US FRANCHISE SYSTEMS INC/, 10-K, 2000-03-30

US FRANCHISE SYSTEMS INC/
10-K, 2000-03-30
HOTELS & MOTELS

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
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FORM 10-K

(MARK ONE)

<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

/ / 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
</TABLE>

COMMISSION FILE NUMBER 0-23941
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U.S. FRANCHISE SYSTEMS, INC.

(Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S> <C>
DELAWARE 58-2361501
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

13 CORPORATE SQUARE, SUITE 250 30329
ATLANTA, GEORGIA (Zip Code)
(Address of Principal Executive
Offices)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 321-4045

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Class A Common Stock, $0.01 par value

TITLE OF EACH CLASS

Indicate by check mark whether the registrant: (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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 / /

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 this Form 10-K or any
amendment to this Form 10-K. / /

The aggregate market value of the outstanding shares of the registrant's
Class A Common Stock and Class B Common Stock held by non-affiliates of the
registrant was approximately $74,136,465 as of March 10, 2000. There were
17,245,834 shares of the registrant's Class A Common Stock and 2,707,919 shares
of the registrant's Class B Common Stock outstanding as of March 14, 2000.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive proxy statement to be delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held on
May 25, 2000 are incorporated by reference in response to Part III of this
Report.

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PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K (this "Form 10-K"),
including statements under "Item 1. Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations," that
are not historical facts constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). Certain, but not necessarily all, of such forward-looking statements can
be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of U.S. Franchise Systems, Inc.
(the "Company" or "USFS") and its subsidiaries to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, but are not limited to, the
following: general economic and business conditions; aggressive competition in
the lodging and franchising industries; success of acquisitions and operating
initiatives; management of growth; risks relating to the Company's loans to, and
other investments in, franchisees; dependence on senior management; brand
awareness; general risks of the lodging and franchising industries; development
risk and construction; risk of loss of management contracts and uncertain future
of the management business; risk relating to the availability of financing for
franchisees; the existence or absence of adverse publicity; changes in business
strategy or development plan; availability, terms and deployment of capital;
business abilities and judgment of personnel; availability of qualified
personnel; labor and employee benefit costs; changes in, or failure to comply
with, government regulations; construction schedules; the costs and other
effects of legal and administrative proceedings; and other factors referenced in
this Form 10-K. The Company will not undertake and specifically declines any
obligation to publicly release the results of any revisions which may be made to
any forward-looking statement to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events. The Company does not intend to update the information contained herein
with respect to its exploration of potential strategic alternatives for any
future developments or circumstances unless and until there is a definitive
transaction agreement entered into between the Company and any third party or
until its exploration of potential alternatives is definitively terminated.
There can be no assurance whatsoever that any transaction between the Company
and any third party will take place or, even if one does occur, about the nature
and extent of any terms and conditions of any such potential transaction. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Risk Factors".

ITEM 1. BUSINESS.

USFS was formed in August 1995 to acquire, market and service
well-positioned brands with potential for rapid unit growth primarily through
franchising. The Company's brands, which are in the lodging industry, are
Microtel Inn & Suites, Hawthorn Suites and Best Inn & Suites. The Company
acquired the rights to these brands because of their potential for significant
growth, which reflects, among other things, their potential profitability for
franchisees at the property level and their positions in attractive segments of
the lodging industry. Microtel primarily competes in the budget and economy
segments, Hawthorn primarily in the upscale and mid-market segments, and Best
primarily in the mid-market and economy segments of the lodging industry. The
Company also manages certain properties on behalf of franchisees. Since it began
selling franchises in January 1996, the number of USFS branded hotel properties
open or in development has grown from 27 to 1,218 as of December 31, 1999,
consisting of 398 open, 120 under construction, 414 for which franchise
agreements had been executed but that were not under construction and 286
accepted applications from prospective franchisees. There can be no assurances
that hotels in

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development or for which applications have been accepted will result in open
hotels. See "Risk Factors--Dependence on, and Obstacles to, Hotel Openings."

As a franchisor, the Company licenses the use of its brand names to
independent hotel owners and operators (i.e., franchisees). The Company provides
its franchisees with a variety of benefits and services designed to:
(i) decrease development costs, (ii) shorten the time frame and reduce the
complexity of the construction process and (iii) increase occupancy rates,
revenues and profitability of the franchised properties. The Company offers
prospective franchisees a business format, design and construction assistance
(including architectural plans), quality standards, training programs, national
reservations systems, national and local advertising and promotional campaigns
and volume purchasing discounts.

The Company expects that its future revenues will consist primarily of
(i) franchise royalty fees, (ii) franchise application fees, (iii) various
management fees, (iv) international master license agreement fees, and
(v) payments made by vendors who supply the Company's franchisees with various
products and services. The Company recognizes franchise application fees as
revenue only upon the opening of the underlying hotels.

USFS announced that in recent months it received a number of unsolicited
inquiries regarding the possible sale of the Company, including inquiries from
several competitors. In response to those unsolicited inquiries, the Company
retained Banc of America Securities LLC as an advisor. The Company has had
discussions with several of those persons, although none resulted in offers
which were satisfactory to the Company and to the Board of Directors. The
Company has requested that Banc of America Securities assist the Company more
generally in evaluating strategic alternatives and opportunities that may be or
become available to the Company.

USFS does not intend to update the information contained herein with respect
to its exploration of potential strategic alternatives for any future
developments or circumstances unless and until there is a definitive transaction
agreement entered into between USFS and any third party or until its exploration
of potential alternatives is definitively terminated. There can be no assurance
whatsoever that any transaction between USFS and any third party will take place
or, even if one does occur, about the nature and extent of any terms and
conditions of any such potential transaction.

The Company was incorporated in Delaware in November 1997 for purposes of
acquiring the Hawthorn Suites brand. See "Acquisition of the Microtel, Hawthorn
Suites and Best Inns Systems--Hawthorn Acquisition." The Company's predecessor,
also known as USFS, was incorporated in Delaware in August 1995. The Company's
executive offices are located at 13 Corporate Square, Suite 250, Atlanta,
Georgia 30329 and its telephone number is (404) 321-4045. The term "the Company"
refers to USFS before the Hawthorn merger, and as the surviving corporation in
the merger.

BUSINESS STRATEGY

The Company's business strategy is to: (i) rapidly increase the number of
open Microtel, Hawthorn Suites and Best Inns hotels, (ii) operate its
administrative and franchisee support departments in order to maximize the
operating leverage inherent in the franchising business, and (iii) acquire
additional lodging or other service-oriented brands that provide attractive unit
economics to franchisees and significant growth opportunities for the Company.
To successfully accomplish its growth strategy, the Company supports its
franchisees in their efforts to develop, acquire, open and operate hotels by
assisting in the areas of public relations, construction, design, marketing,
finance, national accounts purchasing, training and in certain cases, by
providing financing and other development subsidies.

THE COMPANY'S LODGING FRANCHISE SYSTEMS

MICROTEL INN & SUITES. Microtels are distinctively styled hotels with a
residential look that offer travelers an attractive and consistent appearance,
clean, comfortable rooms and the safety of interior

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corridor room access, all for a competitive rate. Microtel typically is
categorized as a budget and economy hotel chain. Microtel's efficient
architectural design minimizes construction costs and maintenance expenses
through smaller room sizes, limited common areas, smaller land requirements and
built-in standardized furniture, all of which enable franchisees to own and
operate a Microtel at a lower cost. These lower costs may reduce a franchisee's
equity investment and may broaden its debt financing alternatives, thereby
expanding the appeal of the Microtel brand to prospective franchisees.

The Company acquired the Microtel brand in October 1995, at which time there
were 27 properties open or in development. The Company has realized the
following franchise sales growth over the past three years:

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------
1999 1998 1997
MICROTEL FRANCHISE DATA -------- -------- --------
<S> <C> <C> <C>
Properties open (1)......................................... 179 124 64
Executed agreements and under construction................ 58 62 52
Executed agreements but not under construction............ 248 276 253
Accepted applications..................................... 101 115 77
--- --- ---
Total in development and accepted applications(2)........... 407 453 382
--- --- ---
OPEN PLUS IN DEVELOPMENT PLUS ACCEPTED APPLICATIONS......... 586 577 446
=== === ===
</TABLE>

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(1) The Company does not receive royalties from 27 hotels open as of
December 31, 1999.

(2) There can be no assurance that properties in development or for which
applications have been accepted will result in open hotels. During 1999,
five previously opened hotels ceased operating as a Microtel. Since the
Microtel brand was acquired by the Company, 35% of accepted applications did
not become executed agreements and 38% of executed agreements terminated
before resulting in open hotels. See "Risk Factors--Dependence on, and
Obstacles to, Hotel Openings."

In 1999, for Microtel hotels open one year or more, average daily rate,
occupancy and Revpar was $44.13, 60.8% and $26.93, respectively.

HAWTHORN SUITES. As an upscale, extended-stay hotel, Hawthorn Suites
provides the traveler with the convenience of a hotel and the amenities
typically found in an apartment. Hawthorn Suites' hotel rooms contain
full-service kitchens with appliances, cookware and utensils, video cassette
players, modem ports, exercise facilities and valet service. Hawthorn Suites
hotels also offer a hot breakfast buffet every morning and guests are invited to
an evening social hour. A center courtyard, an outdoor pool, a multi-use sport
court, a barbecue area and a retail store selling sundry and meal items, snacks
and beverages, will also be part of newly constructed Hawthorn Suites hotels. In
addition to participating in the upscale, extended-stay segment, the Company
also franchises (i) Hawthorn Suites LTD., a mid-price, all suites hotel brand
that is designed to meet the needs of both extended-stay and transient guests,
(ii) Hawthorn Suites Golf Resorts, an all suites lodging concept located on or
near golf courses and targeted to travelers who want to combine golf with a
meeting or conference retreat experience, (iii) Hawthorn Hotel & Suites,
designed for high barrier to entry locations, such as center city and airport
markets, featuring a minimum of 25% suites with the remainder being upgraded
hotel rooms, and (iv) Hawthorn Inn & Suites, designed for tertiary markets
featuring a minimum of 25% suites and the remainder being upgraded hotel rooms.

Hotels that are part of the Hawthorn Suites system use the Spirit
Reservation System ("Spirit"). Spirit is operated under contract with Hyatt
Hotels Corporation ("Hyatt") by CSC Outsourcing, Inc. ("CSC") and Sabre
Technology Solutions ("Sabre"). Spirit receives and processes calls made to a
toll-free number dedicated to Hawthorn Suites. The Spirit system is directly
linked by computer to all Hawthorn Suites hotels. Hyatt manages the voice and
Global Distribution System ("GDS") reservation activities for both Hawthorn
Suites and Hyatt through the Spirit Reservation Center located in Omaha,
Nebraska. Persons

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calling the Hyatt toll-free number who experience sold out Hyatts or no Hyatts
in their desired market are transferred to a Hawthorn Reservation Agent. There
can be no assurance that CSC and Sabre will continue to service Hawthorn Suites'
future reservation needs.

The Company acquired the right to franchise the Hawthorn brand in
March 1996, at which time there were 17 properties open or in development. The
Company has realized the following franchise sales growth over the past three
years:

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------
1999 1998 1997
HAWTHORN SUITES FRANCHISE DATA -------- -------- --------
<S> <C> <C> <C>
Properties open............................................. 100 51 26
Executed agreements and under construction................ 40 29 14
Executed agreements but not under construction............ 132 96 54
Accepted applications..................................... 70 78 17
--- --- ---
Total in development and accepted applications(1)........... 242 203 85
--- --- ---
OPEN PLUS IN DEVELOPMENT PLUS ACCEPTED APPLICATIONS......... 342 254 111
=== === ===
</TABLE>

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(1) There can be no assurance that properties in development or for which
applications have been accepted will result in open hotels. During 1999, no
previously opened hotels ceased operating as a Hawthorn. Since the Company
acquired the franchise rights to the Hawthorn brand in March 1996, 32% of
accepted applications did not become executed agreements and 14% of executed
agreements terminated before resulting in open hotels. See "Risk
Factors--Dependence on, and Obstacles to, Hotel Openings."

In 1999, for properties in the Hawthorn system one year or more, average
daily rate, occupancy and Revpar was $84.52, 65.4% and $55.30, respectively.

BEST INNS & SUITES. Best Inns & Suites is primarily an economy and
mid-market hotel chain. Properties offer single, double, and in some cases suite
accommodations with limited kitchens and business services. All Best Inns
properties offer free local phone calls, complimentary breakfast, cable
television with one free movie and a sports channel or pay per view. Best Suites
provide accommodations with separate living, dining and work areas, plus a wet
bar, microwave and refrigerator, exercise room, meeting facilities and a
convenience store.

The Company acquired the Best Inns brand in April 1998, at which time there
were 38 properties open or in development. Since that time, the Company has
realized the following franchise sales growth:

<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
-------------------
1999 1998*
BEST INNS FRANCHISE DATA (inception to date) -------- --------
<S> <C> <C>
Properties open............................................. 119 52
Executed agreements and under construction................ 22 12
Executed agreements but not under construction............ 34 21
Accepted applications..................................... 115 142
--- ---
Total in development and accepted applications(1)........... 171 175
--- ---
OPEN PLUS IN DEVELOPMENT PLUS ACCEPTED APPLICATIONS......... 290 227
=== ===
</TABLE>

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* The Best Inns brand was acquired on April 28, 1998.

(1) There can be no assurance that properties in development or for which
applications have been accepted will result in open hotels. During 1999,
seven previously opened hotels ceased operating as a

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Best Inns. Since the Company acquired the Best Inns brand in April 1998, 60%
of accepted applications did not become executed agreements and 11% of
executed agreements terminated before resulting in open hotels. See "Risk
Factors--Dependence on, and Obstacles to, Hotel Openings."

In 1999, for properties in the Best Inns system one year or more, average
daily rate, occupancy and Revpar was $47.94, 65.4% and $31.35, respectively.

HOTEL MANAGEMENT. When the Company acquired the Best Inn brand in 1998, it
also acquired the assets of a fee-based management company. In 1999, the Company
reduced the number of properties that it manages by 17 contracts. As of
December 31, 1999, the Company managed 24 hotels for various franchisees,
including 17 properties owned by one franchisee. See "Acquisition of the
Brands-Best Inns Acquisition." and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations--Introduction." The Company is
currently evaluating the future prospects of its management business to
determine whether to continue to offer such services in the future. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Introduction."

OPERATIONS

FRANCHISE SALES. The Company employs a national franchise sales force
consisting of approximately 50 people. The primary objectives of the Company's
franchise sales strategy are to identify potential franchisees and possible
locations for each of the Company's brands and to create an awareness and
general acceptance of its products with numerous participants in the hospitality
industry, including hotel owners, lodging consultants, vendors and operators.
The franchise sales force seeks to achieve these objectives through the
implementation of a multi-faceted sales strategy, which includes cold calling,
telemarketing, direct mail, trade advertising and public relations. In addition
to stock option grants, the compensation program is structured so that each
franchise salesperson earns 100% of his or her annual income in commissions.

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DESIGN AND CONSTRUCTION. The Company's design and construction department
provides development expertise in the disciplines associated with new
construction and renovation, with emphasis on low development costs, low
maintenance expense, quality construction and profit maximization for its
franchisees. The Company provides detailed architectural plans, CAD-CAM computer
files, specifications, system standards and manuals, and makes the services of
the department available to franchisees at various stages of the development
process. In order to maintain product quality and brand identity, the design and
construction department reviews the architectural plans of its franchisee's
projects.

QUALITY ASSURANCE. Franchise quality control is accomplished through
inspections prior to a franchisee's entry into the system and on an ongoing
basis. Quality assurance programs promote consistent standards throughout each
of the Company's franchise systems. The Company inspects each property up to
twice per year. Hotels that fail to meet certain franchise standards are
notified and are generally given 30 days to either correct the conditions that
led to the failure or to implement a plan to correct the failure. If they do not
correct the deficiencies, the Company can terminate the license.

MARKETING. The Company has two distinct marketing efforts. The first is
intended to build awareness of USFS among franchisees and shareholders. The
second marketing initiative is the brand-building campaigns for Microtel, Best
Inns and Hawthorn Suites. The Company utilizes television and newspaper
advertising, newsletters (both in print and in electronic/internet formats),
direct mail, trade press advertising and special web site pages on usfsi.com,
microtelinn.com, hawthorn.com and bestinn.com, as well as direct contact by the
franchise sales organization.

CENTRAL RESERVATIONS SYSTEM. Microtel's and Best Inns' central reservations
center in Marion, Illinois utilizes the Company's FIRST reservations system,
which communicates with the hotels via the Internet. Hawthorn outsources its
central reservations operation to SPIRIT, the reservation system used by Hyatt
hotels.

CORPORATE COMMUNICATIONS. A targeted corporate communications program
supports marketing and franchise sales efforts by promoting awareness of the
Company and its brands. The Company works closely with such lodging industry
trade publications as HOTEL BUSINESS, HOTEL & MOTEL MANAGEMENT, LODGING and
BUSINESS TRAVEL NEWS. The Company also works to reach consumers and develop
storylines with such national outlets as CNN and USA TODAY, as well as daily and
business publications in local markets that regularly report on individual hotel
ground breaks and openings. To spearhead public relations at the local level,
the Company employs a public relations manager who acts as liaison with
franchisees and the local press. The manager places stories, helps plan local
public relations campaigns and special events, and publishes a monthly
newsletter for each brand.

TRAINING. The Company maintains training programs that are designed to
teach its franchisees how to best utilize the Company's reservations system and
marketing programs, as well as the fundamentals of hotel operations such as
recruiting, housekeeping, repairs and maintenance and personnel policies. The
Company also provides special on-site training upon request. In addition, each
franchise sales person must complete a structured initial training program and
regular retraining.

FRANCHISE RESOURCES. The franchise resources department functions as a
single point of contact for all franchisees to call for support on all issues
prior to, during, and after construction. Franchise resources acts as a liaison
between the franchisee and all departments of the Company.

PURCHASING. The Company has established relationships with various vendors
to make volume purchasing discounts for certain products, services, furnishings
and equipment available to its franchisees. In certain cases, the Company
receives payments from the vendors.

MANAGEMENT. The Company currently provides hotel management services to
certain franchisees. Such services include property oversight and accounting.
However, the Company recently has reduced the number of its management contracts
and there is no assurance that the Company will continue providing

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such services in the future. See "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations."

FRANCHISE AGREEMENTS

The Company's franchise agreements grant hotel owners the right to utilize
one of the brand names associated with the Microtel, Hawthorn Suites or Best
Inns hotel systems under long-term franchise agreements. In order to qualify for
a franchise from the Company, a candidate must undergo a screening process,
which typically includes a review of the potential franchisee's financial
condition and the proposed lodging location. A representative of the Company
conducts a site inspection to determine whether the location meets standards and
whether the brand name selected is appropriate at that location. All of the
Company's franchise agreements offer an area of exclusivity to each location,
the degree of which is negotiated individually with each franchisee. The
Company's current standard agreements are typically 20-year terms although
actual lengths vary. The standard franchise agreements generally require
franchisees to satisfy certain development milestones.

Each franchise agreement provides for the payment of two primary types of
on-going fees: a royalty fee and a reservation and marketing fee, both of which
are based upon a percentage of the franchisee's gross room revenues. The royalty
fee is intended to cover the operating expenses of the franchisor, such as costs
incurred in providing quality assurance, administrative support and other
franchise services, and to provide the Company with operating profits. The
reservation and marketing fee is collected for administrative convenience by the
Company and remitted to independent not-for-profit reservation and marketing
corporations which exist for each of the three brands. The Company spends the
reservation and marketing funds on behalf of the franchisees for such services
as a reservation system, national advertising and certain promotional programs
(see "Reservations and Advertising Funds"). Reservation and marketing fees
collected by the Company on behalf of the three not-for-profit corporations
typically range from two (2%) percent to three (3%) percent of each franchisee's
gross room revenues per year. Franchisees also typically pay a franchise
application fee to the Company, the amount of which varies.

The terms of the Company's current standard forms of franchise agreements
state that, by year of operation, franchisees are required to pay the following
ongoing royalty fees (each, as a percentage of gross room revenues), although
actual fees may vary:

<TABLE>
<CAPTION>
MICROTEL HAWTHORN BEST
-------- -------- --------
<S> <C> <C> <C>
Year 1...................................................... 4.0% 5.0% 3.0%
Year 2...................................................... 5.0% 5.0% 4.0%
Year 3 and thereafter....................................... 6.0% 5.0% 5.0%
</TABLE>

The Company has agreed, and may agree in the future, to offer a wide range
of incentives to various franchisees, including providing loans, development
subsidies or discounted fees. The Company's standard form of franchise agreement
is terminable by the Company if the franchisee fails to maintain certain quality
standards or to pay royalties, reservation and marketing fees or other charges.

ACQUISITION OF THE BRANDS

MICROTEL ACQUISITION. The Company acquired the Microtel brand from Hudson
Hotel Corporation ("Hudson") on October 5, 1995. As part of the purchase of the
Microtel brand, royalties are payable to Hudson as follows: 1.0% of the
"revenues subject to royalties" on the first 100 Microtel properties opened
after the closing, 0.75% of such revenues for the next 150 Microtel properties
opened, and 0.50% of such revenues for each Microtel property opened after the
first 250.

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newly executed Microtel franchises open or under construction by December 31,
2001 in order to avoid being in default under the last remaining target. For
purposes of meeting this target, the 27 Microtel properties that do not pay
royalties to the Company and, if open or under construction, the additional 23
Microtel Inn properties and 10 Microtel Suites hotels that are currently
entitled to be built by certain parties without the payment of royalties to the
Company pursuant to the Microtel Acquisition Agreement, are excluded.

