidly with new technology," said Tom Mirgon, senior vice
president of administration. "We have to bring greater value to our franchises
by giving our franchisees the best technology options to keep their properties
operating at maximum effectiveness."

[LOGO OF PROFIT MANAGER APPEARS HERE]

To enable franchisees to better manage their hotels, Choice is implementing
Profit Manager, a proprietary property management system designed to manage
reservations, rates and inventory more efficiently and effectively.

Janna Morrison, vice president of property systems, acknowledged the
challenge of the ambitious project to outfit every Clarion, Quality, Comfort,
Sleep Inn and MainStay Suites hotel with Profit Manager by the end of 2000.

"In our first roll-out phase in 1997, we encountered some difficulties in
larger properties with managing group business," she explained. "As a result, we
designed a new release of the software, and we will continue to evolve the
product to meet our franchisees' needs."

A comprehensive Windows-based system, Profit Manager includes InSync, a
communications tool that allows instantaneous synchronization between the CHOICE
2001 central reservations system and each hotel. CHOICE 2001 gathers
reservations from a variety of sources, including global distribution systems
(GDS) run by airlines, the Internet and call centers to provide the ability to
manage room inventory and rates. This real-time, two-way communication helps
increase property revenue and decrease the likelihood of overbookings.

Profit Maximizer, another Profit Manager feature, helps the individual
hotel predict future occupancy and demand for hotel rooms. Using past property
data, each hotel can forecast future stay patterns and more effectively set
rates to meet guest demand.

For the company's economy hotel brands, Econo Lodge and Rodeway Inn, the
company has developed ChoiceLink for Windows to provide a gateway to
reservations through CHOICE 2001, thus giving them access to the GDS and
Internet.

9
<PAGE>

[LOGO]

Choice's Strategic Partnerships program is another way to build value for
both guests and franchisees. Operating under a "4-Win" strategy, the program
ensures that products and services endorsed by Choice benefit the guest, the
franchisee, the vendor and Choice.

"The guest enjoys brand-name products and services that help build guest
loyalty for the franchisee, who also benefits from competitively priced
products," explained Daniel Rothfeld, vice president, partner services. "Vendor
partners gain access to a critical mass of franchisees, which in turn generates
residual income for the company."

When Choice needs a well-managed hotel with technologically savvy personnel to
help test the latest version of its Profit Manager property management system
software, one of the places it turns is the Comfort Inn hotel of Scottsdale,
Ariz., the 1998 Comfort Inn of the Year award winner.

The 124-room property, owned by Zenith Management of Duluth, Minn., is
located just five miles from Choice's Western Regional Headquarters where Choice
software programmers develop and refine products, including Profit Manager, the
company's state-of-the-art property management system.

"With its consistently high occupancy, the Comfort Inn hotel of Scottsdale
is a perfect `beta site' for testing new releases of Profit Manager software,"
said Christopher Yellen, Choice director of product management. "They can
thoroughly test all aspects of Profit Manager in real day-to-day business
situations,"

David Dolliver, the hotel's general manager, noted he and his staff are
happy to help test Profit Manager and any other software designed to make his
hotel more profitable. "We have a great relationship with Choice, and we're
eager to continue working with them to make programs like Profit Manager the
best they can be," he said.

Serving as a test site offers certain advantages, including the opportunity
to suggest changes to benefit local hotel operators. "Not only are we one of
the first to see and use the most up-to-date version of a particular software
program, but we have the opportunity to provide input from an operations
standpoint that hopefully will enhance the program for all users," he said.

[PICTURE APPEARS HERE]

David Dolliver (right), general manager of the Comfort Inn in Scottsdale, Ariz.,
reviews the new Profit Manager property management software with Robert Mason
(left), Choice manager of information systems administration, and Christopher
Yellen, Choice director of product management.
<PAGE>

The Quality brand's Serta bed program underscores the value of this
initiative. Banking on the inherent quality of the Serta name, Quality brand
hotels promote the restful sleep assured by the Serta beds featured in every
room. Taking the program one step further, participating Quality brand hotels
now can offer guests the opportunity to purchase Serta beds at a significant
discount.

"The Serta bed promotion gives everyone an opportunity to win," said Pete
Jordan, Quality brand management vice president. "Our guests not only can enjoy
the Serta experience in our hotels, but now they can take it home. Franchisees
can offer guests a `quality' night's rest. And Serta, our preferred vendor,
gains access to yet another sales channel."

[PICTURE APPEARS HERE]

Another value-added service for franchisees is the Internet Project
Management system, or IPM, which consolidates the design, sourcing, purchasing,
management and financing of renovation and refurbishment projects into a single
turnkey, competitively priced package for franchisees. Through partner
relationships with The Gettys Group, an interior design and procurement firm,
and McClier Corporation, a leading architecture, engineering, construction and
project management company, the level of service has been enhanced through
access to these services over the Internet and a toll-free hotline.

As a successful underpinning to the franchisor-franchisee relationship,
Choice continues to review and update its franchise agreement to stay
competitive in the industry.

"We have worked hard to improve our basic agreement by rewriting it into plain
English and reducing its

[PICTURE APPEARS HERE]
<PAGE>

length significantly," said Michael DeSantis, senior vice president, general
counsel & secretary. "We just announced a reduction in the cap on liquidated
damages paid upon termination, from 60 months to 36 months. This revision
follows another recent cutting edge change to the agreement, which implemented
five year mutual outs for franchisees in good standing, making Choice one of
only a few hotel franchisors to provide this opportunity."

Confronted with new competition springing up around their nine-year-old Econo
Lodge hotel in Lenoir City, Tenn., owner-operator Howard Patel and his family
carefully considered strategies for maintaining their impressive base of
business. They decided to participate in the Econo Lodge Exterior Enhancement
Program, a solution devised by Choice to revitalize the brand's older
properties. Since the program was introduced three years ago, the more than 320
franchisees who participated have seen the performance of their hotels improve
significantly.

Choice helped the Patel family design a pleasing new facade featuring
columns, parapets, arches, a canopy entrance and improved lighting. The
objective was to modernize the hotel's exterior to more accurately represent the
value of its guest rooms, which are upgraded on an ongoing basis.

"In the lodging business, it's important to stay on top of the competition
so that you don't lose your existing guests," Patel said. "The Econo Lodge
Exterior Enhancement Program has helped us hold our own and compete effectively
against the new hotels that are being constructed in our market."

Patel manages the 42-room hotel in partnership with his wife, Indira, and
the help of their college-age sons, Ketan and Hitesh. They have taken several
additional steps to make the property stand out from the pack. For example,
they introduced free continental breakfast, put hair dryers in every room,
upgraded guest room television sets to 25-inch models and established a policy
of free local telephone calls.

[PICTURE APPEARS HERE]

Owner Howard Patel and his wife, Indra, are proud of the exterior renovation of
their 42-room Ecomo Lodge hotel in Lenior City, Tenn.

Providing Value To Every Customer

Each day brings new opportunities for Choice's 2,000 associates to serve a
myriad of customers - hotel guests, franchisees, shareholders and strategic
partners.

Before a hotel opens its doors, Choice associates work hard to help
franchisees launch a successful property. "For our Sleep Inn brand we hold a
pre-construction meeting with each new franchisee to review the operational and
marketing resources available from Choice," said Norm Cavin, Sleep Inn brand
management vice president.

The drive to provide more value through successful hotel openings has led
to creation of a new team of property opening specialists who work with
franchisees to develop marketing plans and programs that will get the property
operating at market level more quickly.

12
<PAGE>

"The sooner a hotel can ramp up its occupancy and bring its room rate to
market level, the better the franchisee feels about his or her investment, and
the faster our royalties can grow," said Wells. "Working with our Market Area
staff, we've created a program that can add value for all concerned."

To further generate business for its franchisees, Choice also maintains a
strong national sales program aimed at travel agents, tour operators,
corporations and other high volume accounts. Last fall, the company enrolled all
of its franchisees as members of the American Society of Travel Agents (ASTA) to
enhance the relationship with the travel agent community. Unlike many other
hotel companies, Choice continues to pay full commissions on business placed
through travel agents.

At the same time, the company cultivates its relationships with travel
promotion organizations such as AAA through special discount programs for AAA
members at Choice brand hotels and by encouraging franchisees to earn and
improve their AAA designation.

[LOGO OF AAA APPEARS HERE]

This same dedicated spirit helps Choice internationally, working with
master franchisees to open up new territories for Choice hotel brands. A 1998
agreement with the Flag organization in Australia will bring almost 500 hotels
into the Choice global system, generating greater brand equity and driving more
business to Choice hotels in the United States and internationally.

[LOGO OF FLAG APPEARS HERE]

"As our brands truly become more global, and as guests experience their
amenities and services in their own countries, we will cultivate travelers
coming to our domestic locations looking for the same satisfaction," noted Bruno
Geny, senior vice president, international.

While strengthening its regional teams internationally for further growth
and development worldwide, Choice also is undertaking globalization of marketing
services and brand management to improve its marketing to leisure and business
travel intermediaries.
<PAGE>

For developer Greg Averbuch, it all comes down to synergy. Averbuch, president
of Summit Management Corp., uses the word a lot when describing the Sleep Inn
and MainStay Suites hotels he plans to operate side by side in Atlanta. He also
views his relationship with Choice as highly synergistic.

Averbuch opened his first Choice franchise, a Sleep Inn hotel, in downtown
Memphis, Tenn., in 1996. It has performed exceptionally well and received a
Choice award in 1998 for achieving the highest RevPAR of any Sleep Inn hotel.

The success of his Memphis property not only inspired Averbuch to build a
second Sleep Inn hotel in Atlanta's Buckhead section but also to consider
another Choice brand for a plot of land directly adjacent to the new Sleep Inn
site. "I wanted a brand that would complement Sleep Inn by meeting different
needs for the same customer," he said.

Enter Choice's MainStay Suites mid-priced, extended-stay brand. "By
offering a new, fresh lodging product for extended-stay guests directly next
door to a similarly positioned product for transient guests, we are truly a
full-service provider here in Atlanta," Averbuch said. "It's brand segmentation
at the local level."

According to Averbuch, Choice professionals were integrally involved in
each step of the development and marketing phases for both Sleep Inn projects
and for the new MainStay Suites hotel. "Choice ensures consistency in these
products by being available for consultation throughout, from groundbreaking
through construction," he said.

[PICTURE APPEARS HERE]

Anne Curtis (left), Choice director of corporate communications, reviews plans
for the grand opening of the Sleep Inn in Atlanta with Owner Greg Averbach.

14
<PAGE>

"Our greater brand focus will give us global brands with clear definition and
differentiation," said Wells. "We can build on our presence in 36 countries to
become the pre-eminent global lodging franchisor if we can create the proper
value proposition for our regional partners and property owners."

The Value Is In Our Name.Choice

There are three basic reasons for a hotel franchisor to offer a portfolio
of different brands: (1) to serve different customer demographics and
lifestyles; (2) to serve different travel occasions; or (3) to effectively do a
combination of both.

Choice does both. After all, it's in the name. The company offers both
traveling consumers and hotel franchisees the best and most varied choice of
lodging in the industry. From the economy segment to the upscale market,
diverse brands provide more than 110 million available room nights a year around
the globe. Beneath the Choice identity are seven distinct hotel brands, each
serving a par-

Located in the Buckhead section of Atlanta, the new 142-room Sleep Inn is the
200/th/ hotel opened under that brand since the brand's introduction in 1989.

[PICTURE APPEARS HERE]
<PAGE>

ticular segment of the broad travel industry. At a time when the industry is
undergoing consolidation, new brands are being unveiled and old brands are being
revamped, the ability to differentiate brands becomes more critical.

"We must trade on our brand diversity," said Wells. "We must continue to
create an understandable and unique identity for each of our brands by focusing
on offering guests clear choices."

In the fiercely competitive market for guests visiting Colonial Williamsburg,
Va., one of the top tourist destinations in the country, the 118-unit Quality
Suites hotel has gained a decisive advantage by offering two-room suites with
separate living and sleeping areas.

"In this area, many traveling families are looking for more than just a
standard room," said Joe Puhl, general manager. "Guests also appreciate our
hotel's free full buffet breakfast and room amenities, such as free coffee, a
refrigerator, microwave, two remote-controlled televisions, a video cassette
player, stereo cassette player and the Quality Sleeper mattress by Serta."

Business travelers ask for the hotel's Quality Executive Rooms, which
feature a large work desk, speakerphone with data port and easy chair, in
addition to all the other standard amenities.

The hotel, owned and operated by the Newport Hospitality Group of
Williamsburg, received a top honor from Choice in 1998, the Gold Hospitality
Award, for exceeding Choice's rigid quality assurance standards.

Last year, Gold Hospitality Awards were presented to just six percent of
the eligible hotels in the Choice system.

[PICTURE APPEARS HERE]

Joe Puhl, general manager, shows off the breakfast offered at his Quality
Suites hotel in Williamsburg, Va.
<PAGE>

Choice's close working relationship with individual franchisees encompasses a
wide range of operational issues including one of the lodging industry's
greatest challenges: providing continuity despite ongoing personnel turnover.
When the Rodeway Inn Airport East of Tempe, Ariz., recently lost its general
manager, a Choice field representative worked with the new manager to make the
transition.

Clark Ward was brought in during a peak travel season to serve as interim
general manager of the hotel, owned by Choice's largest multiple franchisee,
Sunburst Hospitality Corp. of Silver Spring, Md. Chris Bates, Choice's
franchise service director assigned to the hotel, took the initiative to
intervene and help Ward keep the property on track and maintain its award-
winning reputation.

Bates' first order of business was to help Ward set optimal rates for his
hotel. "Living in Phoenix, I was able to share my knowledge of the area with
Clark, brief him on the area's seasons and help him set the appropriate rates,"
Bates said. "Clark arrived at Fiesta Bowl time, which is a huge money-maker for
his hotel. I helped him set the appropriate rates based on the demand in the
area at that time."

Jeff Heath, area manager for Sunburst Hospitality Corp., said the company's
hotel managers work closely with Choice's field representatives. "Our franchise
service directors help us with various projects including marketing programs,"
he said. "We feel comfortable picking up the phone and asking for their
assistance."

"By eliminating the assignment of multiple field staff representatives to
each hotel, there now is a ratio of one franchise service representative to
approximately 45 hotels in comparison to the previous ratio of one to 90," said
Brent Russell, Choice vice president of franchise operations for the South
Central Market Area. "Our franchisees appreciate the focus on revenue
generation and extra service they receive."

Chris Bates (left), Choice franchise service director for the Smith Central
Market Area, discuses local marketing with Mr Adams, directors of sales for the
Rodeway Inn Airport East in Tempe, Ariz.

[PICTURE APPEARS HERE]

Brand standards and quality are central to the drive for better brand
identity. Choice continues to raise the bar for its franchisees in terms of
quality assurance and guest satisfaction. As standards tighten, under-
performing hotels will leave the system through termination. The result will be
more consistent quality within brands, which will better protect the individual
franchisee's investment.

The drive to build value continues. Block by block, the foundation for an
industry leader gets stronger. Each day Choice and its associates create new
opportunities for future success.

17
<PAGE>

Sleep Inn

[LOGO OF SLEEP INN APPEARS HERE]
The Sleep Inn brand offers consistent quality with an all-new construction, mid-
priced product featuring a walk-in, oversized shower, complimentary continental
breakfast and affordable rates, all backed by a 100 percent satisfaction
guarantee.

1998 Highlights:

. The Sleep Inn brand was spotlighted in the June issue of Consumer Reports as
the top hotel chain in its segment and received the magazine's highest rating
for value
. Smith Travel Research listed the Sleep Inn brand among the top five fastest-
growing midscale chains over the last five years

[PICTURE APPEARS HERE]

The Sleep Inn hotel of Jerome, Idaho 1998 Inn of the Year award winner

Hotels Rooms
------ -----
Open: 200 15,214
Under Development: 193 14,979
Total: 393 30,193

Quality Inns, Hotels & Suites

[LOGO OF QUALITY APPEARS HERE]
The Quality brand offers an established mid-priced lodging product with rooms
designed for today's business travelers, backed by a 100 percent satisfaction
guarantee.

1998 Highlights:

. An advertising campaign was launched in Business Week, PC Magazine, and U.S.
News and World Report
. Higher quality assurance standards were established, and guest complaints
dropped by 36 percent
. New Quality Suites and Quality Inn & Suites prototypes were introduced
. Millions of television viewers watched tennis pros Jimmy Connors and John
McEnroe play at The Quality Challenge Tennis Tournament; Commercials
spotlighting Quality's commitment to service ran during The Challenge and
during the U.S. Open Golf Preview show

[PICTURE APPEARS HERE]

The Quality Inn Baltimore of Asheville, N.C., 1998 Inn of the Year award winner

Hotels Rooms
------ -----
Open: 679 75,472
Under Development: 177 18,782
Total: 856 94,254
<PAGE>

Comfort Inns & Comfort Suites

[LOGO OF COMFORT APPEARS HERE]
The Comfort brand is a leading limited-service
hotel chain offering affordable rates, free deluxe continental breakfast and
exceptional rooms and suites, all backed by a 100 percent satisfaction
guarantee.

1998 Highlights:

. Millions of viewers learned about the deluxe complimentary continental
breakfast offered at Comfort Inn and Comfort Suites hotels this summer during
network television advertising

. Comfort added 38 Comfort Suites hotels to its domestic portfolio in 1998,
representing a 25 percent increase

. The Comfort brand continued to sponsor such highly visible golf tournaments as
the Wendy's Three-Tour Challenge, Shell's Wonderful World of Golf and the
Comfort Classic at the Brickyard

[PICTURE APPEARS HERE]

The Comfort Suites hotel of Madison, Wls.
1998 Inn of the Year award winner

<TABLE>
<CAPTION>
Hotels Rooms
------ -----
<S> <C> <C>
Open: 1,718 133,065
Under Development: 385 33,061
Total: 2,103 166,126
</TABLE>

Clarion Inns, Hotels, Suites & Resorts

[LOGO OF CLARION APPEARS HERE]
The Clarion brand features upscale full-service
hotels that provide outstanding value to both business and leisure travelers as
well as superior service and a 100 percent satisfaction guarantee.

1998 Highlights:

. More than 40 percent of all Clarion rooms are Clarion Class Business or
Leisure rooms, designed expressly for business and leisure travelers and
equipped with amenities including coffee makers, irons, ironing boards,
compact refrigerators, microwaves, hair dryers, signature Class One Office
workstations, oversized desks, two-line speakerphones with data ports,
ergonomic desk chairs and easy-access electrical outlets

. The Clarion brand launched a print advertising campaign aimed at business
travelers in USA Today's News and Money sections as well the paper's New York
Stock Exchange and mutuals pages

[PICTURE APPEARS HERE]

The clarion Hotel & Conference Center of Edison, N.J.
1998 Inn of the Year award winner

<TABLE>
<CAPTION>
Hotels Rooms
------ -----
<S> <C> <C>
Open: 130 21,355
Under Development: 45 7,037
Total: 175 28,392
</TABLE>

<PAGE>

United States

Choice continued its leadership in the U.S. lodging industry in 1998
with 3,039 hotels open and 866 under development under the brand names Comfort,
Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn and MainStay Suites.

It was a year of honors and tributes as the editors of Entrepreneur
magazine named Choice the top lodging franchisor of the year, Consumer Reports
recognized the Sleep Inn brand as the nation's top budget chain and Success
magazine rated the Comfort and Quality brands among the top franchises.

A highlight of the year was the launch of the Guest Privileges frequent-
stay program, designed to generate repeat business and build loyalty with
existing customers by awarding points that can be redeemed for room nights, gift
certificates and vacations in exotic destinations.

The Americas

Choice Atlantica Hotels, master franchisor for Choice in most of South
America, announced plans to develop 140 Comfort, Quality, Clarion and Sleep Inn
hotels during the next five years beginning with three hotels in Brazil starting
with a 117-room property in Sao Paulo.

Nicholas Brady, former U.S. Treasury secretary who recently was named vice
chairman of the Choice Atlantica board, explained the decision, saying the
"growing volume of international business travelers to markets throughout the
continent is boosting demand for high-quality, reputable, well-run hotels."

For the third consecutive year, Choice Hotels Canada was named the Hotel
Chain of the Year by the North West Commercial Travelers' Association of Canada.

[MAPP APPEARS HERE]
<PAGE>

Econo Lodge

[LOGO OF ECONO LODGE APPEARS HERE]
The Econo Lodge brand is among the best roadside names in its category, offering
clean, affordable economy lodging for travelers who know "Our Rates Are Low, Not
Our Standards."

1998 Highlights

. The Econo Lodge brand launched an industry first: a clean-room initiative tied
to one of the best known household cleaning brands in the country, Procter &
Gamble's Mr. Clean. The program offers housekeeping certification and provides
information on ways to promote cleanliness and value

. Econo Lodge guest satisfaction ratings as measured by D.K. Shifflet &
Associates, a leading travel research and consulting firm, rose eight
percentage points during 1998, as opposed to a four-point increase for the
lodging industry overall

. More than 300 hotels participated in the Econo Lodge Exterior Enhancement
Program, which has boosted revenue per available room systemwide

[PICTURE APPEARS HERE]

The Econo Lodge hotel of Brunswick, Ga.
1998 Inn of the Year award winner

<TABLE>
<CAPTION>
Hotels Rooms
------ -----
<S> <C> <C>
Open: 723 45,656
Under Development: 132 9,636
Total: 855 55,292
</TABLE>

Rodeway Inn

[LOGO OF RODEWAY INN APPEARS HERE]
The Rodeway Inn brand offers economy hotels with national consumer exposure
specializing in meeting the needs of the senior travel market in cities and
towns large and small.

1998 Highlights:
. Baseball Hall of Famer Tommy Lasorda endorsed the brand's senior-friendly
amenities in print advertisements in Reader's Digest
. Based upon data provided by Smith Travel Research, revenue per available room
for the Rodeway Inn brand grew 4.7 percent while its competitive set grew by
only 3.4 percent
. Rodeway Inn hotels opened in key locations including Denver, Mobile Ala., Salt
Lake City, Baltimore, Phoenix, Palm Springs Calif., and Virginia Beach,Va.

[PICTURE APPEARS HERE]

The Rodeway Inn hotel of Macon, Ga.
1998 Inn of the Year award winner

<TABLE>
<CAPTION>
Hotels Rooms
------ -----
<S> <C> <C>
Open: 202 12,873
Under Development: 51 3,532
Total: 253 16,402
</TABLE>
<PAGE>

International Offices

THE AMERICAS REGION
Choice Hotels International
10750 Columbia Pike
Silver Spring, MD 20901
(301) 592-6166

EUROPE, MIDDLE EAST,
AND AFRICA REGION
Choice Hotels International
1 Warwick Row
London, England SW1E 5ER
44-171-808-5656

ASIA PACIFIC REGION*
Level 8, 52 Alfred Street
Milsons Point, Sydney NSW 2061 Australia
61-2-9929-6444

*new office to open in Singapore in 1999

International Inns of the Year

[PICTURE APPEARS HERE]
The Comfort Suites Paradise Island, Nassau, Bahamas
1998 Americas Region Hotel of the Year award winner

[PICTURE APPEARS HERE]
Comfort HomeHotel Bolinder Munktell, Eskiltuna, Sweden
1998 International Hotel of the Year award winner

[PICTURE APPEARS HERE]
The Quality Resort Terraces, Queenstown, New Zealand
1998 Asta/Pacific Region Hotel of the Year award winner

18
<PAGE>

[MAPP APPEARS HERE]

Europe, Middle East & Africa

Friendly Hotels, Choice's master franchisor for western Europe, announced
plans to develop 750 hotels within the next decade. At year's end, the Choice
Hotels Europe portfolio included 241 hotels open and 41 under development in the
United Kingdom, France, Germany, Belgium, Ireland, Italy, Switzerland, Portugal
and Spain.

Choice Hotels Europe launched its own frequent-stay program, the Favoured
Guest Card, which awards one free night for 10 paid stays at its hotels in the
United Kingdom, Ireland and France.

Choice Hotels Scandinavia consolidated its formidable position in Sweden,
Norway and Denmark by integrating hotels acquired as a result of the previous
year's acquisition of the Inter-Nor, Home Hotels and Eurostop hotel groups. At
year's end the master franchisor's portfolio stood at 84 hotels and one under
development. Choice's own direct development will continue to focus on key
cities in the Middle East, Mediterranean countries and major African
destinations

Asia/Pacific

Choice formed a strategic alliance with Flag International Limited to
create the largest hotel franchising company in Australia. At year's end, the
new Flag Choice Hotels organization included 537 hotels in Australia, New
Zealand, Fiji and Papua New Guinea. The Quality brand is now the leading mid-
market hotel product in New Zealand.