As of March 10, 2000, the Company had open or under construction 223
Microtel properties which counted toward satisfying the development schedule.
Therefore, from March 10, 2000 until December 31, 2001, the Company is required
to break ground on an additional 27 Microtel brand hotels in order to avoid
being in default under the Microtel Acquisition Agreement. If the Company fails
to so satisfy the development schedule, it may cure its default by making a
$1,000,000 payment to Hudson.

Upon the Company's initial public offering in 1996, the provisions of the
Microtel Acquisition Agreement which allowed Hudson the right to reacquire all
the rights to the Microtel System and all operating assets associated therewith
upon a default by the Company of its obligations under the agreement terminated
and are of no further effect. Accordingly, the Company has the exclusive right
to franchise the Microtel brand.

HAWTHORN ACQUISITION. On March 12, 1998, the Company completed a series of
transactions which enabled it to acquire the entire interest in the Hawthorn
Suites brand of hotels. The Company now has the exclusive right to franchise the
Hawthorn Suites brand of hotels and to retain 100% of the royalties derived
therefrom.

BEST INNS ACQUISITION. On April 28, 1998, the Company completed its
acquisition of the exclusive worldwide franchise rights to the Best Inns hotel
brands, including the franchise agreements for the existing Best Inns hotels. In
addition, the Company acquired management contracts and certain other assets
relating to the management of hotels on behalf of third party owners. To
facilitate the transaction, the Company made a $15 million unsecured
subordinated loan to Alpine Hospitality Ventures LLC ("Ventures") at an interest
rate of 12% per annum, interest on which will be paid in cash to the extent
available and otherwise will be paid-in-kind. The loan is subordinated to a
guarantee provided by Ventures in connection with a third-party senior loan in
the principal amount of approximately $65 million to its subsidiary that
acquired 17 Best Inns hotels in the Best Inns acquisition and is structurally
subordinated to such third party loan. In the fourth quarter of 1999, the
Company was advised that the senior lender informed Ventures of its intention to
institute a "lock-box" arrangement, thereby eliminating the payment of cash
interest to the Company while such arrangement is in place. The Company will
continue to receive interest in-kind payments, but will not include such in-kind
payments in income. In March 2000, the lock-box agreement was executed. The
Company has taken a $15.5 million reserve during the fourth quarter 1999 against
the value and accrued interest of the loan. If the senior debt is not paid
currently, certain management and franchisee fees could be deferred until cash
is available. A portion of these fees were deferred in the fourth quarter 1999.
The Company is also committed to make up to $7.5 million of additional loans to
Ventures under certain circumstances, including if required by Ventures in order
to make a capital contribution to the owner of the properties in order to
achieve compliance with certain debt service coverage ratios in order to obtain
an extension of the maturity date of the loan, or to obtain the release of a
property from the senior lender's liens in connection with a condemnation,
casualty or otherwise. No such additional loans have been made as of
December 31, 1999 but it is possible the loan, or a portion thereof, will be
required to be made in the future. The Company manages the hotels owned by the
subsidiary of Ventures. Commencing April 2001, the Company may be obligated to
reimburse the owner of the properties for as much as 90% of the management fee
if the owner's net profit for the 12-month period then ended, and each
subsequent 12-month period, falls below a specified level. If the performance of
the hotels does not materially improve by April 2001, the Company expects to
have to make a payment to the owner of the properties. In addition, the senior
lender to these properties has advised Ventures in March 2000 that it currently
has the right to require the termination of the

9
<PAGE>
management contract, but is not doing so at this time. The Company also issued
to Alpine Hospitality Equities LLC ("Alpine Equities"), an affiliate of
Ventures, 350,000 shares (the "Alpine Shares") of Class A Common Stock for a
purchase price of $1.6 million. Alpine Equities was granted certain demand and
piggy-back registration rights on customary terms with respect to the Alpine
Shares, as well as certain tag-along rights on certain sales of Common Stock
made by Messrs. Leven and Aronson. Additionally, the Company agreed to pay to
Alpine Equities $1,000 per year for each hotel added to the Best Inns system
after the closing of the transaction, provided that such new hotels are paying
royalties to the Company or any of its affiliates. Richard D. Goldstein, a
director of the Company, is an Executive Vice President and a Senior Managing
Director of the general partner of Alpine Equity Partners L.P., the entity that
indirectly owns and controls a majority of Alpine Equities and Ventures.

ESTABLISHMENT OF DEVELOPMENT FUND

On March 17, 1998, NorthStar Constellation, LLC (together with its
affiliates, "NorthStar"), Lubert-Adler Real Estate Opportunity Funds (together
with its affiliates, "Lubert-Adler") and Constellation Equity Corp., an entity
controlled by NorthStar ("Constellation"), formed Constellation Development Fund
(the "Development Fund"). The Development Fund was established, in part, to
provide capital that will allow the Company to expand its Microtel and Hawthorn
Suites brands into high visibility, difficult to develop areas by providing debt
and equity financing to selected local developers. NorthStar, Lubert-Adler and
Constellation agreed to contribute to the Development Fund up to $50 million of
equity capital. On October 31, 1998 the Development Fund entered into a
$60 million senior credit facility with NationsBank, N.A. As of December 31,
1999 the Development Fund has invested in seven Microtel and two Hawthorn Suites
hotels which are in different stages of development. As of February 21, 2000,
the managers of the Development Fund agreed that no additional projects will be
commenced in the future. In connection with the establishment of the Development
Fund, the Company committed to make a loan of up to $10 million to
Constellation. Constellation will use the funds to make an investment which is
subordinated to certain debt and equity returns of investors in the Development
Fund. The loan bears interest at an annual rate of 8%, is non-recourse and is
repayable from distributions and payments made to Constellation from the
Development Fund. As of December 31, 1999, the Company had made loans of
approximately $5.7 million in the aggregate to Constellation and the Company
expects to lend approximately an additional $400,000 to Constellation in 2000.
Due to the uncertainty surrounding ultimate recoverability of the subordinated
loans, the Company is accounting for them on the cost-recovery basis, where
interest income is recorded only after recovery of principal. The Company will
be paid $3.5 million over the first five years to manage the Development Fund
and has earned $2 million of such payments as of December 31, 1999. In
connection with this transaction, the Company also sold an aggregate of 500,000
shares of Class A Common Stock to NorthStar and Lubert-Adler for $5.6 million.
Rights of Northstar and Lubert-Adler to acquire additional shares of Class A
common stock have expired. In addition, David T. Hamamoto, Co-Chief Executive
Officer of NorthStar was elected to the Board of Directors of the Company. Dean
Adler, a director of the Company, serves as a manager of Lubert-Adler, and
Mr. Adler, along with Mr. Hamamoto and Mr. Aronson, serve as managers of the
Development Fund.

THE HOTEL FRANCHISING AND LODGING INDUSTRIES

HOTEL FRANCHISING. Over the years, owners of hotels not affiliated with
regional or national lodging companies have increasingly chosen to join hotel
franchise chains. The Company and other hotel franchise chains provide a number
of services designed to directly or indirectly increase hotel occupancy rates,
revenues and profitability. The Company believes that hotel operators often view
franchise chain membership as an important means of remaining competitive with
hotels that are either owned by or affiliated with national or regional lodging
companies. In determining whether to affiliate with a franchise chain, hotel
operators will compare costs of affiliation with the incremental revenues
anticipated to be derived from chain membership, and any benefit the owner
perceives may be available with financing sources or if the hotel is sold in the
future. Costs of affiliation include capital expenditures and operating costs
required to

10
<PAGE>
meet a chain's quality and operating standards, plus the ongoing payment of
franchise royalties and assessments for the reservations system and marketing
programs maintained by the franchisor.

LODGING INDUSTRY. The lodging industry has traditionally been divided into
five segments, each of which is identified by the average daily room rate
generally charged by hotel operators in the segment (the "ADR"). These
categories include, in descending order of ADR, luxury, upscale, mid-price,
economy and budget. Hotels are further segmented into limited-service and
full-service, depending on the degree of food and beverage and other services
offered, and hotels are also segmented into transient hotels, which serve short-
term guests, and extended-stay hotels, which serve guests on multiple night or
multiple week stays. The Company's franchised properties typically operate in
the budget and economy segments of the limited-service sectors through its
Microtel brand, the economy and mid-price segment through its Best Inns brand
and the upscale and mid-price segments through its Hawthorn Suites brand. In
1999, hotel owners in general were faced with a more difficult environment due
to declining occupancy rates, lower percentages of room rate increases,
increased room supply and higher interest rates. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Introduction."

COMPETITION

Competition among national brand franchisors and smaller chains in the
lodging industry to expand their franchise systems is significant. Competition
intensified in the franchising business in 1999 as new entrants that were
primarily builders or acquirors of hotels established franchising initiatives
during the year. The Company believes that competition for the sale of lodging
franchises is based principally upon (i) the name recognition and perceived
value and quality of the brand, (ii) the nature and quality of services provided
to franchisees, (iii) the franchisee's view of the relationship of building or
conversion costs and operating expenses to the potential for revenue and
profitability during operation and upon sale, (iv) the franchisee's ability to
finance and buy or sell the property, (v) the size and performance of the chain,
and (vi) the fees charged and financial assistance made available to the
franchisee. The Company's franchisees compete for guests with franchisees of,
and properties owned or operated by, other hotel chains, independent properties
and owner-operated chains. The success of the Company's franchisees affects the
profitability of the Company, as the Company's receipt of royalty fees under its
franchise agreements is tied directly to the gross room revenues earned by its
franchisees. In choosing a particular hotel, consumers consider differences in
room rates, quality and condition of accommodations, name recognition,
availability of alternative lodging (including short-term lease apartments),
service levels, reputation, safety, reservation systems and location.

Both among consumers and potential franchisees, Microtel competes with
independent hotels and regional/national brands, including but not limited to,
Comfort Inn-Registered Trademark-, Days Inn-Registered Trademark-, Econo
Lodge-Registered Trademark-, Fairfield Inn-Registered Trademark-, Sleep
Inn-Registered Trademark-, Red Roof Inn-Registered Trademark-, Budgetel
Inn-Registered Trademark-, Super 8-Registered Trademark-, Ramada
Limited-Registered Trademark-, Motel 6-Registered Trademark-, Jameson
Inns-Registered Trademark-, Travelodge-Registered Trademark-,
Thriftlodge-Registered Trademark-, Knights Inn-Registered Trademark-, Red Carpet
Inn-Registered Trademark- and Scottish Inns-Registered Trademark-. Best Inns
hotels compete for consumers and/or potential franchisees with independent
hotels and regional/ national brands, including but not limited to, Budgetel
Inn-Registered Trademark-, Comfort Inn-Registered Trademark-, Days
Inn-Registered Trademark-, Fairfield Inn-Registered Trademark-, Hampton
Inn-Registered Trademark-, La Quinta-Registered Trademark-, and Red Roof
Inn-Registered Trademark-. Hawthorn Suites properties compete for consumers
and/or potential franchisees with independent hotels and regional/national
brands, including but not limited to, Residence Inn-Registered Trademark-,
Homewood Suites-Registered Trademark-, Summerfield Suites-Registered Trademark-,
Woodfin Suites-Registered Trademark-, AmeriSuites-Registered Trademark-, Hampton
Inn and Suites-Registered Trademark-, Fairfield Suites-Registered Trademark-,
MainStay-Registered Trademark-, Candlewood-Registered Trademark-, Wingate
Inn-Registered Trademark-, Towne Place-Registered Trademark- and Courtyard by
Marriott-Registered Trademark-. Many of the Company's competitors are affiliated
with larger chains with substantially more properties, greater marketing budgets
and greater brand identity than the Company.

REGULATION

The sale of franchises is regulated by various state laws, as well as by the
Federal Trade Commission ("FTC"). The FTC requires that franchisors make
extensive disclosure to prospective franchisees, although it does not require
registration of offers to prospective franchisees. The required disclosure is

11
<PAGE>
made through a Uniform Franchise Offering Circular, which must be provided to
potential franchisees at least 10 days prior to execution of a franchise
agreement. A number of states require registration and disclosure in connection
with franchise offers and sales. In addition, several states have "franchise
relationship laws" that limit the ability of franchisors 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 existing regulations, the Company cannot predict the
effect of any future legislation or regulation. Additionally, various federal,
state, and local laws and regulations may affect activities undertaken by the
Company in connection with the financing of franchisees. In particular, the
Company may be required to obtain a license or to register in certain states in
order to underwrite or promote loans to be made by third party lenders or to
make loans directly to franchisees.

EMPLOYEES

As of December 31, 1999 the Company and its subsidiaries employed 142 full
time and two part time employees and the three affiliated reservations and
marketing not-for-profit corporations together employed 28 full time and five
part-time employees. None of the Company's or the not-for-profit reservation and
marketing corporations' employees are represented by unions. Management
considers its employee relations to be satisfactory.

TRADEMARKS AND LICENSES

The Company either owns or has filed applications with regard to certain
trademarks and service marks, including, among others, US FRANCHISE SYSTEMS,
MICROTEL, MICROTEL with design, HAWTHORN SUITES, HAWTHORN SUITES with the tree
logo, HAWTHORN SUITES LTD. with design, BEST INNS OF AMERICA, BEST SUITES OF
AMERICA and BEST INNS & SUITES. The Company considers its marks to be material
to its business and certain of the marks are also registered with or
applications for registration are pending with various state and foreign
government agencies. The Company is not aware of any material adverse claim
concerning its owned or licensed marks, however the Company is contesting an
opposition to the registration (but not to the use) of certain Best Inns marks.
See "Item 3--Legal Proceedings."

ITEM 2. PROPERTIES.

The principal executive and administrative offices of the Company are
located at 13 Corporate Square, Suite 250, Atlanta, Georgia 30329. The Company
currently leases a total of 15,852 square feet of office space at the foregoing
address, pursuant to a lease that expires on September 30, 2005. The Company
also leases a total of 8,542 square feet of office space at 1205 Skyline Drive,
Marion, Illinois 62959 pursuant to a lease that expires on September 30, 2000.

ITEM 3. LEGAL PROCEEDINGS.

The Company is and may become party to claims and litigations that arise in
its normal course of business, including but not limited to those listed below.
In management's opinion, except for certain of the matters described below, the
outcome of any currently pending matters is not expected to have a material
adverse effect on the Company's consolidated financial statements.

Nomura Asset Capital Corporation has commenced an action against the Company
and its subsidiary seeking damages in an amount not less than $704,910. Nomura
has also asserted that it is entitled to foreclose on $432,949 in loan
participations previously funded by the Company and pledged to Nomura. The
complaint alleges, among other things, that the Company owes Nomura this amount
in connection with certain construction loans Nomura has made to the Company's
franchisees. The Company has filed a counterclaim for unspecified damages. The
Company cannot predict the outcome of this matter.

12
<PAGE>
Best Western International and Cal-Vegas LP have filed notices of opposition
to the registration (but not to the use) by the Company of certain Best Inns
marks. The Company believes that the opposition rights of Cal-Vegas have
expired, and is contesting the Best Western opposition. While the Company cannot
predict the outcome of this matter, it does not believe that it will have a
material adverse effect on the Company's ability to market the Best Inns brands
or on the Company's consolidated financial statements.

The Company and certain subsidiaries are defendants in an action brought in
the United States District Court, Southern District of Illinois by the owner of
nine Best Inn properties for alleged mismanagement under management agreements
that the Company assumed in connection with its 1998 acquisition of the Best
Inns brand. USFS Management, Inc., a subsidiary of the Company, has filed a
counterclaim alleging fraudulent conduct by the owner and certain of his
affiliates. Discovery and settlement discussions are ongoing, and the Company is
opposing the claim. The amount of damages the plaintiff is seeking is
unspecified, and the Company cannot predict the outcome of this matter. The
Company believes it has meritorious defenses and is contesting this matter
vigorously.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matter was submitted during the fourth quarter ended December 31, 1999 to
a vote of security holders of the Company.

13
<PAGE>
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's Class A Common Stock is traded on the Nasdaq National Market
under the symbol USFS. As of March 10, 2000, there were 68 holders of record of
the Company's Class A Common Stock and 3 holders of record of the Company's
Class B Common Stock. Management of the Company believes that there are in
excess of 1,100 beneficial holders of its Class A Common Stock. The following
table shows the range of reported high and low bid prices per share of Class A
Common Stock.

<TABLE>
<CAPTION>
1998 HIGH LOW
- ---- -------- --------
<S> <C> <C>
First quarter............................................... $13.63 $9.00
Second quarter.............................................. 12.75 7.63
Third quarter............................................... 7.88 3.94
Fourth quarter.............................................. 9.88 4.38
</TABLE>

<TABLE>
<CAPTION>
1999 HIGH LOW
- ---- -------- --------
<S> <C> <C>
First quarter............................................... $14.63 $8.88
Second quarter.............................................. 23.19 12.50
Third quarter............................................... 22.00 14.31
Fourth quarter.............................................. 16.88 4.25
</TABLE>

DIVIDEND POLICY. The Company has not declared or paid any cash dividends on
its Class A or Class B Common Stock. The Company currently intends to retain any
earnings for use in its business and therefore does not anticipate paying any
cash dividends in the foreseeable future. Any future determination to pay cash
dividends will be made by the Board of Directors in light of the Company's
earnings, financial position, capital requirements and such other factors as the
Board of Directors deems relevant.

COMMITMENTS TO ISSUE SHARES. In connection with a letter agreement with
Leisure Hotel Management dated February 3, 1998, the Company has authorized the
issuance of up to $900,000 worth of shares of Class A Common Stock upon the
attainment of certain development milestones. On March 3, 2000, the Company
issued 48,290 shares of Class A Common Stock, valued at approximately $240,000,
in satisfaction of the first such milestone. The Company is also obligated to
grant options for shares of Class A Common Stock under its employee stock option
plan to certain members of the Company's franchise salesforce in the event they
achieve specified sales benchmarks in 2000.

ITEM 6. SELECTED FINANCIAL DATA.

Presented below is selected consolidated historical financial information of
the Company and its subsidiaries for the years ended December 31, 1999, 1998 and
1997, respectively. The selected financial data has been derived from the
consolidated financial statements which were audited by the Company's
independent public accountants and should be read in conjunction with the
Company's Consolidated Financial Statements (and the related notes and schedules
thereto, including Note 12, "Segment Reporting") included under "Item 8.
Financial Statements and Supplementary Data" of this Report and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this Report.

14
<PAGE>
SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1999 1998 1997
- ----------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................. $ 19,696 $ 10,584 $ 1,867
Expenses................................................. 33,382 13,468 10,814
Net loss after tax....................................... 13,748 2,884 8,947
Loss applicable to common
Stockholders............................................. 13,748 2,884 8,947
Net loss applicable to common
Stockholders per share................................... 0.69 0.16 0.71
Weighted average common
Shares outstanding (1)................................... 19,886,030 17,670,591 12,563,772
BALANCE SHEET DATA (at period end):
Working capital.......................................... 6,348 $ 15,936 $ 12,144
Total assets............................................. 70,712 84,176 36,351
Total liabilities........................................ 13,874 14,467 32,153
Redeemable Preferred Stock (2)........................... -- --
Redeemable Common Stock.................................. 324 324 324
Stockholders' equity..................................... $ 56,514 $ 69,385 $ 3,874
</TABLE>

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

(1) Includes 3,128,473 shares for the periods ended December 31, 1999, 1998, and
1997, respectively, of Class A Common Stock that are redeemable under
certain circumstances by the Company for reasons not under the Company's
control.

(2) On January 1, 1997, all the outstanding shares of redeemable preferred stock
were converted into $18,477,000 aggregate principal amount of 10%
subordinated debentures due September 29, 2007. The subordinated debentures
and associated interest were paid off with a portion of the proceeds from
the equity offering on May 19, 1998.

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

GENERAL

This "Management's Discussion and Analysis of Financial Condition and
Results of Operations" should be read in conjunction with the consolidated
financial statements included herein of the Company and its subsidiaries.
Certain statements under this caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" constitute "forward-looking
statements" under the Reform Act. See "Special Note Regarding Forward-Looking
Statements" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors". Comparisons have been made
between the years ended December 31, 1999, 1998 and 1997 for the purposes of the
following discussion.

INTRODUCTION

Although 1999 was a challenging year in a number of respects, USFS recorded
record revenues, income from operations (before giving effect to certain charges
described below), franchise sales and hotel openings. The Company was profitable
on an operating basis (before giving effect to certain charges described below)
for the first time ever.

However, during 1999, the Company began to feel the effects of the
increasingly difficult environment now being encountered by some of its
franchisees. The hotel industry continues to experience declining

15
<PAGE>
occupancies and percentages of room rate increases, and increases in the costs
of doing business, particularly in the limited services segment. Additionally,
hotel operators face increasing new room supply and higher interest rates. As a
result, the Company believes its franchise royalty and management fee income
suffered in 1999 due to timing delays of hotel openings and financial
performance of certain hotels. Furthermore, the Company believes that during
1999 the number of hotel companies participating in the hotel franchising
business increased. As reported in its Form 10-Q for the quarter ended
September 30, 1999, the Company is addressing this more competitive environment
by adding additional personnel in franchise services, quality, marketing and
training to provide additional support to customers which will result in higher
corporate overhead in 2000.