Quality and Clarion brand hotels are targeted for major gateway locations
that are fast-growing and supported by business travel.
<PAGE>

MainStay Suites

[LOGO OF MAINSTAY SUITES]

The MainStay Suites brand is Choice's newest lodging concept: the industry's
first franchised mid-market, extended-stay hotel with advanced technological
design and residential amenities designed to serve professionals on extended
assignments.

1998 Highlights:
. Launched in 1996, the MainStay Suites brand has more than quadrupled in size
since year-end 1997, with 20 more hotels projected to open by year-end 1999
. The Mariner kiosk, an automated check-in, check-out system that also offers
conciege assistance, is available to guests 24 hours a day
. Many corporate travel offices have begun booking year-long stays at MainStay
Suites hotels for employees on extended assignments

[PICTURE APPEARS HERE]

The MainStay Suites hotel of Lake Mary, Fla.

<TABLE>
<CAPTION>
Hotels Rooms
------ -----
<S> <C> <C>
Open: 19 1,817
Under Development: 22 1,917
Total: 41 3,734
</TABLE>

International

The International presence of Choice brands is significant, with 632 properties
open outside of the United States in 36 countries. The total includes 242 in the
Americas (excluding the United States); 331 in Europe and the Middle East; and
59 in Asia-Pacific.

1998 Highlights:

. Choice's International division announced it would introduce the 100 percent
satisfaction guarantee program worldwide, beginning with hotels in New
Zealand, India, Indonesia, Scandinavia and the Caribbean
. Choice announced it formed a strategic alliance with Flag International
Limited creating Flag Choice Hotels, the largest hotel franchising company in
Australia
. Choice Hotels Europe announced the launch of a frequent-stay program, the
Favoured Guest Card, which awards one free night for every 10 paid stays at
any of the more than 150 hotels in the United Kingdom, Ireland and France

[PICTURE APPEARS HERE]

The Comfort Inn Kensington of London

<TABLE>
<CAPTION>
Hotels Rooms
------ ------
<S> <C> <C>
Open: 632 53,095
Under Development: 611 40,375
Total: 1,243 93,470
</TABLE>

Hotel and Room statistics as of December 31, 1998
<PAGE>

Financial Information

Choice Hotels International, Inc. and Subsidiaries

TABLE OF CONTENTS

<TABLE>
<S> <C>
Management's Discussion & Analysis............ 20

Report of Independent Public Accountants...... 28

Consolidated Financial Statements............. 29

Notes to Consolidated Financial Statements.... 33

Board of Directors and Corporate Officers..... 45

Corporate Information......................... 46
</TABLE>

19
<PAGE>

Management's Discussion & Analysis

Choice Hotels International, Inc. and Subsidiaries

The Company is one of the largest hotel franchisors in the world with 3,671
hotels open and 1,477 hotels under development as of December 31, 1998
representing 305,452 rooms open and 115,607 rooms under development in 36
countries. The Company franchises hotels under the Comfort, Quality, Econo
Lodge, Sleep Inn, Clarion, Rodeway Inn and MainStay Suites brand names. The
Company has over 2,300 franchisees in the franchise system with no single
franchisee accounting for more than 5% of its royalty or total revenues. The
Company operates in all 50 states and the District of Columbia and 35 additional
countries with 95% of its franchising revenue derived from hotels franchised in
the United States. Accordingly, management's discussion of its franchise
operating results focuses on the performance of the domestic system.

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; 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.

During 1997, the Company changed its fiscal year-end from May 31 to December 31.
Accordingly, the following discussion includes a discussion of the results of
the seven months ended December 31, 1997, as compared to unaudited results from
the comparable seven month period in 1996.

COMPARISON OF CALENDAR YEAR 1998 OPERATING RESULTS AND CALENDAR YEAR 1997
OPERATING RESULTS

The Company recorded net income of $55.3 million for the year ended December 31,
1998 ("Calendar 1998"), an increase of $16.6 million, compared to net income of
$38.7 million for the year ended December 31, 1997 ("Calendar 1997"). The
increase in net income for Calendar 1998 was primarily attributable to an
increase in franchise revenue as a direct result of the addition of new
franchisees to the system, improvements in the operating performance of hotels
and an increase in the effective royalty rates achieved. Additionally, in
Calendar 1998 the Company recognized a gain on early extinguishment of debt of
$7.2 million.

SUMMARIZED FINANCIAL RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 ARE
AS FOLLOWS:

1998 1997
(unaudited)
REVENUES: (In thousands)....................... --------- -----------
Royalty fees............................... $115,369 $106,299
Product sales.............................. 21,256 23,806
Initial franchise fees & relicensing fees.. 16,571 16,096
Partner services revenue and other......... 11,081 11,912
European hotel operations.................. 1,098 17,303
---------------------
TOTAL REVENUES............................. 165,375 175,416
---------------------
OPERATING EXPENSES:
Selling, general & administrative.......... 50,670 50,782
Product cost of sales...................... 19,736 22,769
Depreciation & amortization................ 7,116 9,173
European hotel operations.................. 1,133 15,624
---------------------
TOTAL OPERATING COSTS...................... 78,655 98,348
---------------------
Operating income................................ 86,720 77,068
Gain on sale of stock........................... (2,370) --
Interest expense and other...................... 19,326 13,295
Interest and dividend income.................... (12,636) (2,503)
---------------------
Income before income taxes
and extraordinary item..................... 82,400 66,276
Income taxes.................................... 34,327 27,604
---------------------
Net income before extraordinary item............ 48,073 38,672
Gain on early extinguishment of debt,
net of $4,532 of income taxes.............. 7,232 --
---------------------
NET INCOME................................. $ 55,305 $ 38,672
---------------------

FRANCHISE REVENUES: Management analyzes its business based on "net franchise
revenue," which is total revenue excluding product sales and European hotel
operations, and franchise operating expenses which are reflected as selling,
general and administrative expenses.

20
<PAGE>

Management's Discussion & Analysis

Choice Hotels International, Inc. and Subsidiaries

Net franchise revenues were $143.0 million for Calendar 1998 and $134.3 million
for Calendar 1997. Royalties increased $9.1 million to $115.4 million from
$106.3 million in Calendar 1997, an increase of 8.5%. The increase in royalties
is attributable to a net increase of 159 franchisees during the period
representing an additional 10,196 rooms added to the system, an improvement in
domestic RevPAR of 2.3% and an increase in the effective royalty rate of the
domestic hotel system to 3.6% from 3.5%. Domestic initial fee revenue generated
from franchise contracts signed increased 3.0% to $16.6 million from $16.1
million in Calendar 1997. Total franchise agreements signed in Calendar 1998
were 440, up 4.5% from the total contracts signed in Calendar 1997 of 421.
Revenues generated from partner service relationships increased to $6.4 million
from $6.1 million in Calendar 1997. Under the partner services program the
Company generates revenue from hotel industry vendors in exchange for being
designated as preferred providers of goods or services to hotel owners and the
millions of hotel guests who stay in the Company's franchised hotels.

The number of domestic rooms under development increased to 75,232 from 62,384,
an increase of 20.6% for the year ended December 31, 1998. The total number of
international hotels on line increased to 632 from 605 an increase of 4.5% for
the year ended December 31, 1998. International rooms on line increased to
53,095 as of December 31, 1998 from 50,639, an increase of 4.9%. The total
number of international hotels under development increased to 611 from 119 for
the year ended December 31, 1998. The number of international rooms under
development increased to 40,375 as of December 31, 1998 from 12,029 as of
December 31, 1997. These increases are primarily attributable to a strategic
alliance in June 1998 with Flag International Limited.

FRANCHISE EXPENSES: The cost to operate the franchising business is reflected
in selling, general and administrative expenses. Selling, general and
administrative expenses were $50.7 million for Calendar 1998, a decrease of $0.1
million from the Calendar 1997 total of $50.8 million. As a percentage of net
franchise revenues, selling, general and administrative expenses declined to
35.5% in Calendar 1998 from 37.8% in Calendar 1997. The improvement in the
franchising margins relates to the economies of scale generated from operating a
larger franchisee base, cost control initiatives and improvements in franchised
hotel performance.

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 to reimburse the Company 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 reservation and marketing fees it collects from franchisees in
accordance with the franchise agreements; as such, no income or loss to the
Company is generated. During the second quarter of 1998, the Company changed its
presentation of marketing and reservation fees such that the fees collected and
associated expenses are reported net. All prior periods have been reclassified
to conform to the new presentation.

The total marketing and reservation fees received by the Company (previously
reported as revenue) were $127.4 million and $110.2 million for the years ended
December 31, 1998 and December 31, 1997, respectively. Depreciation and
amortization charged to reservation and marketing expenses was $5.7 million and
$2.9 million for the years ended December 31, 1998 and December 31, 1997,
respectively. 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. As of
December 31, 1998 the Company's balance sheet includes a receivable in amounts
due from marketing and reservation funds of $13.4 million related to shortfalls
in the marketing ($7.8 million) and reservation ($5.6 million) funds. As of
December 31, 1997, the Company's balance sheet includes a receivable in
amounts due from marketing and reservation funds of $5.2 million related to a
shortfall in the marketing fund and a current liability in accounts payable of
$4.5 million related to excess monies in the reservation fund. The Company
expects to be able to recover these receivables through future marketing and
reservation fees.

PRODUCT SALES: Sales made to franchisees through the Company's group purchasing
program declined $2.6 million to $21.3 million in Calendar 1998 from $23.8
million in Calendar 1997. The group purchasing program utilizes bulk purchases
to obtain favorable pricing from third party vendors for franchisees ordering
similar products. The Company acts as a clearing house

21
<PAGE>

Management's Discussion & Analysis

Choice Hotels International, Inc. and Subsidiaries

between the franchisee and the vendor, and orders are shipped directly to the
franchisee.

Similarly, product cost of sales decreased $3.0 million (or 13.3%) from Calendar
1997. The product services margins increased for the year ended December 31,
1998 to 7.2% from 4.4% in Calendar 1997. This purchasing program is provided to
the franchisees as a service and is not expected to be a major component of the
Company's profitability. In the fourth quarter of 1998, the Company discontinued
the group purchasing program as previously operated.

EUROPEAN HOTEL OPERATIONS: In January 1998, the Company and Friendly Hotels,
PLC ("Friendly") consummated a transaction in which Friendly acquired from the
Company the master franchise rights for the Comfort, Quality and Clarion brands
for all of Europe, with the exception of Scandinavia, for a payment of $8.0
million. As part of this transaction, Friendly acquired ten hotels in France,
two in Germany and one in the United Kingdom from the Company in exchange for
$22.2 million in 5.75% convertible preferred shares in Friendly. In addition,
Friendly will pay the Company deferred compensation of $4.0 million in cash,
payable by the fifth anniversary or sooner depending on the level of future
profits of the hotels acquired.

DEPRECIATION AND AMORTIZATION: Depreciation and amortization decreased to $7.1
million in Calendar 1998 from $9.2 million in Calendar 1997. This decrease was
primarily attributable to the sale of the Company's European hotels.

INTEREST EXPENSE AND INTEREST INCOME: The increase in interest expense of $6.0
million in Calendar 1998 from $13.3 million in Calendar 1997 results from
additional debt incurred in connection with the Distribution (as defined in the
notes to the consolidated statements). Included in Calendar 1998 results is
approximately $10.4 million of interest income earned on the note receivable
from Sunburst Hospitality Corporation and $2.2 million in dividend income from
the Company's investment in Friendly.

EXTRAORDINARY ITEM: During 1998, the Company recorded extraordinary gains for
the early extinguishment of a capitalized lease obligation. The Company retired
$13.7 million in debt and removed related assets of $1.7 million from the
consolidated balance sheets. The extraordinary gain was $7.2 million, after
income tax benefits of $4.7 million, or $0.12 per diluted share.

COMPARISON OF SEVEN MONTH PERIOD ENDED DECEMBER 31, 1997 OPERATING RESULTS AND
SEVEN MONTH PERIOD ENDING DECEMBER 31, 1996 OPERATING RESULTS

The Company recorded net income of $27.3 million for the seven months ended
December 31, 1997 ("December 1997"), an increase of $4.0 million, compared to
net income of $23.3 million for the seven months ended December 31, 1996
("December 1996"). The increase in net income for December 1997 was primarily
attributable to an increase in franchise revenue as a direct result of the
addition of new franchisees to the system, improvements in the operating
performance of hotels and an increase in the effective royalty rates achieved.

SUMMARIZED FINANCIAL RESULTS FOR THE SEVEN MONTHS ENDED DECEMBER 31, 1997 AND
1996 ARE AS FOLLOWS:

1997 1996
(unaudited)
------------------

REVENUES: (in thousands)
Royalty fees................................ $ 70,308 $61,821
Product sales............................... 13,524 14,717
Initial franchise fees & relicensing fees... 8,597 9,304
Partner services revenue and other.......... 4,869 3,161
European hotel operations................... 10,541 10,975
-------------------
TOTAL REVENUE............................... 107,839 99,978
-------------------

OPERATING EXPENSES:
Selling, general & administrative........... 29,454 28,132
Product cost of sales....................... 13,031 13,481
Depreciation & amortization................. 3,977 3,153
European hotel operations................... 9,203 9,745
-------------------
TOTAL OPERATING COSTS....................... 55,665 54,511
-------------------
Operating income................................. 52,174 45,467
Interest expense, net............................ 5,791 5,784
-------------------
Income before income taxes....................... 46,383 39,683
Income taxes..................................... 19,096 16,338
-------------------
NET INCOME.................................. $ 27,287 $23,345
-------------------

FRANCHISE REVENUES: Net franchise revenues were $83.8 million for the seven
months ended December 31, 1997 and $74.3 million for the seven months ended
December 31, 1996. Royalties increased $8.5 million to $70.3 million from $61.8
million for the seven months ended December 31, 1996, an increase of 13.7%. The
increase in royalties is attributable to a net increase of 264 franchisees
during the period representing an additional 19,881

22
<PAGE>

Management's Discussion & Analysis

Choice Hotels International, Inc. and Subsidiaries

rooms added to the system, an improvement in domestic RevPAR of 2.4% and an
increase in the effective royalty rate of the domestic hotel system to 3.5% from
3.4%. Domestic initial fee revenue generated from franchise contracts signed
declined 7.5% to $8.6 million from $9.3 million for the seven months ended
December 31, 1997 as compared to the seven months ended December 31, 1996. Total
franchise agreements signed for the seven months ended December 31, 1997 were
368, down 14.0% from the total contracts signed in December 1996 of 428. The
decline in initial fees is partly a result of the Company's sales force
reorganization and the resulting temporary displacement of the sales force. The
reorganization of the regional market management sales and support force was
completed in September 1997. Revenues generated from partner service
relationships increased to $3.4 million from $1.5 million in December 1996.

The number of domestic rooms under development as of December 31, 1997 increased
to 62,384 from 59,023, at December 31, 1996 an increase of 5.7%. The total
number of international hotels on line increased to 605 from 548 at December 31,
1996 an increase of 10.4%. International rooms on line increased 9.0% to 50,639
as of December 31, 1997 from 46,473 as of December 31, 1996. The total number of
international hotels under development decreased to 119 from 143, a decrease of
16.8% from December 31, 1996. The number of international rooms under
development decreased to 12,029 as of December 31, 1997 from 13,906 as of
December 31, 1996, a decrease of 13.5%.

FRANCHISE EXPENSES: Selling, general and administrative expenses were $29.5
million for the seven months ended December 31, 1997, an increase of $1.3
million from the comparable period in 1996. The increase in selling, general and
administrative expenses was primarily due to additional personnel to support
company growth and new company initiatives. As a percentage of net franchise
revenues, selling, general and administrative expenses declined to 35.2% for the
seven months ended December 31, 1997 from 37.8% for the seven months ended
December 31, 1996. The improvement in the franchising margins relates to the
economies of scale generated from operating a larger franchisee base, cost
control initiatives and improvements in franchised hotel performance.

MARKETING AND RESERVATIONS: The total marketing and reservation fees received
by the Company (previously reported as revenue) were $72.3 million and $66.3
million for the seven months ended December 31, 1997 and December 31, 1996,
respectively. Depreciation and amortization charged to reservation and marketing
expenses was $1.7 million and $1.4 million for the seven months ended December
31, 1997 and December 31, 1996, respectively.

PRODUCT SALES: Sales made to franchisees through the Company's group purchasing
program declined $1.2 million to $13.5 million for the seven months ended
December 31, 1997 from $14.7 million for the seven months ended December 31,
1996.

Similarly, product cost of sales decreased $0.4 million (or 3.3%) for the seven
months ended December 31, 1997. The product services margins decreased for the
seven months ended December 31, 1997 to 3.6% from 8.4% for the seven months
ended December 31, 1996.

DEPRECIATION AND AMORTIZATION: Depreciation and amortization increased to $4.0
million for the seven months ended December 31, 1997 from $3.2 million for the
seven months ended December 31, 1996. The increase was primarily due to capital
improvements to the Company's financial and billing information systems.

COMPARISON OF FISCAL YEAR 1997 OPERATING RESULTS AND FISCAL YEAR 1996 OPERATING
RESULTS

The Company recorded net income of $34.7 million for the year ended May 31, 1997
("Fiscal 1997"), an increase of $23.0 million, compared to net income of $11.7
million for the year ended May 31, 1996 ("Fiscal 1996"). Fiscal 1996 results
include a $24.8 million asset impairment charge related to the Company's
European hotel operations. Exclusive of this charge, Fiscal 1996 net income was
$26.7 million. The increase in net income for Fiscal 1997 was primarily
attributable to an increase in franchise revenue as a direct result of the
addition of new franchisees to the franchise system and improvements in the
operating performance of franchised hotels.

FRANCHISE REVENUES: Net franchise revenues were $126.7 million for Fiscal 1997
and $110.6 million for Fiscal 1996. Royalties increased $9.2 million to $97.2
million from $88.0 million in ended Fiscal 1996, an increase of 10.5%. The
increase in royalties is attributable to a net increase of 292 franchisees
during the period representing an additional 21,578 rooms added to the system,
an improvement in domestic RevPAR of 2.9% and an increase in the effective
royalty rate of the domestic hotel system to 3.4% from

23
<PAGE>

Management's Discussion & Analysis

Choice Hotels International, Inc. and Subsidiaries

3.3%. Domestic initial fee revenue generated from franchise contracts signed
increased 14.8% to $14.0 million from $12.2 million in Fiscal 1996. Total
franchise agreements signed in Fiscal 1997 were 495, up 13.5% from the total
contracts signed in Fiscal 1996 of 436. Revenues generated from partner services
relationships increased to $6.1 million from $1.8 million in Fiscal 1996.

The number of domestic rooms under development increased to 61,754 from 54,172,
an increase of 14.0% for the period ending May 31, 1997. The total number of
international hotels on line increased to 563 from 557 an increase of 1.1% as of
May 31, 1997. International rooms online increased 1.6% from 46,843 as of May
31, 1996 to 47,603 as of May 31, 1997. The total number of international hotels
under development increased to 110 from 100, an increase of 10.0% for the period
ending May 31, 1997. The number of international rooms under development
increased to 10,339 as of May 31, 1997 from 9,613 as of May 31, 1996, an
increase of 7.6%.

FRANCHISE EXPENSES: Selling, general and administrative expenses were $51.1
million in Fiscal 1997, an increase of $5.9 million from the Fiscal 1996 total
of $45.2 million. Of the increase, $4.8 million was directly attributable to
additional costs of operating as an independent company apart from Manor Care.
These additional costs were primarily additional staffing, incremental rental
expenses, and consulting fees as the Company assumed certain administrative
tasks previously provided by Manor Care. The remaining increases in selling,
general and administrative expenses were primarily due to additional personnel
to support company growth and new company initiatives.

As a percentage of total net franchising revenues, total franchising selling,
general and administrative expenses were 40.3% in Fiscal year 1997 and 40.9% in
Fiscal year 1996. Exclusive of the $4.8 million increase resulting from the
distribution, as a percentage of net franchising revenues, selling, general and
administrative expenses declined to 36.5% in Fiscal 1997 from 40.9% in Fiscal
1996. The improvement in the franchising margins primarily relates to the
economies of scale generated from operating a larger franchisee base.

PRODUCT SALES: Sales made to franchisees through the Company's group purchasing
program increased $2.0 million to $23.6 million in Fiscal 1997 from $21.6
million in Fiscal 1996.

Similarly, product cost of sales increased $2.1 million (or 9.9%) in Fiscal
1997. The product services margins decreased in Fiscal 1997 to 3.7% from 4.0% in
Fiscal 1996.

EUROPEAN HOTEL OPERATIONS: Total revenues at the Company's owned hotel
operations in Europe declined to $17.7 million in Fiscal 1997 from $19.6 million
in Fiscal 1996. Operating margins at the hotels declined to 8.9% in Fiscal 1997
from 10.6% in Fiscal 1996. The decline in revenue and operating performance
reflects the difficult economic and competitive climates in which a number of
the European hotels operated.

DEPRECIATION AND AMORTIZATION: Depreciation and amortization decreased $1.6
million (or 16.7%) to $7.6 million in Fiscal 1997 from $9.2 million in Fiscal
1996. The decrease was primarily due to an asset impairment charge against
European fixed assets which reduced the asset base upon which depreciation is
determined.

PROVISION FOR ASSET IMPAIRMENT: In Fiscal 1996, the Company recorded a charge
against earnings of $24.8 million relating to impairment of certain long-lived
assets related to the Company's European hotel operations.

OTHER: In Fiscal 1997, the Company recognized $943,000 in dividend income from
its investment in Friendly Hotels, PLC.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $44.1 million for the year ended
December 31, 1998, an increase of $10.5 million from $33.6 million for the seven
months ended December 31, 1997. As of December 31, 1998, the total long-term
debt outstanding for the Company was $279.2 million.

Cash used in investing activities for the year ended December 31, 1998, the
seven months ended December 1997 and Fiscal years 1997, and 1996 was $14.2
million, $149.7 million, $16.9 million, and $78.5 million, respectively.
Included in Other items (investing activities) for the year ended December 31,
1998 was an increase of $12.7 million due from the marketing and reservation
funds.

On October 15, 1997, the Company funded a $115 million, five year Subordinated
Term Note to Sunburst with an initial simple interest rate of 11% per annum. In
connection with the amendment

24
<PAGE>

Management's Discussion & Analysis

Choice Hotels International, Inc. and Subsidiaries

of the strategic alliance agreement discussed below, effective October 15, 2000
interest payable shall accrue at a rate of 11% per annum compounded daily. The
Company will implement this amendment prospectively beginning January 1, 1999 by
recognizing interest on the outstanding principal and accrued interest amounts
at an effective rate of 10.58%. The note is payable in full, along with accrued
interest on October 15, 2002. Total interest accrued at December 31, 1998 and
1997 was $10.4 million and $2.4 million, respectively.

During 1998, Sunburst repaid $8 million of the approximately $25 million of
estimated receivables due to the Company. On December 28, 1998, the Company and
Suburst amended the strategic alliance agreement entered into in connection with
the Sunburst Distribution. As part of that amendment, the Company exchanged the
remaining $17 million balance in return for, among other things, the exclusive
rights to the MainStay Suites brand from Sunburst and a commitment from Sunburst
to build a total of 25 MainStay Suites. The $17 million, net of income taxes of
approximately $7 million, was recorded as an adjustment to additional paid in
capital as it represents an adjustment to the accounting for the Sunburst
Distribution.

On May 31, 1996, the Company repurchased the remaining 5.5% minority interest
held by its management for $27.9 million. Approximately $26.4 million was
allocated to goodwill. During Fiscal 1996, the Company purchased a 5% common
stock interest and a preferred stock interest in Friendly, for approximately $17
million.

Investment in property and equipment includes computer hardware as well as new
developments and enhancements of reservation and finance systems. During the
year ended December 31, 1998, the seven months ended December 31, 1997 and the
fiscal years ended May 31, 1997, and 1996, capital expenditures totaled $12.3
million, $7.3 million, $10.6 million and $6.5 million, respectively, and related
primarily to the development of a new property management system and the
installation of new financial systems. Capital expenditures in prior years
include amounts for computer hardware, reservation systems and European hotel
capital improvements.

On October 15, 1997, the Company entered into a five-year $300 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 $150
million, $50 million of which is available in foreign currency borrowings. At
the time of the Distribution, the Company borrowed $150 million under the term
loan and $140 million under the revolving credit facility, the proceeds of which
were used to fund the $115 million Sunburst note and to refinance existing
indebtedness. As of December 31, 1998, the Company had $135 million of term
loans outstanding and $37 million of revolving loans. The term loan is payable
over five years, $22.5 million of which is due in 1999. The credit facility
includes customary financial and other covenants that require the maintenance of
certain ratios including maximum leverage, minimum net worth and interest
coverage and restrict the Company's ability to make certain investments,
repurchase stock, incur debt and dispose of assets. At the Company's option, the
interest rate may be based on LIBOR, a certificate of deposit rate or an
alternate base rate (as defined), plus a facility fee percentage. The rate is
determined based on the Company's consolidated leverage ratio at the time of
borrowing.