The effects of this more difficult and competitive environment caused the
Company to record a special charge of approximately $19.3 million in 1999. Of
the total charge, approximately $1 million relates to cash expenditures to be
made in 2000. The largest portion of the charge ($17.1 million) came from
reserves against the Company's loan portfolio, only approximately $0.4 million
of which relates to cash expenditures to be made in 2000. Of the $17.1 million
charge, $15.5 million related to reserves taken against the principal and
accrued interest on the loan made to Ventures in connection with the 1998
acquisition of the Best Inns brand. See "Item 1. Business--Acquisition of the
Brands--Best Inns Acquisition." In the fourth quarter 1999, the Company was
advised by Ventures that the senior lender to its operating subsidiary planned
to institute a "lock-box" arrangement because of the deteriorating financial
condition of the 17 hotels owned by that subsidiary. The lock-box arrangement,
which was executed in March 2000, effectively precludes the payment of cash
interest to the Company while such arrangement is in place. The Company will
continue to receive interest as in-kind payments. Based upon the current
performance level of the properties owned by the subsidiary of Ventures and the
institution of a lock-box by the senior lender, the Company concluded that the
value of the loan was impaired and therefore it was appropriate to take a
reserve against the value of the loan and the accrued interest. The Company did
not recognize the paid-in-kind interest interest income in the fourth quarter of
1999. Unless performance of these properties improves, the Company does not
intend to include in income the pay-in-kind interest related to the Ventures
loan in 2000.

To the extent that the difficult environment encountered by the Company's
franchisees during 1999 continues in 2000, the Company's royalty and management
fee revenues and profitability could be adversely affected and all or a portion
of the Company's remaining loan portfolio ($14.3 million net of $16.1 million of
reserves at December 31, 1999) could become impaired.

The difficult environment confronting hotel operators combined with the lack
of scale of the Company's hotel management operations has caused the Company to
begin to reevaluate the future prospects of its hotel management business line.
During 1999, 17 management contracts were terminated, leaving the Company with
24 contracts at December 31, 1999. As of March 10, 2000 the Company has agreed
to terminate three additional contracts, leaving the Company with 21 contracts
(including 17 with the operating subsidiary of Ventures). The Company is
currently considering various alternatives related to the remaining contracts.
Accordingly, because the Company is managing fewer properties, hotel management
revenues will decline substantially in 2000 as compared to 1999. If the Company
determines not to continue to provide management services, the Company may be
required to take a non-recurring charge related to exiting the management
business line in 2000. The amount of this charge cannot be determined at this
time.

16
<PAGE>
USFS does not intend to update the information contained herein with respect
to its exploration of potential strategic alternatives for any future
developments or circumstances unless and until there is a definitive transaction
agreement entered into between USFS and any third party or until its exploration
of potential alternatives is definitively terminated. There can be no assurance
whatsoever that any transaction between USFS and any third party will take place
or, even if one does occur, about the nature and extent of any terms and
conditions of any such potential transaction.

RESULTS OF OPERATIONS

REVENUES:

The Company derived revenues from the following sources:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
Royalty and other fee income........................... $14,607,000 $ 7,578,000 $ 769,000
Franchise application fees............................. 5,089,000 3,006,000 1,098,000
----------- ----------- ----------
TOTAL.................................................. $19,696,000 $10,584,000 $1,867,000
</TABLE>

1999 REVENUES COMPARED TO 1998 REVENUES

Royalty and other fee income increased $7.0 million for the year ended
December 31, 1999. The largest portion of the increase was in royalties
($5.9 million), which increased from $4.5 million to $10.4 million. This
increase resulted from an increase in the number of royalty paying hotels from
197 at the end of 1998 to 370 at the end of 1999. In addition, management
company revenues increased $0.5 million from $1.4 million to $1.9 million,
primarily due to the fact that 1998 only had a partial year of management
company results (USFS obtained management contracts on April 28, 1998 in
connection with the Best Inns acquisition). Management fee revenue is expected
to decline substantially in 2000 as discussed in the Introduction. Other fee
income increased $0.6 million primarily because of an increase in national
accounts revenue. Franchise application fees increased $2.1 million as a result
of an increase in the number of hotels opened during the year from 107 in 1998
to 182 in 1999.

1998 REVENUES COMPARED TO 1997 REVENUES

Royalty and other fee income increased $6.8 million in 1998 compared to
1997. The largest portion of the increase related to higher royalties
($4.3 million), which increased from $0.2 million to $4.5 million. This increase
resulted from the increase in the number of royalty paying hotels from 43 at the
end of 1997 to 197 at the end of 1998. In 1998, USFS began receiving hotel
management fees from third party property owners resulting from the completion
of the Best Inns acquisition on April 28, 1998. Hotel management fees were
$1.4 million in 1998. Other fee income increased $1.1 million due primarily to
the first year of management fees from Constellation Development Fund
($1.0 million) which was formed in March 1998. Franchise application fees
increased $1.9 million, as a result of an increase in the number of hotels
opened during the year from 42 in 1997 to 107 in 1998.

17
<PAGE>
EXPENSES:

The Company's expenses are in the following areas:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
General and administrative............................ $12,175,000 $11,590,000 $ 9,083,000
Franchise sales commissions........................... 4,878,000 2,216,000 641,000
Depreciation and amortization......................... 1,677,000 1,393,000 571,000
Interest income....................................... (2,469,000) (2,493,000) (1,386,000)
Interest expense...................................... 762,000 1,905,000
Bad debt reserve...................................... 17,121,000 -- --
TOTAL EXPENSES........................................ $33,382,000 $13,468,000 $10,814,000
</TABLE>

1999 EXPENSES COMPARED TO 1998 EXPENSES

Total expenses increased $19.9 million from 1998 to 1999. In 1999, total
expenses included approximately $19.3 million of special charges, $17.1 million
of which related to bad debt reserves (only approximately $0.4 million of which
relates to cash expenditures to be made in 2000), $1.4 million of which was in
general and administrative expenses and $0.6 million of which was in commission
expense. Excluding such charges, total expenses increased $0.6 million from
$13.5 million in 1998 to $14.1 million in 1999.

18
<PAGE>
Excluding $1.4 million of the charges recorded in 1999, general and
administrative expenses otherwise decreased $0.8 million from $11.6 million in
1998 to $10.8 million in 1999. The primary reasons for this decline include:
(i) a reduction of approximately $0.4 million in compensation expense resulting
primarily from the change to a completely incentive-based plan for senior sales
personnel; (ii) a reduction in professional fees of approximately $0.2 million;
(iii) a reversal of approximately $0.2 million of a reserve taken in a previous
year in anticipation of a move to a new office space that was no longer required
after the Company executed an addendum to the lease for its existing office
space in July 1999, and (iv) lower marketing expenses of approximately
$0.4 million. This decline was partially offset by a $0.4 million increase in
general and administrative expenses related to the management business line.
Expenses associated with the management business line increased from
$0.9 million in 1998 to $1.3 million in 1999 primarily as a result of a full
year of operations in 1999 compared to 1998.

The $1.4 million of special charges included in general and administrative
expenses includes: (i) approximately $0.5 million related to the deposit
forfeiture and associated expenses resulting from the abandonment of the
proposed acquisition by the Company of an existing Hawthorn Suites hotel in
Atlanta, Georgia; (ii) a reserve of approximately $0.3 million related primarily
to the improvements associated with a parcel of land held for resale;
(iii) approximately $0.3 million related to various legal expenses, the primary
portion of which related to the disposition of a dispute over development fees
owed to a builder for two hotels built on behalf of the Company; and
(iv) approximately $0.3 million of other charges.

Franchise sales commissions increased $2.7 million primarily due to the
increased number of hotel openings in 1999 compared to 1998. Commission expense
for 1999 includes a net commission adjustment of approximately $0.6 million
primarily related to a non-recurring charge for license agreements defaulted due
to noncompliance with agreed upon milestones and a change in commissions for
executive management.

Depreciation and amortization expense increased approximately $0.3 million
for the year ended December 31, 1998 primarily due to increased amortization
related to issuance of development subsidies.

Interest income was substantially similar in 1999 and 1998. The Company did
not record pay-in-kind interest related to the loan to Ventures in the fourth
quarter of 1999, and does not expect to recognize pay-in-kind interest in 2000.
Therefore, interest income is expected to decline in 2000 compared to 1999.

Bad debt reserves increased by approximately $17.1 million in 1999 due
primarily to a $15.5 million reserve taken against the principal amount and
accrued interest of the note to Ventures and a $1.6 million reserve taken
against termination of the Nomura loan program and various monies due from
franchisees.

In May 1998, the Company repaid all outstanding debt with proceeds from its
common stock offering. Therefore, interest expense declined by $0.8 million in
1999 compared to 1998.

1998 EXPENSES COMPARED TO 1997 EXPENSES

Expenses increased approximately $2.7 million in 1998 compared to 1997.

General and administrative expenses increased $2.5 million in 1998 compared
to 1997, the largest portions of which are: (i) the addition of a management
company (approximately $0.9 million) due to the addition of the management
business on April 28, 1998 in connection with the Best Inn Acquisition,
(ii) additional salaries and wage-related costs pertaining to the increased
number of executed and open hotels (approximately $0.7 million), and
(iii) increased travel expenses (approximately $0.5 million) and (iv) increased
administrative expenses and other external advisory services (approximately
$0.4 million).

Franchise sales commissions increased $1.6 million due to the increased
number of hotel openings in 1998 compared to 1997.

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<PAGE>
Depreciation and amortization expense increased $0.8 million in 1998
compared to 1997 primarily due to (i) increased amortization related to the
acquisitions of the Hawthorn and Best Inns brands (approximately $0.6 million)
and (ii) increased depreciation due to the implementation of a new reservation
system, computers and related business equipment (approximately $0.2 million).

Interest income increased $1.1 million primarily due to additional loans to
franchisees and interest earned on the cash proceeds from the Company's
May 1998 equity offering. Interest expense decreased $1.1 million due to the
payoff of the Company's outstanding indebtedness in connection with the
May 1998 equity offering.

NET LOSS--A summary of operating results is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
Loss after taxes...................................... ($13,748,000) ($2,884,000) ($8,947,000)
Loss applicable to common stockholders................ ($13,748,000) ($2,884,000) ($8,947,000)
</TABLE>

1999 NET LOSS COMPARED 1998 NET LOSS

The Company's net loss increased by $10.9 million in 1999 compared to 1998.
Excluding the $19.3 million in special charges in 1999, the Company earned net
profits from operations of approximately $5.5 in 1999 compared to a net loss
from operations of $2.9 million in 1998 representing an improvement of
approximately $8.4 million compared to 1998. The increase in profit from
operations is due primarily to the number of hotel openings and operating hotels
resulting in increased application fees and royalty revenues, various management
fees, and a reduction in interest expense due to the pay-off of the Company's
outstanding indebtedness in 1998. The Company had accumulated net operating loss
carry-forwards for income tax purposes of $12.7 million and $13.9 million as of
December 31, 1999 and 1998, respectively. Given the uncertainty regarding
eventual use of the carry-forward due to the limited operating history of the
Company, management recorded a valuation allowance for the full amount of the
deferred tax asset as of December 31, 1999.

1998 NET LOSS COMPARED TO 1997 NET LOSS

The Company's net loss decreased by $6.1 million during 1998 primarily due
to the increased number of hotel openings and operating hotels resulting in
increased application fees and royalty revenues, various management fees, a
reduction in interest expense due to the pay-off of the Company's outstanding
indebtedness and an increase in interest income. The Company had accumulated net
operating loss carry-forwards for income tax purposes of $13.9 million and
$11.5 million as of December 31, 1998 and 1997, respectively. Given the
uncertainty regarding eventual use of the carry-forward due to the limited
operating history of the Company, management recorded a valuation allowance for
the full amount of the deferred tax asset as of December 31, 1998.

LIQUIDITY AND CAPITAL RESOURCES

On October 24, 1996, the Company completed a public offering of 1,825,000
shares of Class A Common Stock at $13.50 per share. Net proceeds were
approximately $21 million, all of which have been spent by the Company.

On May 19, 1998, the Company completed a public offering of 4,250,000 shares
of Class A Common Stock at $10.50 per share. The Company received net proceeds
of approximately $41 million, of which approximately $30 million was used to
repay all of its outstanding indebtedness, including all principal and accrued
interest. The remaining $11 million was held either as cash or cash equivalents
to be used for working capital and general corporate purposes. Cash and cash
equivalents were $6.3 million as of

20
<PAGE>
December 31, 1999. In management's opinion, based on the Company's current
operations, the Company's capital resources, including its cash on hand and
borrowing capability, are sufficient to fund operations for the next 12 months.

In connection with the establishment of the Development Fund (see "Item 1.
Business--Development Fund"), the Company committed to make a loan of up to
$10 million to Constellation. Constellation will use the funds to make an
investment which is subordinated to certain debt and equity returns of investors
in the Development Fund. The loan bears interest at an annual rate of 8%, is
non-recourse and is repayable from distributions and payments made to
Constellation from the Development Fund. As of December 31, 1999, the Company
had made loans of approximately $5.7 million in the aggregate to Constellation,
and expects to lend approximately an additional $400,000 to Constellation. Due
to the uncertainty surrounding ultimate recoverability of the subordinated
loans, the Company is accounting for them on the cost-recovery basis, where
interest income is recorded only after recovery of principal. In addition, the
Company sold an aggregate of 500,000 shares of Class A Common Stock to NorthStar
and Lubert-Adler for $5.6 million. Rights of NorthStar and Lubert-Adler to
acquire additional shares of Class A common stock have expired. The Company will
be paid $3.5 million over the first five years to manage the Development Fund
and has earned $2 million of such payments as of December 31, 1999.

In connection with the Best Inns Acquisition (see "Item 1.
Business--Acquisition of the Brands-Best Inns Acquisition"), the Company made a
$15 million unsecured subordinated loan to Ventures at an interest rate of 12%
per annum, interest on which will be paid in cash to the extent available and
otherwise will be paid-in-kind. The loan is subordinated to a guarantee provided
by Ventures in connection with a third-party senior loan in the principal amount
of approximately $65 million to its subsidiary that acquired 17 Best Inns hotels
in the Best Inns acquisition and is structurally subordinated to such third
party loan. In the fourth quarter 1999, the Company was advised that the senior
lender informed Ventures of its intention to institute a "lock-box" arrangement,
thereby eliminating the payment of cash interest to the Company while such
arrangement is in place. The Company will continue to receive interest in-kind
payments but will not include such in-kind payments in income. In March 2000,
the lock-box agreement was executed. The Company has taken a $15.5 million
reserve during the fourth quarter 1999 against the loan and accrued interest. If
the senior debt is not paid currently, certain management and franchisee fees
could be deferred until cash is available. A portion of these fees were deferred
in the fourth quarter 1999. The Company also committed to make up to
$7.5 million of additional loans to Ventures under certain circumstances,
including if required by Ventures in order to make a capital contribution to the
owner of the properties in order to achieve compliance with certain debt service
coverage ratios in order to obtain an extension of the maturity date of the
loan, or to obtain the release of a property from the senior lender's liens in
connection with a condemnation, casualty or otherwise. No such additional loans
have been made as of December 31, 1999, but it is possible the loan, or a
portion thereof, will be required to be made in the future. The Company manages
the hotels owned by the subsidiary of Ventures. Commencing April 2001, the
Company may be obligated to reimburse the owner of the properties for as much as
90% of the management fee if the owner's net profit for the 12-month period then
ended, and each subsequent 12-month period, falls below a specific level. If the
performance of the hotels does not materially improve by April 2001, the Company
expects to have to make a payment to the owner of the properties. In addition,
the senior lender to these properties has advised Ventures in March 2000 that it
currently has the right to require the termination of the management contract,
but is not doing so at this time. The Company also issued to Alpine Equities, an
affiliate of Ventures, 350,000 shares of Class A Common Stock for a purchase
price of $1.6 million. Additionally, the Company agreed to pay to Alpine
Equities $1,000 per year for each hotel added to the Best Inns system after the
closing of the transaction, provided that such new hotels are paying royalties
to the Company or any of its affiliates.

The Company currently has no outstanding lines of credit in place. The
Company currently uses cash and its own stock as its primary capital resource.

21
<PAGE>
For the year ended December 31, 1999, the Company had a net loss of
$13.7 million. The net cash used in operating activities was $0.3 million. The
net use of cash was primarily in accounts receivable, prepaid expenses and
deposits. Net cash used was partially offset by cash inflows of application fees
for executed franchise agreements, depreciation and amortization, non-cash
compensation cost related to the Company's employee stock option plans and
increases in accrued expenses.

For the year ended December 31, 1998, the Company had a net loss of
$2.9 million. The net cash used in operating activities was $11.6 million. The
net use of cash was primarily a result of increases in promissory notes
receivable related to the application fees on executed franchise agreements,
increases in deferred commissions paid to salesmen for executed franchise
agreements, and increases in loans to franchisees. Net cash used was partially
offset by cash inflows of application fees for executed franchise agreements,
depreciation and amortization, non-cash compensation cost related to the
Company's employee stock option plans and increases in commissions payable.

For the year ended December 31, 1999, net cash used in investing activities
was $9.5 million which was primarily a result of the issuance of development
subsidies to franchisees and loans to Constellation Development Fund.

For the year ended December 31, 1998, net cash used in investing activities
was $17.0 million which was primarily a result of the issuance of the previously
discussed long term notes receivable, issuance of development subsidies to
franchisees, acquisition of property and equipment and acquisition of franchise
rights.

For the year ended December 31, 1999, net cash provided by financing
activities was $0.2 million resulting from the exercise of stock options.

For the year ended December 31, 1998, net cash provided by financing
activities was $28.8 million which was a result of the issuance of common stock,
partially offset by repayment of the Company's outstanding indebtedness.

YEAR 2000 COMPUTER MATTER.

The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or customer
reservations or engage in similar normal business activities. The Company has
devoted substantial resources and time to analyzing and remediating Year 2000
Issues that are within the Company's control that may significantly impact the
Company's operations. Based on these efforts, the Company has experienced no
material disruptions or adverse effects due to Year 2000 issues and management
believes that the Year 2000 Issue will not pose material operational problems
for its computer systems and does not expect that any remaining costs of
compliance will have a materially adverse impact on the results of operations
during any quarterly or annual reporting period. The Company does not believe
that its operations and systems are vulnerable to those third parties' failure
to remediate their own Year 2000 Issues. There can be no guarantee that the
systems of other companies on which the Company's operations and systems rely
will not have an adverse effect in the Company's systems or results of
operations. There can be no assurances that circumstances will not arise in the
future that will require management to take action in addition to what has
already been performed on the Year 2000 Issues.

SEASONALITY.

Royalties generated by gross room revenues of franchised properties are
expected to be the largest source of revenue for the Company for the immediate
future. The Company expects to experience seasonal revenue patterns similar to
those experienced by the lodging industry generally. The summer

22
<PAGE>
months, because of increase in leisure travel, are expected to produce higher
revenues for the Company than other periods. Accordingly, the Company may
experience lower revenues and profits in the first and fourth quarters and
higher revenues and profits in the second and third quarters.

INFLATION.

The rate of inflation has not had a material effect on the revenues or
operating results of the Company since its inception.

RESERVATIONS AND ADVERTISING FUNDS

During 1998, the Company created independent reservations and advertising
not-for-profit corporations owned by its franchisees (the "Funds") for the
purpose of collecting and disbursing reservations and advertising fees related
to the Microtel and Hawthorn brands. In connection with the creation of the
Funds, the Company ceased reporting reservations and advertising fees and
expenses related to these Funds within its consolidated financial statements
effective April 1, 1998. Any deficits arising from reservations and advertising
operations for quarterly periods prior to April 1, 1998 have been included in
general and administrative expenses. The Company manages the reservations and
advertising programs on behalf of the Funds, and has made interest-bearing loans
at 8.5% in aggregate principal amounts, net of reserves, of approximately
$1.0 million to the Microtel Fund to supplement reservation, advertising, and
promotional efforts, and may make additional loans in the future. The Company
also administers reservations and advertising programs on behalf of Best Inns
franchisees by virtue of its management of Best Reservations Corp., an Illinois
not-for-profit corporation and has made interest-bearing loans at 8.5% in
aggregate principal amounts of approximately $0.8 million to Best Reservation
Corp. as of December 31, 1999, and may make additional loans in the future.

RISK FACTORS

In evaluating the Company and its business, the following risks should be
considered. These are not the only risks the Company faces. Some risks are not
yet known to the Company and others that the Company does not consider material
but could later turn out to be so. All of these risks could adversely affect the
Company's business:

MANAGEMENT OF GROWTH

The Company has experienced rapid growth in the number of its employees and
the scope of its operations since its inception. This growth has resulted in,
and is expected to continue to create, new and increased responsibilities for
management personnel, as well as added demands on the Company's operating and
financial systems. The Company's success will depend on its ability to manage
this growth while implementing its strategy. The efforts of key management
personnel and the Company's ability to attract or develop new management
personnel and to integrate these new employees into its overall operations will
be crucial to continued growth. The recent aggressive competition in the
franchise business has made it more difficult and more costly to attract
qualified personnel. If the Company is unable to manage growth effectively, the
Company's business and results of operations could be materially and adversely
affected.

DEPENDENCE ON, AND OBSTACLES TO, HOTEL OPENINGS

The Company expects that in the future its principal source of revenue will
be franchise fees received from its franchisees. Accordingly, future revenues
will be highly dependent on the timing and the number of open hotels and their
gross room revenues. There are numerous factors beyond the control of the
Company which affect the probability and timing of a hotel opening and the
ability or desire for a hotel to stay in the Company's franchise system. These
factors include, but are not limited to, the ability of a

23
<PAGE>
potential hotel owner to (i) secure adequate financing or satisfy financing
payments during the construction period; (ii) locate an appropriate site of a
hotel; (iii) obtain all necessary state and local construction, occupancy or
other permits and approvals; (iv) obtain necessary construction materials; and
(v) reach a satisfactory level of profitability at the hotel. Under industry and
general economic conditions that prevailed in 1999 and that are expected to
continue in 2000, hotel developers have had and may continue to have difficulty
accessing needed capital and attaining satisfactory levels of profitability. As
a result, the number and timing of franchised hotel openings, and accordingly
the Company's franchise fees, could be adversely affected if current conditions
do not improve. Additionally, there can be no assurance that accepted franchise
applications will result in executed franchise agreements or that executed
franchise agreements will result in open properties. Deteriorating conditions in
the lodging industry can be expected to adversely affect the likelihood that
properties in development will open on a timely basis or at all.

LIMITED OPERATING HISTORY; NET LOSSES; OUR RESULTS FLUCTUATE AND THESE
FLUCTUATIONS CAN BE UNPREDICTABLE

The Company began operating in October 1995 and therefore has a limited
operating history upon which investors can evaluate its performance. While the
Company was profitable during the first three quarters of 1999, the Company
incurred significant charges in the fourth quarter of 1999 that resulted in a
net loss for the year. There can be no assurance that the Company will be
profitable in the future. Additionally, events outside our control, including
those set forth in other risk factors, may cause the Company to experience
fluctuations in revenues and operating results. As a result, the Company's
future results may be below market expectations, including the expectations of
financial analysts and investors. A failure to meet such expectations may
adversely affect the trading price of the Company's Class A Common Stock.

MANAGEMENT, BY VIRTUE OF OWNERSHIP OF SUPERVOTING CLASS B COMMON STOCK, CONTROLS
THE COMPANY

Holders of Class A Common Stock are entitled to one vote per share and
holders of Class B Common Stock are entitled to ten votes per share. Each share
of Class B Common Stock is convertible at any time into one share of the
Class A Common Stock and, with limited exceptions, will convert automatically
upon any transfer thereof. Michael A. Leven, Chairman, President and Chief
Executive Officer, and Neal K. Aronson, Executive Vice President and Chief
Financial Officer, have the right to vote all of the outstanding shares of
Class B Common Stock, which, together with shares of Class A Common Stock which
they beneficially own (including stock held by other members of management),
represent approximately 65% of the combined voting power of the Company's
outstanding Common Stock. By reason of their right to vote the Class B Common
Stock, Messrs. Leven and Aronson will be able to (i) elect all of the Company's
directors (except as otherwise contractually provided), (ii) amend the Charter
with respect to most matters, (iii) effect a merger, sale or other major
corporate transaction, (iv) defeat any unsolicited takeover attempt and
(v) generally direct the affairs of the Company (including in a manner that may
benefit themselves disproportionately relative to other shareholders).

SUCCESSFUL COMPLETION AND INTEGRATION OF ACQUISITIONS

One element of the Company's business strategy is to continuously evaluate
acquisitions and business combinations. These acquisitions may be of brands in
the lodging industry or in other industries, or of businesses that the Company
does not expect to franchise, which would require the Company to develop
expertise in areas that it does not currently operate. There can be no assurance
that the Company will identify and complete suitable acquisitions or if
completed, that such acquisitions will be successfully integrated. The Company
did not engage in any such transaction in 1999. Acquisitions involve numerous
risks, including difficulties assimilating new operations and brands. There can
be no assurance that any

24
<PAGE>
acquisitions would result in long-term benefits to the Company or that
management would be able to manage effectively the resulting business.

DEPENDENCE ON SENIOR MANAGEMENT

The success of the Company is largely dependent on the efforts and abilities
of its senior management and certain other key personnel, particularly
Messrs. Leven, Aronson and Steve Romaniello, Executive Vice President-Franchise
Sales and Administration. The Company's success will depend in large part on its
ability to retain these individuals and other current members of its senior
management team and to attract and retain qualified personnel in the future. The
loss of members of senior management or of certain other key employees or the
Company's inability to retain and attract other qualified employees could have
an adverse impact on the Company's business and results of operations. Certain
franchise agreements have stipulations which allow franchisees to exit without
penalty if certain members of management are no longer affiliated with the
Company. The Company does not maintain key person life insurance on behalf of
the lives of any of its officers or employees.

COMPETITION FOR NEW FRANCHISE PROPERTIES AND HOTEL GUESTS

Competition among national brand franchisers and smaller chains in the
lodging industry to grow their franchise systems is fierce and intensified
during 1999. During 1999, an increasing number of hotel companies announced new
franchise initiatives. As a result, the Company believes there has been a marked
increase in franchise sales personnel throughout the lodging industry and more
aggressive financial incentives are being offered to hotel owners and
developers. Many of the Company's competitors are affiliated with larger chains
with substantially more properties, greater marketing budgets and greater brand
identity than the Company and its brands. There can be no assurance that the
Company can franchise a sufficient number of properties to generate operating
efficiencies that will enable it to compete with these larger chains. See
"Business--Competition."

GENERAL RISKS OF THE LODGING INDUSTRY

The Company is exposed to general risks of the lodging industry in a number
of ways. First, as a franchiser and manager, the Company's franchise royalty and
management fee revenues vary directly with its franchisees' gross room revenues.
As a result, the Company's franchise and management businesses are, and will be,
affected by risks experienced by hotel operators generally. In fact, because of
factors adversely affecting the lodging industry such as lower occupancy rates,
lower percentages of daily rate growth, higher interest rates and increased room
supply competition, the Company is currently evaluating the future prospects of
its management business to determine whether to continue to offer management
services. Second, to the extent the Company directly or indirectly makes equity
or debt investments in hotel properties, those investments will be subject to
the risks experienced by the underlying properties. Third, the Company may
directly acquire ownership interests in its branded hotel properties in order to
promote the brand or for other reasons. To the extent that the Company owns or
leases hotel properties, it will be subjected to the risks of a hotel operator.

The segments in which hotels franchised under the Company's brands currently
operate or plan to operate, may be adversely affected by changes in national or
local economic conditions and other local market conditions, such as an
oversupply of or a reduction in demand for lodging or a scarcity of potential
sites in a geographic area, changes in travel patterns, extreme weather
conditions, changes in governmental regulations that influence or determine
wages, prices, construction costs or methods of operation, changes in interest
rates, the availability of financing, and changes in real estate tax rates and
other operating expenses. In addition, due in part to the strong correlation
between the lodging industry's performance and economic conditions, the lodging
industry is subject to cyclical changes in revenues and profits. In fact, the
Company believes that hotel operators were negatively affected during 1999 by
increased room supply, weaker room demand and higher interest rates, among other
things. These risks may have been exacerbated by the relatively illiquid nature
of real estate holdings.

25
<PAGE>
Downturns or prolonged adverse conditions in real estate or capital markets
or in national or local economies could have a material adverse impact on the
Company's ability to locate new franchisees, the timing of new hotel openings,
the number of rooms at newly-opened hotels, and the amount of royalty and
management fee income earned by the Company and could result in the cancellation
of the Company's franchise agreements and management contracts and increase
risks of impairment on loans or other investments made by the Company directly
or indirectly to or in franchisees and developers and potential deferral or loss
of the interest income associated with such potential write-offs. In fact,
during 1999, 12 of the Company's franchised hotels left their respective systems
and 17 of the Company's management contracts were terminated. In addition to the
aforementioned risks, the Company's current and potential future investments in
or ownership of hotel properties creates a risk of decreased earnings due to
losses related to start-up expenses or ongoing losses due to shortfalls in
expected performance of a hotel. In addition, any guaranty required to secure
construction or permanent loan financing could adversely affect the Company's
financial condition.

The Company expects to experience seasonal revenue patterns similar to those
experienced by participants in the lodging industry generally. Accordingly, the
summer months, because of increases in leisure travel, are expected to produce
higher revenues for the Company than other periods during the year.

DEVELOPMENT AND OWNERSHIP RISK

The Company's success depends upon the development or conversion and opening
of hotels. As a result, it is subject to risks experienced by hotel developers.
These risks, which are applicable to Microtels as new construction properties,
and to Hawthorn and Best Inns as both new construction and conversion
properties, include delays in the commencement or completion of construction,
failure to obtain all necessary zoning and construction permits, discovery of
environmental hazards, unavailability of financing on favorable terms, if at
all, the failure of developed properties to achieve desired revenue or
profitability levels once opened, competition for suitable development sites
from competing franchise chains, the risk of incurring substantial costs in the
event a development project must be abandoned prior to completion, changes in
governmental rules, regulations and interpretations and general economic and
business conditions. The Company's revenues may also be adversely affected by
increases in interest rates, which could increase the costs of financing new
hotel construction or the conversion of existing hotels. Any one of these risks
could discourage or prohibit potential franchisees from beginning or completing
hotel projects or harm the profitability of an open hotel, which could result in
the termination of franchise agreements and management contracts.

If the Company leases and/or owns hotel properties or makes, directly or
indirectly, equity or debt investments in hotel properties, it would be subject
to risks experienced by hotel operators generally. The Company recently incurred
costs of approximately $0.5 million in connection with its abandoned purchase of
a Hawthorn Suites property, representing a portion of a forfeited deposit and
transaction costs.

RISKS RELATING TO THE FINANCING OF FRANCHISEES

The Company participates, from time to time, in construction loans, equity
investments, and long-term mortgage loans made to franchisees. In particular,
the Company has committed to lend up to $10 million to Constellation Equity
Corp. ("Constellation") to be invested by Constellation in Constellation
Development Fund, LLC (the "Development Fund") and to be used by the Development
Fund to provide debt and equity financing to selected developers. As of
December 31, 1999, the Company has loaned approximately $5.7 million in the
aggregate to Constellation and expects to loan approximately an additional
$400,000 to Constellation in 2000. The loan to Constellation is subordinated to
returns of other members. If such returns are not met, this loan could be
jeopardized. Due to the uncertainty surrounding the ultimate recoverability of
the subordinated loan, the Company is accounting for them on a cost-recovery
basis, where interest income is recorded only after recovery of principal. As of
December 31,

26
<PAGE>
1999, the Development Fund has invested in seven Microtels and two Hawthorn
Suites hotels which are in different stages of development. As of February 21,
2000 the managers of the Development Fund agreed that no additional projects
will be commenced in the future. In addition, the Company made a $15 million
unsecured subordinated loan to Alpine Hospitality Ventures LLC ("Ventures") in
connection with the Best Inns acquisition at an interest rate of 12% per annum,
interest on which will be paid in cash to the extent available and otherwise to
be paid in-kind. The loan is subordinated to a guaranty provided by Ventures in
connection with a third party senior loan in the principal amount of
approximately $65 million to its subsidiary that acquired 17 Best Inns hotels in
the Best Inns transaction and is structurally subordinated to such third party
loan. The Company is also committed to make additional loans of up to
$7.5 million to Ventures under certain circumstances. No such additional loans
were made as of December 31, 1999, but it is possible that the loan, or a
portion thereof, will be required to be made in the future. Each of Ventures and
Constellation is a highly leveraged entity and there can be no assurances that
any loans to Ventures or Constellation will be repaid. In the fourth quarter
1999, the Company was advised by Ventures that the senior lender to its
operating subsidiary planned to institute a "lock-box" arrangement because of
the deteriorating financial condition of the operating subsidiary. In
March 2000, the lock-box agreement was executed. The lock-box arrangement
effectively precludes the payment of cash interest to the Company while such
arrangement is in place. The Company will continue to receive interest in-kind
payments but will not include such in-kind payments in income. Recognition of
such in-kind payments as income is dependent upon the amount of underlying
property values of the borrower, relative to other lenders and shareholders.
There can be no assurance that those values will continue to be sufficient to
permit the Company to continue to record such interest income and, in fact, no
such income has been recognized by the Company in the fourth quarter 1999, and
the Company does not currently expect to record income in 2000. In fact, the
Company has taken a reserve of approximately $15.5 million associated with the
principal and accrued interest of the loan.

The Company has also made various loans and advances to individual
franchisees, the reservation and marketing funds for the Microtel and Best Inns
brands, and loan participations in a financing program with Nomura Asset Capital
Corp. See "Item 3. Legal Proceedings" for a discussion of a pending litigation
concerning these loan participations. The Company is subject to the risks
experienced by lenders generally, including risks of franchisee/borrower
defaults and bankruptcies. Among other things, the ability of the borrowers to
repay these loans will be affected by the factors discussed under "General Risks
of the Lodging Industry" and "Development and Ownership Risk." The failure of a
borrower to pay interest could have a material adverse effect on the Company's
results of operations. In the event of default under such loans, the Company, as
a lender, would bear the risk of loss of principal to the extent the value of
the collateral was not sufficient to pay lenders, which may be more senior in
the capital structure. As of December 31, 1999, in addition to the loans to
Ventures and Constellation, the Company had outstanding loans made to borrowers
of approximately $8.6 million aggregate principal amount (net of approximately
$1.1 million of reserves). If the financial condition of the borrowers of these
loans were to worsen, the loans could be deemed to be impaired, which could
result in a significant charge to the Company and future interest income related
to these loans could be deferred or eliminated which could have a materially
adverse effect on future income. In connection with equity investments, the
Company would be subject to risks as an equity investor. See
"Business--Regulation."

REGULATION

The sale of franchises is regulated by various state laws, as well as by the
FTC. To the extent that the Company manages, owns or leases hotel properties, it
will be subject to additional governmental regulations. For example, owners and
operators of hotels are subject to numerous federal, state and local government
regulations, including those relating to the preparation and sale of food and
beverages (such as health and liquor license laws) and building and zoning
requirements. Under the Americans with Disabilities Act of 1990 (the "ADA"), all
public accommodations are required to meet certain federal requirements related
to access and use by disabled persons. The determination that hotels owned,

27
<PAGE>
managed or leased by the Company are not in compliance with the ADA could result
in the imposition of fines, and award of damages to private litigants or
significant expense to the Company in bringing these hotels into compliance.
Additionally, various national, state and local laws and regulations may affect
activities undertaken by the Company in connection with providing financing to
franchisees. In particular, the Company may be required to obtain a license or
to register in certain states in order to arrange loans to be made to
franchisees. See "Business--Regulation."

DEPENDENCE ON SPIRIT RESERVATION SYSTEM

Franchisees of the Hawthorn brand open one year or greater derived
approximately 21% of their reservations through the Spirit Reservation System,
which is operated under contract with Hyatt Hotels Corporation by CSC
Outsourcing, Inc. ("CSC") and Sabre Technology Solutions ("Sabre"). There can be
no assurance that CSC and Sabre will continue to service Hawthorn Suites'
reservations needs in the future. See "Business--The Company's Lodging Franchise
Systems--Hawthorn Suites".

ABSENCE OF DIVIDENDS

The Company has not paid a dividend on its Common Stock since its inception.
The Company intends to retain any earnings to finance its growth and for general
corporate purposes and therefore does not anticipate paying any cash dividends
in the foreseeable future. See "Dividend Policy". In addition, future financing
agreements may contain limitations on the payment of cash dividends or other
distributions of assets to the holders of Common Stock.

ANTI-TAKEOVER DEVICES

Certain identical provisions of the Certificate of Incorporation and the
By-laws of the Company may be deemed to have anti-takeover effects and may
delay, deter or prevent a change in control of the Company that stockholders
might otherwise consider in their best interests. These provisions (i) allow
only the Board of Directors, the Chairman of the Board of Directors or the Chief
Executive Officer of the Company to call special meetings of the stockholders,
(ii) eliminate the ability of stockholders to take any action without a meeting,
(iii) establish certain advance notice procedures for nomination of candidates
for election as directors and for stockholder proposals to be considered at
stockholders' meeting, (iv) generally authorize the issuance of one or more
classes of "blank check" preferred stock, with such designations, rights and
preferences as may be determined from time to time by the Board of Directors,
(v) require approval of holders of 75% of the outstanding Class B Common Stock
for the Board of Directors to create a series of Preferred Stock with general
voting rights or with the right to elect a majority of directors under any
circumstances and (vi) require approval of holders of 75% of the outstanding
voting power to amend or repeal items (i), (ii) or (v) above or this item (vi).

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999
AND 1998 AND FOR THE THREE YEARS ENDED DECEMBER 31, 1999:

Independent Auditors' Report.............................. 30

Consolidated Statements of Financial Position............. 31

Consolidated Statements of Operations..................... 32

Consolidated Statements of Stockholders' Equity........... 33

Consolidated Statements of Cash Flows..................... 34

Notes to Consolidated Financial Statements................ 35
</TABLE>

29
<PAGE>
INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
U.S. Franchise Systems, Inc.:

We have audited the accompanying consolidated statements of financial
position of U.S. Franchise Systems, Inc. and subsidiaries (the "Company") as of
December 31, 1999 and 1998 and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the three years
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1999 and 1998 and the results of its operations and its cash flows for the three
years ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Atlanta, Georgia
March 14, 2000

30
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and temporary cash investments....................... $ 6,339,000 $ 15,966,000
Accounts receivable--Net.................................. 2,315,000 2,108,000
Deposits and prepaid expenses............................. 536,000 315,000
Promissory notes receivable............................... 1,898,000 980,000
Deferred commissions...................................... 2,564,000 1,754,000
------------ ------------
TOTAL CURRENT ASSETS.................................. 13,652,000 21,123,000
PROMISSORY NOTES RECEIVABLE................................. 12,369,000 24,667,000
PROPERTY AND EQUIPMENT--Net................................. 2,141,000 3,396,000
FRANCHISE RIGHTS--Net....................................... 24,691,000 25,490,000
DEFERRED COMMISSIONS........................................ 6,525,000 7,215,000
DEVELOPMENT SUBSIDIES--Net.................................. 10,837,000 1,263,000
OTHER ASSETS--Net........................................... 497,000 1,022,000
------------ ------------
TOTAL ASSETS.......................................... $ 70,712,000 $ 84,176,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 227,000 $ 498,000
Commissions payable....................................... 1,516,000 1,464,000
Deferred application fees................................. 3,686,000 1,973,000
Accrued expenses.......................................... 1,875,000 1,252,000
------------ ------------
TOTAL CURRENT LIABILITIES............................. 7,304,000 5,187,000
DEFERRED APPLICATION FEES................................... 6,570,000 9,280,000
------------ ------------
TOTAL LIABILITIES..................................... 13,874,000 14,467,000
REDEEMABLE STOCK:
Common shares, par value $0.01 per share; issued and
outstanding 3,128,473 (net of 58,807 shares in Treasury at
December 31, 1999 and December 31, 1998) entitled to
redemption under certain circumstances at $324,000 (net of
$6,000 in Treasury) as of December 31, 1999 and December
31, 1998.................................................. 324,000 324,000
STOCKHOLDERS' EQUITY:
Common shares, par value $0.01 per share; authorized
30,000,000 shares of Class A Common Stock and 5,000,000
shares of Class B Common Stock; issued and outstanding
14,063,496 Class A shares and 2,707,919 Class B shares at
December 31, 1999; issued and outstanding 14,038,721 Class
A shares and 2,707,919 Class B shares at December
31,1998................................................... 167,000 167,000
Capital in excess of par.................................. 90,293,000 89,416,000
Accumulated deficit....................................... (33,946,000) (20,198,000)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY............................ 56,514,000 69,385,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS(1)EQUITY............... $ 70,712,000 $ 84,176,000
============ ============
</TABLE>

See notes to consolidated financial statements.

31
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE YEARS ENDED DECEMBER 31, 1999

<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
REVENUES:
Royalty and other fee income........................ $ 14,607,000 $ 7,578,000 $ 769,000
Franchise application fees.......................... 5,089,000 3,006,000 1,098,000
------------ ----------- -----------
19,696,000 10,584,000 1,867,000
EXPENSES:
General and administrative.......................... 12,175,000 11,590,000 9,083,000
Franchise sales commissions......................... 4,878,000 2,216,000 641,000
Depreciation and amortization....................... 1,677,000 1,393,000 571,000
Interest income..................................... (2,469,000) (2,493,000) (1,386,000)
Interest expense.................................... 762,000 1,905,000
Bad debt reserves................................... 17,121,000
------------ ----------- -----------
33,382,000 13,468,000 10,814,000
NET LOSS BEFORE TAXES........................... (13,686,000) (2,884,000) (8,947,000)
Income taxes.......................................... 62,000 0 0
------------ ----------- -----------
NET LOSS AFTER TAXES............................ $(13,748,000) $(2,884,000) $(8,947,000)
============ =========== ===========
Weighted average number of common shares
outstanding......................................... 19,886,030 17,670,591 12,563,772
Loss per share (Basic).............................. $ (0.69) $ (0.16) $ (.71)
============ =========== ===========
</TABLE>

See notes to consolidated financial statements.

32
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE THREE YEARS ENDED DECEMBER 31, 1999

<TABLE>
<CAPTION>
COMMON STOCK CAPITAL TOTAL
---------------------- IN EXCESS ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT OF PAR DEFICIT EQUITY
----------- -------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1996.... 9,394,115 $ 94,000 $20,549,000 $ (8,367,000) $12,276,000
Issuance of capital
stock--acquisition of computer
software......................... 30,303 -- 250,000 -- 250,000
Fair value of options granted...... -- -- 295,000 -- 295,000
Net loss........................... -- -- -- (8,947,000) (8,947,000)
----------- -------- ----------- ------------ -----------
Balance as of December 31, 1997.... 9,424,418 $ 94,000 $21,094,000 $(17,314,000) $ 3,874,000
=========== ======== =========== ============ ===========
Issuance of capital stock--Hawthorn
acquisition...................... 2,222,222 22,000 17,754,000 -- 17,776,000
Development fund................... 500,000 5,000 5,602,000 -- 5,607,000
Stock offering..................... 4,250,000 43,000 40,758,000 -- 40,801,000
Best acquisition................... 350,000 3,000 3,890,000 -- 3,893,000
Fair value of options granted...... -- -- 318,000 -- 318,000
Net loss........................... (2,884,000) (2,884,000)
----------- -------- ----------- ------------ -----------
Balance as of December 31, 1998.... 16,746,640 167,000 89,416,000 (20,198,000) 69,385,000
=========== ======== =========== ============ ===========
Stock options exercised............ 24,775 -- 211,000 211,000
Fair value of options granted...... 666,000 666,000
Net Income (loss).................. -- -- -- (13,748,000) (13,748,000)
----------- -------- ----------- ------------ -----------
Balance as of December 31, 1999.... $16,771,415 $167,000 $90,293,000 $(33,946,000) $56,514,000
=========== ======== =========== ============ ===========
</TABLE>

See notes to consolidated financial statements.