On May 1, 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 $300
million revolving credit facility.

As of March 12, 1999, the Company has repurchased 5.4 million shares of its
common stock at a total cost of $74.1 million. The Company has authorization
from its Board of Directors to repurchase up to an additional 3.3 million
shares. As of March 12, 1999, there were 55.4 million total common shares
outstanding (a weighted average of 56.1 million).

The Company has entered into interest rate swap agreements with a notional
amount of $115 million at December 31, 1998, 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 interest rate
swap agreements is accrued as interest rates change and is recognized as an
adjustment to interest expense. On average, the interest rate swap agreements
have a life of one and one-half years with a fixed rate of 5.85% and a variable
rate at December 31, 1998 of 5.07%. As of December 31, 1998, the interest rate
swap agreements have a fair market valuation of approximately $(2.8 million).

25
<PAGE>

Management's Discussion & Analysis

Choice Hotels International, Inc. and Subsidiaries

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

YEAR 2000 COMPLIANCE

The Company is engaged in an ongoing effort to evaluate and remediate the Year
2000 computer problem shared by virtually all companies and businesses. As part
of this effort, a cross-functional Year 2000 Compliance Committee was
established to manage and supervise the efforts to become compliant and a Year
2000 action plan has been developed. The Company has completed the first three
phases of the plan, which include (i) making the Company's internal
organizations aware of the Year 2000 issue and assigning responsibility
internally, (ii) inventorying and initial testing of its proprietary software
and (iii) inventorying and testing secondary internal systems (e.g. employee
PCs). The Company is in the process of completing the remaining phases which
include: (i) assessing the risk from third party vendors and franchisees (ii)
contingency planning, and (iii) educating the franchise community. Throughout
the process, remedial actions have been or will be taken as warranted.

The Company's exposure to potential Year 2000 problems exists in two general
areas: technological operations in the sole control of the Company, and
technological operations dependent in some way on one or more third parties.
With respect to the Company's internal systems, it has conducted Year 2000
compliance testing on all of its proprietary software, including its
reservations and reservations support systems, its franchise support system and
its franchisee property management support systems. The tests have indicated
that, except for two DOS based systems, the proprietary software is Year 2000
compliant. The DOS version of ChoiceLINKS is not Year 2000 compliant and the DOS
version of the Company's property management system is only compliant through
December 31, 2000. The Company has communicated this to franchisees using these
systems and has recommended that they migrate to the Windows based versions of
these systems. The Company has also been in the process of replacing its
hardware platforms for these systems and a number of smaller support systems and
has kept them updated so that by the end of 1998, all of the Company's large
system computers are no more than eighteen months old. Based on manufacturers
specifications, the Company believes that these new hardware platforms are Year
2000 compliant. However, the company will have to update the operating systems
for several of its servers.

The Company has completed its process of conducting an inventory of third party
software, including PC operating systems and word processing and other
commercial software. The inventory did not disclose any material compliance
issues.

The Year 2000 Compliance Committee is currently identifying third party vendors
and service providers whose non-compliant systems could have a material impact
on the Company and undertaking an assessment as to such parties' compliant
status. These parties include airline global distribution systems (GDS), utility
providers, telephone service providers, banks and data processing services. The
GDS companies, which provide databases through which travel agents can book
hotel rooms, have assured the Company in writing that they are compliant and the
Company has conducted tests with three of the four major GDS companies. The Year
2000 Compliance Committee is in the process of assessing other third parties as
to their compliance and the consequences in the event they are not compliant. As
of February 1999, the Company has received responses from approximately one-half
of its vendors. Such vendors have indicated that they are, or expect to be, Year
2000 compliant. Throughout 1999, the committee will continue to seek and assess
responses from all of its material vendors.

As of February 1999, the Company has devised contingency plans for its Phoenix,
Arizona reservation center. These plans include access to alternative power
sources and insuring the availability of key employees. Contingency plans for
the Silver Spring, Maryland corporate headquarters and other Company locations
will be developed throughout the second and third quarters of 1999.

Costs of addressing potential Year 2000 problems have not been material to date.
The value of employee time devoted to testing and development has been
approximately $200,000. Total costs for replacement of hardware and operating
systems are expected to

26
<PAGE>

Management's Discussion & Analysis

Choice Hotels International, Inc. and Subsidiaries

be approximately $700,000. However, these replacements (as well as replacements
undertaken in prior years) are being implemented primarily as part of the
Company's ongoing technology updating, rather than specifically for Year 2000
compliance reasons. Based upon preliminary information gathered to date, Year
2000 compliance costs are not currently expected to have a material adverse
impact on the Company's financial position, results of operations or cash flows.
However, if the Company, its vendors or franchisees are unable to resolve such
Year 2000 issues in a timely manner, it could result in a material financial
risk, including loss of revenue, substantial unanticipated costs and service
interruptions.

The Company is not in a position to guarantee the performance of others with
respect to their Year 2000 compliance or predict whether any of the assurances
that others provide regarding Year 2000 compliance may prove later to be
inaccurate or overly optimistic.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

The Company adopted SFAS No. 130, "Reporting Comprehensive Income," and SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information" in
Calendar 1998. The adoption of these pronouncements required the Company to make
certain additional disclosures.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
Accounting for Derivative Instruments and Hedging Activities which requires
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 nature of the
derivative. Implementation of SFAS No. 133 is required for Fiscal year 2000. The
Company does not expect SFAS No. 133 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," contain forward-looking
information that involves risk and uncertainties. Actual future results and
trends may differ materially depending on a variety of factors discussed in the
"Risk Factors" section included in the Company's Form 10 Registration Statement
and various Form 8-K filings, including the nature and extent of future
competition, and political, economic and demographic developments in countries
where the Company does business or may do business in the future. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. The Company undertakes no obligation to revise
or update these forward-looking statements.

27
<PAGE>

Report of Independent Public Accountants

Choice Hotels International, Inc. and Subsidiaries

TO CHOICE HOTELS INTERNATIONAL, INC.

We have audited the accompanying consolidated balance sheets of Choice Hotels
International, Inc. and subsidiaries, as defined under "Basis of Presentation"
in the Notes to Consolidated Financial Statements, as of December 31, 1998 and
December 31, 1997, and the related consolidated statements of income and cash
flows for the year ended December 31, 1998, the seven months ended December 31,
1997 and for each of the two fiscal years in the period ended May 31, 1997, and
the consolidated statement of shareholders' equity and comprehensive income for
the period from October 15, 1997 (inception) to December 31, 1997 and the year
ended December 31, 1998. 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 generally accepted auditing
standards. 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 consolidated financial position of Choice Hotels
International, Inc. and subsidiaries as of December 31, 1998 and December 31,
1997, and the consolidated results of their operations and their consolidated
cash flows for the year ended December 31, 1998 and the seven months ended
December 31, 1997, and each of the two fiscal years in the period ended May 31,
1997, and the consolidated statements of shareholders' equity and comprehensive
income for the period from October 15, 1997 (inception) to December 31, 1997 and
the year ended December 31, 1998, in conformity with generally accepted
accounting principles.

/s/ Arthur Andersen LLP
Arthur Andersen LLP
Washington, D.C.,
January 29, 1999

28
<PAGE>

Consolidated Statements of Income

Choice Hotels International, Inc. and Subsidiaries

<TABLE>
<CAPTION>
Year ended Seven months ended Fiscal years ended
(In thousands) December 31, December 31, May 31,
1998 1997 1997 1996
---------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Royalty fees................................................ $ 115,369 $ 70,308 $ 97,215 $ 87,994
Product sales............................................... 21,256 13,524 23,643 21,570
European hotel operations................................... 1,098 10,541 17,737 19,609
Initial franchise fees and relicensing fees................. 16,571 8,597 16,802 15,578
Partner services revenue and other.......................... 11,081 4,869 12,642 6,997
---------------------------------------------------------
Total revenues......................................... 165,375 107,839 168,039 151,748

OPERATING EXPENSES
Selling, general and administrative......................... 50,670 29,454 51,102 45,196
Product cost of sales....................................... 19,736 13,031 22,766 20,709
European hotel operations................................... 1,133 9,203 16,166 17,521
Depreciation and amortization............................... 7,116 3,977 7,643 9,179
Provision for asset impairment.............................. -- -- -- 24,760
---------------------------------------------------------
Total operating expenses............................... 78,655 55,665 97,677 117,365
---------------------------------------------------------
Operating income............................................ 86,720 52,174 70,362 34,383
---------------------------------------------------------

OTHER
Minority interest........................................... -- -- -- 1,532
Gain on sale of stock....................................... (2,370) -- -- --
Interest on notes payable to Manor Care..................... -- -- 7,083 7,083
Interest expense and other.................................. 19,326 8,788 4,647 4,791
Interest and dividend income (including interest
income on Sunburst Note of $10.4 million and
$2.7 million for the year ended December 31, 1998 and
the seven months ended December 31, 1997, respectively).. (12,636) (2,997) (943) --
---------------------------------------------------------
Total other............................................ 4,320 5,791 10,787 13,406
---------------------------------------------------------

Income before income taxes and extraordinary item.............. 82,400 46,383 59,575 20,977
Income taxes................................................... (34,327) (19,096) (24,845) (9,313)
---------------------------------------------------------
Net income before extraordinary item........................... $ 48,073 $ 27,287 $ 34,730 $ 11,664

Extraordinary gain on early extinguishment of debt
(net of taxes of $4,532)..................................... 7,232 -- -- --
---------------------------------------------------------
Net income..................................................... $ 55,305 $ 27,287 $ 34,730 $ 11,664
---------------------------------------------------------
Weighted average shares outstanding............................ 58,717 59,798 62,680 62,628
---------------------------------------------------------
Diluted shares outstanding..................................... 59,548 61,300 62,680 62,628
---------------------------------------------------------
Basic EPS:
Income before extraordinary item............................... $0.82 $0.46 $0.55 $0.19
Extraordinary item............................................. 0.12 -- -- --
---------------------------------------------------------
Net income..................................................... $0.94 $0.46 $0.55 $0.19
---------------------------------------------------------
Diluted EPS:
Income before extraordinary item............................... $0.81 $0.45 $0.55 $0.19
Extraordinary item............................................. 0.12 -- -- --
---------------------------------------------------------
Net income..................................................... $0.93 $0.45 $0.55 $0.19
=========================================================
</TABLE>

See notes to consolidated statements.

29
<PAGE>

Consolidated Balance Sheets

Choice Hotels International, Inc. and Subsidiaries

<TABLE>
<CAPTION>
As of (In thousands) December 31, December 31,
1998 1997
----------------------------
<S> <C> <C>
ASSETS

Current assets
Cash and cash
equivalents..................................................................... $ 1,692 $ 10,282
Receivables (net of allowance for doubtful accounts of $8,082,
and $7,608, respectively)..................................................... 28,117 24,278
Income taxes receivable......................................................... 5,427 1,242
Receivable from Sunburst Hospitality............................................ -- 25,066
Other current assets............................................................ 425 3,442
----------------------------
Total current assets.......................................................... 35,661 64,310
Property and equipment, net........................................................ 32,845 37,040
Goodwill, net...................................................................... 66,749 68,792
Franchise rights, net.............................................................. 44,981 48,819
Investment in Friendly Hotels, PLC................................................. 45,139 17,581
Assets held for sale............................................................... -- 10,752
Amounts due from marketing and reservation funds................................... 23,364 13,087
Other assets....................................................................... 21,637 8,567
Note receivable from Sunburst Hospitality.......................................... 127,849 117,447
----------------------------
TOTAL ASSETS.................................................................. $398,225 $ 386,395
============================

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Current portion of long term debt............................................... $ 22,646 $ 15,041
Accounts payable................................................................ 16,216 26,452
Accrued expenses................................................................ 19,606 20,702
Income taxes payable............................................................ -- 6,007
----------------------------
Total current liabilities..................................................... 58,468 68,202
Long term debt..................................................................... 256,564 267,780
Deferred income taxes ($19,569 and $0 respectively)
and other liabilities............................................................ 26,683 1,155
----------------------------
Total liabilities............................................................. 341,715 337,137
============================

SHAREHOLDERS' EQUITY

Common stock, $ .01 par value, 160,000,000 shares authorized;
56,726,917 and 59,828,878 shares issued and outstanding at
December 31, 1998 and 1997, respectively......................................... 607 598
Additional paid-in-capital......................................................... 43,432 47,907
Accumulated other comprehensive income (loss)...................................... 2,112 (8,316)
Treasury stock..................................................................... (54,204) (189)
Retained earnings.................................................................. 64,563 9,258
----------------------------
Total shareholders' equity.................................................... 56,510 49,258
----------------------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................... $398,225 $ 386,395
============================
</TABLE>

See notes to consolidated statements.

30
<PAGE>

Consolidated Statements of Cash Flows

Choice Hotels International, Inc. and Subsidiaries

Net income........................................................... $ 55,305 $ 27,287 $ 34,730 $ 11,664
Reconciliation of net income to net cash provided by operating
activities:
Depreciation and amortization...................................... 12,544 6,159 10,438 11,839
Provision for bad debts............................................ 1,473 2,274 2,238 685
Increase (decrease) in deferred taxes.............................. 14,852 (4,828) 3,171 (13,527)
Non cash interest and dividend income.............................. (12,364) (2,997) (943) --
Extraordinary gain on early extinguishment of debt................. (11,964) -- -- --
Provision for asset impairment..................................... -- -- -- 24,760
Changes in assets and liabilities:
Receivables.................................................... (4,311) (10,606) (4,835) (7,533)
Prepaid expenses and other current assets...................... (1,849) 2,403 1,615 (990)
Current liabilities............................................ (6,180) 11,226 (2,145) 4,050
Income taxes payable/receivable................................ (3,411) 2,689 1,061 (265)
Other liabilities.............................................. -- -- 175 2,059
-----------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 44,095 33,607 45,505 32,742
-----------------------------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES

Investment in property and equipment................................. (12,254) (7,329) (10,630) (6,506)
Purchase of minority interest........................................ -- -- (2,494) (55,269)
Investment in Friendly Hotels, PLC................................... -- -- -- (17,069)
Repayments from (advances to) Sunburst Hospitality................... 8,145 (25,066) -- --
Note receivable from Sunburst Hospitality............................ -- (115,000) -- --
Other items, net..................................................... (10,090) (2,344) (3,804) 345
-----------------------------------------------------------
NET CASH UTILIZED IN INVESTING ACTIVITIES................... (14,199) (149,739) (16,928) (78,499)
-----------------------------------------------------------

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from mortgages and other long-term debt..................... 194,901 236,509 31,107 17,296
Principal payments of debt........................................... (184,300) (78,851) (51,260) (350)
Purchase of treasury stock........................................... (54,015) (189) -- --
Cash transfers (to) from Parent, net................................. -- (35,222) (8,069) 31,567
Proceeds from issuance of common stock............................... 4,928 -- -- --
-----------------------------------------------------------
NET CASH PROVIDED BY (UTILIZED IN) FINANCING ACTIVITIES..... (38,486) 122,247 (28,222) 48,513
-----------------------------------------------------------

NET CHANGE IN CASH AND CASH EQUIVALENTS.............................. (8,590) 6,115 355 2,756
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..................... 10,282 4,167 3,812 1,056
-----------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................... $ 1,692 $ 10,282 $ 4,167 $ 3,812
-----------------------------------------------------------
</TABLE>

See notes to consolidated statements.

31
<PAGE>

Consolidated Statements Of Shareholders' Equity And Comprehensive Income

Choice Hotels International, Inc. and Subsidiaries

<TABLE>
<CAPTION>
(In thousands, except share amounts) Accumulated
Other
Common Stock Additional Comprehensive
Shares Amount Paid-in-Capital Income (Loss)
==========================================================
<S> <C> <C> <C> <C>
Initial capitalization - October 15, 1997 .................... 59,767,716 598 $ 48,064 $ (8,662)
Comprehensive income
Net income ................................................ -- -- -- --

Other comprehensive income, net of tax
Foreign currency translation adjustment ................... -- -- -- 346
Comprehensive income ......................................... -- -- -- --

Exercise of stock options/grants, net ........................ 71,876 -- (157) --
Treasury purchases ........................................... (10,714) -- -- --
Transfers of net income to Sunburst prior to
the distribution ........................................... -- -- -- --
----------------------------------------------------------
Balance as of December 31, 1997 .............................. 59,828,878 598 $ 47,907 $ (8,316)
==========================================================
Comprehensive income
Net income ................................................ -- -- -- --

Other comprehensive income, net of tax
Foreign currency translation adjustments, net -- -- -- --
Unrealized loss on securities, net of
reclassification adjustment (see notes) -- -- -- --
Other comprehensive income ................................ -- -- -- 10,428

Comprehensive income ......................................... -- -- -- --
Exercise of stock options/grants, net ........................ 827,439 9 5,665 --

Treasury purchases, net ...................................... (3,929,400) -- -- --
Purchase of MainStay brand option
from Sunburst .............................................. -- -- (10,140) --
----------------------------------------------------------
Balance as of December 31, 1998 .............................. 56,726,917 607 $ 43,432 $ 2,112
==========================================================

<CAPTION>
Treasury Comprehensive Retained
Stock Income Earnings Total
=============================================================
<S> <C> <C> <C> <C>
Initial capitalization - October 15, 1997 ................. $ -- $ -- $ 40,000
Comprehensive income
Net income ............................................. -- $ 27,287 27,287 27,287

Other comprehensive income, net of tax
Foreign currency translation
adjustment ............................................. -- 346 -- 346
--------
Comprehensive income ...................................... -- $ 27,633 -- --
========
Exercise of stock options/grants, net ..................... -- -- (157)
Treasury purchases ........................................
Transfers of net income to Sunburst prior to (189) -- (189)
the distribution ........................................
-- $(18,029) (18,029)
------------------------------------------------------------

Balance as of December 31, 1997 ........................... $ (189) $ 9,258 $ 49,258
============================================================
Comprehensive income
Net income ............................................. -- $ 55,305 $ 55,305 55,305

Other comprehensive income, net of tax
Foreign currency translation adjustments, net -- 10,892 -- (18,029)
Unrealized loss on securities, net of
reclassification adjustment (see notes) -- (464) -- (464)
--------
Other comprehensive income ............................. -- 10,428 -- --
--------

Comprehensive income ...................................... -- $ 65,733 -- --
========
Exercise of stock options/grants, net ..................... -- 5,674
--
Treasury purchases, net ................................... (54,015) -- (54,015)
Purchase of MainStay brand option
from Sunburst ........................................... -- -- (10,140)
------------------------------------------------------------

Balance as of December 31, 1998 ........................... $(54,204) $ 64,563 $ 56,510
============================================================
</TABLE>

See notes to consolidated statements.

32
<PAGE>

Notes To Consolidated Financial Statements

Choice Hotels International, Inc. and Subsidiaries

BASIS OF PRESENTATION

On March 7, 1996, Manor Care, Inc. ("Manor Care") announced its intention to
proceed with the separation of its lodging business ("Choice Hotels Holdings,
Inc." or "Holdings") from its health care business via a spin-off of its lodging
business (the "Manor Care Distribution"). On September 30, 1996 the Board of
Directors of Manor Care declared a special dividend to its shareholders of one
share of common stock of Holdings for each share of Manor Care stock, and the
Board set the Record Date and the Distribution Date. The Manor Care Distribution
was made on November 1, 1996 to holders of record of Manor Care's Common Stock
on October 10, 1996. Choice Hotels International, Inc. (the "Company"), which
was a subsidiary of Manor Care became a wholly-owned subsidiary of Holdings.

The Manor Care Distribution separated the lodging and health care businesses of
Manor Care into two public corporations. The operations of Holdings consisted
principally of the hotel franchise operations and the owned and managed hotel
operations formerly conducted by Manor Care directly or through its subsidiaries
(the "Lodging Business").

On November 1, 1996, concurrent with the Manor Care Distribution, Holdings
changed its name from Choice Hotels Holdings, Inc. to Choice Hotels
International, Inc. ("CHI") and the Company changed its name to Choice Hotels
Franchising, Inc.

On April 29, 1997, CHI's Board of Directors announced its intention to separate
CHI's franchising business from its owned hotel business (referred to as the
"Sunburst Distribution"). On September 16, 1997, the Board of Directors and
shareholders of CHI approved the separation of the business via a spin-off of
the Company, along with CHI's European hotel and franchising operations, to its
shareholders. The Board set October 15, 1997 as the date of distribution and on
that date, CHI shareholders received one share in the Company (renamed "Choice
Hotels International, Inc." and referred to hereafter as the "Company") for
every share of CHI stock held on October 7, 1997 (the date of record).
Concurrent with the October 15, 1997 distribution date, CHI changed its name to
Sunburst Hospitality Corporation, (referred to hereafter as "Sunburst") and
effected a one-for-three reverse stock split of its common stock.

The Company is in the business of hotel franchising. As of December 31, 1998,
the Company had franchise agreements with 3,671 hotels open and 1,477 hotels
under development in 36 countries under the following brand names: Comfort,
Clarion, Sleep, Quality, Rodeway, Econo Lodge, and MainStay Suites.

The consolidated financial statements present the financial position, results of
operations and cash flows and equity of the Company as if it were formed as a
separate entity of its parent (Manor Care prior to Manor Care Distribution and
Sunburst prior to Sunburst Distribution) which conducted the hotel franchising
business and European hotel operations and as if the Company were a separate
company for all periods presented. The Parent's historical basis in the assets
and liabilities of the Company has been carried over to the consolidated
financial statements. All material intercompany transactions and balances
between the Company and its subsidiaries have been eliminated. Changes in the
Investments and advances from Parent represent the net income of the Company
plus the net change in transfers between the Company and Manor Care through
November 1, 1996 and Sunburst through October 15, 1997.

An analysis of the activity in the "Investments and advances from Parent"
account for the three years ended May 31, 1997 and the seven months ended
December 31, 1997 is as follows:

<TABLE>
<CAPTION>
(In thousands)
<S> <C>
----------------
Balance, May 31, 1995 ............................... $ (12,699)
Transfers from Parent, net .......................... 31,567
Net income .......................................... 11,664
----------------
Balance, May 31, 1996 ............................... 30,532
Transfers to Parent, net ............................ (8,069)
Net income .......................................... 34,730
----------------
Balance, May 31, 1997 ............................... 57,193
Net income from June 1, 1997
through October 15, 1997 ....................... 18,029
Transfers to Parent, net through
October 15, 1997 ............................... (35,222)
Initial capitalization .............................. (40,000)
----------------
Balance, October 15, 1997 ........................... $ 0
----------------
</TABLE>

33
<PAGE>

Notes To Consolidated Financial Statements

Choice Hotels International, Inc. and Subsidiaries

The average balance of the Investments and advances from Parent was $48.6
million, $43.9 million and $8.9 million for the seven months ended December 31,
1997 and the fiscal years ended May 31, 1997 and 1996, respectively.

RECLASSIFICATIONS

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

SIGNIFICANT ACCOUNTING POLICIES

FISCAL YEAR

During October 1997, the Company changed its fiscal year from a May 31 year end
to a December 31 year end.

ASSETS HELD FOR SALE

Assets held for sale by the Company are stated at the lower of cost or estimated
net realizable value.

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.

PROPERTY AND EQUIPMENT

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

<TABLE>
<CAPTION>
DECEMBER 31,
(In thousands) 1998 1997
<S> <C> <C>
---------------------
Land................................................. $ 1,603 $ 996
Facilities in progress............................... 1,600 --
Building and improvements............................ 8,023 18,238
Furniture, fixtures and equipment.................... 33,494 31,228
-------------------
44,720 50,462
Less: Accumulated depreciation....................... (11,875) (13,422)
-------------------
$ 32,845 $ 37,040
-------------------
</TABLE>

During 1998, approximately $1.7 million of fixed assets were eliminated in
conjunction with the termination of a capital lease obligation. (See Long Term
Debt and Notes Payable.)

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:

Building and improvements.................................. 10-40 years
Furniture, fixtures and equipment.......................... 3-20 years

GOODWILL

Goodwill primarily represents an allocation of the excess purchase price of the
stock of the Company over the recorded minority interest. Goodwill is amortized
on a straight-line basis over 40 years. Such amortization amounted to $2.0
million, $1.1 million, $1.9 million and $1.1 million for the year ended December
31, 1998, the seven months ended December 31, 1997, and the fiscal years ended
May 31, 1997 and 1996, respectively. Goodwill is net of accumulated amortization
of $8.1 million and $6.1 million at December 31, 1998 and 1997.

FRANCHISE RIGHTS

Franchise rights are intangible assets and represent an allocation in purchase
accounting for the value of long-term franchise contracts. The majority of the
balance results from the Econo Lodge and Rodeway acquisitions made in fiscal
year 1991. Franchise rights acquired are amortized over an average life of 15
years. Amortization expense for the year ended December 31, 1998 and the seven
months ended December 31, 1997, and the fiscal years ended May 31, 1997 and 1996
amounted to $3.8 million, $1.7 million, $2.9 million and $2.6 million,
respectively. Franchise rights are net of accumulated amortization of $19.5
million and $15.7 million at December 31, 1998 and 1997.