33
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................ $(13,748,000) $ (2,884,000) $ (8,947,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization....................... 1,677,000 1,393,000 571,000
Deferred compensation amortization.................. 666,000 318,000 295,000
Gain on sale of land................................ (185,000)
Land impairment..................................... 279,000
Changes in assets and liabilities:
(Increase) in accounts receivable, prepaid
expenses and deposits........................... (428,000) (1,449,000) (519,000)
(Increase) Decrease in promissory notes
receivable...................................... 11,380,000 (6,337,000) (3,075,000)
(Increase) in deferred commissions................ (120,000) (3,777,000) (3,009,000)
Increase (Decrease) in other assets............... 756,000 (1,231,000) 187,000
Increase (Decrease) in accounts payable........... (271,000) (640,000) 459,000
Increase (Decrease) in accrued expenses........... 623,000 404,000 (120,000)
Increase in commissions payable................... 52,000 293,000 334,000
Increase (Decrease) in deferred application
fees............................................ (997,000) 2,265,000 3,323,000
Increase in subordinated debentures paid in
kind............................................ 935,000
------------ ------------ ------------
Net cash used in operating activities............... (316,000) (11,645,000) (9,566,000)
INVESTING ACTIVITIES:
Issuance of long-term note receivable............... (15,000,000)
Issuance of development subsidies................... (9,957,000) (1,190,000) (109,000)
Acquisition of property and equipment............... (261,000) (3,918,000) (5,162,000)
Proceeds from sale of properties.................... 809,000 5,752,000
Acquisition of franchise rights..................... (113,000) (2,690,000) (178,000)
------------ ------------ ------------
Net cash used in investing activities............... (9,522,000) (17,046,000) (5,449,000)
FINANCING ACTIVITIES:
Repayment of subordinated debt...................... (19,866,000)
Issuance of common stock, net....................... 211,000 48,633,000 --
Redemption of common stock.......................... (6,000)
Principal payments on borrowings.................... (277,000)
------------ ------------ ------------
Net cash provided by (used in) financing
activities........................................ 211,000 28,767,000 (283,000)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND TEMPORARY
CASH INVESTMENTS.................................... (9,627,000) 76,000 $(15,298,000)
CASH AND TEMPORARY INVESTMENTS
Beginning of period................................. 15,966,000 15,890,000 31,188,000
------------ ------------ ------------
End of period....................................... $ 6,339,000 $ 15,966,000 $ 15,890,000
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest.............................. $ 762,000 $ 1,009,000
============ ============
Noncash activities:
Issuance of 30,303 shares of Class A common stock
for
Reservations System Software........................ $ 250,000
============
</TABLE>

See notes to consolidated financial statements.

34
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999

1. ORGANIZATION AND BASIS OF PRESENTATION

U.S. Franchise Systems, Inc. (the "Company") was incorporated in
November 1997 for purposes of acquiring the Hawthorn Suites brand. See "Hawthorn
Acquisition." The Company's predecessor also known as USFS, was incorporated in
Delaware in August 1995. The term "the Company" refers to USFS before the
Hawthorn merger, and as the surviving corporation in the merger. The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

MICROTEL INNS AND SUITES FRANCHISING, INC.: On September 7, 1995, the
Company entered into an agreement (the "Microtel Agreement") with Hudson Hotels
Corporation ("Hudson") to acquire the exclusive worldwide franchising rights and
operating assets of the Microtel hotel system (the "Microtel Acquisition"). The
Microtel Agreement requires the Company to pay a royalty for the right to use,
and license others to use, certain trademarks, service marks, and trade names
associated with the Microtel hotel system.

HAWTHORN SUITES FRANCHISING, INC.: On March 12, 1998, the Company completed
a series of transactions which enabled it to acquire the entire interest in the
Hawthorn Suites brand of hotels. The Company now has the exclusive right to
franchise the Hawthorn Suites brand of hotels and to retain 100% of the
royalties derived therefrom.

BEST FRANCHISING, INC.: On April 28, 1998, the Company completed its
acquisition of the exclusive worldwide franchise rights to the Best Inns hotel
brands, including the franchise agreements for the existing Best Inns hotels. In
addition, the Company acquired management contracts and certain other assets
relating to the management of hotels on behalf of third-party owners.

RESERVATIONS AND ADVERTISING FUNDS: In 1998, the Company created
independent reservations and advertising not-for-profit corporations owned by
its franchisees (the "Funds") for the purpose of collecting and disbursing
reservations and advertising fees related to the Microtel and Hawthorn brands.
In connection with the creation of the Funds, the Company ceased reporting
reservations and advertising fees and expenses within its consolidated financial
statements effective April 1, 1998. Any deficits arising from reservations and
advertising operations for quarterly periods prior to April 1, 1998 have been
included in general and administrative expenses.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Application fee revenue and related costs--Initial franchise fee revenue
consists of application fees received by the Company's subsidiaries from
prospective franchisees. Such fees are recognized in income when the underlying
hotels open. Franchise sales commissions, and other related selling costs are
deferred until the underlying hotels open, at which time such costs are charged
to expense.

Royalty and other fee revenue--The Company recognizes royalty and other fee
income on the accrual method.

Allowance for doubtful trade accounts--During the years ended December 31,
1999, 1998 and 1997, the Company charged $530,000, $116,000 and $10,000
respectively as an allowance for estimated uncollectible accounts, and reduced
the allowance by $239,000, $59,000 and $39,000 respectively. Allowance for

35
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
doubtful account balances as of December 31, 1999 and 1998 was $313,000 and
$56,000, respectively. Charges to the account are made on a specific
identification basis.

Cash and temporary cash investments--The Company considers its investments
with an original maturity of three months or less to be cash equivalents.

Franchise rights--Franchise rights represent the cost of acquiring such
rights and are amortized on a straight-line basis over 25 years for Microtel,
31 years for Hawthorn and 33 years for Best Inns.

Development subsidies--Development subsidies consist of subsidies granted to
assist in the conversion or construction for prospective or existing
franchisees. They are amortized over the operating life of the license
agreement.

Impairment of long-lived assets--Long-lived assets, principally intangibles,
are evaluated quarterly and written down to fair value when management believes
that the unamortized balance cannot be recovered through future undiscounted
cash flows. Assets held for sale are carried at the lower of cost or net
realizable value. See note 4 and 5.

Other assets--Other assets primarily consist of architectural drawings and
renderings (amortized over 15 years) and loan participations. Accumulated
amortization for the years ended December 31, 1999 and 1998 was $279,000 and
$183,000, respectively.

Income taxes--The Company has adopted the provisions of SFAS 109,
"Accounting for Income Taxes," which requires the use of the asset and liability
approach in accounting for income taxes.

Fair value of financial instruments--The carrying amounts of cash and cash
equivalents, trade and notes receivables, other current assets, accounts
payable, accrueds, and notes payable meeting the definition of a financial
instrument approximate fair value.

Stock-based compensation plans--The Company has elected to account for its
stock option plans in accordance with SFAS 123, "Accounting for Stock-Based
Compensation." Under the provisions of SFAS 123, compensation is recognized for
the fair value of options granted over the vesting period.

Earnings per share--In February 1997, the Financial Accounting Standards
Board issued SFAS 128, "Earnings per Share," which simplifies the standards for
computing earnings per share (EPS) information and makes the computation
comparable to international EPS standards. SFAS 128 replaces the presentation of
"primary" (and when required "fully diluted") EPS with a presentation of "basic"
and "diluted" EPS. Net income per share--basic is computed based on net income
divided by the weighted average common shares outstanding. If required, net
income per share--diluted is computed by dividing net income by the weighted
average common and common shares during the year plus the incremental shares
that would have been outstanding under stock option plans.

Management 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 and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

36
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New accounting pronouncements: The Company adopted SOP 98-5 "Reporting on
the Cost of Start-up Activities" in fiscal year 1999. The effect on the
financial statements was not material. In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"), which was modified by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities- Deferral of the
effective date of FASB Statement No. 133." SFAS 133 requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. The Company plans to adopt
SFAS 133 beginning in the first quarter of 2001, and does not presently expect
such adoption to have any material effect on the Company's financial statements
at that time.

Reclassifications--Certain amounts in the prior year financial statements
have been reclassified to conform with the 1999 financial statement
presentation.

3. NOTES RECEIVABLE

In connection with the Best Inns Acquisition, the Company made a
$15 million unsecured subordinated loan to Alpine Hospitality Ventures LLC
("Ventures") at an interest rate of 12% per annum, interest on which will be
paid in cash to the extent available and otherwise will be paid-in-kind. The
loan is subordinated to a guarantee provided by Ventures in connection with a
third-party senior loan in the principal amount of approximately $65 million to
its subsidiary that acquired 17 Best Inns hotels in the Best Inns acquisition
and is structurally subordinated to such third-party loan. In the fourth quarter
1999, the Company was advised that the senior lender informed Ventures of its
intention to institute a "lock-box" arrangement, thereby eliminating the payment
of cash interest to the Company while such arrangement is in place, although
in-kind payment of interest accrues instead. Unless the properties improve
materially, the Company does not expect to recognize such in-kind interest as
income. In March 2000, the lock-box agreement was executed. During the fourth
quarter 1999, the Company took a reserve of $15.5 million against the loan and
accrued interest. If senior debt is not serviced currently, certain management
and franchise fees could be deferred until cash is available. A portion of these
fees were deferred in the fourth quarter 1999. The Company is also committed to
make up to $7.5 million of additional loans to Ventures under certain
circumstances, including, if required by Ventures in order to make a capital
contribution to the owner of the properties in order to achieve compliance with
certain debt service coverage ratios in order to obtain an extension of the
maturity date of the loan, or to obtain the release of a property from the
senior lender's liens in connection with a condemnation, casualty or otherwise.
No such additional loans were made as of December 31, 1999, but it is possible
that additional loans may be required in the future. The Company manages the
hotels owned by a subsidiary of Ventures. Commencing April 1, 2001, the Company
may be obligated to reimburse the owner of the properties for as much as 90% of
the management fee if the owner's net profit for the 12-month period then ended,
and each subsequent 12-month period, falls below a specified level. If the
performance of the hotels does not materially improve by April 2001, the Company
expects to have to make payments to the owner of the properties. In addition,
the senior lender to these properties has advised Ventures in March 2000 that it
currently has the right to require the termination of the management contract,
but is not doing so at this time. In 1999 and 1998, the Company earned franchise
royalty fees of $0.7 million and $0.5 million, respectively, and management fees
of $1.2 million and $0.9 million, respectively, from the owner of the
properties. The Company also issued to Alpine Hospitality Equities LLC ("Alpine
Equities"), an affiliate

37
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999

3. NOTES RECEIVABLE (CONTINUED)
of Ventures, 350,000 shares (the "Alpine Shares") of Class A Common Stock for a
purchase price of $1.6 million. Alpine Equities was granted certain demand and
piggy-back registration rights on customary terms with respect to the Alpine
Shares, as well as certain tag-along rights on certain sales of Common Stock
made by the Company's CEO (Mr. Leven), and CFO (Mr. Aronson). Additionally, the
Company agreed to pay to Alpine Equities $1,000 per year for each hotel added to
the Best Inns system after the closing of the transaction, provided that such
new hotels are paying royalties to the Company or any of its affiliates.

The Company manages the reservations and advertising programs on behalf of
the Microtel Reservation and Advertising Fund and has made interest bearing
loans at 8.5% in an aggregate principal amount, net of reserves, of
approximately $1.0 million to the Microtel Fund to supplement reservation,
advertising and promotional efforts and may make additional loans in the future.
The Company also administers reservations and advertising programs on behalf of
Best Inns franchisees by virtue of its management of Best Reservations Corp, an
Illinois not-for-profit corporation and has made interest bearing loans at 8.5%
to the Best Reservation Corp. in aggregate principal amount of approximately
$0.8 million as of December 31, 1999, and may make additional loans in the
future.

On March 17, 1998, NorthStar Constellation, LLC (together with its
affiliates, "NorthStar"), Lubert-Adler Real Estate Opportunity Funds (together
with its affiliates, "Lubert-Adler") and Constellation Equity Corp., an entity
controlled by NorthStar ("Constellation"), formed Constellation Development Fund
LLC (the "Development Fund"). The Development Fund was established, in part, to
provide capital that will allow the Company to expand its Microtel and Hawthorn
Suites brands into high visibility, difficult to develop areas by providing debt
and equity financing to selected local developers. NorthStar, Lubert-Adler and
Constellation agreed to contribute to the Development Fund equity up to
$50 million. On October 31, 1998 the Development Fund entered into a
$60 million senior credit facility with NationsBank, N.A. As of December 31,
1999 the Development Fund has invested in seven Microtel and two Hawthorn Suites
hotels which are in different stages of development. As of February 21, 2000 the
managers of the Development Fund agreed that no additional projects would be
commenced in the future. In connection with the establishment of the Development
Fund, the Company committed to make a loan of up to $10 million to
Constellation. Constellation will use the funds to make an investment which is
subordinated to certain debt and equity returns of investors in the Development
Fund. The loan bears interest at an annual rate of 8%, is non-recourse and is
repayable from distributions and payments made to Constellation from the
Development Fund. As of December 31, 1999, the Company had made loans of
approximately $5.7 million in the aggregate to Constellation and the Company
expects to lend approximately an additional $400,000 to Constellation in 2000.
Due to the uncertainty surrounding ultimate recoverability of the subordinated
loan, the Company is accounting for it on the cost-recovery basis, where
interest income is recorded only after recovery of principal. The Company will
be paid $3.5 million over the first five years to manage the Development Fund,
$2 million of which was earned as of December 31, 1999. In connection with this
transaction, the Company also sold an aggregate of 500,000 shares of Class A
Common Stock to NorthStar and Lubert-Adler for $5.7 million. Rights of NorthStar
and Lubert-Adler to acquire additional shares of Class A Common Stock have
expired. In addition, David T. Hamamoto, Co-Chief Executive Officer of NorthStar
was elected to the Board of Directors of the Company. Dean Adler, a director of
the Company, serves as a manager of Lubert-Adler, and Mr. Adler, along with
Mr. Hamamoto and Mr. Aronson, serve as managers of the Development Fund.

38
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999

3. NOTES RECEIVABLE (CONTINUED)
The Company accepts promissory notes as part of the initial purchase price
of a franchise. No revenue is recognized upon receipt of such notes until such
time as the hotel opens and the notes are repaid by the franchisee. The balance
of such notes as of December 31, 1999 and 1998 were $3.0 million and
$2.9 million, respectively.

Additionally, the Company makes loans to certain franchisees to assist in
the construction and initial operation of the hotels. The amount of such loans
was $4.4 million and $4.0 million as of December 31, 1999 and 1998,
respectively, net of reserve for uncollectible amounts of $651,000 in 1999 and
$0 in 1998.

4. INTANGIBLE ASSETS

The Company has intangible assets related to the acquisition of its various
franchise rights which are carried at cost net of accumulated amortization. A
summary of such costs is as follows:

<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred franchise rights.......................... $26,810,000 $26,696,000
Accumulated amortization........................... 2,119,000 1,206,000
----------- -----------
Net deferred franchise rights...................... $24,691,000 $25,490,000
=========== ===========
</TABLE>

The Company grants development subsidiaries to certain franchisees in
connection with the construction and conversion of properties into one of its
brands. A summary of such deferred costs is as follows:

<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Development subsidies............................... $11,137,000 $1,299,000
Accumulated amortization............................ 300,000 36,000
----------- ----------
Development subsidies net........................... $10,837,000 $1,263,000
=========== ==========
</TABLE>

During 1999, the Company determined that certain development subsidies would
not be recoverable from future cash flow and therefore has written off such
assets in the amount of $123,000.

39
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999

5. PROPERTY AND EQUIPMENT

Property and equipment is recorded at historical cost and consisted of the
following at December 31, 1999 and 1998, respectively:

<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Land............................................... -- $ 1,122,000
Construction in progress........................... -- 198,000
Furniture, fixtures, and equipment................. $ 659,000 594,000
Computer equipment and software.................... 2,162,000 1,978,000
----------- -----------
2,821,000 3,892,000
Less accumulated depreciation...................... 1,109,000 496,000
----------- -----------
1,712,000 3,396,000
Real Estate held for sale.......................... 429,000
----------- -----------
$ 2,141,000 $ 3,396,000
=========== ===========
</TABLE>

PC based computer software is depreciated on a straight-line basis over a
period of three years. The reservation system and accounting system software are
depreciated on a straight-line basis over a period of five years. Computer
equipment is depreciated using the 200% declining-balance method over a period
of five years. The remaining fixed assets are depreciated using the 200%
declining-balance method over a period of seven years. Depreciation expense was
$316,000, $365,000 and $108,000 for the years ended December 31 1999, 1998 and
1997, respectively.

Land (with associated improvements) is held for sale in Redding, California.
It is expected to be sold during 2000. The land and associated improvements were
written down to net realizable value in fiscal 1999 resulting in a $279,000
reserve.

The Company recorded a reserve of approximately $0.5 million in the fourth
quarter of 1999 in connection with the abandoned purchase of a Hawthorn Suites
property, representing a portion of a forfeited deposit and associated
transaction costs.

6. REDEEMABLE PREFERRED STOCK AND SUBORDINATED DEBENTURES

Until December 31, 1996, the cumulative redeemable exchangeable preferred
stock earned cumulative dividends at an annual dividend rate of 10%, payable in
additional shares of redeemable preferred stock. On January 1, 1997, the Company
exercised its option to exchange the redeemable preferred stock at its
liquidation value of $18,477,000 into 10% subordinated debentures due
September 29, 2007. In May 1998, the Company repaid all outstanding principal
and interest on the subordinated debentures with a portion of the proceeds from
its $41 million equity offering (See Note 7).

7. STOCKHOLDERS EQUITY

The Company has two classes of common stock: Class A Common Stock, par value
$.01 per share and Class B Common Stock, par value $.01 per share outstanding at
December 31, 1999 and 1998, respectively. Shares of Class A Common Stock and
Class B Common Stock are identical in all respects except that:

40
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999

7. STOCKHOLDERS EQUITY (CONTINUED)
(i) holders of Class B Common Stock are entitled to ten votes per share and
holders of Class A Common Stock are entitled to one vote per share; and
(ii) the shares of Class B Common Stock are convertible into Class A Common
Stock at the option of the holder and, with limited exceptions, upon the
transfer thereof. There are 30 million shares of Class A Common Stock and
5 million shares of Class B Common Stock authorized for issuance.

On October 24, 1996, the Company completed an initial public offering of
1,825,000 shares of Class A Common Stock at $13.50 per share. Net proceeds to
the Company were approximately $21 million. On May 19, 1998, the Company
completed a public offering of 4,250,000 shares of Class A Common Stock at
$10.50 per share. Net proceeds were approximately $41 million, of which
approximately $30 million was used by the Company to repay all of its
outstanding indebtedness including all principal and accrued interest and the
remaining $11 million of which was either used for working capital and general
corporate purposes or is currently available as cash balances.

41
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999

8. STOCK PURCHASED BY EMPLOYEES

Under the terms of certain employee stock purchase agreements, Company
management holds 4,027,886 shares of unrestricted stock and 1,344,457 shares of
restricted stock at December 31, 1999.

The Company repurchased 30,921 unrestricted and 26,886 restricted shares
(57,807 shares in the aggregate) from two management employees who left the
Company during 1997 at $.1034 and $.1137 per share, respectively, pursuant to
the terms of the departing management employees' respective employee stock
purchase agreements. As of December 31, 1999 and 1998 the 57,807 shares are held
by the Company as treasury stock. Pursuant to the terms of their respective
employee stock purchase agreements, certain management shareholders had the
right to purchase, at any time, the repurchased shares from the Company at the
price paid by the Company. Such shareholders permanently declined the option to
repurchase such shares. Restricted shares and certain unrestricted shares are
subject to five year and ten year vesting periods, respectively, subject to,
among other things, certain management employees' continued employment by the
Company. Any shares which are forfeited will be repurchased by the Company and
reoffered to certain management shareholders at $.1034 or $.1137 per share, as
applicable, based on the price paid by the management employee for the shares.
Compensation expense will be recorded to the extent the fair value of the
reoffered shares exceeds $.1034 or $.1137, as applicable. All restricted shares
are subject to an earnings test formula based upon increases in the Company's
earnings before interest, taxes, and depreciation and are deemed earned upon the
satisfaction of these performance criteria (the "Earned Shares"). Earned Shares
are subject to forfeiture if the holder's employment ceases with the Company
before September 29, 2005. Any restricted shares that have not been earned by
September 29, 2005 will be redeemed by the Company and reissued to the original
stockholders of the Company (other than certain management shareholders) pro
rata based on their original holdings of common stock. Restricted shares and all
other shares subject to the employee stock purchase agreements held by other
members of management have been classified as redeemable common stock in the
balance sheet because they are redeemable by the Company under certain
circumstances for reasons beyond the Company's control.