The Company periodically assesses the amortization lives of its franchise
rights. Effective January 1, 1998, the Company changed its estimate of the
useful life of Econo Lodge franchise rights to a 17 year period and Rodeway
franchise rights to a 3 year period to more closely match the remaining
estimated contract lives of franchise contracts acquired in 1991. The effect of
this change in estimate was to increase depreciation and amortization expense by
approximately $900,000 and decrease net income by $0.01 per dilutive share for
the year ended December 31, 1998.

DEFERRED FINANCING COSTS

Debt financing costs are deferred and amortized, using the interest method, over
the term of the related debt.

34
<PAGE>

Notes To Consolidated Financial Statements

Choice Hotels International, Inc. and Subsidiaries

SELF-INSURANCE PROGRAM
Subsequent to the Manor Care Distribution, the Company maintained its own self-
insurance program for certain levels of general and professional liability,
automobile liability and worker's compensation coverage. The estimated costs of
these programs were accrued at present values based on actuarial projections for
known and anticipated claims. As of June 1, 1997, the Company was no longer self
insured.

Prior to the Manor Care Distribution, the Company participated in Manor Care's
self-insurance program for certain levels of general and professional liability,
automobile liability and workers' compensation coverage. The estimated costs of
these programs are accrued at present values based on actuarial projections for
known and anticipated claims. All accrued self-insurance costs through November
1, 1996 were assumed by Manor Care, and have been treated as paid to Manor Care,
and as such, amounts paid to Manor Care up to November 1, 1996 have been charged
directly to Investments and advances from Parent.

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, 10, or 15 years. 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. Royalty
fees, primarily based on gross room revenues of each franchisee, are recorded
when earned. Reserves for uncollectible accounts are charged to bad debt expense
and 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. These fees, which are based on a
percentage of the franchisees' gross room revenues, are used exclusively to
reimburse the Company 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 reservation
and marketing fees it collects from franchisees in accordance with the franchise
agreements; as such, no income or loss to the Company is generated. During the
second quarter of 1998, the Company changed its presentation of marketing and
reservation fees such that the fees collected and associated expenses are
reported net. All prior periods have been reclassified to conform to the new
presentation.

The total marketing and reservation fees received by the Company (previously
reported as revenue) for the year ended December 31, 1998, the seven months
ended December 31, 1997, and the fiscal years ended May 31, 1997 and 1996
amounted to $127.4 million, $72.3 million, $104.2 million and $98.9 million,
respectively. Depreciation and amortization charged to reservation and marketing
expenses for the year ended December 31, 1998, the seven months ended December
31, 1997, and the fiscal years ended May 31, 1997 and 1996 amounted to $5.7
million, $2.2 million, $2.8 million and $2.7 million, respectively. 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. As of December 31, 1998 the Company's
balance sheet includes a receivable in amounts due from marketing and
reservation funds of $13.4 million related to shortfalls in the marketing ($7.8
million) and reservation ($5.6 million) funds. As of December 31, 1997, the
Company's balance sheet includes a receivable in amounts due from marketing and
reservation funds of $5.2 million related to a shortfall in the marketing fund
and a current liability in accounts payable of $4.5 million related to excess
monies in the reservation fund. The Company expects to be able to recover these
receivables through future marketing and reservation fees.

IMPAIRMENT POLICY

The Company evaluates the recoverability of long lived assets, including
franchise rights and goodwill, 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.

35
<PAGE>

Notes To Consolidated Financial Statements

Choice Hotels International, Inc. and Subsidiaries

CAPITALIZATION POLICIES

Major renovations and replacements 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 taken into income. Maintenance, repairs and minor replacements are
charged to expense.

INTEREST RATE HEDGES

The Company has entered into interest rate swap agreements with a notional
amount of $115 million at December 31, 1998 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 interest rate
swap agreements is accrued as interest rates change and is recognized as an
adjustment to interest expense. On average at December 31, 1998, the interest
rate swap agreements have a life of one and one-half years with a fixed rate of
5.85% and variable rate of 5.07%. As of December 31, 1998 and 1997, the interest
rate swap agreements have a fair market valuation of approximately $(2.8
million) and $(0.5 million), respectively.

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 year ended December 31, 1998, the seven months ended December 31, 1997
and the fiscal years ended May 31, 1997 and 1996 were $5.8 million, exclusive of
$2.1 million of foreign dividends; $16.2 million, exclusive of $0.6 million of
foreign dividends; $27.5 million and $29.9 million, respectively. The Company's
foreign operations had net income (loss) of $2.3 million, $0.3 million, $(1.8
million) and $(19.4 million) for the year ended December 31, 1998, the seven
months ended December 31, 1997 and the fiscal years ended May 31, 1997 and 1996.
The majority of the revenues and assets of foreign operations relate to the
Company's European business operations (see "Acquisitions and Divestitures").

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, 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 these estimates.

EARNINGS PER SHARE

The Company adopted Financial Accounting Standards Board Statement ("SFAS") No.
128, "Earnings Per Share" in 1997. 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>
Seven months
Year ended ended
December 31, December 31,
(In millions, except per share amounts) 1998 1997
---------------------------
<S> <C> <C>
Computation of Basic Earnings Per Share:
Net income..................................... $55.3 $27.3
Weighted average shares outstanding............ 58.7 59.8
Basic earnings per share....................... $0.94 $0.46
Computation of Diluted Earnings Per Share:
Net income for diluted earnings per share...... $55.3 $27.3
Weighted average shares outstanding............ 58.7 59.8
Effect of Dilutive Securities
Employee stock option plan..................... 0.8 1.5
--------------------
Shares for diluted earnings per share.......... 59.5 61.3
--------------------
Diluted earning per share...................... $0.93 $0.45
====================
</TABLE>

The effect of dilutive securities is computed using the treasury stock method
and average market prices during the period. In 1998 the Company excluded
497,864 antidilutive options from the computation of diluted earnings per share.
The Company had no shares outstanding to the public or material dilutive
securities prior to the Sunburst Distribution and therefore, no reconciliation
has been provided for periods prior to December 31, 1997.

The weighted average number of common shares outstanding is based on the
Company's weighted average number of outstanding common shares for the period
October 15, 1997 through December 31, 1998, Sunburst's weighted average number
of outstanding common shares for the period November 1, 1996 through October 15,
1997 and Manor Care's weighted average number of outstanding common shares prior
to November 1, 1996.

COMPREHENSIVE INCOME

As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which establishes new rules for the reporting and display
of comprehensive income and its

36
<PAGE>

Notes To Consolidated Financial Statements

Choice Hotels International, Inc. and Subsidiaries

components; however, the adoption of SFAS 130 had no impact on the Company's net
income or shareholders' equity. SFAS 130 requires unrealized gains or losses on
the Company's available-for-sale securities and the foreign currency translation
adjustments, which prior to adoption were reported separately in shareholders'
equity, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS 130.

The components of total accumulated other comprehensive income in the balance
sheet are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
(In thousands) 1998 1997
---------------------------
<S> <C> <C>
Unrealized losses on available
for sale securities............................ $ (464) $ --
Foreign currency
translation adjustment......................... 2,576 (8,316)
---------------------------
Total accumulated other
comprehensive income (loss).................... $ 2,112 $ (8,316)
---------------------------
</TABLE>

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

<TABLE>
<CAPTION>
Amount Before Income Tax Amount
(In thousands) Taxes (Expense)/Benefit Net of Taxes
---------------------------------------------------
<S> <C> <C> <C>
Calendar year 1998
Net unrealized losses $(1,450) $ 986 $ (464)
Foreign currency
translation adjustments, net 9,972 920 10,892
------------------------------------------------
Total other
comprehensive income $ 8,522 $1,906 $10,428
------------------------------------------------
Fiscal year 1997
Foreign currency
translation adjustments $(1,298) $ -- $(1,298)
------------------------------------------------
Total other
comprehensive loss $(1,298) $ -- $(1,298)
------------------------------------------------
</TABLE>

Below represents the detail of other comprehensive income:

<TABLE>
<CAPTION>
1998
----
<S> <C>
Foreign currency translation adjustments........................ $ 2,760
Plus: reclassification of loss on liquidation
of foreign subsidiaries....................................... 8,132
Net foreign currency translation adjustments.................... $10,892
-------
Unrealized holding gains arising
during the period............................................. $ 920
Less: reclassification adjustments for gains
included in net income.......................................... (1,384)
-------
Net unrealized holding losses arising
during the period............................................... $ (464)
-------
</TABLE>

INCOME TAXES

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

Income before income taxes for the year ended December 31, 1998, the period
beginning June 1, 1997 and ending December 31, 1997 ("December 1997") and the
fiscal years ended May 31, 1997 and 1996 were derived from the following:

<TABLE>
<CAPTION>
(In thousands) CY 1998 December 1997 FY 1997 FY 1996
==========================================
<S> <C> <C> <C> <C>
Income before
income taxes:
Domestic operations $82,400 $45,866 $62,641 $ 52,801
Foreign operations -- 517 (3,066) (31,824)
-------------------------------------------
Income
before income taxes $82,400 $46,383 $59,575 $ 20,977
===========================================
</TABLE>

The provision for income taxes follows for the year ended December 31, 1998, the
period beginning June 1, 1997 and ended December 31, 1997 ("December 1997") and
the fiscal years ended May 31, 1997 and 1996:

<TABLE>
<CAPTION>
(In thousands) CY 1998 December 1997 FY 1997 FY 1996
----------------------------------------------
<S> <C> <C> <C> <C>
Current tax (benefit)
expense:
Federal $ 25,594 $15,742 $19,421 $20,097
Federal (benefit)
expense of foreign
operations (9,674) 204 (1,213) (2,792)
State 3,482 3,475 3,950 3,754

Deferred tax
(benefit) expense:
Federal 2,482 (223) 2,293 125
Federal (benefit)
expense of foreign
operations 9,938 -- -- (9,778)

State 2,505 (102) 394 (2,093)
-----------------------------------------------
$ 34,327 $19,096 $24,845 $ 9,313
===============================================
</TABLE>

37
<PAGE>

Notes to Consolidated Financial Statements

Choice Hotels International, Inc. and Subsidiaries

Deferred tax assets (liabilities) are comprised of the following as of December
31.

(In thousands) 1998 1997
========================================
Depreciation and
amortization $(16,013) $(3,184)
Prepaid expenses (3,975) (1,484)
Other (5,316) (2,458)
----------------------------------------
Gross deferred tax
liabilities (25,304) (7,126)
----------------------------------------

Foreign operations 2,211 2,843
Accrued expenses 5,035 5,283
Net operating losses 187 398
Other 1,860 1,001
----------------------------------------
Gross deferred tax
assets 9,293 9,525
----------------------------------------
Net deferred tax
asset (liability) $(16,011) $ 2,399
========================================

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

CY 1998 December 1997 FY 1997 FY 1996
=================================================
(In thousands, except Federal income tax rate)
Federal income
tax rate 35% 35% 35% 35%
Federal taxes at
statutory rate $28,856 $16,234 $20,853 $7,345
State income taxes,
net of federal tax benefit 3,892 2,192 2,824 1,080
Minority interest -- -- -- 536
Other 1,579 670 1,168 352
-------------------------------------------------
Income tax expense $34,327 $19,096 $24,845 $9,313
=================================================

Cash paid for state income taxes was $3,398,000; $197,000; and $1,302,000 for
the year ended December 31, 1998, the seven months ended December 31, 1997 and
the fiscal year ended May 31, 1997, respectively. Federal income taxes were
paid by Manor Care for the period ending October 31, 1996. Federal income taxes
were paid by Sunburst Hospitality Corporation for the period beginning November
1, 1996 through May 31, 1997. The Company paid $18,880,000 in income taxes
for the calendar year ended December 31, 1998, and $9,060,000 for the short
period beginning June 1, 1997 and ending December 31, 1997.

Consistent with the existing Company tax-sharing policy, current Federal
provision amounts prior to October 15, 1997 have been treated as paid to, or
received from, the Company, and as such, there are no current tax provision
balances due to the Sunburst Hospitality Corporation at May 31, 1997.
Differences between amounts paid to or received from Sunburst Hospitality
Corporation and the Company have been charged or credited directly to
Investments and advances from Parent. As part of the tax-sharing agreement, the
current taxes payable as of October 15, 1997 were assumed by Sunburst.

ACCRUED EXPENSES

Accrued expenses were as follows as of December 31:

(In thousands) 1998 1997
-----------------------
Accrued salaries & benefits $ 10,152 $ 8,495
Accrued interest 3,302 2,026
Reservation fund payable -- 4,542
Other 6,152 5,639
-----------------------
Total $ 19,606 $ 20,702
=======================

LONG TERM DEBT AND NOTES PAYABLE

As of December 31, debt consisted of the following:

(In thousands) 1998 1997
---------------------
$300 million competitive advance
and multi-currency revolving credit
facility with an average rate of
5.91% and 6.60% at December
31, 1998 and 1997, respectively $172,000 $267,600

$100 million senior note offering
with an average rate of 7.22% at
December 31, 1998 99,382 --

$15 million line of credit with a rate
of 6.1% at December 31, 1998 6,200 --

Capital lease obligation -- 13,469

Other notes with an average rate
of 5.85% and 5.6% at December
31, 1998 and 1997 1,628 1,752
---------------------
Total indebtedness $279,210 $282,821
=====================

38
<PAGE>

Notes to Consolidated Financial Statements

Choice Hotels International, Inc. and Subsidiaries

Maturities of debt as of December 31, 1998 were as follows:

YEAR (In thousands)
1999........................................ $ 22,646
2000........................................ 32,646
2001........................................ 42,646
2002........................................ 74,646
2003........................................ 146
Thereafter.................................. 106,480
--------
Total....................................... $279,210
========

On October 15, 1997, the Company entered into a $300 million competitive advance
and multi-currency revolving credit facility (the "Credit Facility") provided by
a group of 14 banks. The Credit Facility provides for a term loan of $150
million and a revolving credit facility of $150 million, $50 million of which is
available for borrowings in foreign currencies. The credit facility includes
customary financial and other covenants that require the maintenance of certain
ratios including maximum leverage, minimum net worth and interest coverage and
restricts the Company's ability to make certain investments, repurchase stock,
incur debt and dispose of assets. The term loan is payable over five years,
$22.5 million of which is due in 1999. Borrowings under the facility are, at the
option of the borrower, at one of several rates including LIBOR plus 20.0 to
87.5 basis points, based upon a defined financial ratio 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
facility. The Credit Facility requires 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. The Credit Facility will terminate on October 15, 2002.

In connection with the Sunburst Distribution, the Company borrowed $115 million
under its Credit Facility in order to fund a Subordinated Term Note to Sunburst.
The Subordinated Term Note of $115 million accrues interest monthly at an
initial simple rate of 11% per annum through October 14, 2000. In connection
with the amendment of the strategic alliance agreement discussed in
"Transactions with Sunburst," effective October 15, 2000, interest shall accrue
at a rate of 11% per annum compounded daily. The Company will implement this
amendment prospectively beginning January 1, 1999, recognizing interest on the
outstanding principal and accrued interest amounts at an effective rate of
10.58%. The note is payable in full, along with accrued interest, on October 15,
2002. Total interest accrued as of December 31, 1998 and 1997 was $12.8 million
and $2.4 million, respectively.

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, 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 $300 million revolving credit facility. Total interest expense of
$4.8 million was recorded in the consolidated statements of income for the year
ended December 31, 1998.

During April 1998, the Company obtained a revolving line of credit for $15
million in order to finance short term working capital requirements and other
short term general corporate goals. The line of credit is due to expire on
April 30, 1999 and bears interest at floating rates. Interest accrues monthly
on the outstanding balance. The line of credit contains essentially the same
covenants as the Credit Facility and is prepayable without penalty.

Cash paid for interest was $19.2 million, $7.9 million, $11.6 million and $11.8
million for the year ended December 31, 1998, the seven months ended December
31, 1997, and the fiscal years ended May 31, 1997 and 1996, respectively.

LEASES

Rental expense under non-cancelable operating leases was approximately $1.7
million, $181,000, $171,000 and $231,000 for the year ended December 31, 1998,
the seven months ended December 31, 1997 and the fiscal years ended May 31, 1997
and 1996, respectively. The Company paid office rent of $977,500 and $1.1
million to Sunburst for the year ended December 31, 1998 and the seven months
ended December 31, 1997 based on the portion of total space occupied by the
Company. Future minimum lease payments are as follows:

YEAR (In thousands)
1999........................................ $ 2,462
2000........................................ 2,499
2001........................................ 2,530
2002........................................ 2,489
2003........................................ 2,250
Thereafter.................................. --
-------
Total....................................... $12,230
=======

39
<PAGE>

Notes to Consolidated Financial Statements

Choice Hotels International, Inc. and Subsidiaries

During 1998, the Company recorded an extraordinary gain for the early
extinguishment of a capitalized lease obligation. The Company retired $13.7
million in debt and removed related assets of $1.7 million from the consolidated
balance sheets. Accordingly, an extraordinary gain of $7.2 million was
recognized, after income tax benefits of $4.5 million, or $0.12 per diluted
share.

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

ACQUISITIONS AND DIVESTITURES

On May 31, 1995, the Company repurchased one-half of the 11% interest held by
its management in the Company. Approximately $19.8 million was allocated to
goodwill; the purchase cost of $27.4 million was paid in June and July 1995. On
May 31, 1996, the Company repurchased the remaining 5.5% minority interest in
the Company for $27.9 million. Approximately $26.4 million was allocated to
goodwill.

On May 31, 1996, the Company invested approximately $17.1 million in the capital
stock of Friendly Hotels, PLC ("Friendly"). In exchange for the $17.1 million
investment, the Company received 750,000 shares of common stock and 10 million
newly issued immediately convertible preferred shares. In addition, the Company
granted to Friendly a Master Franchise Agreement for the United Kingdom and
Ireland in exchange for 333,333 additional shares of common stock. The
preferred shares carry a 5.75% dividend payable in cash or in stock, at the
Company's option. The dividend accrues annually with the first dividend paid
on the earlier of the third anniversary of completion or on a conversion date.
The proceeds of the investment received by Friendly were used to support the
construction of 10 Quality or Comfort hotels. As a condition to the investment,
the Company has the right to appoint three directors to the board of Friendly.

In January 1998, the Company completed a transaction with Friendly in which
Friendly would assume the master franchise rights for Choice's Comfort, Quality
and Clarion brand hotels throughout Europe (with the exception of Scandinavia)
for the next 10 years. In exchange, the Company will receive from Friendly $8.0
million, payable in eight equal annual installments. As of December 31, 1998,
the Company had received $1.0 million. The master franchise payment is being
recognized over the life of the agreement.

As part of the transaction, Friendly acquired European hotels owned by the
Company for $26.2 million in convertible preferred shares and cash. In exchange
for 10 hotels in France, two in Germany and one in the United Kingdom, the
Company received $22.2 million in new unlisted 5.75 percent convertible
preferred shares in Friendly at par, convertible for one new Friendly ordinary
share for every 150p nominal of the preferred convertible shares. In addition,
Friendly will pay the Company deferred compensation of $4.0 million in cash,
payable by the fifth anniversary of completion or sooner dependent on the level
of future profits of the hotels acquired. The Company reflected the net assets
subject to this transaction as assets held for sale in the December 31, 1997,
accompanying consolidated balance sheet. At December 31, 1998, the Company
owned approximately 5.2% of the outstanding ordinary shares of Friendly which
would increase to approximately 45% if the Company's preferred stock were
converted.

The Company recognized $2.1 million, $0.6 million and $0.9 million in preferred
dividend income from the Friendly investment for the year ended December 31,
1998, the seven months ended December 31, 1997 and the fiscal year ended May 31,
1997, respectively. As of December 31, 1998 and 1997, accrued but unpaid
preferred dividends were $3.7 million and $1.5 million, respectively.

TRANSACTIONS WITH SUNBURST

Subsequent to the Manor Care Distribution, the Company participated in a cash
concentration system with Sunburst and as such maintained no significant cash
balances or banking relationships. Substantially all cash received by the
Company was immediately deposited in and combined with Sunburst's corporate
funds through its cash management system. Similarly, operating expenses, capital
expenditures and other cash requirements of the Company have been paid by
Sunburst and charged to the Company. The net result of all of these
intercompany transactions were reflected in Investments and advances from
Parent.

40
<PAGE>

Notes to Consolidated Financial Statements

Choice Hotels International, Inc. and Subsidiaries

As part of the Sunburst Distribution, Sunburst and the Company have entered into
a strategic alliance agreement. Among other things, the agreement provides
for: (i) a right of first refusal to the Company to franchise any lodging
properties to be acquired or developed by Sunburst, (ii) certain commitments by
Sunburst for the development of Sleep Inn and MainStay Suites hotels, (iii)
continued cooperation of both parties with respect to matters of mutual
interest, such as new product and concept testing, (iv) continued cooperation
with respect to third party vendor arrangements; and (v) certain limitations on
competition in each others' line of business. The strategic alliance agreement
extends for a term of 20 years with mutual rights of termination on the fifth,
10th and 15th anniversaries. In December 1998, the parties amended the
strategic alliance agreement (vi) to eliminate Sunburst's option to acquire the
MainStay Suites brand, (vii) to amend Sunburst's development commitments and
(viii) to provide certain global amendments to Sunburst's franchise agreements.

For purposes of providing an orderly transition after the Sunburst Distribution,
Sunburst and the Company entered into various agreements, including, among
others, a Distribution Agreement, a Tax Sharing Agreement, a Corporate Services
Agreement and an Employee Benefits Allocation Agreement. Effective as of
October 15, 1997, these agreements provide, among other things, that Sunburst
(i) will receive, human resources certain corporate and support services, such
as accounting, tax and computer systems support, (ii) will provide to the
Company certain services including asset management, and payables processing;
(iii) will adjust outstanding options to purchase shares of Company Common Stock
held by Company employees, Sunburst employees, and employees of Manor Care,
(iii) is responsible for filing and paying the related taxes on consolidated
federal tax returns and consolidated or combined state tax returns for itself
and any of its affiliates (including the Company) for the periods of time that
the affiliates were members of the consolidated group, (v) will be reimbursed by
the Company for the portion of income taxes paid that relate to the Company and
its subsidiaries, and (vi) guarantees that the Company will, at the date of
distribution, have a specified minimum level of net worth. These agreements
will extend for a maximum period of 30 months from the Distribution date or
until such time as the Company and Sunburst have arranged to provide such
services in-house or through another unrelated provider of such services. As of
March 31, 1999, all services provided by each party under the Corporate Services
Agreement, except for human resources and tax services provided by the Company,
will be terminated. Costs associated with the Corporate Services Agreement as
well as costs of services provided by Sunburst to the Company or provided by the
Company to Sunburst have been allocated between the entity providing the
services and the entity receiving the services in the accompanying financial
statements. As a result, future administrative and corporate expenses are
expected to vary from historical results. However, the Company has estimated
that general and administrative expenses incurred annually will not materially
change.

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 financial statements for franchising
royalty, marketing and reservation fees were $11.2 million for the year ended
December 31, 1998, $6.2 million for the seven months ended December 31, 1997 and
$9.5 million and $7.5 million for the fiscal years ended May 31, 1997 and 1996,
respectively.

In accordance with the Sunburst Distribution Agreement, the Company agreed to
assume and pay certain liabilities of Sunburst, subject to the Company
maintaining a minimum net worth of $40 million, at the date of Distribution. As
of December 31, 1997, the Company reflected a $25 million receivable due from
Sunburst on the consolidated balance sheet. In 1998, net payments of
approximately $8 million were collected from Sunburst in cash. On December 28,
1998, the Company and Sunburst amended the strategic alliance agreement entered
into in connection with the Sunburst Distribution. As part of that amendment,
the Company exchanged the remaining $17 million balance in return for, among
other things, the exclusive rights to the MainStay Suites brand from Sunburst
and a commitment from Sunburst to build a total of 25 MainStay Suites. The $17
million, net of income taxes of approximately $7 million, was recorded as an
adjustment to additional paid in capital as it represents an adjustment to the
accounting for the Sunburst Distribution.

RELATED PARTY TRANSACTIONS

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

41
<PAGE>

Notes to Consolidated Financial Statements

Choice Hotels International, Inc. and Subsidiaries

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 or results of
operations.

PENSION, PROFIT SHARING, AND INCENTIVE PLANS

Bonuses accrued for key executives of the Company under incentive compensation
plans were $755,000 and $520,000 at December 31, 1998 and 1997, respectively.

During 1998, employees of the Company participated in 401(k) retirement plans
sponsored by the Company. For the year ended December 31, 1998, the Company
recorded compensation expense of $1.2 million related to the plan. Prior to the
Manor Care Distribution and Sunburst Distribution, employees participated in
retirement plans sponsored by Manor Care and Sunburst. Costs allocated to the
Company under those plans were based on the size of its payroll relative to the
sponsor's payroll. Costs allocated to the Company were approximately $1.2
million, $1.4 million and $0.8 million for the seven months ended December 31,
1997, and the fiscal years ended May 31, 1997 and 1996, respectively.

CAPITAL STOCK

In 1998, the Company granted key executives 84,592 restricted shares of common
stock with a value of $1,105,403 on the grant date. The restricted stock vests
over a three year period. In 1997, the Company granted a key executive 85,470
restricted shares of common stock with a value of $1.25 million on the grant
date and vesting over a three year period. In 1998, 42,735 of these shares were
forfeited.

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

The Company has stock option plans for which it is authorized to grant options
to purchase up to 7.1 million shares of the Company's common stock, of which 1.5
million shares remain available for grant. Stock options may be granted to
officers, key employees and non-employee directors with an exercise price not
less than the fair market value of the common stock on the date of grant. In
connection with the Sunburst Distribution, the outstanding options held by
current and former employees of the Company were redenominated in stock of the
newly separated companies and the number and exercise prices of the options were
adjusted based on

A SUMMARY OF THE OPTION ACTIVITY UNDER THE ABOVE PLANS IS AS FOLLOWS AS OF
DECEMBER 31, 1998 AND 1997:

<TABLE>
<CAPTION>
1998 1997
==================================================================
Shares Weighted-Option Shares Weighted-Option
FIXED OPTIONS (000) Price (000) Price
==================================================================
<S> <C> <C> <C> <C>
Outstanding at beginning of year.................. 4,167,045 $ 8.62 4,689,515 $ 8.71
Granted........................................... 933,263 14.01 15,000 17.63
Exercised......................................... (738,318) 4.75 (28,550) 3.32
Cancelled......................................... (392,681) 11.88 (508,920) 10.05
---------- ------- --------- -------
Outstanding at end of year........................ 3,969,309 $10.28 4,167,045 $ 8.62
==================================================================
Options exercisable at year end................... 1,813,541 1,845,642
Weighted-average fair value of
options granted during the year................... $ 7.96 $ 8.79
</TABLE>

42
<PAGE>

Notes to Consolidated Finanical Statements

Choice Hotels International, Inc. and Subsidiaries

THE FOLLOWING TABLE SUMMARIZES INFORMATION ABOUT STOCK OPTIONS OUTSTANDING AT
DECEMBER 31, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
========================================================================================
RANGE OF NUMBER WEIGHTED-AVERAGE WEIGHTED NUMBER WEIGHTED
EXERCISE PRICES OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
12/31/98 CONTRACTUAL LIFE EXERCISE PRICE 12/31/98 EXERCISE PRICE
==============================================================================================================
<S> <C> <C> <C> <C> <C>
$ 2.64 to 3.96 608,383 1.8 years $ 3.17 578,498 $ 3.12
3.96 to 5.94 223,054 3.3 years 4.99 165,797 4.99
5.94 to 8.91 464,642 4.7 years 7.02 270,501 6.92
8.91 to 13.37 1,677,295 7.8 years 12.08 773,453 11.78
13.37 to 17.63 995,935 9.6 years 14.31 25,292 16.91
--------- ---------
3,969,309 1,813,541
--------- ---------
</TABLE>

the relative trading prices of the common stock of the two companies in order to
retain the intrinsic value of the options.

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 based method of accounting. As permitted by this
accounting standard, the Company continues to account for these plans under APB
Opinion 25, under which no compensation cost has been recognized. 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 1998 and 1997:

1998 1997
---- ----
Risk-free interest rate 4.7% 5.65%
Volatility 36.7% 23.6%
Expected Lives 10 years 10 years
Dividend Yield 0% 0%

If options had been reported as compensation expense based on their fair value
pro forma, net income would have been $54.0 million and $27.3 million for the
year ended December 31, 1998 and the seven months ended December 31, 1997, and
pro forma earnings per share would have been $0.90 and 0.46, respectively. Since
this methodology has not been applied to options granted prior to the Sunburst
distribution date, the resulting pro forma compensation cost is not likely to be
representative of that to be expected in future years.

REPORTABLE SEGMENT INFORMATION

The Company has a single reportable segment encompassing its franchising
business. Franchising business revenues for the year ended December 31, 1998,
the seven months ended December 31, 1997 and fiscal years ended May 31, 1997 and
1996 were $138.3 million, $84.1 million, $120.1 million and $105.4 million; and
operating expenses were $28.2 million, $15.4 million, $13.3 million and $14.7
million. Operating expenses include only costs directly associated with the
Company's domestic and international franchising service offices and do not
include allocation of corporate overhead. Depreciation expense for the
franchise segment was $0.2 million for the year ended December 31, 1998 and
relates primarily to furniture, fixtures and equipment utilized in these
offices. The Company does not allocate amortization expense, interest income,
interest expense or income taxes to its franchising segment.

All other revenues and expenses included on the Company's statement of income
for the year ended December 31, 1998 relate to corporate and other activities.
For the year ended December 31, 1998, the seven months ended December 31, 1997
and fiscal years ended May 31, 1997 and 1996 revenues generated by corporate and
other activities were $27.1 million, $23.7 million, $47.9 million and $46.4
million; operating expenses were $22.5 million, $14.1 million, $37.8 million and
$30.5 million; and depreciation and amortization expense was $6.9 million, $4.0
million, $7.6 million and $9.2 million, respectively.

The Company's international operations had revenues of $7.1 million, $11.8
million, $19.8 million and $21.4 million for the year ended December 31, 1998,
the seven months ended

43
<PAGE>

Notes to Consolidated Financial Statements

Choice Hotels International, Inc. and Subsidiaries

December 31, 1997 and the fiscal years ended May 31, 1997 and 1996,
respectively. Long-lived assets related to international operations were $57.0
million and $38.7 million as of December 31, 1998 and 1997. All other long-lived
assets of the Company are associated with domestic activities.

FAIR VALUE OF FINANCIAL STATEMENTS

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 carrying amounts for
long-term debt approximate fair market values.

The Note Receivable from Sunburst approximates fair value based on its current
yield to maturity, which is equivalent to those investments of similar quality
and terms.

PROVISION FOR ASSET IMPAIRMENT

During fiscal year 1996, the Company began restructuring its European
operations. This restructuring effort included the purchase of an equity
interest in Friendly and a reevaluation of key geographic markets in Europe. In
connection with this restructuring, the Company performed a review of its
European operations and in May 1996 recognized a $15.0 million non-cash charge
(net of an $9.8 million income tax benefit) against earnings related to the
impairment of assets associated with certain European hotel operations.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

The Company adopted SFAS No. 130, "Reporting Comprehensive Income," and SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information"
during 1998. The adoption of these pronouncements required the Company to make
certain additional disclosures.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
Accounting for Derivative Instruments and Hedging Activities which requires
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. Implementation of SFAS No. 133 is required for Fiscal 2000. SFAS
No. 133 will not have a material impact on the Company's earnings or other
comprehensive income.

SUBSEQUENT EVENTS (UNAUDITED)

THE FOLLOWING DATA IS INCLUDED FOR 1998 ONLY, AS THE COMPANY WAS NOT A PUBLIC
COMPANY FOR THE FULL YEAR OF 1997.

SELECTED QUARTERLY FINANCIAL DATA -- (UNAUDITED)
(In thousands, except per share data)

<TABLE>
<CAPTION>
TOTAL
1998 FIRST SECOND THIRD FOURTH YEAR
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
Revenues $33,171 $44,436 $46,731 $41,037 $165,375
Operating income 14,133 23,519 26,736 22,332 86,720
Income before income taxes and extraordinary item 13,961 22,258 25,224 20,957 82,400
Net income before extraordinary item 8,146 12,988 14,718 12,221 48,073
Net income 8,146 12,988 21,950 12,221 55,305

Per basic share:
Net income before extraordinary item $ 0.14 $ 0.22 $ 0.25 $ 0.21 $ 0.82
Extraordinary item $ 0.00 $ 0.00 $ 0.12 $ 0.00 $ 0.12
Net income $ 0.14 $ 0.22 $ 0.37 $ 0.21 $ 0.94

Per diluted share:
Net income before extraordinary item $ 0.13 $ 0.22 $ 0.25 $ 0.21 $ 0.81
Extraordinary item $ 0.00 $ 0.00 $ 0.12 $ 0.00 $ 0.12
Net income $ 0.13 $ 0.22 $ 0.37 $ 0.21 $ 0.93
</TABLE>

44
<PAGE>

Board of Directors & Corporate Officers

Choice Hotels International, Inc. and Subsidiaries

BOARD OF
DIRECTORS

STEWART BAINUM, JR.
. Chairman of the Board:
HCR Manor Care, Inc.
Sunburst Hospitality Corp.

BARBARA BAINUM
. President, Secretary & Director:
Commonweal Foundation
. Secretary & Director:
Realty Investment Co.

CHARLES A. LEDSINGER, JR.
. President & Chief Executive
Officer:
Choice Hotels International

LARRY R. LEVITAN
. Retired Managing Partner:
Andersen Consulting's
Worldwide Communications
Industry Group

FREDERIC V. MALEK*
. Chairman:
Thayer Capital Partners
. Co-Chairman:
CB Richard Ellis, Inc.

JERRY E. ROBERTSON, PH.D.
. Retired Executive Vice President:
3M Life Sciences Sector
and Corporate Services

GERALD W. PETTIT
. President & Chief Executive
Officer:
Creative Hotel Associates
LLC

JAMES H. REMPE
. Retired Senior Vice President,
General Counsel & Secretary:
Manor Care, Inc.

* Retiring at the April 29, 1999,
board meeting

CORPORATE EXECUTIVE
OFFICERS

STEWART BAINUM, JR.
. Chairman of the Board

CHARLES A. LEDSINGER, JR.
. President & Chief Executive
Officer

MICHAEL J. DESANTIS
. Senior Vice President, General
Counsel & Secretary

BRUNO GENY
. Senior Vice President,
International

THOMAS MIRGON
. Senior Vice President,
Administration

MARK C. WELLS
. Senior Vice President,
Marketing

CORPORATE
OFFICERS

JOSEPH M. SQUERI
. Vice President, Treasurer &
Controller

DANIEL ROTHFELD
. Vice President, Partner Services

KEVIN M. ROONEY
. Assistant General Counsel &
Assistant Secretary

GERALD F. HICKEY
. Assistant Treasurer

MARKET AREA
VICE PRESIDENTS

BRENDAN M. EBBS
. Senior Vice President, Franchise
Operations, Northeast
Market Area

WILLIAM WEATHERFORD
. Senior Vice President, Franchise
Operations, Southeast
Market Area

MICHAEL BARNARD
. Vice President, Franchise
Operations, West Market Area

GARY DECATUR
. Vice President, Franchise
Operations, North Central
Market Area

BRENT RUSSELL
. Vice President, Franchise
Operations, South Central
Market Area

BRAND
MANAGEMENT

NORMAN CAVIN
. Sleep Inn Brand Management
Vice President

MICHAEL COTHRAN
. Rodeway Inn Brand
Management
Vice President

PETER JORDAN
. Quality Brand Management
Vice President

DONALD KOLODZ
. Clarion Brand Management
Vice President

DAN SHOEN
. Comfort Brand Management
Vice President

TIM SHUY
. Econo Lodge & MainStay
Suites Brand Management
Vice President

45
<PAGE>

Corporate Information

Choice Hotels International, Inc. and Subsidiaries

STOCK LISTING

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

TRANSFER AGENT & REGISTRAR

ChaseMellon
Shareholder Services LLC
Overpeck Centre
85 Challenger Road
Ridgefield, NJ 07660

INDEPENDENT AUDITORS

Arthur Andersen LLP
Washington, D.C.

ANNUAL MEETING DATE

Choice Hotels International
will hold its Annual Meeting
of Stockholders on Thursday,
April 29, 1999, at 9 a.m. at its
corporate headquarters, 10750
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:
[email protected]

MEDIA RELATIONS:
(301) 592-5032

CORPORATE INTERNET SITE:
www.choicehotels.com

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

Design: Choice Graphic Design
Principal Photographer: Cameron Davidson
Printer: S&S Graphics

<PAGE>

EXHIBIT 21.01

LODGING SUBSIDIARIES

Choice Capital Corp. (Lending subsidiary)
Choice Hotels Australia Pty. Ltd. (90%)
Choice Hotels Canada Inc. (50%)
Choice Hotels del Plata
Choice Hotels Brazil (Cayman) Ltd. (10%)
Choice Hotels International Asia Pacific Pty. Ltd.
Choice Hotels International Services Corp.
Choice Hotels Japan, Inc. (Formerly Quality Hotels Japan, Inc.)
Choice Hotels Limited
Choice Hotels of Brazil, Inc.
Choice Hotels Systems, Inc.
Choice Hotels Thailand (Del.) Inc.
Choice Hotels Venezuela, C.A. (20%)
Quality Hotels Europe, Inc.
Quality Inns International, Inc. (Formerly the Choice Hotels
International, Inc. which is now Choice Hotels Franchising, Inc.)
QI Advertising Agency, Inc.

<PAGE>

EXHIBIT 23.01
-------------

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

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

Arthur Andersen LLP

Washington, D.C.
March 25, 1999

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS, THE CONSOLIDATED STATEMENTS OF INCOME AND THE
CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,692
<SECURITIES> 1,257
<RECEIVABLES> 36,199
<ALLOWANCES> 8,082
<INVENTORY> 363
<CURRENT-ASSETS> 35,661
<PP&E> 44,720
<DEPRECIATION> 11,875
<TOTAL-ASSETS> 398,225
<CURRENT-LIABILITIES> 58,468
<BONDS> 256,564
0
0
<COMMON> 607
<OTHER-SE> 55,903
<TOTAL-LIABILITY-AND-EQUITY> 398,225
<SALES> 0
<TOTAL-REVENUES> 165,375
<CGS> 0
<TOTAL-COSTS> 77,182
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,473
<INTEREST-EXPENSE> 4,320
<INCOME-PRETAX> 82,400
<INCOME-TAX> 34,327
<INCOME-CONTINUING> 48,073
<DISCONTINUED> 0
<EXTRAORDINARY> 7,232
<CHANGES> 0
<NET-INCOME> 55,305
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.93

</TABLE>

<PAGE>

EXHIBIT 99.1

CHOICE HOTELS INTERNATIONAL, INC.
10750 Columbia Pike
Silver Spring, Maryland 20901

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

NOTICE OF ANNUAL MEETING
To Be Held April 29, 1999

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

To the Stockholders of
CHOICE HOTELS INTERNATIONAL, INC.

NOTICE IS HEREBY GIVEN that the 1999 Annual Meeting of Stockholders (the
"Annual Meeting") of Choice Hotels International, Inc., a Delaware corporation
(the "Company"), will be held on Thursday, April 29, 1999 at the Company
corporate office, 10750 Columbia Pike, Silver Spring, Maryland at 9:00 a.m.
(E.S.T.) for the following purposes:

1. To elect two Class II directors to hold office for a three year term
ending at the 2002 Annual Meeting of Stockholders and until their
successors are elected and qualified;

2. To transact such other business as may properly come before the Annual
Meeting.

Holders of record of Choice Hotels common stock at the close of business on
March 10, 1999 will be entitled to notice of, and to vote at, the Annual
Meeting or any adjournment(s) or postponement(s) thereof. Stockholders are
reminded that your shares of Choice Hotels common stock cannot be voted unless
you properly execute and return the enclosed proxy card or make other
arrangements to have your shares represented at the meeting. A list of
stockholders will be available for inspection at the office of the Company
located at the address above, at least 10 days prior to the Annual Meeting.

By Order of the Board of Directors

CHOICE HOTELS INTERNATIONAL, INC.

Michael J. DeSantis
Secretary

March 29, 1999
Silver Spring, Maryland

TO VOTE YOUR SHARES, PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED
PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
<PAGE>

CHOICE HOTELS INTERNATIONAL, INC.
10750 COLUMBIA PIKE
SILVER SPRING, MARYLAND 20901

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

PROXY STATEMENT

ANNUAL MEETING OF STOCKHOLDERS
APRIL 29, 1999

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

GENERAL INFORMATION

This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Choice Hotels International, Inc. a
Delaware corporation ("Choice Hotels" or the "Company"), for use at the 1999
Annual Meeting of Stockholders of the Company to be held at 9:00 a.m. (E.S.T.)
on April 29, 1998, at its Corporate Offices, 10750 Columbia Pike, Silver
Spring, Maryland and at any adjournment(s) or postponement(s) thereof (the
"Annual Meeting"). It is anticipated that this Proxy Statement and proxy will
first be mailed to the Company's stockholders on or about March 29, 1999.

The Company's Annual Report (including certified financial statements) for
the fiscal year ended December 31, 1998, has been mailed separately from this
Proxy Statement. The Annual Report is not part of the proxy solicitation
material.

Voting of Proxies

Your vote is important. Shares can be voted at the Annual Meeting only if
you are present in person or represented by proxy. Even if you plan to attend
the meeting, you are urged to sign, date and return the accompanying proxy
card.

When the enclosed proxy card is properly signed, dated and returned, the
stock represented by the proxy will be voted in accordance with your
directions. You can specify your voting instructions by marking the appropriate
box on the proxy card. If your proxy card is signed and returned without
specific voting instructions, your shares of Choice Hotels common stock will be
voted as recommended by the directors: "FOR" the election of the two nominees
for director named on the proxy card. Abstentions marked on the proxy card are
voted "against" the directors' proposals but are counted in the determination
of a quorum.

You may revoke your proxy at any time before it is voted at the meeting by
(i) filing with ChaseMellon Shareholder Services, L.L.C. in its capacity as
transfer agent for the Company (the "Transfer Agent"), at or before the Annual
Meeting, a written notice of revocation bearing a later date than the proxy,
(ii) executing a later-dated proxy relating to the same shares of Company
Common Stock and delivering it to the Transfer Agent at or before the Annual
Meeting, or (iii) attending the Annual Meeting and voting in person (although
attendance at the Annual Meeting will not, in and of itself, constitute a
revocation of a proxy). Any written notice revoking a proxy should be sent to
ChaseMellon Shareholder Services, L.L.C., Overpeck Centre, 85 Challenger Road,
Ridgefield Park, New Jersey, 07660.

Votes Required

The close of business on March 10, 1999 has been fixed as the record date
for determination of holders of Company Common Stock entitled to notice of and
to vote at the Annual Meeting. On that date, there were outstanding and
entitled to vote 55,336,553 shares of Company Common Stock. The presence,
either in person or by proxy, of persons entitled to cast a majority of such
votes constitutes a quorum for the transaction of

1
<PAGE>

business at the Annual Meeting. Abstentions and broker no-votes on returned
proxies are counted as shares present in the determination of whether the
shares of stock represented at the Annual Meeting constitute a quorum. A broker
"non-vote" occurs when a nominee holding shares of Choice Hotels common stock
for a beneficial owner does not vote on a particular item and has not received
instructions from the beneficial owner.

Stockholders are entitled to one vote per share on all matters submitted for
consideration at the Annual Meeting. With regard to the election of directors,
votes may be cast in favor of or withheld from nominees. Votes that are
withheld will be excluded entirely from the vote and will have no effect.
Abstentions may be specified on all proposals other than the election of
directors. Each proposal is tabulated separately. Abstentions are counted in
tabulations of the votes cast on proposals presented to the stockholders,
whereas broker non-votes are not counted for purposes of determining whether a
proposal has been approved.

The affirmative vote of a plurality of shares of Company common stock
present in person or represented by proxy at the Annual Meeting is required to
elect the directors nominated. "Plurality" means that the individuals who
receive the largest number of votes cast are elected as directors up to the
maximum number of directors to be chosen at the meeting.

Certain members of the Bainum family (including various partnerships,
corporations and trusts established by members of the Bainum family) in the
aggregate have the right to vote approximately 36.72% of the number of
outstanding shares of Company common stock and have indicated an intention to
vote in accordance with the recommendations of the Board of Directors with
respect to the election of directors.

ELECTION OF CLASS I DIRECTORS

The Board of Directors currently consists of three classes of directors, as
nearly equal in number as possible. Directors hold office for staggered terms
of three years (or less if they are filling a vacancy) and until their
successors are elected and qualified. One of the three classes, comprising
approximately one third of the directors, is elected each year to succeed the
directors whose terms are expiring. The directors in Class II will be elected
at the Annual Meeting to serve for a term expiring at the Company's Annual
Meeting in the year 2002. The directors in Classes I and III are serving terms
expiring at the Company's annual Meeting of Stockholders in 2001 and 2000,
respectively.

The Company's Board of Directors has proposed the following nominees for
election as directors at the annual meeting:

Nominees for Class II Directors
With Terms Expiring at the Annual Meeting in the Year 2002:

Stewart Bainum, Jr.
James H. Rempe

The Board of Directors recommends a vote "FOR" the election of the above-
named nominees as directors for a term of three years. Proxies solicited by the
Board of Directors will be voted "FOR" the election of the nominees, unless
otherwise instructed on the proxy card.

Information is provided below with respect to each nominee for election and
each director continuing in office. Should one or more of these nominees become
unavailable to accept nomination or election as a director, the individuals
named as proxies on the enclosed proxy card will vote the shares that they
represent for the election of such other persons as the board may recommend,
unless the board reduces the number of directors. Mr. Rempe will attain the age
of 70 prior to the annual meeting in 2000 and, according to the By-Laws, must
retire at the 2000 Annual Meeting. Except as set forth in the preceding
sentence, the Board of Directors knows of no reason why any of the nominees
will be unavailable or unable to serve.

2
<PAGE>

Nominees for Election as Directors

Class II -- Nominees for Terms Expiring in 2002

Stewart Bainum, Jr., 52, 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 Hospitality Corporation ("Sunburst")
since November 1996; Chairman of the Board of HCR 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 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.

James H. Rempe, 68, Retired, Senior Vice President, General Counsel and
Secretary of Manor Care from August 1981 to December 1998; Senior Vice
President, General Counsel and Secretary of the Company from February 1981 to
November 1996; Director of the Company since October 1997; Director of In Home
Health Inc. from October 1995 to November, 1998 and Vitalink Pharmacy Services,
Inc. from 1994 to September 1998.

Directors Whose Term of Office Continue

Class I -- Term Expires in 2000

Gerald W. Petitt, 53, President and Chief Executive Officer of Creative
Hotel Associates LLC since November 1996; Co-Chairman of the Company from
January 1995 to November 1996 and a Director from December 1980 to November
1996 and since October 1997; President from June 1990 to January 1995 and Chief
Operating Officer from December 1980 to January 1995; Director of Former Choice
from November 1996 to October 1997; Director: Old Westbury Private Capital Fund
LLC and Bessemer Trust Co.

Jerry E. Robertson, Ph.D., 66, Retired; Executive Vice President, 3M Life
Sciences Sector and Corporate Services from November 1986 to March 1994;
Director of the Company from 1989 to November 1996 and since October 1997;
Director of Manor Care from 1989 to September 1998; Director: Allianz Life
Insurance Company of North America, Cardinal Health, Inc., Coherent, Inc.,
Haemonetics, Inc., Medwave, Inc., and Steris Corporation.

Class III -- Terms Expire 2000

Barbara Bainum, 54, President, Secretary and Director of the Commonweal
Foundation since December 1990, December 1984 and December 1994, respectively;
Secretary and Director of Realty Investment Company, Inc. since July 1989 and
March 1982, respectively; Family Services Agency, Gaithersburg, Maryland,
Clinical Social Work since September 1994; Department of Social Services,
Rockville, Maryland, Social Work Case Management from September 1992 to May
1993; member of the Boards of Trustees of Columbia Union College (September
1987 to May 1991) and Atlantic Union College (September 1985 to May 1987);
Director of the Company since October 1997 and of Former Choice from November
1996 to October 1997.

3
<PAGE>

Lawrence R. Levitan, 57, Retired, Managing Partner, Northeast and Southeast
Regions and Managing Partner, Communications Industry of Andersen Consulting
from September 1995 to August, 1997. Various positions with Andersen Consulting
since 1963. Director: Sequent Computer Systems.

Frederic V. Malek,* 62, Chairman of Thayer Capital Partners since March
1993; Co-Chairman of CB Richard Ellis, Inc. from April 1989 to October 1996;
Campaign Manager for Bush-Quayle "92 from January 1992 to November 1992; Vice
Chairman of NWA, Inc. (airlines), July 1990 to December 1991; Director of the
Company from 1990 to November 1996 and since October 1997; Director: HCR Manor
Care, Inc., Sunburst, Aegis Communications, Inc., American Management Systems,
Inc., Automatic Data Processing Corp., CB Richard Ellis, Inc., FPL Group, Inc.
(an affiliate of Florida Power and Light-power company), Global Vacation Group,
Northwest Airlines and various Paine Webber mutual funds.