9. STOCK OPTION PLANS

The Company has stock option plans which reserve shares of Class A Common
Stock for its officers, employees, consultants and advisors (the "Employee
Plan") and for its non-employee directors (the "Directors Plan"). Under the
Employee Plan, the Option Committee of the Board of Directors may grant options
for up to 975,000 shares of the Company's Class A Common Stock taking into
effect the amendment to the Employee Plan increasing by 250,000 the number of
options under the Employee Plan. The amendment was approved by the Board of
Directors of the Company subject to shareholder approval; however, holders of a
majority of the Company's voting stock entered into a Voting Agreement with the
Company dated January 25, 2000 which ensures such approval. The options
generally have a maximum life of seven years. Under the Directors Plan, the
Company may grant options to its non-employee directors for up to 125,000 shares
of the Company's Class A Common Stock. Non-employee directors are each awarded
options to purchase 2,000 shares upon their election to the Board of Directors.
In addition, commencing on January 1, 1998, each non-employee director receives
a grant of 2,000 stock options on January 1 of each year they continue to serve
on the Board. The director options become exercisable on the first anniversary
of the grant date and their maximum life is ten years. Options outstanding under
the Company's stock option plan have been granted at prices equal to the market
value of the stock on the

42
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999

9. STOCK OPTION PLANS (CONTINUED)
date of the grant and vest over a 1, 4, or 5 year period. On December 31, 1999,
all stock options were repriced for all current employees and consultants to
$4.50 per share, resulting in incremental fair value of $327,000, which is
recognized over the remaining vesting period of the options. The Company is also
obligated to grant options for shares of Class A common stock to certain members
of its franchise sales force in the event they achieve specified sales
benchmarks in 2000.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions.

<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Expected life (years).............................. 3.8 3.9 3.8
Expected volatility................................ 34.8% 30.0% 30.1%
Risk free interest rate............................ 5.9% 6.0% 6.0%
Dividend Yield..................................... 0.0% 0.0% 0.0%
</TABLE>

Activity related to the Company's two stock option plans is summarized as
follows:

<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVG. AVG. AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- -------------- -------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Options as of January 1.............. 484,857 $ 9.28 228,500 $11.39 178,500 $13.48
Granted.............................. 322,400 10.99 326,757 7.66 105,700 8.66
Forfeited............................ (62,175) 10.77 (70,400) 9.38 (55,700) 12.72
Exercised............................ (24,775) 8.51 0 0 0
------- ------ ------- ------ ------- ------
Options as of December 31............ 720,307 $ 4.90 484,857 $ 9.28 228,500 $11.39
======= ====== ======= ====== ======= ======
Options exercisable as of December
31................................. 161,793 53,163 39,950
Weighted-average fair value of
options granted during the year.... $10.99 $ 2.23 $ 2.78
====== ====== ======
</TABLE>

43
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999

9. STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1999:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES DEC. 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE DEC. 31, 1999 EXERCISE PRICE
- ----------------------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
.10340 to .11375............. 30,921 2.49 $0.11 7,730 $0.11
$4.50........................ 578,000 3.31 4.50 103,813 4.50
$5.81........................ 32,000 3.61 5.81 -- --
$8.13 to $13.50.............. 52,500 0.15 11.55 50,250 11.59
------- ---- ----- ------- -----
.10340 to $13.50............. 693,421 3.05 $4.90 161,793 $6.49
======= ==== ===== ======= =====
Performance
Based Options*............... 26,886
=======
Total options **........... 720,307
=======
</TABLE>

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

* Performance Based options have been granted to an employee at an average
exercise price of $0.105 per share. Vesting of these options is conditional
on the Company's achieving certain profitability targets. Compensation cost
will be estimated and recorded for these options when management can
reasonably estimate the likelihood that the performance criteria will be
achieved by the Company.

** The fair value of options granted or repriced during the years ended
December 31, 1999 and 1998 was $975,000 and $610,000 respectively, which is
being amortized as compensation expense over the vesting period.
Compensation expense of $503,000, $318,000 and $295,000 was recorded for the
years ended December 31, 1999, 1998, and 1997 respectively. In 1999,
compensation expense includes $132,000 associated with the repricing of the
stock options during the fourth quarter.

44
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999

10. INCOME TAXES

Deferred income taxes in the accompanying consolidated statement of
financial position includes the following amounts of deferred tax assets and
liabilities at December 31, 1999 and 1998, respectively:

<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Deferred expenses................................ $(2,845,000) $(2,955,000)
Other............................................ (964,000) (251,000)
----------- -----------
Total.............................................. $(3,809,000) $(3,206,000)
=========== ===========
DEFERRED TAX ASSETS:
Operating loss carryforwards..................... $ 4,814,000 $ 6,781,000
Deferred revenue................................. 2,973,000 3,905,000
Compensation cost................................ 0 259,000
Allowances and reserves.......................... 6,650,000 0
Other............................................ 1,079,000 112,000
----------- -----------
Total.............................................. 15,516,000 11,057,000
----------- -----------
Valuation allowance................................ (11,707,000) (7,851,000)
----------- -----------
Net deferred tax asset (liability)................. $ 0 $ 0
=========== ===========
</TABLE>

As of December 31, 1999 and 1998, the Company had accumulated net operating
loss carryforwards of $12,667,000 and $13,890,000, respectively which begin to
expire in the year 2010.

During the years ended December 31, 1999, and 1998 the Company increased the
valuation allowance against its net deferred tax asset by $3.9 million and
$1.6 million, respectively due to the uncertainty of the realizability of net
deferred tax assets.

The following is a reconciliation of the statutory tax rate to the effective
tax rate of the Company at December 31, 1999 and 1998, respectively:

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Statutory federal rate...................................... 34% 34%
Statutory state rate less federal effect.................... 4% 4%
Effect of income not subject to tax.........................
Change in valuation allowance............................... (38%) (38%)
--- ---
Effective tax rate.......................................... --% --%
=== ===
</TABLE>

11. SEGMENT REPORTING

The Company currently owns three brands and operates a management company in
the United States. Other/corporate represents overhead and assets not
specifically allocable to the brands or the management

45
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999

11. SEGMENT REPORTING (CONTINUED)
company. Revenues, net income directly attributable to the business segment,
identifiable assets, and capital expenditures are estimated as follows.

<TABLE>
<CAPTION>
MANAGEMENT OTHER/
MICROTEL HAWTHORN BEST COMPANY CORPORATE CONSOLIDATED
----------- ----------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
1999................. $ 6,497,000 $ 7,276,000 $ 4,005,000 $1,918,000 $ -- $ 19,696,000
1998................. $ 4,355,000 $ 3,750,000 $ 1,072,000 $1,407,000 $ -- $ 10,584,000
1997................. $ 1,664,000 $ 203,000 $ -- $ -- $ -- $ 1,867,000

Net Income (loss)
1999................. $ 3,193,000 $ 4,625,000 $(11,833,000) $ 433,000 $(10,166,000) $(13,748,000)
1998................. $ 3,748,000 $ 2,455,000 $ 2,034,000 $ 454,000 $(11,575,000) $ (2,884,000)
1997................. $ 1,139,000 $ (25,000) $ -- -- $(10,061,000) $ (8,947,000)

Identifiable Assets
1999................. $19,343,000 $32,048,000 $ 12,576,000 $ 646,000 $ 6,099,000 $ 70,712,000
1998................. $19,199,000 $24,358,000 $ 22,026,000 $ 917,000 $ 17,676,000 $ 84,176,000
1997................. $18,215,000 $ 2,957,000 $ -- $ -- $ 15,179,000 $ 36,351,000

Capital Expenditures
1999................. $ 12,000 $ 56,000 $ 57,000 $ 36,000 $ 213,000 $ 374,000
1998................. $ 3,360,000 $18,362,000 $ 4,583,000 $ 35,000 $ 523,000 $ 26,863,000
1997................. $ 4,167,000 $ 178,000 -- $ -- $ 995,000 $ 5,340,000
</TABLE>

12. LEASES

The Company leases certain equipment and office space used in its
operations. Rental expense under operating leases was $343,000, $461,000 and
$366,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The
future minimum rental commitments under non-cancelable operating leases at
December 31, 1999 were as follows:

<TABLE>
<S> <C>
2000........................................................ $ 449,000
2001........................................................ 348,000
2002........................................................ 329,000
2003........................................................ 291,000
2004........................................................ 285,000
Beyond...................................................... 221,000
----------
Total....................................................... $1,923,000
==========
</TABLE>

46
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999

13. COMMITMENTS AND CONTINGENCES

The Microtel Acquisition Agreement requires the Company to satisfy a
development schedule, which requires the Company to have a specified number of
new Microtel properties open or under construction by certain target dates. The
Company has satisfied the development schedule to date and must have 250 newly
executed Microtel franchises open or under construction by December 31, 2001 in
order to avoid being in default under the last remaining target. For purposes of
meeting this target, the 27 Microtel properties that do not pay royalties to the
Company and, if open or under construction, the additional 23 Microtel Inn
properties and 10 Microtel Suites hotels that are currently entitled to be built
by certain parties without the payment of royalties to the Company pursuant to
the Microtel Acquisition Agreement, are excluded. As of March 10, 2000, the
Company had opened or under construction 223 Microtel properties which counted
toward satisfying the development schedule. Therefore, from March 10, 2000 until
December 31, 2001, the Company is required to break ground on an additional 27
Microtel brand hotels in order to avoid being in default under the Microtel
Acquisition Agreement. If the Company fails to so satisfy the development
schedule, it may cure its default by making a $1,000,000 payment to Hudson.

The Company has committed to make loans and other payments to Ventures and
the Development Fund (See Note 3).

The Company has agreed to provide development subsidies to various
franchisees to the extent certain milestones are achieved.

The Company has employment agreements with its Chief Executive Officer and
Chief Financial Officer. The agreements are for a ten year term expiring on
September 30, 2005 and provide minimum salary levels and other fringe benefits.

The Company is subject to litigation in the ordinary course of its business.
In the opinion of management, the outcome of such litigation will not have a
material impact of the earnings, financial position or cash flow of the Company.

The Company is currently in litigation with respect to certain financing
programs under which the Company retained an ongoing participation. Management
has reserved approximately $800,000 with respect to the termination of the loan
program as of December 31, 1999.

In connection with a letter agreement with Leisure Hotel Management dated
February 3, 1998, the Company has authorized the issuance of up to $900,000
worth of shares of Class A Common Stock upon the attainment of certain
development milestones. On March 3, 2000, the Company issued 48,290 shares of
Class A Common Stock, valued at approximately $240,000, in satisfaction of the
first such milestone. The Company is also obligated to grant options for shares
of Class A Common Stock to certain members of the Company's franchise salesforce
in the event they achieve specified sales benchmarks in 2000.

47
<PAGE>
U.S. FRANCHISE SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

AS OF DECEMBER 31, 1999 AND 1998 AND
FOR THE THREE YEARS ENDED DECEMBER 31, 1999

14. SELECTED QUARTERLY FINANCIAL DATA--(UNAUDITED)

<TABLE>
<CAPTION>
1999 FIRST SECOND THIRD FOURTH TOTAL YEAR
- ---- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue..................... $ 3,176,000 $ 4,751,000 $ 6,992,000 $ 4,777,000 $ 19,696,000
Net income (loss)........... 505,000 1,513,000 3,034,000 (18,800,000) (13,748,000)
Income (loss) applicable to
common stockholders....... $ 505,000 $ 1,513,000 $ 3,034,000 $(18,800,000) $(13,748,000)
Weighted avg shares
outstanding............... 19,875,113 19,880,326 19,891,538 19,898,888 19,886,030
Weighted avg shares
outstanding--dilutive..... 20,023,661 20,044,600 20,087,111 -- --
Net income (loss) per
share--basic and dilutive
(a)....................... $ .03 $ .08 $ .15 $ (.94) $ (.69)
=========== =========== =========== ============ ============
</TABLE>

<TABLE>
<CAPTION>
1998 FIRST SECOND THIRD FOURTH TOTAL YEAR
- ---- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenue..................... $ 1,296,000 $ 2,795,000 $ 3,354,000 $ 3,139,000 $ 10,584,000
Net income (loss)........... (1,855,000) (1,256,000) 109,000 118,000 (2,884,000)
Income (loss) applicable to
common stockholders....... $(1,855,000) $(1,256,000) $ 109,000 $ 118,000 $ (2,884,000)
Weighted avg shares
outstanding............... 13,094,249 17,837,891 19,875,113 19,875,113 17,670,591
Net income (loss) per
share--
basic (a)................. $ (.14) $ (.07) $ .01 $ .01 $ (.16)
=========== =========== =========== ============ ============
</TABLE>

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

(a) Due to the changes in the numbers of shares outstanding, quarterly per share
amounts do not add to the total for the year.

48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

There have been no disagreements on accounting and financial disclosure
matters which are required to be described by Item 304 of Regulation S-K.

PART III

Items 10, 11, 12, and 13 to be furnished by amendment hereto on or prior to
April 30, 2000 or the Company will otherwise have filed a definitive Proxy
Statement involving the election of directors pursuant to Regulation 14A which
will contain such information.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(A) 1. FINANCIAL STATEMENTS:

See Table of Contents to Financial Statements ("Item 8. Financial Statements
and Supplementary Data").

2. FINANCIAL STATEMENT SCHEDULES:

No schedules are included with this Report, as they are not applicable or
the information required to be set forth therein is included in the consolidated
financial statements or notes thereto.

3. EXHIBITS: The following exhibits are filed with or incorporated by
reference into this Report. Except as otherwise indicated, the exhibit number
corresponds to the exhibit number in the referenced document.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
2.1 Agreement and Plan of Merger, dated December 9, 1997,
between U.S. Franchise Systems, Inc. and USFS
Hawthorn, Inc. (incorporated by reference from the Company's
Registration Statement on Form S-4 (Registration
No. 333-46185)).

2.2 Contribution Agreement, dated December 9, 1997, among
Hawthorn Suites Associates, HSA Properties, Inc., USFS
Hawthorn, Inc. and U.S. Franchise Systems, Inc.
(incorporated by reference from the Company's Registration
Statement on Form S-4 (Registration No. 333-46185)).

3.1 Certificate of Incorporation (incorporated by reference from
the Company's Registration Statement on Form S-4
(Registration No. 333-46185)).

3.2 By-laws (incorporated by reference from the Company's
Registration Statement on Form S-4 (Registration
No. 333-46185)).

4.2 Specimen Class A Common Stock Certificate (incorporated by
reference from the Company's Registration Statement on
Form S-4 (Registration No. 333-46185)).

4.3 Specimen Class B Common Stock Certificate (incorporated by
reference from the Company's Registration Statement on
Form S-4 (Registration No. 333-46185)).

4.4 Shareholders Agreement, dated as of March 12, 1998 by and
among Hawthorn Suites Associates, HSA Properties, Inc.,
Michael A. Leven, Neal K. Aronson and U.S. Franchise
Systems, Inc. (incorporated by reference from the Company's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1998 (File No. 0-23941)).

4.5 Registration and Tag-Along Rights Agreement dated as of
March 17, 1998 between (i) U.S. Franchise Systems, Inc.,
(ii) Sextant Trading LLC, Lubert-Adler Real Estate
Opportunity Fund,
</TABLE>

49
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
L.P., Lubert-Adler Real Estate Opportunity Fund II, L.P. and
Lubert-Adler Capital Real Estate Opportunity Fund, L.P., and
(iii) Michael Leven and Neal K. Aronson (incorporated by
reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1998 (File
No. 0-23941)).

4.6 Registration Rights Agreement dated as of April 28, 1998
among U.S. Franchise Systems, Inc., Alpine Hospitality
Equities LLC, Michael A. Leven and Neal K. Aronson
(incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
March 31, 1998 (File No. 0-23941)).

10.3 Joint Venture Agreement between Microtel Franchise and
Development Corporation and U.S. Franchise Systems, Inc.
dated as of September 7, 1995 (incorporated by reference
from the Company's Registration Statement on Form S-1
(Registration No. 333-11427)).

10.5 Amended and Restated Stockholders' Agreement, dated as of
September 29, 1995, as amended on October 11, 1996, among
the Company and the Original Investors (incorporated by
reference from the Company's Registration Statement on
Form S-1 (Registration No. 333-11427)).

10.6 Amended and Restated Employee Stock Purchase Agreement
between U.S. Franchise Systems, Inc. and Michael A. Leven,
entered into as of September 29, 1995, as amended effective
October 24, 1996 (incorporated by reference from the
Company's Registration Statement on Form S- 1 (Registration
No. 333-11427)).

10.7 Amended and Restated Employee Stock Purchase Agreement
between U.S. Franchise Systems, Inc. and Neal K. Aronson,
entered into as of September 29, 1995, as amended effective
October 24, 1996 (incorporated by reference from the
Company's Registration Statement on Form S-1 (Registration
No. 333-11427)).

10.8 Employment Agreement by and between U.S. Franchise
Systems, Inc. and Michael A. Leven, dated October 1, 1995
(incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).

10.9 Employment Agreement by and between U.S. Franchise
Systems, Inc. and Neal K. Aronson, dated October 1, 1995
(incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).

10.10 Voting Agreement between Michael A. Leven and Andrea Leven
entered into on October 30, 1996 (incorporated by reference
from the Company's Registration Statement on Form S-1
(Registration No. 333-11427)).

10.11 Voting Agreement between Michael A. Leven and Neal K.
Aronson entered into on October 30, 1996 (incorporated by
reference from the Company's Registration Statement on
Form S-1 (Registration No. 333-11427)).

10.12 Office Lease Agreement between Hallwood Real Estate
Investors Fund XV and U.S. Franchise Systems, Inc., dated
September 25, 1995 (incorporated by reference from the
Company's Registration Statement on Form S-1 (Registration
No. 333-11427)).

10.13 First Amendment to Office Lease between Hallwood 95, L.P.,
and U.S. Franchise Systems, Inc., dated May 20, 1996
(incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-11427)).

10.14 U.S. Franchise Systems, Inc. Amended and Restated 1996 Stock
Option Plan (incorporated by reference from the Company's
Registration Statement on Form S-8 (Registration
No. 333-5707, Exhibit 4.3).
</TABLE>

50
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
10.15 U.S. Franchise Systems, Inc. 1996 Stock Option Plan for
Non-Employee Directors (incorporated by reference from the
Company's Registration Statement on Form S-1 (Registration
No. 333-11427)).

10.17 Voting Agreement between Michael A. Leven and Andrea Leven
entered into on March 12, 1998 (incorporated by reference
from Exhibit 10.11 to the Company's Registration Statement
on Form S-4 (Registration No. 333-46185)).

10.18 Voting Agreement between Michael A. Leven and Neal K.
Aronson entered into on March 12, 1998 (incorporated by
reference from Exhibit 10.13 to the Company's Registration
Statement on Form S-4 (Registration No. 333-46185)).

10.21 Agreement of Purchase and Sale between America's Best
Inns, Inc. and The Other Selling Entities Listed on
Schedule I thereto and Best Acquisition, Inc., dated
December 15, 1997. The Registrant agrees to furnish copies
of the schedules hereto supplementally to the Commission on
request (incorporated by reference from the Company's
Registration Statement on Form S-4 (Registration
No. 333-46185)).

10.22 Promissory Note, dated March 18, 1998, from Constellation
Equity Corp. to the Registrant in the principal amount of
$10 million. (incorporated by reference from Exhibit 10.22
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999 (File No. 0-23941)).

10.23 Management Services Agreement, dated March 17, 1998, between
the Registrant and Constellation Development Fund LLC.
(incorporated by reference from Exhibit 10.23 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1997 (File No. 0-23941)).

10.24 Asset Transfer Agreement dated as of April 28, 1998 among
Best Acquisition, Inc., Alpine Hospitality Ventures LLC,
RSVP-BI OPCO, LLC, RSVP-ABI REALCO, LLC, America's Best
Inns, Inc. and the entities identified on Schedule 1
thereto. The Company agrees to furnish copies of the
schedules hereto supplementally on request (incorporated by
reference from the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1998 (File
No. 0-23941)).

10.25 Securities Purchase Agreement dated as of April 28, 1998 by
and between U.S. Franchise Systems, Inc. and Alpine
Hospitality Equities LLC. The Company agrees to furnish
copies of the schedules hereto supplementally on request
(incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
March 31, 1998 (File No. 0-23941)).

10.26 Hotel Management Agreement made and entered into on
April 28, 1998 by and among Alpine Hospitality Ventures LLC,
RSVP-BI OPCO, LLC, RSVP-ABI REALCO, LLC and USFS
Management, Inc. (incorporated by reference from the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1998 (File No. 0-23941)).

10.27 Amended and Restated License Agreement dated April 28, 1998
by and between Best Franchising, Inc. and RSVP-BI OPCO, LLC
(incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
March 31, 1998 (File No. 0-23941)).

10.30 Senior Subordinated Note Purchase Agreement dated as of
April 28, 1998 between Alpine Hospitality Ventures LLC and
U.S. Franchise Systems, Inc. The Company agrees to furnish
copies of the schedules hereto supplementally on request
(incorporated by reference from the
</TABLE>

51
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1998 (File No. 0-23941)).

10.31 Subscription Agreement dated as of March 17, 1998 between
(i) U.S. Franchise Systems, Inc., (ii) Sextant Trading LLC,
and (iii) Lubert-Adler Real Estate Opportunity Fund, L.P.,
Lubert-Adler Real Estate Opportunity Fund II, L.P. and
Lubert-Adler Capital Real Estate Opportunity Fund, L.P.
(incorporated by reference from the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
March 31, 1998 (File No. 0-23941)).

10.32* Amendment No. 1 to Employment Agreement by and between U.S.
Franchise Systems, Inc. and Michael A. Leven, dated as of
January 19, 1997

10.33* Amendment No. 1 to Employment Agreement by and between U.S.
Franchise Systems, Inc. and Neal K. Aronson, dated as of
January 19, 1997

10.34* Second Amendment to Office Lease by and between Hallwood 95,
L.P. and U.S. Franchise Systems, Inc., dated July 16, 1999.

10.35* Microtel Inns and Suites Franchising, Inc. current form of
License Agreement for Microtel hotels

10.36* Hawthorn Suites Franchising, Inc. current form of License
Agreement for Hawthorn hotels

10.37* Best Franchising, Inc. current form of License Agreement for
Best Inns hotels

21.1* List of Subsidiaries of U.S. Franchise Systems, Inc.

23.1* Consent of Deloitte & Touche, LLP.

27.1* Financial Data Schedule for the years ended December 31,
1999, 1998 and 1997, submitted to the Securities and
Exchange Commission in electronic format.
</TABLE>

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

* Filed herewith.

Copies of the exhibits are available at a charge of $.25 per page upon
written request to the Secretary of the Company at 13 Corporate Square, Suite
250, Atlanta, Georgia 30329.

(B) REPORTS ON FORM 8-K

During the period from October 1, 1999 to December 31, 1999 the Company did
not file any reports on Form 8-K.

52
<PAGE>
SIGNATURES

Pursuant to the requirement 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.

<TABLE>
<S> <C> <C>
U.S. FRANCHISE SYSTEMS, INC.
(REGISTRANT)

By /s/ MICHAEL A. LEVEN
-----------------------------------------
Michael A. Leven
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
</TABLE>

Dated March 30, 2000

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 30, 2000 by the following persons on
behalf of the Registrant in the capacities indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLES
--------- ------
<C> <S>
/s/ MICHAEL A. LEVEN Chairman, President and Chief Executive
------------------------------------------- Officer and Director (Principal Executive
(Michael A. Leven) Officer)

/s/ NEAL K. ARONSON Executive Vice President, Chief Financial
------------------------------------------- Officer and Director (Principal Financial
(Neal K. Aronson) and Accounting Officer)

/s/ DEAN ADLER
------------------------------------------- Director
(Dean Adler)

/s/ IRWIN CHAFETZ
------------------------------------------- Director
(Irwin Chafetz)

/s/ DOUG GEOGA
------------------------------------------- Director
(Doug Geoga)

/s/ RICHARD D. GOLDSTEIN
------------------------------------------- Director
(Richard D. Goldstein)

/s/ DAVID T. HAMAMOTO
------------------------------------------- Director
(David T. Hamamoto)

/s/ STEVE ROMANIELLO
------------------------------------------- Director
(Steve Romaniello)

/s/ JEFFREY A. SONNENFELD
------------------------------------------- Director
(Jeffrey A. Sonnenfeld)
</TABLE>

53
<PAGE>
EXHIBIT INDEX

<TABLE>
<C> <S>
10.32 Amendment No. 1 to Employment Agreement by and between U.S.
Franchise Systems, Inc. and Michael A. Leven, dated as of
January 19, 1997

10.33 Amendment No. 1 to Employment Agreement by and between U.S.
Franchise Systems, Inc. and Neal K. Aronson, dated as of
January 19, 1997

10.34 Second Amendment to Office Lease by and between Hallwood 95,
L.P. and U.S. Franchise Systems, Inc., dated July 16, 1999

10.35 Microtel Inns and Suites Franchising, Inc. current form of
License Agreement for Microtel hotels

10.36 Hawthorn Suites Franchising, Inc. current form of License
Agreement for Hawthorn hotels

10.37 Best Franchising, Inc. current form of License Agreement for
Best Inns hotels

21.1 List of Subsidiaries of U.S. Franchise Systems, Inc.

23.1 Consent of Deloitte & Touche, LLP.

27.1 Financial Data Schedule for the years ended December 31,
1999, 1998 and 1997, submitted to the Securities and
Exchange Commission in electronic format.
</TABLE>

<PAGE>

Exhibit 10.32

U.S. FRANCHISE SYSTEMS, INC.

AMENDMENT TO EMPLOYMENT AGREEMENT

This Amendment No. 1 (the "Amendment") to the Employment Agreement (the
"Employment Agreement") dated as of October 1, 1995 by and between U.S.
Franchise Systems, Inc., a Delaware corporation, having its principal place
of business in Atlanta, Georgia (the "Company") and Michael A. Leven, an
individual resident of the State of Georgia ("Employee"), is made as of
January 15, 1997 and shall become effective upon such date.

The Company desires to continue to employ the Employee and the Employee
desires to continue to be employed by the Company, on the terms and
conditions set forth in the original Employment Agreement on the terms and
conditions set forth in the original Employment Agreement, as modified by the
terms and conditions of this Amendment.

WHEREAS the Board of Directors of the Company resolved on January 15,
1997 to amend this Agreement by eliminating the last section of Section 4(g)
to reflect the fact that the performance bonus should no longer be payable on
a proportionate basis based on a 100% of the initial franchise fee or similar
fee of $30,000.00.

Accordingly, both parties, in consideration of the mutual and exchanged
promises in the agreements contained herein and of the wages paid and
services rendered hereunder, hereby agrees as follows:

<PAGE>

1. AMENDMENT TO SECTION 4(g). Effective hereby, the last sentence of
Section 4(g) shall be deleted in its entirety and this shall be substituted
in lieu thereof:

For the purposes of this Section 4(g), such performance bonus of $1,000
or $2,000 per executed franchise agreement shall be computed on a basis
consistent with, and payable at the same time or times as, bonuses that
are paid to members of the sales force of the Company or any company
within the Group with respect to the execution of new franchise
agreements.

2. OTHER PROVISIONS UNCHANGED. Except as specifically amended hereby,
all other terms and conditions of the Employment Agreement shall remain in
full force and effect. To the extent that such Employment Agreement includes
such terms as "herein", "hereto", "in the Agreement" and the like, such terms
shall be interpreted to refer to the Employment Agreement as modified by this
Amendment.

3. COUNTERPARTS. This Amendment may be executed in separate
counterparts, each of which shall be an original and all of which taken
together shall constitute one and the same instrument.

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

U.S. Franchise Systems, Inc.

/s/ Stephen D. Aronson
-------------------------------------
By: Stephen D. Aronson
Title: Vice President- General Counsel

/s/ Michael A. Leven
------------------------------------
Michael A. Leven

<PAGE>

Exhibit 10.33

U.S. FRANCHISE SYSTEMS, INC.

AMENDMENT TO EMPLOYMENT AGREEMENT

This Amendment No. 1 (the "Amendment") to the Employment Agreement (the
"Employment Agreement") dated as of October 1, 1995 by and between U.S.
Franchise Systems, Inc., a Delaware corporation, having its principal place
of business in Atlanta, Georgia (the "Company") and Neal K. Aronson, an
individual resident of the State of Georgia ("Employee"), is made as of
January 15, 1997 and shall become effective upon such date.

Accordingly, both parties, in consideration of the mutual and exchanged
promises in the agreements contained herein and of the wages paid and
services rendered hereunder, hereby agree as follows:

1. AMENDMENT TO SECTION 4(g). Effective hereby, the last sentence of
Section 4(g) shall be deleted in its entirety and this shall be substituted
in lieu thereof:

<PAGE>

For the purposes of this Section 4(g), such performance bonus of $500 or
$1000 per executed franchise agreement shall be computed on a basis
consistent with, and payable at the same time or times as, bonuses that
are paid to members of the sales force of the Company or any company
within the Group with respect to the execution of new franchise
agreements.

2. OTHER PROVISIONS UNCHANGED. Except as specifically amended hereby,
all other terms and conditions of the Employment Agreement shall remain in
full force and effect. To the extent that such Employment Agreement includes
such terms as "herein", "hereto", "in this Agreement" and the like, such term
shall be interpreted to refer to the Employment Agreement as modified by this
Amendment.

3. COUNTERPARTS. This Amendment may be executed in separate
counterparts, each of which shall be an original and all of which taken
together shall constitute one and the same instrument.

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

U.S. Franchise Systems, Inc.

/s/ Stephen D. Aronson
----------------------------------------
By: Stephen D. Aronson
Title: Vice President- General Counsel

/s/ Neal K. Aronson
----------------------------------------
Neal K. Aronson

<PAGE>

EXHIBIT 10.34

SECOND AMENDMENT TO LEASE

State of Georgia
County of DeKalb

THIS SECOND AMENDMENT TO LEASE (the "Agreement") is made and entered into
this 16th day of July, 1999 by and between Hallwood 95 L.P., a Delaware Limited
Partnership, as successor in interest to Hallwood Real Estate Investors Fund IV
("Landlord"), and U.S. Franchise Systems, Inc. ("Tenant").

WITNESSETH:

WHEREAS, Landlord's predecessor in interest and Tenant have previously
entered into a Lease Agreement dated September 25, 1995 (the "Initial
Lease"), for the use and occupancy of certain premises by Tenant known as
Suite 250 (the "Premises") in the building located at 13 Corporate Square,
Atlanta, Georgia 30329 ("the Building"); and

WHEREAS, Landlord and tenant do hereby intend to amend and modify the Lease
as hereinafter set forth.

NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:

1. EFFECTIVE DATE. This Second Amendment to the Lease shall take effect
as of July 1, 1999, and shall continue in effect for the duration of
the said Amendment, that is until September 30, 2005 ("Term").

2. PREMISES. Effective July 1, 1999, the square footage under lease to
Tenant shall be increased from 10,083 rentable square feet to
approximately 15,852 rentable square feet which includes 10,083
rentable square feet of existing space and 5,769 rentable square feet
of expansion space as outlined on Exhibit "A" attached hereto and
incorporated herein.

3. EXTENDED TERM. The term of this Lease Amendment is hereby extended by
an additional five (5) years beginning October 1, 2000 and ending
September 30, 2005.

4. RENTAL. Tenant agrees to pay to Landlord monthly rental payments in
accordance with the following schedule:

<TABLE>
<CAPTION>
Term Total Monthly Rent Due
<S> <C>
7/1/1999 - 6/30/2000 $19,881.05
7/1/2000 - 6/30/2001 $20,676.29
7/1/2001 - 6/30/2002 $21,503.34
7/1/2002 - 6/30/2003 $22,363.48
7/1/2003 - 6/30/2004 $23,258.02
7/1/2004 - 6/30/2005 $24,188.34
7/1/2005 - 9/30/2005 $25,155.87
</TABLE>

5. LEASEHOLD IMPROVEMENTS. Exhibit "B", attached hereto and made part
hereof.

1
<PAGE>

6. SIGNAGE. Provided that Tenant occupies no less than fifteen thousand
(15,000) rentable square feet of space in the Building, and local
ordinances permitting such hereinafter described exterior signage
without requiring a change in the name of the Building, Tenant shall
have the right to install exterior signage on Building 13 and to install
a monument sign outside the northeast entrance of Building 13 (the
"Signs"). The approved signs must be installed within one year from the
date Landlord delivers signage specifications to Tenant.

Landlord's specifications that Tenant must adhere to regarding the
sign(s), including but not necessarily limited to location, size, style,
color, length, width, etc., shall be communicated to Tenant from Landlord
using Landlord's best efforts within 60 days of the date this Lease
Amendment is executed by Landlord.

Tenant shall not commence installation of the sign(s) without
Landlord's prior written approval of all working drawings in connection
therewith, as well as Landlord's approval of contractors to be utilized
by Tenant to construct and install the sign(s). Any and all costs
associated with the sign(s) shall be the expense of Tenant. All cost of
operating and maintaining the sign(s) are also the responsibility of
Tenant. After installation, Tenant shall, at its expense, maintain the
sign(s) in good working order and condition.

In addition, Tenant shall obtain any and all building permits,
electrical permits and sign permits for the installation, operation and
maintenance of the sign(s), required by governmental authorities having
jurisdiction over the Building.

Tenant shall also provide satisfactory evidence to Landlord that the
property and liability insurance coverage, to be maintained by Tenant
and as required by the Lease, covers the sign.

Tenant also agrees that upon expiration or earlier termination of the
Lease, or if Tenant should occupy less than fifteen thousand (15,000)
rentable square feel in the Building, Tenant shall remove the Sign(s)
within sixty (60) days, Tenant shall pay any and all costs to remove
and dispose of the sign under Landlord's direction and to repair and
restore any areas of the Building and or Property requiring repair or
restoration as a result of the installation and/or removal of the sign.

7. BROKER. Tenant and Landlord represent and warrant to each other that
it has not entered into any agreement with, or otherwise had any dealings
with, any broker or agent in connection with the negotiations,
procurement or execution of this Second Amendment which could form the
basis of any claim by any such broker or agent for a brokerage fee or
commission, finder's fee or any other compensation of any kind or nature
in connection herewith. Tenant and Landlord shall and hereby agrees to,
indemnify, defend and hold the other harmless from all cost, expenses, or
liability for commissions or other compensation claimed by any broker or
agent with respect to the Lease and/or this Second Amendment which arise
out of any agreement or dealings, between Tenant or Landlord and any such
agent or broker. Hallwood Commercial Real Estate, LLC, has not acted as
agent for Tenant in his transaction.

8. CONFLICT OF TERMS. Except as expressly amended herein, all terms and
conditions in the Lease shall remain unchanged and in full force and
effect, and all capitalized terms not otherwise defined herein shall
have the meaning set forth in the Lease. In the event of any conflict
between the terms and conditions of the Lease and the terms and
conditions of this Agreement, the terms and conditions of this Agreement
shall control.

<PAGE>

IN WITNESS WHEREOF, each party has caused this Amendment to Lease to be
executed by its authorized officer(s).

LANDLORD: TENANT:

HALLWOOD 95, L.P., U.S. Franchise Systems, Inc.
A Delaware Limited Partnership
Hallwood Commercial Real
Estate, LLC

BY: [ILLEGIBLE] BY: /s/ Neal K. Aronson
----------------------------- -----------------------------

TITLE: [ILLEGIBLE] TITLE: Exec. VP-CFO
-------------------------- --------------------------

DATE: 7/11/99 DATE: July 6, 1999
-------------------------- --------------------------

<PAGE>

EXHIBIT "A"
PREMISES

[FLOOR PLAN]

<PAGE>

Exhibit "8"

LEASEHOLD IMPROVEMENTS

WORK LETTER AGREEMENT

Landlord and Tenant mutually agree as follows:

1. Definitions
-----------

The terms defined in this paragraph, for purposes of this work letter
agreement, shall have the meanings specified herein, and in addition to the
terms defined herein, terms defined in the Lease of which this Agreement is
an Exhibit shall, for purposes of this work letter agreement, have the
meanings specified therein.

1.01 "Building Standard" means the quantity and quality of materials,
finishes and workmanship currently used in Building 13.

1.02 "Construction Documents" means the construction drawings, plans and
specification referred to in paragraph 2.02 below.

1.03 "Leasehold Improvements" mean the tenant improvements as
contemplated by the Construction Documents.

1.04 "Quality Licensed Contractors" means Contractor that is licensed in
the State of Georgia, with required insurance including but not
limited to Workmen's Compensation, Comprehensive General Liability,
Employer's Liability and Property Damage.

2. Approval and Construction Procedures.
-------------------------------------

2.01 Tenant shall build improvements in the Premises pursuant to the
terms hereof and of the Lease and in the manner necessary to
satisfy its business requirements, in substantial compliance with
the Building Standards and applicable Code Requirements and in a
safe and efficient manner to conform with the existing structural,
electrical, plumbing, heating, ventilating and air conditioning
components of the Building.

Tenant shall submit to Landlord for approval floor plans of the
Premises as they are developed. Landlord shall review plans and
provide approvals and/or comments within five (5) business days
after receipt of the plans. Landlord acknowledges that Tenant will
hand deliver plans to Landlord for the purpose of reviewing and
discussing the plans in order to expedite approval. Approval will
not be unreasonably withheld and plans will not be disapproved for
items other than those, which are against local and/or state
codes or affecting the structural or architectural integrity of the
Premises.

The following shall apply to the construction of the Leasehold
Improvements.

(a) All work involved in the completion of Leasehold Improvements shall
be carried out by Tenant and its agents and contractors subject to
the reasonable review and approval by Landlord or its
representatives. Landlord shall cooperate with Tenant and its agents
and contractors to promote the efficient and expeditious completion
of the Leasehold Improvements; and

(b) Tenant agrees to construct or cause to be constructed the Leasehold
Improvements (i) in accordance with the Landlord Approved
Construction Documents, (ii) so as not to damage the structure,
exterior, mechanical systems, electrical system and plumbing of the
Building, and (iii) in compliance with all applicable governmental
or quasi-governmental laws, ordinances, rules and regulations.

(d) Tenant and Tenant's Contractor shall adhere to the Contractor Rules
and Regulations attached hereto as Exhibit C, during all phases of
improvements to the premises.

2.02 Upon completion of any work performed hereunder, Tenant shall
deliver to Landlord copies of all as built construction drawings,
shop drawings plans or specifications related to such work.

<PAGE>
Exhibit "B"
LEASEHOLD IMPROVEMENTS
WORK LETTER AGREEMENT-Page 2

2.03 Tenant shall hold Landlord harmless from any and all mechanic's or
materialman's lien claim(s) arising from the construction of the
Leasehold Improvements: if any such lien claim(s) are filed, Tenant
shall immediately cause all to be removed or obtain a bond insuring
over the effect of such lien(s) in the amount of 100% of the amount
of such lien(s) for the benefit of Landlord. If Tenant fails within
30 days of demand from Landlord to remove or bond over any such
lien(s) unless Tenant is disputing such lien(s) in good faith or
otherwise, to protect Landlord from any such loss, claim, expense,
cost or liability, Landlord may take such reasonable actions necessary
to do so and the cost of such actions shall be additional Rent due
Landlord under the Lease and immediately payable by Tenant.

3. ALLOWANCE.
----------

3.01 Tenant shall receive an allowance in an amount up to $73,491.00, to
apply against Tenant's obligation to pay for the Leasehold
improvements. Solely, tenant shall pay any portion of the Leasehold
Improvement Cost in excess of the amount of such allowance. Leasehold
Improvement Allowance must be used prior to December 31, 2000.

Tenant will be allowed to amortize 50% of any unused allowance monies
to reduce its monthly rental obligations from January 1, 2001 through
September 30, 2005. The maximum amount of unused allowance to be
amortized is $10,000. For example: If $20,000 is remaining as unused
allowance 50% or $10,000 shall be divided by the months remaining on
the lease term which is 57 months ($10,000 divided by 57 = $175.44)
and that amount shall be deducted each month from Tenant's lease
obligation. In no event shall Tenant's amortized rent deduction exceed
$10,000.

3.02 Tenant will be allowed to use up to $20,000.00 of the allowance for
cost associated with the relocation from Suite 140 in Building 13 to
Tenant's second floor premises, including but not limited to
installation of phones, computer or data equipment or cabling.

4 REIMBURSEMENT.
--------------

Tenant may request the allowance after the improvements listed in
paragraph 5 below are complete by submitting to the Landlord the
following:

(a) A billing to the Landlord for the agreed allowance accompanied by
copies of actual paid contractor invoices.

(b) Signed lien waivers from the general contractor and his
subcontractors for the total work performed under the contract,
even if the contract amount is more than the agreed allowance.

Landlord reserves the right to inspect premises and provided all costs
are substantiated; Landlord shall reimburse Tenant within 30 days
after receipt of all of the above items thereof.

5. IMPROVEMENTS
------------

Improvements to the expansion area shall include, but not limited to, the
re-configuration of offices marked 1,2 and 3, in the expanded area. All
improvements shall be done in accordance with paragraphs 1 through 4 above.
<PAGE>

EXHIBIT "B"
LEASEHOLD IMPROVEMENTS
WORK LETTER AGREEMENT -- Page 3

[FLOOR PLAN]

<PAGE>

EXHIBIT C
CONTRACTOR RULES & REGULATIONS

Any contractor, sub-contractor or employee of same shall abide by the
following guidelines. In the event these guidelines are not followed, it
shall be deemed as a breach of contract and will be the building manager's
discretion whether to continue or cancel the contract.

1. PARKING: Contractor and anyone in his employ shall park in areas
designated by the building manager.

2. THE WORK SITES: Work sites shall be kept clean and confined to the
area in which the work is being done unless the building manager gives
prior approval.

3. COMMON AREA: Shall be kept clean at all times, and no material shall be
left in a common area for more than 15 minutes. Contractor at his sole
expense will immediately repair any damage to any common area. Should
these repairs not be made, Hallwood will have the area repaired and
deduct the cost of said repair from the contract amount.

4. USE OF BUILDING FACILITIES: Contractor employees will have use of the
building restrooms. These areas are not to be used as a tool clean-up
area; they are to be left in a clean and orderly condition. Janitor's
closets can be used to get water and clean equipment, but must be
cleaned each time it is used. If these areas are not kept clean,
contractor will lose access to these areas.

5. ACCESS: Should special access to the building be needed, the
contractor shall give the manager at least 48 hours written notice.

6. UTILITY INTERRUPTION: Should there be a required utility interruption,
the contractor shall give the building manager at least 48 hours
written notice. Should this be an accidental interruption, the
contractor will immediately repair the interruption. Should these
repairs not be made in an expeditious manner, Hallwood will make the
needed repairs and deduct the cost of said repairs from the contract
amount.

7. WORKERS ON SITE: Contractor employees and sub-contractors shall
confine their activities to the work area as much as possible. There
will be no loitering in the common areas or building office.

8. TELEPHONE: The building manager's telephone will not be made available
for your use. Should you have the need for direct contact with the job
site, other arrangements should be made.