- --------
* Mr. Malek has retired from the Board of Directors effective as of the Annual
Meeting.

The Board of Directors

The Board of Directors is responsible for overseeing the overall performance
of the Company. Members of the board are kept informed of the Company's
business through discussions with the Chairman, the Chief Executive Officer and
other members of the Company's management, by reviewing materials provided to
them and by participating in board and committee meetings. At the beginning of
1998, the Board of Directors consisted of nine directors. During the fiscal
year, William R. Floyd resigned from the Board of Directors and Stewart Bainum
and Robert C. Hazard, Jr. retired. In February 1999, Larry R. Levitan was
appointed to fill one of the vacancies. Frederic V. Malek has indicated his
intention to retire from the Board of Directors following the Annual Meeting.
In fiscal year 1998, the Board of Directors held seven meetings and each
director, except for Mr. Malek, attended all of the meetings of the Board of
Directors and all of the committees of the Board of Directors on which such
director served. Mr. Malek was unable to attend two Board meetings.

Committees of the Board

The standing committees of the Board of Directors include the Audit
Committee and the Compensation/Key Executive Stock Option Plan Committee. At
the January 21, 1998 Board Meeting, the Nominating Committee was abolished and
the Nominating and Corporate Governance Committee was established. The current
members of the standing committees are as follows:

Compensation/Key Executive Stock Option Nominating & Corporate
Plan Committee Governance Committee

Jerry E. Robertson, Chair Gerald W. Petitt, Chair
Frederic V. Malek Jerry E. Robertson
Barbara Bainum Frederic V. Malek

Audit Committee

Frederick V. Malek, Chair
Jerry E. Robertson
Gerald W. Petitt

The Compensation/Key Executive Stock Option Plan Committee administers the
Company's stock option plans and grant stock options thereunder, reviews
compensation of officers and key management employees, recommends development
programs for employees such as training, bonus and incentive plans, pensions
and retirement, and reviews other employee fringe benefit programs. Prior to
Mr. Bainum's retirement from the Board, a Compensation/Key Executive Stock
Option Plan Committee No. 2 existed on which he did not serve. The purpose of
this second committee was to approve matters that required a committee of
"outside directors" for which Mr. Bainum did not qualify. Upon his retirement,
the second committee was abolished. The Compensation/Key Executive Stock Option
Plan Committee met three times during the 1998 fiscal year.

4
<PAGE>

The Nominating and Corporate Governance Committee is responsible for
administering the Choice Hotels Corporate Governance Guidelines, determining
size and composition of the Board, recommending candidates to fill vacancies on
the Board, determining actions to be taken with respect to directors who are
unable to perform their duties, setting the company's policies regarding the
conduct of business between the company and any other entity affiliated with a
director and determining the compensation of non-employee directors. The
Corporate Governance Guidelines are a set of principles which provide a
benchmark of what is "good" corporate governance. The main tenets of the
Guidelines are:

. Create value for shareholders by promoting their interests
. Focus on the future: formulate and evaluate corporate strategies
. Duty of loyalty to the Company by Directors
. Annual CEO evaluation by independent directors
. Annual approval of 3-year plan and one-year operating plan
. Annual assessment of Board effectiveness by Nominating/Governance
Committee
. No interlocking directorships
. Directors are required to reach and maintain ownership of $100,000 of
Company stock
. Annual report of succession planning and management development by CEO

The Nominating and Corporate Governance Committee was established in
January, 1998 and held one meeting in the 1998 fiscal year.

The Audit Committee reviews the scope and results of the annual audit,
reviews and approves the services and related fees of the Company's independent
public accountants, reviews the Company's internal accounting controls and
reviews the Company's Internal Audit Department and its activities. The Audit
Committee met twice in fiscal year 1998.

Compensation of Directors

The Company has adopted the Choice Hotels International, Inc. Non-Employee
Director Stock Option and Deferred Compensation Stock Purchase Plan ("Option
Plan"). Part A of the Plan provides that eligible non-employee directors are
granted options to purchase 5,000 shares of the Company's common stock on their
first date of election and are granted options to purchase 1,000 shares on
their date of election in subsequent calendar years. Part B of the Plan
provides that eligible non-employee directors may elect once a year to defer a
minimum of 25% of committee fees earned during the ensuing fiscal year. The
fees which are so deferred will be used to purchase the Company's common stock
on the open market within 15 days after the end of each fiscal quarter. Pending
such purchases, the funds will be credited to an Interest Deferred Account,
which will be interest bearing. Stock which is so purchased will be deposited
in a Stock Deferred Account pending distribution in accordance with the Plan.

Pursuant to the Non-Employee Director Stock Compensation Plan adopted by the
Company, eligible non-employee directors will receive annually, in lieu of
cash, restricted shares of the Company's common stock, the fair market value of
which at the time of grant will be equal to $30,000, which will represent the
Board of Directors retainer and meeting fees. In addition, all non-employee
directors receive $1,610 per diem for Committee meetings attended and are
reimbursed for travel expenses and other out-of-pocket expenses.

Upon Mr. Bainum's and Mr. Hazard's retirement, the Board of Directors
approved the continuing vesting and accelerated vesting, respectively, of their
awards under the Option Plan and the Stock Plan. The Board of Directors has
also approved the vesting of Mr. Malek's awards under the Option Plan and the
Stock Plan upon his retirement following the Annual Meeting.

Directors who are employees of the Company receive no separate remuneration
for their services as directors.

5
<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

The following table sets forth the amount of the Company's common stock
beneficially owned by (i) each director of the Company, (ii) the Company's
chief executive officer, the other four most highly compensated executive
officers, a former Chief Executive Officer and two former officers (the "Named
Officers"), (iii) all officers and directors of the Company as a group and (iv)
all persons who are expected to own beneficially more than 5% of the Company's
common stock, as of March 10, 1999, the Record Date. Unless otherwise
specified, the address for each of them is 10750 Columbia Pike, Silver Spring,
Maryland 20901.

<TABLE>
<CAPTION>
Shares of
Common Stock Percent of Shares
Name of Beneficial Owner Beneficially Owned Outstanding(1)
------------------------ ------------------ -----------------
<S> <C> <C>
Stewart Bainum, Jr..................... 15,473,952(2)** 27.84%
Barbara Bainum......................... 5,637,599(3)** 10.18%
Donald H. Dempsey(4)................... 0 *
Michael J. DeSantis.................... 24,155(5) *
William R. Floyd(6).................... 150,992(7) *
Charles A. Ledsinger, Jr............... 65,842(8) *
Larry R. Levitan....................... 0 *
Frederic V. Malek...................... 15,204(9) *
Thomas Mirgon.......................... 25,627(10) *
Gerald W. Petitt....................... 89,055(11) *
James H. Rempe......................... 152,050(12) *
Jerry E. Robertson, Ph.D............... 29,548(13) *
Barry L. Smith(14)..................... 1,490(15) *
All Directors and Officers as a Group
(11 persons).......................... 15,885,077(16) 28.50%
Bruce Bainum........................... 5,624,502(17)** 10.16%
Stewart Bainum......................... 10,590,051(18)** 19.14%
Ronald Baron........................... 9,697,000(19) 35.59%
</TABLE>
- --------
* Less than 1% of class.
** Because of SEC reporting rules, shares held by certain Bainum family
entities are attributed to more than one of the Bainums included in this
table because such named Bainums have shared voting or dispositive control.
Members of the Bainum family (including various partnerships, corporations
and trusts established by members of the Bainum family) in the aggregate
have the right to vote approximately 36.72% of the number of outstanding
shares of Company common stock.
1. Percentages are based on 55,336,553 shares outstanding on March 10, 1999
(the "Record Date") plus, for each person, the shares which would be issued
assuming that such person exercises all options it holds which are
exercisable on such date or become exercisable within 60 days thereafter.
2. Includes 42,127 shares owned directly by Mr. Bainum, Jr. Also includes
5,417,761 shares owned by Bainum Associates Limited Partnership ("Bainum
Associates") and 4,415,250 shares owned by MC Investments Limited
Partnership ("MC Investments"), in both of which Mr. Bainum, Jr. is managing
general partner with the sole right to dispose of the shares; 3,567,869
shares held directly by Realty Investment Company, Inc. ("Realty"), a real
estate management and investment company in which Mr. Bainum, Jr. has shared
voting authority; 1,779,628 shares owned by Mid Pines Associates Limited
Partnership ("Mid Pines"), in which Mr. Bainum, Jr. is managing general
partner and has shared voting authority and 300 shares owned by the
Foundation for Maryland's Future, in which Mr. Bainum, Jr. is the sole
director. Also includes 250,000 shares which Mr. Bainum, Jr. has the right
to acquire pursuant to stock options which are presently exercisable or
which become exercisable within 60 days after the Record Date, and 1,017
shares which Mr. Bainum, Jr. has the right to receive upon termination of
his employment with the Company pursuant to the terms of the Choice Hotels
International, Inc. Non-Qualified Retirement Savings and Investment Plan
("Non-Qualified Savings Plan").

6
<PAGE>

3. Includes 102,677 shares owned directly by Ms. Bainum. Also includes
1,779,628 shares owned by Mid Pines, in which Ms. Bainum's trust is a
general partner and has shared voting authority, 3,567,869 shares owned by
Realty, in which Ms. Bainum's trust has voting stock and shares voting
authority, 112,200 shares owned by Vintage L.P., in which Ms. Bainum is a
shareholder and director of the corporate general partner and shares voting
authority, and 70,305 shares owned by the Commonweal Foundation, in which
Ms. Bainum is President and Director and has shared voting authority. Also
includes 3,089 shares of restricted stock issued to Ms. Bainum which shares
are not vested, but which Ms. Bainum has the right to vote and 1,831 shares
which Ms. Bainum has the right to acquire pursuant to stock options which
are currently exercisable or become exercisable within 60 days of the Record
Date.
4. Mr. Dempsey resigned from the Company in July 1998.
5. Includes 13,490 shares which Mr. DeSantis has the right to acquire pursuant
to stock options which are currently exercisable or become exercisable
within 60 days of the Record Date. Also includes 106 and 5,569 shares,
respectively under the 401(k) Plan and Non-Qualified Plan.
6. Mr. Floyd resigned from the Company in June 1998.
7. Includes 150,892 shares which Mr. Floyd has the right to acquire pursuant to
stock options which are currently exercisable or become exercisable within
60 days of the Record Date.
8. Consist of restricted stock not yet vested, but which Mr. Ledsinger has the
right to vote.
9. Includes 3,523 shares owed directly; 7,665 shares which Mr. Malek has the
right to acquire pursuant to stock options which are presently exercisable
or become exercisable within 60 days of the Record Date and 4,016
restricted shares granted under the Non-Employer Director Stock
Compensation Plan ("Stock Compensation Plan") which are not vested, but
which Mr. Malek has the right to vote.
10. Includes 24,073 shares which Mr. Mirgon has the right to acquire pursuant
to stock options which are currently exercisable or become exercisable
within 60 days of the Record Date.
11. Includes 77,304 shares held directly by Mr. Petitt and 8,661 shares held in
trust for minor children for which Mr. Petitt is trustee. Beneficial
ownership of such shares is disclaimed. Also includes 3,090 restricted
shares granted under the Stock Compensation Plan which are not yet vested,
but which Mr. Petitt has the right to vote.
12. Includes 59,882 shares held directly and 89,861 shares which Mr. Rempe has
the right to acquire pursuant to stock options which are presently
exercisable or exercisable within 60 days of the Record Date. Also includes
2,477 restricted shares granted under the Stock Compensation Plan which are
not yet vested, but which Mr. Rempe has the right to vote.
13. Includes 6,299 shares held directly by Mr. Robertson and 15,500 shares
owned by the JJ Robertson Limited Partnership, of which Mr. Robertson and
his wife are the general partners with shared voting authority, and 3,354
restricted shares granted under the Stock Compensation Plan which are not
yet vested, but which Mr. Robertson has the right to vote. Also includes
4,395 shares which Mr. Robertson has the right to acquire pursuant to stock
options which are presently exercisable or become exercisable within
60 days of the Record Date and 814 shares acquired pursuant to the Choice
Hotels International, Inc. Non-Employee Director Stock Option and Deferred
Compensation Stock Purchase Plan.
14. Mr. Smith retired from the Company in April 1998.
15. Consist of 606 shares and 884 shares, respectively which Mr. Smith has the
right to receive pursuant to the terms of the 401(k) Plan and the Non-
Qualified Savings Plan.
16. Includes a total of 404,935 shares which the officers and directors
included in the group have the right to acquire pursuant to stock options
which are presently exercisable, or exercisable within 60 days of the
Record Date, and a total of 106 shares and 9,657 shares, respectively,
which such directors and officers have the right to receive pursuant to the
terms of the 401 (k) Plan and the Non-Qualified Savings Plan.
17. Includes 94,500 shares owned directly by Mr. Bainum. Also includes
1,779,628 shares owned by Mid Pines, in which Mr. Bainum is a general
partner and has shared voting authority, 3,567,869 shares owned by Realty
in which Mr. Bainum's trust has voting stock and shares voting authority,
112,200 shares owned by Vintage L.P., in which Mr. Bainum is a shareholder
and director of the corporate general partner and

7
<PAGE>

shares voting authority and 70,305 shares owned by the Commonweal
Foundation, in which Mr. Bainum is a Director and has shared voting
authority. Mr. Bainum's address is 8737 Colesville Road, Suite 800, Silver
Spring, Maryland, 20910.
18. Includes 2,523 shares held directly by Mr. Bainum, 3,906,542 shares held
directly by the Stewart Bainum Declaration of Trust, of which Mr. Bainum
is the sole trustee and beneficiary, his joint interest in 983,878 shares
owned by Bainum Associates and 1,248,542 shares owned by MC Investments,
each of which is a limited partnership in which Mr. Bainum has joint
ownership with his wife as a limited partner and as such has the right to
acquire at any time a number of shares equal in value to the liquidation
preference of their limited partnership interests; 3,567,869 shares held
directly by Realty, in which Mr. Bainum and his wife have shared voting
authority; and 70,305 shares held by the Commonweal Foundation of which
Mr. Bainum is Chairman of the Board of Directors and has shared voting
authority. Also includes 798,711 shares held by the Jane L. Bainum
Declaration of Trust, the sole trustee and beneficiary of which is
Mr. Bainum's wife, and 7,665 shares which Mr. Bainum has the right to
acquire pursuant to stock options which are presently exercisable or which
become exercisable within 60 days after the Record Date. Also includes
4,016 shares of restricted stock granted by the issuer to Mr. Bainum under
the Stock Compensation Plan, which are not vested but which Mr. Bainum has
the right to vote.
19. As of February 3, 1998 based on a Schedule 13-D, as amended, filed by Mr.
Baron with the Securities and Exchange Commission (the "Commission"). Mr.
Baron's address is 450 Park Avenue, Suite 2800, New York, New York 10022.
Pursuant to a letter agreement dated January , 1998 between the Company,
Mr. Baron and entities under the control of Mr. Baron (together with Mr.
Baron, the "Baron Entities"), each Baron Entity covenanted not to (i)
acquire any additional shares of stock or security convertible into stock
of the Company; (ii) take any action or participate in any transaction
which may constitute an event of default under the Existing Credit
Facility or (iii) seek representation on the Board of Directors of the
Company.

8
<PAGE>

EXECUTIVE COMPENSATION

Compensation received by the Named Officers prior to consummation of the
Former Choice Spinoff/1/ was paid by Manor Care. Compensation received by the
Named Officers after the Former Choice Spinoff, but prior to the Spinoff, was
paid by Former Choice. Compensation received by the Named Officers after the
Spinoff was paid by the Company.

- --------
1. Prior to becoming a separate, publicly-held company on October 15, 1997
pursuant to the Spinoff (as defined below), the Company was named 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 conducted primarily by the Company) and its
European hotel ownership business pursuant to a pro rata distribution to
its stockholders of all of the stock of the Company (the "Spinoff"). At
the time of the Spinoff, the Company changed its name to "Choice Hotels
International, Inc.," and Former Choice changed its name to "Sunburst
Hospitality Corporation." For purposes of this Proxy Statement, references
to the Company's former parent corporation pior to the Spinoff are to
"Former Choice," and references to such corporation after the Spinoff are
to "Sunburst."

Prior to November 1996, Former Choice and the Company were subsidiaries 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 Spinoff"). In connection with the Former Choice
Spinoff, the Company became a wholly-owned subsidiary of Former Choice and
remained as such until consummation of the Spinoff.

Summary Compensation Table

<TABLE>
<CAPTION>
Annual Compensation(1) Long-Term Compensation
--------------------------------- ----------------------------------------------
Name and Principal Fiscal Restricted Stock Option All Other
Position Year(1) Salary Bonus Other StockAwards(5) Shares(#)(2) Compensation(3)
------------------ ------- -------- ------- -------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.(4).. 1998 $169,149 $57,829 (5) -- 57,300 $6,453
Chairman 1997A 148,310 47,683 (5) -- -- --
1997B 656,357 388,520 (5) -- 60,000(6) --
1996 625,102 337,555 (5) -- 60,000(7) 33,543
Charles A. Ledsinger,
Jr.(8)................. 1998 159,633 -- $99,632(9) $825,000 598,563 --
President and Chief
Executive Office
Thomas Mirgon(10)....... 1998 239,325 92,083 (5) -- 22,500 --
Senior Vice President,
Administration 1997A 188,423 51,315 $169,624(11) -- 7,100(12) --
1997B 58,477 26,315 (5) -- 40,000(13) --
1996 -- -- -- -- -- --
Michael J.
DeSantis(14)........... 1998 166,538 36,750 (5) -- 22,500 1,920
Senior Vice President,
General Counsel and
Secretary.............. 1997A 122,870 19,204 (5) -- 40,000(15) --
1997B 99,530 3,477 (5) -- -- --
1996 35,625 -- -- -- -- --
Mark C. Wells(16)....... 1998 167,115 -- 121,130(17) 300,000 65,000 --
Senior Vice President,
Marketing
William R. Floyd(18).... 1998 224,841 193,634 (5) -- -- 459,975(19)
1997A 437,260 267,233 $139,403(20) -- 65,000(21) --
1997B 270,373 146,001 (5) $250,000(23) 307,693(24) --
1996 -- -- -- -- -- --
Barry L Smith(25)....... 1998 162,058 74,354 (5) -- -- 144,337(26)
1997A 254,231 108,000 (5) - 37,900(27) 11,086
1997B 240,000 108,000 (5) - 25,000(28) 11,086
1996 233,650 116,820 (5) -- 5,000(29) 10,427
Donald H. Dempsey(30)... 1998 171,250 -- 46,100(31) 249,152 100,000 --
</TABLE>

9
<PAGE>

- --------
1. On September 16, 1997, the Company changed its fiscal year end from May 31
to December 31. Accordingly, the summary compensation information presented
for the periods prior to 1998 is for the twelve months ended December 31,
1997 ("1997A"), the fiscal year ended May 31, 1997 ("1997B") and the fiscal
year ended May 31, 1996 ("1996"). Summary compensation data paid to the
Named Officers during the period between January 1, 1997 and May 31, 1997
are reflected in each of the 1997A and 1997B periods.

2. For Messrs. Bainum, Jr. and Smith, the grants in 1997B and 1996 represent
options to purchase shares of Manor Care common stock. In connection with
the Former Choice Spinoff, the options to purchase Manor Care common stock
were converted, in some cases 100%, to options to purchase Former Choice
common stock. For Messrs. Floyd and Mirgon with respect to grants in 1997B
and for all of the Named Officers with respect to grants in 1997A,
represents options to acquire shares of Former Choice common stock. In
connection with the Spinoff, the options to purchase Former Choice common
stock were converted to successor options to purchase Company common stock
and Sunburst common stock. In all cases, however, the exercise prices were
adjusted to maintain the same financial value to the option holder before
and after the Former Choice Spinoff and the Spinoff.

3. Represents amounts contributed by Manor Care for 1996, Former Choice for
1997B, Former Choice/Sunburst for 1997A and the Company for 1998 under
their respective 401(k) Plan and Non-Qualified Savings Plan, which provide
retirement and other benefits to eligible employees, including the Named
Officers. The value of the amounts contributed in stock by the Company
during 1998 under the 401(k) Plan and Non-qualified Savings Plan,
respectively, for the Named Offices were as follows: Mr. Bainum, Jr., $0
and $6,453; Mr. DeSantis, $1,920 and $0; Mr. Floyd, $2,370 and $0; and Mr.
Smith, $5,925 and $5,911.

4. For part of 1997B and all of 1996, Mr. Bainum, Jr. was the Chairman and
Chief Executive Officer of Manor Care and Former Choice. In November, 1996,
he resigned as Chief Executive Officer of Former Choice. The compensation
reflected for 1997B and 1996 is the total compensation received for
services rendered to both Manor Care and Former Choice. For the period
between January 1, 1997 and October 15, 1997, the amount of compensation
paid solely by Former Choice was $132,533 for base salary and $47,683 for
bonus. From October 15, 1997 to December 31, 1997 the amount of
compensation paid solely by the Company was $15,777 for the period between
October 16, 1997 and December 31, 1997.

5. The value of perquisites and other compensation does not exceed the lesser
of $50,000 or 10% of the amount of annual salary and bonus paid as to any of
the Named Officers.

6. In connection with the Spinoff, these options were converted into options
to acquire 60,000 shares of Company common stock at an exercise price of
$12.1130 and 20,000 shares of Sunburst common stock at an exercise price of
$7.1894.

7. In connection with the Spinoff, these options were converted into options
to acquire 60,000 shares of Company common stock at an exercise price of
$9.2807 and 20,000 shares of Sunburst common stock at an exercise price of
$5.5083.

8. Mr. Ledsinger's employment as President and Chief Executive Officer
commenced August, 1998.

9. Includes $95,571 in relocation expenses.

10. Mr. Mirgon's employment with the Company and Former Choice commenced March
3, 1997.

11. Consists of $160,994 in relocation expenses and $8,630 in automobile
allowance.

12. In connection with the Spinoff, these options were converted into options
to purchase 7,878 shares of Company common stock at an exercise price of
$13.2008 and 888 shares of Sunburst common stock at an exercise price of
$7.835.

13. In connection with the Spinoff, these options were converted into options
to purchase 44,946 shares of Company common stock at an exercise price of
$13.0043 and 5,000 shares of Sunburst common stock at an exercise price of
$7.7421.

14. Mr. DeSantis' employment commenced in January 1996. He was appointed
Senior Vice President, General Counsel and Secretary in June 1997.

15. In connection with the Spinoff, these options were converted into options
to purchase 44,946 shares of Company common stock at an exercise price of
$13.2008 and 5,000 shares of Sunburst common stock at an exercise price of
$7.835.

16. Mr. Wells' employment as Senior Vice President, Marketing commenced May
1998.

17. Includes $115,638 in relocation expenses.

18. Mr. Floyd's employment as Chief Executive Officer of Former Choice and the
Company commenced October 16, 1996 and ended on June 16, 1998.

19. In connection with Mr. Floyd's resignation, the Company agreed to continue
payments to Mr. Floyd in an amount equal to one year's base salary and
automobile allowance in consideration of the cancellation of his
employment agreement and confidentiality undertakings. The amount of such
payments paid in 1998 is $227,033.

20. Consists of $127,703 in relocation expenses (including $107,831 reported
under 1997B) and $11,700 in automobile allowance.

10
<PAGE>

21. In connection with the Spinoff, these options were converted into options
to purchase 71,631 shares of Company common stock at an exercise price of
$16.488 and 10,833 shares of Sunburst common stock at an exercise price of
$9.786.

22 Consists of relocation expenses.

23. Represents a grant of 85,470 restricted shares of Former Choice common
stock granted on November 4, 1996. The shares vest in three equal annual
installments beginning on November 4, 1997. The restricted shares are
entitled to dividends and in connection with the Spinoff, Mr. Floyd
received 85,470 shares of Company common stock as a dividend on such
shares of Former Choice common stock. In connection with his resignation,
Mr. Floyd forfeited 42,735 shares.

24. In connection with the Spinoff, these options were converted into options
to purchase 341,515 shares of Company common stock at an exercise price of
$12.2095 and 45,584 shares of Sunburst common stock at an exercise price
of $7.2466.

25. Mr. Smith retired from the Company in May 1998.

26. Includes $132,500 in consulting fees paid pursuant to a Consulting
Agreement with the Company for a term from Mr. Smith=s retirement through
December 15, 1998.

27. In connection with the Spinoff, these options were converted into options
to purchase 42,586 shares of Company common stock at an exercise price of
$13.2008 and 4,738 shares of Sunburst common stock at an exercise price of
$7.835.

28. In connection with the Former Choice Spinoff and the Spinoff, these
options were converted into options to acquire 77,624 shares of Company
common stock at an exercise price of $12.113 and 6,819 shares of Sunburst
common stock at an exercise price of $7.1894.

29. In connection with the Former Choice Spinoff, these options were converted
into options to acquire 15,183 shares of Company common stock at an
exercise price of $9.2807 and 1,023 shares of Sunburst common stock at an
exercise price of $5.5083.

30. Mr. Dempsey resigned from the Company in July 1998.

31. Includes $40,607 in relocation expenses.

STOCK OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
Potential Realizable
Value of Assumed
Rate of Stock Price
Appreciation for
Individual Grants Option Term(1)
---------------------------------------------- ----------------------
Percentage of
Total Options
Number of Granted to all Exercise
Options Employees in Base Price Expiration
Name Granted 1998 Per Share Date 5%(2) 10%(3)
---- --------- -------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr.
(4).................... 47,300 4.4% $ 14.125 9/23/08 $ 420,170 $ 1,064,798
Charles A. Ledsinger,
Jr. (4)................ 598,563 56.2% $ 12.53 7/31/08 $4,716,676 $11,953,063
Thomas Mirgon (4)....... 22,500 2.1% $14.8437 1/26/08 $ 210,040 $ 532,282
Michael J. DeSantis
(4).................... 22,500 2.1% $14.8437 1/26/08 $ 210,040 $ 532,292
Mark C. Wells (4)....... 65,000 6 .1% $ 16.00 5/18/08 $ 654,050 $ 1,657,494
William R. Floyd........ 0 -- -- -- -- --
Barry L. Smith.......... 0 -- -- -- -- --
Donald H. Dempsey ...... 100,000 9.4% $14.6563 1/12/08(5) $ 921,730 $ 2,335,840
</TABLE>
- --------
1. The dollar amounts under these columns are the result of calculations at the
5% and 10% rates set by the Securities and Exchange Commission and therefore
are not intended to forecast future possible appreciation, if any, of the
stock price. Since options are granted at market price, a zero percent gain
in the stock price will result in no realizable value to the optionees.

2. A 5% per year appreciation in stock price from $14.125 per share yields
$23.0081, from $14.8437 per share yields $24.1788, from $12.53 per share
yields $26.0623, from $12.53 per share yields $20.41, and from $14.6563 per
share yields $23.8736.

3. A 10% per year appreciation in stock price from $14.125 per share yields
$36.6366, from $14.8437 per share yields $38.5007, from $16.00 per share
yields $41.4999, from $12.53 per share yields $32.4996, and from $14.6563
per share yields $38.0147.

4. The options granted to the officers vest at the rate of 20% per year on the
first through the fifth anniversaries of the date of the stock option grant.

5. Such options were forfeited upon Mr. Dempsey's resignation.

11
<PAGE>

AGGREGATED OPTION EXERCISES IN 1998
AND YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
Number of Unexercised
Options at December, 31, 1998
--------------------------------
Value of Unexercised
Shares Acquired Value in-the-money Options--
on Exercise Realized Exercisable Unexercisable at December 31, 1998(1)
--------------- -------- -------------- --------------- -------------------------
Name # $ # # Exercisable Unexercisable
---- --------------- -------- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Stewart Bainum, Jr...... 105,000 $982,107 250,000 152,300 $2,047,611 $ 450,370
Charles A. Ledsinger,
Jr..................... -- -- 0 598,563 -- $ 374,102
Thomas Mirgon........... -- -- 10,585 64,839 $ 4,574 $ (11,938)
Michael J. DeSantis.. .. -- -- 8,990 58,456 $ 2,690 $ (19,475)
Mark C. Wells........... -- -- 0 65,000 -- $(162,500)
Donald H. Dempsey....... -- -- 0 0 -- --
William R. Floyd........ -- -- 150,892 0 $ 133,603 --
Barry L. Smith.......... 83,384 731,475 0 0 -- --
</TABLE>
- --------
1. The closing prices of Company common stock as reported by the New York Stock
Exchange on December 31, 1998 was $13.50. The value is calculated on the
basis of the difference between the option exercise price and such closing
price multiplied by the number of shares of Company common stock underlying
the option.

Employment Agreements

The Company entered into an employment agreement with Stewart Bainum, Jr.,
providing for Mr. Bainum, Jr.'s employment as Chairman of the Company's Board
of Directors. The agreement has a term of three years. Either Choice or Mr.
Bainum may terminate the agreement upon 30 days' prior written notice on the
first and second anniversary dates of the agreement. Under the agreement, Mr.
Bainum, Jr. is currently paid a base salary of $127,500 per annum for services
to the Company and a maximum bonus of 60% of Mr. Bainum, Jr.'s base
compensation based upon the performance of the Company.

The Company entered into an employment agreement Charles A. Ledsinger. The
agreement has a term of five years from July 31, 1998 and provides for a base
salary of $500,000 per annum, subject to annual adjustments and an annual bonus
of up to 60% of his base compensation, based on Company performance. The
agreement also provides for a make-whole bonus payment to compensate Mr.
Ledsinger for the pro rata portion of a bonus from his previous employer that
he forfeited upon employment with the Company. Pursuant to the employment
agreement, Mr. Ledsinger was granted 65,842 shares of restricted Company common
stock and options to purchase 598,563 shares of common stock, of which 39,900
of the options were incentive stock options granted under the Former Choice
1996 Long Term Incentive Plan. The remainder of the options were non-qualified
stock options. The agreement also contains a change of control provision which
provides for a severance payment equal to 200% of his base salary and 75% of a
prior year's bonus if he is terminated within twelve months of a change of
control of the Company.

The Company assumed an employment agreement between Former Choice and Thomas
Mirgon. The agreement has a term of five years from March 3,1997 and provides
for a base salary of $230,000 per annum, subject to annual adjustments and an
annual bonus of up to 50% of his base compensation, based on the Company's
performance. The agreement also provides for (i) a one-time cash payment of
$50,000, payable in two equal installments: the first within 30 days of March
3, 1997 and the second within 30 days of March 3, 1998; and (ii) a grant of
30,000 non-qualified options and 10,000 incentive stock options.

The Company entered into an employment agreement with Mark C. Wells. The
agreement has a term of five years from May 18, 1998 and provides for a base
salary of $275,000 per annum, subject to annual adjustments and an annual bonus
of up to 50% of his base compensation, based on performance. Pursuant to the
employment agreement, Mr. Wells was granted 18,750 shares of restricted Company
common stock and options to purchase 65,000 shares of common stock, of which
16,250 of the options were incentive stock options granted under the Former
Choice 1996 Long Term Incentive Plan. The remainder of the options were non-
qualified stock options.

12
<PAGE>

The Company entered into an employment agreement with Michael J. DeSantis.
The agreement has a term of five years from April 29, 1998 and provides for a
base salary of $170,000 per annum, subject to annual adjustments and an annual
bonus of up to 50% of his base compensation, based on performance.

The Company assumed an employment agreement between Former Choice and
William R. Floyd, who resigned from the Company in June 1998. The agreement had
a term of five years from October 21, 1996 and provided for a base salary of
$425,000 per annum, subject to annual adjustments and an annual bonus of up to
60% of his base compensation, based on performance (including a customer
satisfaction component). Pursuant to the employment agreement, prior to the
Spinoff, Former Choice granted to Mr. Floyd 85,470 shares of restricted Former
Choice common stock and options to purchase 307,693 shares of Former Choice
common stock, of which 34,188 of the options were incentive stock options
granted under the Former Choice 1996 Long Term Incentive Plan. The remainder of
the options were non-qualified stock options. Upon assumption of the Employment
Agreements by the Company, such restricted stock and options were adjusted and
converted into Company common stock and options. In connection with his
resignation, the Company and Mr. Floyd entered into an Agreement which
terminated the employment agreement and provided for one-year of base salary
and automobile allowance, continued vesting of stock options until June 16,
1999, and the vesting of one-half of the restricted common stock which vested
on November 4, 1998. The remaining options and restricted stock were forfeited.

The Company entered into an employment agreement with Donald H. Dempsey, who
resigned from the Company in July, 1998. The agreement had a term of five years
from January 12, 1998 and provided for a base salary of $325,000 per annum,
subject to annual adjustments, and an annual bonus of up to 55% of his base
compensation, based upon the Company's performance. The agreement also provided
for an award of 17,000 restricted shares of the Company's common stock and
options to acquire 100,000 shares of the Company's common stock, both granted
on January 12, 1998. Upon his resignation, all options and restricted stock
were forfeited.

On December 18, 1997, the Company entered into a consulting agreement with
Barry L. Smith under which Smith provided consulting services to the Company
upon his retirement in May 1998 until December 15, 1998. Smith received
consulting fees of $132,500 during the term of the consulting agreement. Smith
agreed that during the term of the agreement, he would not compete with the
Company.

Retirement Plans

The Company has adopted the Choice Hotels International, Inc. Supplemental
Executive Retirement Plan (the "SERP"). Participants are the CEO and Senior
Vice Presidents and other officers who report directly to the CEO.

Participants in the SERP receive a monthly benefit for life based upon final
average salary and years of service. Final average salary is the average of the
monthly base salary, excluding bonuses or commissions, earned in a 60 month
period which produces the highest average out of the 120 months of employment,
prior to the first occurring of the early retirement date or the normal
retirement date. The nominal retirement age is 65, and participants must have a
minimum of 15 years of service. Participants may retire at age 60 and may elect
to receive reduced benefits commencing prior to age 65, subject to Board
approval. All of the Named Officers who are participants, except for Mr. Smith,
are age 55 or younger, so that none of their compensation reported above would
be included in the final average salary calculation. See "Employment
Agreements" for a discussion of the terms applicable to Mr. Floyd's
participation in the SERP.

13
<PAGE>

Assuming that the following officers continue to be employed by the Company
until they reach age 65, their credited years of service are as follows:

<TABLE>
<CAPTION>
Current Years Years of Service
Name of Individual of Service at Age 65
------------------ ------------- ----------------
<S> <C> <C>
Charles A. Ledsinger....................... 0 16
Thomas Mirgon.............................. 2 24
Mark C. Wells.............................. 1 17
Michael J. DeSantis........................ 3 28
</TABLE>

The table below sets forth estimated annual benefits payable upon retirement
to persons in specified compensation and years of service classifications.
These benefits are straight life annuity amounts, although participants have
the option of selecting a joint and 50% survivor annuity or ten-year certain
payments. The benefits are not subject to offset for social security and other
amounts.

Years of Service/Benefit as
Percentage of Final Average Salary

<TABLE>
<CAPTION>
25 or
Remuneration 15/15% 20/22.5% more/30%
------------ ------- -------- --------
<S> <C> <C> <C>
$300,000 $45,000 $67,500 $90,000
350,000 52,500 78,750 105,000
400,000 60,000 90,000 120,000
450,000 67,500 101,250 135,000
500,000 75,000 112,500 150,000
600,000 90,000 135,000 180,000
</TABLE>

In October 1997, the Company established the Choice Hotels International,
Inc. Retirement Savings and Investment Plan (the "401(k) Plan"). The 401(k)
Plan is a defined contribution retirement, savings and investment plan
qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), and includes a cash or deferred arrangement under Section 401(k)
of the Code. All employees age 21 or over and who have worked for the Company
for a twelve month period during which such employee completed at least 1,000
hours will be eligible to participate. Subject to certain non-discrimination
requirements, each employee will be able to contribute an amount to the 401(k)
Plan on a pre-tax basis up to 15% of the employee's salary, but not more than
the current Federal limit of $10,0 00. The Company will match contributions
made by its employees subject to certain limitations. The amount of the match
will be equal to a percentage of the amount of salary reduction contribution
made on behalf of a participant during the plan year based upon a formula that
involves the profits of the Company for the year and the number of years of
service of the participant. Amounts contributed by the Company pursuant to its
401(k) Plan for Named Officers are included in the Summary Compensation Table
under the column headed "All Other Compensation."

The Company also adopted the Choice Hotels International, Inc. Non-Qualified
Retirement Savings and Investment Plan ("Non-Qualified Savings Plan"). Certain
select highly compensated members of management of the Company will be eligible
to participate in the Non-Qualified Savings Plan. The Non-Qualified Savings
Plan is structured so as to provide the participants with a pre-tax savings
vehicle to the extent that pre-tax savings are limited under the 401(k) Plan as
a result of various governmental regulations, such as non-discrimination
testing. Amounts contributed by the Company under its Non-Qualified Savings
Plan for fiscal year 1998 for the Named Officers are included in the Summary
Compensation Table under the column headed "All Other Compensation."

The Company match under the 401(k) Plan and the Non-Qualified Savings Plan
is limited to a maximum aggregate of 6% of the annual salary of a participant.
Likewise, participant contributions under the two plans will not exceed the
aggregate of 15% of the annual salary of a participant.

14
<PAGE>

THE FOLLOWING COMPENSATION COMMITTEE REPORT AND THE PERFORMANCE GRAPH THAT
APPEARS IMMEDIATELY AFTER SUCH REPORT SHALL NOT BE DEEMED TO BE SOLICITING
MATERIAL OR TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 OR INCORPORATED
BY REFERENCE IN ANY DOCUMENT SO FILED.

BOARD COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION

During part of fiscal year 1998, there were two compensation committees for
the Company, the Compensation/Key Executive Stock Option Plan Committee (the
"Committee") and the Compensation/Key Executive Stock Option Plan Committee No.
2 ("Committee No. 2"). The role of Committee No. 2, which was comprised of
"outside directors" as defined in Section 162(m)(3) of the Code, was to approve
awards under the 1997 Long-Term Incentive Plan to the Chief Executive Officer
and the Named Officers defined below. However, since the retirement of Stewart
Bainum from the Board of Directors, the role of Committee No. 2 has been
assumed by the Committee and Committee No. 2 has been abolished. The current
members of the Committee, Messrs. Robertson (Chairman), Malek and Ms. Bainum,
were appointed effective November 21, 1997.

The following philosophy and principles have been set forth as a framework
within which the Committee will operate.

Compensation Committee Philosophy and Guiding Principles

. Attract and retain talented management;

. Closely align management's interests and actions with those of
shareholders through the establishment of appropriate award vehicles;

. Reward employees for enhancing shareholder value through sustained
improvement in earnings per share;

. Position base pay at market so that the Company can vary total
compensation costs with financial results by means of variable pay; and

. Recognize the concept that executive officers individually, and as a
group, should have a significant ownership stake in the Company.

Executive Compensation Policies

Compensation Levels

The Committee relates total compensation levels for the Company's executive
officers to the total compensation paid to similarly situated executives based
on various independently published compensation surveys, primarily conducted
and evaluated by independent consultants. Summary data on companies of similar
size in the service sector are used as the primary comparison and companies in
the hotel industry are used as a secondary comparison. Total compensation is
targeted to approximate the median of the competitive market data and
comparison companies. However, because of the performance-oriented nature of
the incentive programs, total compensation may exceed market norms when the
Company's targeted performance goals are exceeded. Similarly, total
compensation may lag the market when performance goals are not achieved.
Compensation for the executive officers, other than the Chief Executive
Officer, was set in January 1998. In June 1998, William R. Floyd, Chief
Executive Officer and President, resigned from the Company. In September 1998,
Charles A. Ledsinger, Jr. was appointed Chief Executive Officer and President.
For the twelve months ended December 31, 1998, compensation for the current
President and Chief Executive Officer was slightly below the median while
compensation for all of the other executive officers, as a group, was at or
above the median.

15
<PAGE>

One of the comparison companies, LaQuinta Hotel Corporation, was not
included as part of the Peer Group Index (defined below) for the performance
graph, see "Performance Graph", because it in July 1998, it was acquired by
Meditrust Companies, which has diversified holdings in real estate, healthcare
and hospitality. It was included as a comparison company for compensation
purposes because such comparison was done before the acquisition.

Policy with Respect to Qualifying Compensation for Deductibility

Section 162(m) of the Code imposes a $1 million ceiling on tax-deductible
compensation paid to the Chief Executive Officer and the next four most highly
compensated executive officers.

The Company's policy with respect to the deductibility limit of Section
162(m) of the Internal Revenue Code generally is to preserve the federal income
tax deductibility of compensation paid when it is appropriate and is in the
best interests of the Company and its stockholders. However, the Company
reserves the right to authorize the payment of nondeductible compensation if it
deems that is appropriate. In connection with Charles A. Ledsinger's employment
agreement, Mr. Ledsinger was granted 65,842 non-performance based restricted
shares of Company Common Stock which vest in three equal annual installments
beginning July 31, 1999. At vesting (unless Mr. Ledsinger elects to defer
receipt), the fair market value of the stock will be compensation to Mr.
Ledsinger and included in calculating the $1 million ceiling. Additionally, the
employment agreement provides for options to purchase 498,563 shares of Company
Common Stock which were granted outside of the 1997 Incentive Plan and which
vest in five equal yearly installments beginning July 31, 1999. Upon the
exercise of such options by Mr. Ledsinger during any fiscal year, his gain (the
difference between the fair market value on the date of exercise and the
exercise price) will be included in calculating the compensation for that
fiscal year for which the federal income tax deduction is disallowed. The
Committee intends to monitor the Company's compensation programs with respect
to such laws.

Annual Compensation

The base salary pay practice as previously adopted by the Former Choice
Compensation Committee is to target compensation at the 55th percentile of the
market range among the comparison groups for a particular position and to
adjust as appropriate for experience and performance.

Annual merit adjustments for the executive officers affecting compensation
paid in the twelve months ended December 31, 1998 were set in January 1998.

In 1997, the Committee revised its performance measurements for awards under
the annual cash bonus program to focus heavily on management's responsibility
to deliver earnings per share based on earnings per share from continuing
operations at established annual targets. For executive officers other than the
Chief Executive Officer, the measurements include specific performance
objectives directly accountable to the executive officer. These performance
objectives, where applicable, could include licensee/customer satisfaction and
RevPAR and would incorporate each executive officer's accountability for the
successful execution of key initiatives tied to achievement of the Company's
strategic plan. For the 1998 fiscal year, the awards under the annual cash
bonus program were based 75% on achieving increased earnings per share and 25%
on achieving performance objectives. For this period, actual performance
exceeded the goals for earnings per share.

Long- Term Incentives

The Company will award long-term incentives under the 1997 Incentive Plan.
The plan gives the Committee the latitude of awarding Incentive Stock Options,
non-qualified stock options, restricted stock, and other types of long-term
incentive awards. The recommended awards were developed by analyzing peer group
average market data and the Company's past practice. The Committee reviewed and
approved a Stock Option Guide Chart for the Company's executives which utilizes
a market based salary multiple to establish a competitive range of stock
options from which executive awards could be determined.

16
<PAGE>

Compensation of the Chief Executive Officer

Mr. Floyd served as Chief Executive Officer and President until June 1998.
His base salary was established by his rights under his employment agreement,
approved by the Committee. The base salary was reviewed each year by the
Committee and was subject to merit increases based primarily on his achievement
of performance objectives and the comparison to competitive market data and the
comparison companies. In September 1997, the Committee approved a 5% merit
increase to Mr. Floyd's base salary.

Under the annual cash bonus program, Mr. Floyd had the potential to be
awarded up to 60% of his base salary if bonus objectives were achieved. Unlike
the other executive officers, Mr. Floyd's bonus objectives were tied 100% to
earning per share. Mr. Floyd received his full bonus payout for fiscal year
1997 in February 1998.

Mr. Ledsinger was appointed Chief Executive Officer and President in August
1998. His base salary is established by his rights under his employment
agreement, approved by the Committee. The base salary is reviewed each year by
the Committee and is subject to merit increases based primarily on his
achievement of performance objectives and the comparison to competitive market
data and the comparison companies. The performance objectives vary from year to
year but in general relate to such matters as positioning the Company for
growth, achieving the Company's strategic plan and other various financial
goals. Although no specific weights are assigned to any particular objective, a
greater emphasis is placed on corporate and personal performance than on
competitive practices within the industry. In February 1999, the Committee
approved a 5% annualized (3.75% pro rata) merit increase to Mr. Ledsinger's
base salary.

Under the annual cash bonus program, Mr. Ledsinger has the potential to be
awarded up to 60% of his base salary if bonus objectives are achieved. Unlike
the other executive officers, Mr. Ledsinger's bonus objectives are tied 100% to
earning per share. For the fiscal year ended December 31, 1998, actual
performance exceeded the goals for earnings per share. In addition to the pro
rata bonus payout for fiscal year 1998, Mr. Ledsinger's employment agreement
provided for a make-whole provision with respect to the pro rata portion of a
bonus from his previous employer which he forfeited when he accepted employment
with the Company.

THE COMPENSATION COMMITTEE

Jerry E. Robertson, Chairman
Frederic V. Malek
Barbara Bainum

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<PAGE>

PERFORMANCE GRAPH

The following graph compares the performance of Choice common stock with the
performance of the New York Stock Exchange Composite Index ("NYSE Composite
Index") and a peer group index (the "Peer Group Index") by measuring the
changes in common stock prices from October 16, 1997, plus assumed reinvested
dividends. The Commission's rules require that the Company select a peer group
in good faith with which to compare its stock performance by selecting a group
of companies in lines of business similar to its own. Accordingly, the Company
has selected a peer group that includes companies which are actively traded on
the New York Stock Exchange and the NASDAQ Stock Market and which are in the
franchising and/or hospitality industry. The common stock of the following
companies have been included in the Peer Group Index: Prime Hospitality
Corporation, Marriott International, Inc., Promus Hotel Corporation, Cendent
Corporation and Hilton Hotels Corp.

The graph assumes that $100 was invested on October 16, 1997, in each of
Choice common stock, the NYSE Composite Index and the Peer Group Index, and
that all dividends were reinvested. In addition, the graph weighs the
constituent companies on the basis of their respective capitalization, measured
at the beginning of each relevant time period.

<TABLE>
<CAPTION>
October 10, December 31, March 31, June 30, September 30, December 31,
1997 1997 1998 1998 1998 1998
----------- ------------ --------- -------- ------------- ------------ ---
<S> <C> <C> <C> <C> <C> <C> <C>
Choice Hotels 100 94.1 108 79.8 74.6 80.5
NYSE Composite Index 100 101.5 114.2 116.3 102.0 121.8
Peer Group 100 100.6 111.4 98.3 65.5 77.8
</TABLE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS RELATED TRANSACTIONS

Creative Hotel Associates LLC is a franchisee of the Company with Sleep Inns
in Ormond Beach, Florida and Albuquerque, New Mexico and a Comfort Inn and
Suites in Carbondale, Colorado. Robert C. Hazard, Jr. is

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<PAGE>

Chairman of Creative Hotel Associates LLP and Gerald W. Petitt is the President
and Chief Executive Officer. Total payments to the Company for fiscal year 1998
were $212,000. The Company and Creative Hotels have also entered into an
agreement which provides for no royalty fees for two selected hotels for a
period of five years. Mr. Petitt is a director of the Company and Mr. Hazard,
Jr. retired from the Board of Directors in August, 1998.

Pursuant to its relocation policy, the Company entered into a bridge loan
agreement with Charles A. Ledsinger in the amount of $754,000 for the purchase
of his residence. The bridge loan was interest-free and was repaid in March
1999. Also under its relocation policy, the Company purchased Mr. Ledsinger
Jr.'s previous residence. In March 1999, the Company sold the residence to a
third party.

Relationship with Manor Care

Stewart Bainum, Jr. is the Chairman of the Company's Board of Directors and
is also the Chairman of the Board of Directors of HCR Manor Care, the parent
company of Manor Care. Additionally, Stewart Bainum, who retired as a Director
of the Company in August 1998, is a director of HCR Manor Care and James Rempe,
who is a Director of the Company, served as Senior Vice President and General
Counsel of Manor Care until December 1998. Additionally, Messrs. Bainum, Bainum
Jr. and Rempe, as well as certain other officers and directors of HCR Manor
Care own shares and/or options or other rights to acquire shares of the
Company.

In connection with the Spinoff, the Company, Sunburst and Manor Care entered
into an Omnibus Amendment and Guaranty Agreement (the "Amendment and Guaranty")
pursuant to which the Company (i) became a party to certain agreements entered
into between Manor Care and Former Choice at the time of the Former Choice
Spinoff, (ii) guaranteed Sunburst's payment obligations under the Gaithersburg
Lease and the Silver Spring Lease (each as defined below), (iii) guaranteed
Sunburst's payment obligations to Manor Care under an agreement pursuant to
which Manor Care provided to Former Choice/Sunburst certain consulting
services, and (iv) guaranteed Sunburst's payment obligations under a loan note
(the "MNR Note") in the principal amount of $225,772,500 payable by Former
Choice to MNR Finance Corp., a subsidiary of Manor Care. The Gaithersburg Lease
and the Silver Spring Lease and the related guarantees were terminated in May,
1998, see "Relationship with Sunburst--Lease Agreements." All amounts due under
the MNR Note were repaid at the time of the Spinoff.

Relationship with Sunburst

In connection with the Spinoff, the Company and Sunburst entered into
certain agreements intended to govern the relationship between the parties
after the Spinoff. In addition, Sunburst is the Company's largest franchisee,
with a portfolio of 88 hotels containing 12,125 rooms located in 28 states as
of March 1999. The material terms of certain of these agreements and other
arrangements, entered into between the Company and Sunburst, including the
franchise agreements with respect to Sunburst's hotels, are described below.

Distribution Agreement

In connection with the Spinoff, the Company and Sunburst entered into a
Distribution Agreement which provided for, among other things, the principal
corporate transactions required to effect the Spinoff, the assumption by the
Company of all liabilities relating to its business and the allocation between
the Company and Sunburst of certain other liabilities, certain indemnification
obligations of Sunburst and Choice and certain other agreements governing the
relationship between the Company and Sunburst with respect to or in consequence
of the Spinoff.

Subject to certain exceptions, the Company has agreed to indemnify Sunburst
and its subsidiaries against any loss, liability or expense incurred or
suffered by Sunburst or its subsidiaries arising out of or related to the
failure by the Company to perform or otherwise discharge liabilities allocated
to and assumed by the Company under the Distribution Agreement, and Sunburst
has agreed to indemnify the Company against any loss, liability or expense
incurred or suffered by the Company arising out of or related to the failure by
Sunburst to perform or otherwise discharge the liabilities retained by Sunburst
under the Distribution Agreement. The foregoing cross-indemnities do not apply
to indemnification for tax claims and liabilities, which are addressed in the
Tax Sharing Agreement described below.

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<PAGE>

To avoid adversely affecting the intended tax consequences of the Spinoff,
each of the Company and Sunburst will agree to comply in all material respects
with each representation and statement made to any taxing authority in
connection with the IRS tax ruling or any other tax ruling obtained by the
Company and Sunburst in connection with the Spinoff.

Under the Distribution Agreement, each of the Company and Sunburst were
granted access to certain records and information in the possession of the
other, and requires the retention of such information in its possession for
specified periods and thereafter requires that each party give the other prior
notice of its intention to dispose of such information. In addition, the
Distribution Agreement provides for the allocation of shared privileges with
respect to certain information and requires each of the Company and Sunburst to
obtain the consent of the other prior to waiving any shared privilege.

In accordance with the Distribution Agreement, the Company agreed to assume
and pay certain liabilities of Sunburst, subject to the Company maintaining a
minimum net worth of $40 million, at the date of the Spinoff. As of December
31, 1997 the Company reflected a $25 million receivable due from Sunburst on
its consolidated balance sheet. In 1998, net payments of approximately $8
million were collected from Sunburst in cash. On December 28, 1998, the Company
and Sunburst amended the Strategic Alliance Agreement (defined below) entered
into in connection with the Spinoff. As part of that amendment, the Company
exchanged the remaining $17 million balance in return for, among other things,
the termination of Sunburst's option for the exclusive rights to the MainStay
Suites brand and a commitment from Sunburst to build a total of 25 MainStay
Suites.

Strategic Alliance Agreement

At the time of the Spinoff, the Company and Sunburst entered into a
Strategic Alliance Agreement pursuant to which: (i) Sunburst granted a right of
first refusal to the Company to franchise any lodging property that Sunburst
develops or acquires and intends to operate under franchise; (ii) Sunburst has
also agreed, barring a material change in market conditions, to continue to
develop Sleep Inns and MainStay Suites hotels so that it will have opened a
total of 14 Sleep Inns and 15 MainStay Suites hotels by October 15, 2001 (48
months of the Spinoff); (iii) The Company granted to Sunburst an option,
exercisable under certain circumstances, to purchase the brand names, marks,
franchise agreements and other assets of the MainStay Suites hotel system; (iv)
the Company and Sunburst agreed to continue to cooperate with respect to
matters of mutual interest, including new product and concept testing for the
Company in hotels owned by Sunburst; and (v) Sunburst authorized the Company to
negotiate with third party vendors on Sunburst's behalf for the purchase of
certain items. The Strategic Alliance Agreement extends for a term of 20 years
with rights of mutual termination on the fifth, tenth and fifteenth
anniversaries.

On December 28, 1998, Sunburst and the Company amended the Strategic
Alliance Agreement to: (i) cancel Sunburst's option to acquire the MainStay
Suites system; (ii) change Sunburst's development obligations to 13 Sleep Inns
and 25 MainStay Suites by October 15, 2001; and (iii) provide certain other
global amendments to Sunburst's franchise agreements.

Amendment and Guaranty

In connection with the Spinoff, the Company entered into the Amendment and
Guaranty for the purpose of adding the Company as a party to certain agreements
entered into between Former Choice and Manor Care in connection with the Former
Choice Spinoff and adding the Company as a guarantor of certain payment
obligations of Sunburst to Manor Care pursuant to agreements between Former
Choice and Manor Care. For a discussion of the Amendment and Guaranty, see
"Certain Relationships and Related Transactions--Relationship with Manor Care"
and "--Lease Agreements."

Term Note

In connection with the Spinoff, the Company loaned to Sunburst approximately
$115 million which was used by Sunburst to repay approximately $96 million
outstanding under Former Choice's credit facility and to repay that portion of
the Former Choice indebtedness under the MNR Note allocated to Sunburst in
connection with the Spinoff (approximately $37 million).

20
<PAGE>

This loan is represented by a Term Note in an aggregate principal amount of
$115 million (the "Term Note"). The Term Note has a maturity of five years and
initially accrues interest monthly at an simple rate of 11% per annum though
October 14, 2000. At October 15, 2000, interest accrues at a rate of 11% per
annum compounded daily. The Term Note is subordinated to all senior debt of
Sunburst and contains certain restrictive covenants comparable to those
contained in Sunburst's senior credit facility (including restrictions on
Sunburst's ability to make certain investments, incur debt, pay dividends,
dispose of assets and create liens on its assets).

Corporate Services Agreement

The Company and Sunburst entered into a Corporate Services Agreement which
provides that the Company will provide to Sunburst certain corporate support
services, including human resources, accounting, tax and computer systems
support, and Sunburst will provide to the Company certain services including
asset management and accounts payable processing. As of March 31, 1999, all
services provided by each party under the Corporate Services Agreement, except
for human resources and tax services provided by the Company, will be
terminated. During fiscal year 1998, the Company paid Sunburst $168,660 and
Sunburst paid the Company $1,664,750 for services under the Corporate Services
Agreement.

Consulting Agreement

The Company and Sunburst entered into a Consulting Agreement in which
Sunburst will provide consulting and advisory services to the Company related
to financial issues affecting Sunburst. The term of the agreement commences
October 15, 1997 and terminated on November 1, 2001. Sunburst is entitled to an
annual retainer fee equal to 30% of the annual compensation (including base
salary, incentive bonus and fringe benefits) paid to James A. MacCutcheon by
Sunburst during such period. If Mr. MacCutcheon ceases to be employed by
Sunburst, the agreement can be terminated by either party, but if terminated by
Sunburst, then the Company shall pay Sunburst a termination fee equal to 30% of
any amount due by Sunburst to Mr. MacCutcheon under his employment agreement as
a result of his separation,

During fiscal year 1998, the Company paid Sunburst $116,268 pursuant to the
Consulting Agreement.

Tax Sharing Agreement

The Company and Sunburst have entered into a Tax Sharing Agreement for
purposes of allocating tax liabilities of Former Choice from before the Spinoff
among the Company and Sunburst and their respective subsidiaries. In general,
Sunburst will be responsible for (i) filing consolidated federal income tax
returns for the Sunburst affiliated group and combined or consolidated state
tax returns for any group that includes a member of the Sunburst affiliated
group, including in each case the Company and its subsidiaries for the periods
of time that such companies were members of the applicable group and (ii)
paying the taxes relating to such tax returns to the applicable taxing
authorities (including any subsequent adjustments resulting from the
redetermination of such tax liabilities by the applicable taxing authorities).
The Company will reimburse Sunburst for the portion of such taxes that relates
to the Company and its subsidiaries, as determined based on their hypothetical
separate company income tax liabilities. The Company and Sunburst have agreed
to cooperate with each other, and to share information, in preparing such tax
returns and in dealing with other tax matters.

Employee Benefits Allocation Agreement

In connection with the Spinoff, the Company and Sunburst entered into an
Employee Benefits and Other Employment Matters Allocation Agreement (the
"Employee Benefits Allocation Agreement"). The Employee Benefits Allocation
Agreement provides for the allocation subsequent to the Spinoff of employee
benefits, as they relate to employees who remained employed by Sunburst or its
subsidiaries ("Sunburst Employees") after the Spinoff and employees who are
employed by the Company or its subsidiaries after the Spinoff ("Choice
Employees"). Pursuant to the Employee Benefits Allocation Agreement, Sunburst
will continue sponsorship of

21
<PAGE>

the various Sunburst profit sharing plans, stock plans and health and welfare
plans with respect to Sunburst Employees. The Company has established a number
of plans which allow it to provide to its employees substantially the same
benefits currently provided to them as employees of Former Choice. The Employee
Benefits Allocation Agreement provides for cross-guarantees between the Company
and Sunburst with respect to the payment of benefits under certain plans and
for cross-indemnification with respect to employment-related claim relating to
prior to the Spinoff.

The Employee Benefits Allocation Agreement also provided for the adjustment
of outstanding options to purchase shares of Sunburst common stock held by
Sunburst Employees, Choice Employees and employees of Manor Care who hold such
options as a result of the Former Choice Spinoff. As a result of these
adjustments, the Company granted options to purchase approximately 5,222,474
shares of common stock to Choice Employees, Sunburst Employees and employees of
Manor Care.

Lease Agreements

Pursuant to the Amendment and Guaranty, the Company was added as a guarantor
of Sunburst's obligations under a lease for certain office space in
Gaithersburg, Maryland (the "Gaithersburg Lease") a lease agreement with
respect to the complex at 10750 and 10770 Columbia Pike, Silver Spring,
Maryland (the "Silver Spring Complex") at which Sunburst's principal executive
offices were located (the "Silver Spring Lease"). Additionally, Sunburst and
Choice entered into a sublease agreement (the "Silver Spring Sublease") with
respect to the Silver Spring Lease for the Company's principal executive
offices at 10750 Columbia Pike,
Silver Spring, Maryland, 20901. The Gaithersburg Lease, the Silver Spring Lease
and the Silver Spring Sublease were canceled in May, 1998. In fiscal year 1998,
the Company paid to Sunburst $977,500 under the Silver Spring Sublease.

Transitional Service Agreements

The Company and Sunburst have entered into a number of agreements pursuant
to which the Company provides, or will provide, certain continuing services to
Sunburst for a transitional period. Such services will be provided on market
terms and conditions. Subject to the termination provisions of the specific
agreements, Sunburst will be free to procure such services from outside vendors
or may develop an in-house capability in order to provide such services
internally. Management believes that these agreements are based on commercially
reasonable terms including pricing and payment terms. The primary transitional
services agreements are summarized below.

Pursuant to the Employee Benefits Administration Agreement, the Company
provides certain benefits, compensation and other services. Such other services
may include benefit plan administration and accounting, COBRA administration,
regulatory compliance and certain fiduciary services. Pursuant to the Tax
Administration Agreement, the Company provides certain sales, use, occupancy,
real and personal property tax return administration, audit and appeals
services for Sunburst. Pursuant to the Vehicle Lease Agreement, the Company
provides the use of certain vehicles to Sunburst.

Franchise Agreements

The Clarion, Comfort, Econo Lodge, Sleep Inn, Quality, MainStay Suites and
Rodeway marks are each owned by the Company. Each hotel property owned by
Sunburst is subject to a franchise agreement between the Company and Sunburst,
as franchisee (the "Franchise Agreements"). (The material terms of such
agreements are described below.) Total fees paid to the Company for
franchising, royalty, marketing and reservation fees for fiscal year 1998 were
$11.2 million.

Term.

Each Franchise Agreement has an initial term of 20 years, except the
agreement for Tempe, Arizona which is a year to year agreement. The Franchise
Agreements have varying original dates, from 1982 through

22
<PAGE>

1996. Certain Franchise Agreements allow for unilateral termination by either
party on the 5th, 10th, or 15th anniversary of the Franchise Agreement.

Termination by Sunburst.

Sunburst (except with respect to one property as described below) may
terminate a Franchise Agreement if the Company defaults on its material
obligations under such Franchise Agreement and fails to cure such defaults
within 30 days following written notice. The Franchise Agreement with respect
to the Quality Hotel--Arlington (the "Non-Standard Franchise Agreement") does
not allow Sunburst to terminate such Franchise Agreement.

Termination by Choice.

The Company (except with respect to the Non-Standard Franchise Agreement)
may suspend or terminate a Franchise Agreement at any time, if, among other
things, Sunburst (a) fails to submit reports when due; (b) fails to pay amounts
due under such Franchise Agreement; (c) fails to pay its debts generally as
they become due; or (d) receives two or more notices of default for similar
reasons for any 12 month period. The Company (except with respect to the Non-
Standard Franchise Agreement) may terminate a Franchise Agreement immediately
upon notice to Sunburst if, among other things, (a) certain bankruptcy events
occur with respect to Sunburst; (b) Sunburst loses possession or the right to
possession of the Property; (c) Sunburst breaches transfer restrictions in the
related Franchise Agreement; (d) any action is taken to dissolve or liquidate
Sunburst; or (e) there is a threat or danger to the public health and safety in
the continued operation of the Property. If a Franchise Agreement is terminated
by the Company for any of the reasons discussed in the immediately preceding
two sentences, Sunburst is required to pay Special Interest equal to the
product of (i) the average monthly gross room revenue for the preceding 12
months, multiplied by (ii) the royalty fee percentage (more fully described
below), multiplied by (iii) the number of months unexpired under the term of
the related Franchise Agreement (in no event less than $21-$50 multiplied by
the specified room count).

The Non-Standard Franchise Agreement has termination provisions similar to
those in the other Franchise Agreements. The Company may terminate the Non-
Standard Franchise Agreement immediately upon notice to Sunburst if, among
other things, (a) certain bankruptcy events occur with respect to Sunburst; (b)
certain breaches of the related agreements are not remedied; (c) any action is
taken to dissolve or liquidate Sunburst; or (d) legal proceedings against
Sunburst are not dismissed within a certain period of time. Upon termination,
the Franchise Agreement for the Rodeway Inn-Phoenix (Tempe) calls for Special
Interest of the greater of (i) $50,000 and (ii) the sum of the previous two
years of fees paid by the licensee.

Fees.

The Franchise Agreements require the payment of certain fees and charges,
including the following: (a) a royalty fee of between 1.93% to 5.0% of monthly
gross room revenues; (b) a marketing fee of between 0.7% and 2.5% plus $0.28
per day multiplied by the specified room count; and (c) a reservation fee of
0.88% to 1.75% of monthly gross room revenues (or 1% of monthly gross room
revenues plus $1.00 per room confirmed through Choice's reservation system).
The marketing fee and the reservation fee are subject to reasonable increases
during the term of the franchise if the Company raises such fees uniformly
among all its franchisees, generally. Late payments (i) will be a breach of the
Franchise Agreement and (ii) will accrue interest from the date of delinquency
at a rate of 1.5% per month or portion thereof.

In December 1998, the Company and Sunburst entered into an amendment which
provided that (i) Sunburst shall pay an application fee of $20,000 on all
future franchise agreements, and (ii) no royalties, marketing or reservation
fees shall be payable for a period of two years for the next ten franchise
agreements entered into after the amendment.

Certain Covenants.

The Franchise Agreements impose certain affirmative obligations upon the
Company including: (a) to lend the Franchisor an operations manual; (b) to
utilize money collected from marketing and reservation fees to

23
<PAGE>

promote those aspects of the franchise business; and (c) to periodically
inspect the Property. The Franchise Agreements also impose affirmative
obligations upon Sunburst including: (a) to participate in a specified
reservation system; (b) to keep and comply with the up-to-date version of the
Company's rules and regulations for properly running the specified franchise;
(c) to prepare monthly financial and other records; (d) to not interfere with
the franchised mark(s) and the Company's rights thereto; and (e) to maintain
certain specified insurance policies.

Assignments.

Sunburst is prohibited from directly or indirectly selling, assigning,
transferring, conveying, pledging or mortgaging its interest in the Franchise
Agreement, or any equity interest in such franchise interests without the
consent of the Company except that, among other things, certain percentages of
ownership interests in Sunburst may be transferred without the Company's
consent. The Company's consent to such transfers, will not be given unless,
among other things: (a) all monetary obligations due under the Franchise
Agreement are paid to the Company; (b) no defaults under the Franchise
Agreement remain uncured; (c) the transferee agrees in writing to upgrade the
related Property to the then-current standards; and (d) the transferee agrees
to remain liable for all obligations under the Franchise Agreement so
transferred.

The Company is permitted to assign all or any part of its rights or
obligations under the Franchise Agreements. However, the Franchise Agreements
(with the exception of the Non-Standard Franchise Agreement) do not permit the
Company to absolve itself from the obligations that it transfers under the
Franchise Agreement. Upon the assignment of the Company's obligations under the
Non-Standard Franchise Agreement, the Company will no longer be liable with
respect to the obligations it so transfers.

Noncompetition Agreement

The Company and Sunburst have entered into a noncompetition agreement that
defines the rights and obligations with respect to certain businesses to be
operated by the Company and Sunburst. Under the noncompetition agreement, for a
period of five years from the date of the Spinoff, subject to the exceptions
set forth below, Sunburst will be prohibited from conducting any business that
competes with the business operated by Former Choice transferred to the Company
as part of the Spinoff ("the Choice Business"). Sunburst will also be
prohibited from acquiring any entity conducting a business that competes with
the Choice Business, with certain exceptions outlined below, unless, prior to
such acquisition, Sunburst offers to sell such competing business to the
Company on substantially the same terms and conditions; provided, however, that
Sunburst will not be required to make such an offer to the Company where the
competing business is not readily divisible from other businesses permitted to
be held or acquired by Sunburst and the gross sales from such competing
business for the 12 months prior to such acquisition do not exceed the greater
of $1,000,000 (as adjusted for increases to the Consumer Price Index during the
term) or 5% of gross sales of the businesses to be acquired. Subject to the
foregoing, however, the noncompetition agreement does not prohibit Sunburst
from engaging in the following activities: (i) the continued operation and
development of any business operated as of the date of the Spinoff by Former
Choice and retained by Sunburst; (ii) any activities otherwise permitted under
the Strategic Alliance Agreement; (iii) the ownership of up to 5% of the equity
interests of a publicly-traded entity that competes with the Company's
business; and (iv) the ownership of equity interests of any entity that
competes with the Company's business, if (A) the competing business does not
comprise such entity's primary business, (B) the gross sales of such entity for
the prior 12 months attributable to such competing business does not exceed 20%
of such entity's consolidated gross sales, and (C) neither the fair market
value of, nor the value, if any, attributed by the acquisition agreement to,
the competing business is in excess of $5,000,000 (as adjusted for increases to
the Consumer Price Index during the term).

During the term of the noncompetition agreement, subject to the exceptions
set forth below, the Company will be prohibited from conducting any business
that competes with the business operated by Former Choice and retained by
Sunburst in the Spinoff (the "Hotel Business"). The Company is also prohibited
from acquiring any entity conducting a business that competes with the Hotel
Business, with certain exceptions outlined below, unless, prior to such
acquisition, the Company offers to sell such competing business to

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Sunburst on substantially the same terms and conditions; provided, however,
that the Company will not be required to make such an offer to Sunburst where
the competing business is not readily divisible from other business permitted
to be held or acquired by the Company and the gross revenues from such
competing business for the 12 months prior to such acquisition do not exceed
the greater of $1,000,000 (as adjusted for increases to the Consumer Price
Index during the term) or 5% of gross sales of the businesses to be acquired.
Subject to the foregoing, however, the noncompetition agreement will not
prohibit the Company from the following activities: (i) continued operation and
development of any business operated as of the date of the Spinoff by the
Company, (ii) any activities otherwise permitted under the Strategic Alliance
Agreement, (iii) the ownership of up to 5% of the equity interests of a
publicly-traded entity that competes with the Hotel Business, (iv) the
ownership of equity interests of any entity that competes with the Hotel
Business, if (A) the competing business does not comprise such entity's primary
business, (B) the gross revenue of such entity for the prior 12 months
attributable to such competing business does not exceed 20% of such entity's
consolidated gross sales, and (C) neither the fair market value of, nor the
value, if any, attributed by the acquisition agreement to, the competing
business is in excess of $5,000,000 (as adjusted for increases to the Consumer
Price Index during the term).

Potential Conflict

The ongoing relationship between the Company and Sunburst resulting from the
agreements and arrangements described above may potentially give rise to
conflict of interest between the Company and Sunburst. With respect to the
agreements between the parties, the potential exists for disagreements as to
the quality of the services provided by the parties and as to contract
compliance. Nevertheless, the Company believes that there will be sufficient
mutuality of interest between the two companies to result in a mutually
productive relationship.

In addition, Stewart Bainum Jr. serves as Chairman of the Boards of
Directors of both the Company and Sunburst. Frederick V. Malek serves as a
director of each of the Company and Sunburst. As a result of the Spinoff,
Messrs. Bainum, Jr. and Malek, as well a certain other officers and directors
of the Company and of Sunburst, also own shares and/or options or other right
to acquire shares in each of the Company and Sunburst. Appropriate polices and
procedures are followed by the Board of Directors of the Company and Sunburst
to limit the involvement of the overlapping directors (and, if appropriate,
relevant officers of such companies) in conflict situations, including
requiring them to abstain from voting as directors of either the Company or
Sunburst on certain matters which present a conflict between the two companies.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended, (the
"Exchange Act") requires the Company's reporting officers and directors, and
persons who own more than ten percent of the Company's Common Stock, to file
reports of ownership and changes in ownership on Forms 3, 4 and 5 with the
Securities and Exchange Commission (the "Commission"), the New York Stock
Exchange and the Company. Based solely on the Company's review of the forms
filed with the Commission and written representations from reporting persons
that they were not required to file Form 5 for certain specified years, the
Company believes that all of its reporting officers, directors and greater than
ten percent beneficial owners complied with all filing requirements applicable
to them during the fiscal year ended December 31, 1998, except for the
following late filings: (i) Michael J. DeSantis was one day late in filing a
Form 4, and (ii) Joseph M. Squeri was three days late in filing a Form 4.

SOLICITATION OF PROXIES

The Company will bear the cost of the solicitation. In addition to
solicitation by mail, the Company will request banks, brokers and other
custodian nominees and fiduciaries to supply proxy material to the beneficial
owners of Company common stock of whom they have knowledge, and will reimburse
them for their expenses

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in so doing; and certain directors, officers and other employees of the
Company, not specially employed for the purpose, may solicit proxies, without
additional remuneration therefor, by personal interview, mail, telephone or
telegraph.

RELATIONSHIP WITH INDEPENDENT PUBLIC ACCOUNTANTS

Since 1980, Arthur Andersen LLP has served as the Company's independent
public accounting firm. It is expected that representatives of Arthur Andersen
will be present at the annual meeting. They will be given an opportunity to
make a statement if they desire to do so, and it is expected that they will be
available to respond to appropriate questions.

PROCEDURES FOR STOCKHOLDER PROPOSALS AND NOMINATIONS

Under the Company's Bylaws, nominations for director may be made only by the
Board of Directors or a committee of the board, or by a stockholder entitled to
vote who has delivered notice to the Company not less than 60, nor more than
90, days before the first anniversary of the preceding year's annual meeting.

The Bylaws also provide that no business may be brought before an annual
meeting except as specified in the notice of meeting (which includes
stockholder proposals that the Company is required to set forth in its proxy
statement under SEC Rule 14a-8) or as otherwise brought before the meeting by
or at the direction of the board or by a stockholder entitled to vote who has
delivered notice to the Company (containing certain information specified in
the Bylaws) within the time limits described above for a nomination for the
election of a director. These requirements are separate and apart from, and in
addition to, the SEC's requirements that a stockholder must comply with in
order to have a stockholder proposal included in the Company's proxy statement
under SEC Rule 14a-8.

Stockholder Proposals for 2000 Annual Meeting

Stockholder proposals intended to be presented at the Company's 2000 Annual
Meeting of Stockholders must be received by the Company's Corporate Secretary
no later than February 28, 2000. Such proposals must meet the requirements set
forth in the rules and regulations of the SEC in order to be eligible for
inclusion in the Company's 2000 proxy materials.

OTHER MATTERS TO COME BEFORE THE MEETING

The Board of Directors does not know of any matters which will be brought
before the 1999 annual meeting other than those specifically set forth in the
notice of meeting. If any other matters are properly introduced at the meeting
for consideration, including, among other things, consideration of a motion to
adjourn the meeting to another time or place, the individuals named on the
enclose proxy card will have discretion to vote in accordance with their best
judgment, unless otherwise restricted by law.

By Order of the Board of Directors

Michael J. DeSantis
Secretary

Dated: March 29, 1999