9. MATERIALS: Any materials taken out of a space during demolition, not
scheduled for reinstallation in that space, will remain the property
of the building and shall be placed in storage or removed from the
site by the contractor as directed by the manager.

10. VACANT SPACE: There will be no removal of material of any kind, from
any vacant space in the building for use somewhere else, without
written consent from the building manager.

11. TENANT DISRUPTIONS: Any activity that is excessively noisy, (ram-set,
hammer drills, saws, concrete cutting, screw guns, coring, etc.) will
be done after normal business hours and scheduled with the building
manager.

12. CHANGES IN THE WORK: Any change in the scope of work, whether it affects
the contract amount or not, must go through the building manager where
a change order will be initiated. No change in the work will be
accepted without a signed change order.

13. DUMPSTER: Prior to setting any container used to dispose of
construction debris, approval must by given by the building manager.
Steps must be taken by the contractor not to allow said container to
damage parking lot or any area it might occupy. Should such damage
occur, it shall be repaired at the sole cost of the contractor in a
timely manner or Hallwood will repair such damage and deduct cost of
repair from contract amount.

14. QUALITY OF WORK: Hallwood will not accept any work that is not of the
highest quality. All material will be specified in bid documents or in
the absence of any specifications, will be of highest quality.
Craftsmanship will also be of highest quality. Any work not meeting
Hallwood's quality standard will not be accepted and will be re-done at
the contractor's sole expense prior to final payment.

15. HEALTH AND SAFETY PROGRAMS: Contractor agrees to abide by all the
regulations imposed by Hallwood with respect to "Hazard Communication",
"Lockout/Tagout", "Health and Safety" or any other program in place
at the time. Contractor also agrees to train his employees in all
proper procedures required by these programs.

8
<PAGE>

16. MECHANICAL: In the event that there are no mechanical prints or
specifications attached to the bid document, the following
language shall apply to all work. In the event of a conflict
between this language and the construction documents the
construction documents shall govern.

Contractor agrees to provide sufficient supply and return air,
heating and air conditioning to all usable areas covered by this
contract. This shall include, but not limited to, all labor,
fire dampers, controls, ducts, supply and return registers
heating elements, cooling coils, hangers, filters or any other
items required to adequately condition the space equal to or
better than building standard conditions. Contractor shall air
balance the system to provide proper air flow in accordance with
all "ASHRAE", SMACNA", and "AABC" guidelines. Contractor shall
keep all filters cleaned during construction and replace with new
filters upon completion and prior to delivery of space to owner.
In no event shall more than 5 lineal feet of flex duct be used
in any single run.

<PAGE>

Exhibit 10.35

Location: HOTELADDRESS1
HOTELADDRESS2

ID Number: IDNUMBER

Date: ___________________

LICENSE AGREEMENT

between

MICROTEL INNS AND SUITES FRANCHISING, INC.

and

ENTITYNAMECAPS

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
1. THE LICENSE.......................................................................................1
A. The Hotel................................................................................1
B. The Hotel System.........................................................................1

2. GRANT OF LICENSE..................................................................................1

3. YOUR RESPONSIBILITIES.............................................................................2
A. Operational and Other Requirements.......................................................2
B. Performance of the Work..................................................................3
C. Upgrading of the Hotel...................................................................3
D. Fees.....................................................................................3
E. No Right to Offset.......................................................................4

4. OUR RESPONSIBILITIES..............................................................................5
A. Training.................................................................................5
B. Services.................................................................................5
C. Consultation on Operations, Facilities and Marketing.....................................5
D. (1) Microtel Reservations and Advertising Fund, Inc. ...............................5
(2) Use of Marketing/Reservation Contributions......................................5
E. Application of Manual....................................................................5
F. Other Arrangements.......................................................................6
G. Inspections/Compliance Assistance........................................................6

5. PROPRIETARY RIGHTS................................................................................6
A. Ownership of the Hotel System and Proprietary Marks......................................6
B. Trademark Disputes.......................................................................6
C. Protection of Name and Marks.............................................................6

6. RECORDS AND AUDITS................................................................................7
A. Monthly Reports..........................................................................7
B. Preparation and Maintenance of Records...................................................7
C. Audit....................................................................................7
D. Annual Financial Statements..............................................................7

7. INDEMNITY AND INSURANCE...........................................................................7
A. Indemnity................................................................................7
B. Insurance................................................................................8

8. TRANSFER..........................................................................................9
A. Transfer by Us...........................................................................9
B. Transfer by You..........................................................................9
C. Transfers of the License or Equity Interest in You Upon Death...........................10
</TABLE>

<PAGE>

<TABLE>
<S> <C>
D. Registration of a Proposed Transfer of Equity Interests.................................10
E. Non-Waiver of Claims....................................................................11
F. Our Right of First Refusal..............................................................11
G. No Right of First Refusal...............................................................11

9. CONDEMNATION AND CASUALTY........................................................................11
A. Condemnation............................................................................11
B. Casualty................................................................................11
C. Extensions of Term......................................................................12

10. TERMINATION......................................................................................12
A. Expiration of Term......................................................................12
B. Defaults................................................................................12
C. De-identification of Hotel Upon Termination or Expiration of this Agreement.............14
D. Payment of Liquidated Damages...........................................................15

11. RENEWAL..........................................................................................16
A. Requirements............................................................................16
B. Alternative Process.....................................................................16

12. RELATIONSHIP OF PARTIES..........................................................................16
A. No Agency Relationship..................................................................16
B. Your Notices to Public Concerning Independent Status....................................16
C. Use of the Microtel Name................................................................17

13. MISCELLANEOUS....................................................................................17
A. Severability and Interpretation.........................................................17
B. Binding Effect..........................................................................17
C. Exclusive Benefit.......................................................................17
D. Entire Agreement........................................................................17
E. Our Withholding of Consent..............................................................17
F. Notices.................................................................................17
G. Descriptive Headings....................................................................18
H. Management of the Hotel.................................................................18
I. Conversion of Other Properties..........................................................18
J. Guest Room Rates........................................................................18
K. Attorneys' Fees.........................................................................18
</TABLE>

GUARANTY
ATTACHMENT A
ATTACHMENT B
ATTACHMENT C
GUARANTY BY HAWTHORN SUITES FRANCHISING, INC.
STATE-SPECIFIC AMENDMENTS

<PAGE>

LICENSE AGREEMENT

This license agreement ("Agreement" or "License Agreement"), dated
____________, 20__, is entered into by and between Microtel Inns and Suites
Franchising, Inc., a Georgia corporation having an address at 13 Corporate
Square, Suite 250, Atlanta, Georgia 30329 ("we," "our," "us" or "Licensor"), and
ENTITYNAMECAPS, a ENTITYTYPE having an address at ENTITYADDRESS ("you," "your"
or "Licensee"). In consideration of the following mutual promises, the parties
agree as follows:

1. THE LICENSE.

We have the exclusive right to license a unique concept and system (the
"Hotel System") to establish and operate economy-budget hotels under the names
"Microtel Inn," "Microtel Inn and Suites" and "Microtel Suites" and certain
brand extensions thereof (collectively, "Hotels" or "Microtel Hotels"). Before
signing this Agreement, you have read our Offering Circular for Prospective
Franchisees ("UFOC") and independently evaluated and investigated the risks of
investing in the hotel industry generally and purchasing a Microtel franchise
specifically, including such factors as current and potential market conditions,
owning a franchise and various competitive factors. Following your
investigation, you wish to enter into this Agreement to obtain a license to use
the Hotel System to operate a BRAND hotel located at HOTELADDRESS1,
HOTELADDRESS2 (the "Hotel").

A. THE HOTEL. The Hotel includes all structures, facilities,
appurtenances, furniture, fixtures, equipment, entry, exit and parking areas
located on the real property identified on Attachment A hereto or any other real
property we approve for Hotel expansion, signage or other facilities. You agree
not to make any material changes to the Hotel without our prior written consent,
which consent will not be unreasonably withheld, including, but not limited to,
any change in the number of rooms or suites at or to be constructed as part of
the Hotel ("Guest Rooms").

B. THE HOTEL SYSTEM. We have designed the Hotel System so that the
public associates the Hotels with high quality standards. The Hotel System
includes, without limitation: (i) the tradenames, trademarks, and service marks
"Microtel Inn," "Microtel Inn and Suites" and "Microtel Suites" and such other
tradenames, trademarks, and service marks we hereafter designate for use with
the Hotel System (collectively, the "Proprietary Marks"); (ii) prototypical
architectural plans, designs and layouts, including, without limitation, site,
floor, roof, plumbing, lobby, electrical and landscape plans; (iii) a national
toll free number system for central reservation system, as renovated by us from
time to time (collectively, the "CRS"); (iv) the national Microtel directory
(the "National Directory"); (v) management, personnel and operational training
programs, materials and procedures; (vi) standards and specifications for
operations, marketing, construction, equipment and furnishings described in our
confidential manuals, as amended by us from time to time (collectively, the
"Manual"); and (vii) marketing, advertising and promotional programs.

2. GRANT OF LICENSE.

We hereby grant to you a license (this "License") to use the Hotel
System to build and operate the Hotel in accordance with the terms of and
commencing on the date of this Agreement and terminating as provided in
Paragraph 10 (the "License Term"). During the License Term, neither we nor any
of our affiliates or franchisees will develop or license any Microtel Hotels
within the area described in Attachment B (the "Territory"). This Agreement does
not limit our right, or the rights of our parent, subsidiaries or affiliates,
(i) to use or license others to use any part of the Hotel System outside the
Territory; (ii) to conduct

<PAGE>

other business activities under, or license others to use, hospitality brands
that are not part of the Proprietary Marks, whether outside or within the
Territory, even if the other brands or business activities compete with the
Hotel and/or the Hotel System; or (iii) to use or license others to use the
Hotel System within the Territory to replace any previously executed Microtel
Hotel license agreement. Continuation of your Territory depends on being in
compliance with your License Agreement. Your Territory will expire upon the
issuance of a notice of default and termination and your failure to cure the
default in the time permitted, or upon termination of the License Agreement.

3. YOUR RESPONSIBILITIES.

A. OPERATIONAL AND OTHER REQUIREMENTS. During the License Term, you
agree to:

(1) maintain the Hotel in first class condition and in a
clean, safe and orderly manner;

(2) provide efficient, courteous, and high-quality
service to the public while maintaining a high moral
and ethical standard and atmosphere at the Hotel;

(3) operate the Hotel twenty-four (24) hours a day, every
day;

(4) strictly comply in all respects with our requirements
concerning:

(a) the Hotel System, the Manual and all other
policies and procedures we communicate to
you;

(b) our quality standards and the types of
services, products and amenities you may
use, promote or offer at the Hotel;

(d) directory and reservation service listings
of the Hotel; and

(e) your participation in all of our marketing,
reservation service, advertising, Internet,
computer, training and operating programs,
including a property management system that
interfaces with the CRS or any other central
reservation system we adopt;

(5) execute our then-current Software License Agreement
including payment of a $1500 software license fee, to
participate in, connect with and use the CRS;

(6) except as provided in Paragraph 4E, adopt all changes
we make to the Hotel System;

(7) strictly comply with all governmental requirements,
including: (i) the payment of taxes; (ii) the filing
and maintenance of trade or fictitious name
registrations; and (iii) the filing and maintenance
of all licenses and permits to operate the Hotel;

(8) permit our representatives to inspect the Hotel at
any time and provide them free lodging during the
inspection period;

<PAGE>

(9) not use the Hotel or the Hotel System to promote a
competing business or other lodging facility;

(10) use your best efforts to create a favorable response
to the names "Microtel Inn," "Microtel Inn and
Suites" and "Microtel Suites";

(11) promptly pay to us and/or our parent, subsidiaries
and affiliates when due all royalties and fees owed
under this Agreement;

(12) use your best efforts to treat the Manual and any
other information or materials we designate as
confidential ("Confidential Materials") and not
duplicate, circulate or distribute any Confidential
Materials to any unauthorized person;

(13) use best efforts to require each employee who will
have access to any Confidential Materials to keep the
Confidential Materials confidential; and

(14) conduct your advertising in a dignified manner. At
our request, you agree to submit to us all
advertising and promotional materials and immediately
discontinue your use of any materials we reasonably
reject.

B. PERFORMANCE OF THE WORK. As a primary inducement for us to enter into
this Agreement, you agree to perform the work listed on Attachment C (the
"Work") in strict accordance with our specifications.

C. UPGRADING OF THE HOTEL. If at any time the Hotel falls below the
quality standards set forth in the Manual, we may require you to upgrade or
renovate the Hotel to reach acceptable standards. Your failure to upgrade or
renovate the Hotel promptly after we notify you to do so may result in our
issuing a quality default notice which could lead to our terminating this
Agreement.

D. FEES.

(1) For each month (or part of a month) during the
License Term, beginning with the date the Hotel opens
for business (the "Opening Date"), you shall pay to
us by the tenth (10th) day of the following month:

(a) a "Royalty Fee" equal to the following
percentages of Gross Room Revenues (as
defined in Paragraph 3D(2)) of the Hotel:
(i) four percent (4%) during the first
twelve (12) month period following the
Opening Date ("Year 1"); (ii) five percent
(5%) during the twelve (12) month period
following Year 1 ("Year 2"); and (iii) six
percent (6%) for each month after Year 2
until the expiration or sooner termination
of this Agreement;

(b) a "Marketing/Reservation Contribution"
("Contribution") equal to the following
percentages of Gross Room Revenues of the
Hotel: (i) three percent (3%) during Year 1;
(ii) two and one-half percent (2.5%) during
Year 2; and (iii) two percent (2%)
thereafter until the expiration or sooner
termination of this Agreement. Beginning in
Year 3, we may, at any time, increase your
Contribution only if: (i) we simultaneously
impose a similar increase on all other
Microtel Hotel licensees whose license
agreements

<PAGE>

contain fee provisions similar to this
Paragraph 3D; and (ii) at least sixty-six
percent (66%) of the open Microtel Hotels
(one vote per open Hotel) agree to such an
increase; and

(c) any sales, gross receipts, personal property
or similar tax imposed on us and calculated
solely on any payment required under this
Agreement, unless the tax is an optional
alternative to an income tax otherwise
payable by us.

(2) "Gross Room Revenues" shall mean gross receipts
attributable to or payable for the rental of Guest
Rooms, including, without limitation, the net
proceeds of use and occupancy and business
interruption, rent loss, or similar insurance held by
you with respect to the Hotel. However, insurance
proceeds are included in Gross Room Revenues only if
you actually receive them. Gross Room Revenues do not
include gratuities to employees or service charges
levied in lieu of such gratuities which are payable
to employees, or any taxes or fees collected by you
for transmittal to any taxing authorities.

(3) If we require, you agree to make your monthly
payments to a designated bank account by telegraphic
transfer, automatic debit arrangement, or other means
we specify. We will pay for the cost of connection to
such telegraphic or automatic debit service. If an
automatic debit or similar arrangement is utilized
and funds are insufficient to cover your payment
obligation, any amounts unpaid on or before the due
date shall be deemed overdue. If any payment is
overdue, in addition to the overdue amount, you shall
pay us interest on the overdue amount from the due
date until paid in full at the lesser rate of one and
one-half percent (1.5%) per month or the maximum rate
permitted by law. Our ability to charge interest on
all overdue amounts shall be in addition to any other
remedies we may have as a result of your failure to
make payments when due.

(4) You agree to pay us a $2,500.00 fee each time you
apply to us to add any Guest Rooms to the Hotel.

(5) Subject to our requirements and at your own expense,
you may conduct local and regional marketing and
advertising programs. You shall pay us reasonable
fees for optional advertising materials you order
from us for these programs.

(6) You will participate in any global distribution
system connected to our CRS and pay applicable
commissions to travel agents. You agree to pay: (i)
all commissions and fees for reservations you accept
through any sources (including the Internet), whether
processed through us, our CRS, third party
reservation systems, or billed directly to you; and
(ii) telephone charges and equipment related to the
CRS.

E. NO RIGHT TO OFFSET. You acknowledge and agree that you will not, for
any reason, withhold payment of any Royalty Fees, Contributions or any other
fees or payments due us pursuant to this Agreement. You will not have the right
to withhold or offset any liquidated or unliquidated amounts, damages or other
monies allegedly due you by us against any Royalty Fees, Contributions or any
other fees due us under this Agreement.

<PAGE>

4. OUR RESPONSIBILITIES.

A. TRAINING. We provide initial training prior to the Opening Date.
During the License Term, we will provide both required and optional training
programs. We are responsible for the cost of instruction and you are responsible
for all travel, lodging and other training expenses, including reasonable
charges for training materials. If any training is held at your Hotel, you agree
to provide our representatives with free lodging.

B. SERVICES. Provided you are in full compliance with your obligations
under this Agreement, you shall have access to the CRS, listings in advertising
publications and the National Directory.

C. CONSULTATION ON OPERATIONS, FACILITIES AND MARKETING. On an ongoing
basis, you may consult with us and we shall advise you in connection with Hotel
operations, facilities and marketing, including suppliers for fixtures,
furnishings, signs and other equipment.

D. (1) MICROTEL RESERVATIONS AND ADVERTISING FUND, INC. By
executing this Agreement, you agree to become a
member of Microtel Reservations and Advertising Fund,
Inc. (the "Fund"), a Georgia not-for-profit
corporation which holds the Contributions. Pursuant
to the terms of a management agreement, we manage the
Fund. For administrative convenience, we collect the
Contributions before passing them on to the Fund.
Copies of the Fund's Bylaws and management agreement
are available upon request.

(2) USE OF MARKETING/RESERVATION CONTRIBUTIONS. The Fund
will use the Contributions to pay for: (i)
advertising, promotion, publicity, market research
and other marketing programs; (ii) maintaining and
producing the National Directory, our Internet site,
and the CRS; and (iii) our overhead relating directly
to national and local marketing and reservations. Our
overhead is limited to costs associated with the
financial management of the Contributions and the
salaries and benefits of certain individuals who work
for our reservation or marketing departments. We will
neither profit financially from nor use the
Contributions to pay for marketing directly related
to our sale of franchises. The Fund is not obligated
to spend funds for marketing or reservation services
exceeding the Contributions received from licensees
using the Hotel System. If the Fund has a surplus of
Contributions at the end of any taxable year, all
expenditures in the following taxable year(s) shall
be made first out of earnings accumulated from
previous years' surplus Contributions, next out of
current year earnings from surplus Contributions, and
finally from current year Contributions. Upon your
written request, we will provide you with an annual
statement regarding Contributions.

E. APPLICATION OF MANUAL. All Microtel Hotels must comply with the terms
of the Manual, although we may permit limited exceptions based on local
conditions or special circumstances. Each change in the Manual will be explained
to you at least thirty (30) days prior to its effective date. Any change to the
Manual which, in our reasonable discretion, would cause a substantial investment
by you will not be effective unless approved by sixty-six percent (66%) of the
open Microtel Hotels. Each open hotel shall have one vote and approval of
sixty-six percent (66%) of the open hotels will be required to implement the
change. Notwithstanding the foregoing, changes to the Manual which relate to
guest security and/or

<PAGE>

life/safety issues are not subject to the approval of you or other licensees
even if substantial investments are required.

F. OTHER ARRANGEMENTS. We may arrange for development, marketing,
operations, administration, technical and support functions, facilities,
services and/or personnel with any other entity and may use any facilities,
programs, services and/or personnel used in connection with the Hotel System in
connection with our other business activities, even if our other business
activities compete with the Hotel or the Hotel System.

G. INSPECTIONS/COMPLIANCE ASSISTANCE. We have the right to inspect your
Hotel at any time, with or without notice to you, to determine if the Hotel is
in compliance with the Hotel System and the standards set forth in the Manual.
If the Hotel fails to comply with either, we may, at our option and at your
cost, require you to correct the deficiencies within the reasonable time we
establish.

5. PROPRIETARY RIGHTS.

A. OWNERSHIP OF THE HOTEL SYSTEM AND PROPRIETARY MARKS. You acknowledge
and shall not contest, either directly or indirectly, either during the License
Term or thereafter: (i) our exclusive right to both use and grant licenses to
use the Hotel System and any element(s) or component(s) thereof; (ii) that we
are the owner or exclusive licensee of all right, title and interest in and to
the Proprietary Marks together with the goodwill they symbolize; or (iii) the
validity or ownership of the Proprietary Marks. All improvements and additions
to or associated with the Hotel System made by you or anyone else and all
goodwill arising from your use of the Proprietary Marks shall inure to our
benefit and become our property. Upon expiration or termination of this
Agreement, no monetary amount shall be attributed to any goodwill associated
with your use of the Hotel System or portion thereof.

B. TRADEMARK DISPUTES. We have the sole right to handle third party
disputes concerning the use of all or any part of the Hotel System, and you
shall, at your reasonable expense, extend your full cooperation to us in all
matters relating to the operation of the Hotel. All recoveries made as a result
of disputes with third parties regarding use of the Hotel System or any part
thereof belong solely to us. We are not required to initiate lawsuits against
alleged imitators or infringers and may settle any dispute in our discretion.
You shall not initiate any lawsuit or proceeding against alleged imitators or
infringers or any other lawsuit or proceeding to enforce or protect the Hotel
System without our prior written consent.

C. PROTECTION OF NAME AND MARKS. Consistent with their ownership rights
and rights to use the Proprietary Marks, both parties to this Agreement shall
use their reasonable best efforts to protect and maintain the Proprietary Marks
and their distinguishing characteristics. You agree: (i) to execute any
documents we request to obtain or maintain protection for the Proprietary Marks;
(ii) to use the Proprietary Marks only in connection with the operation of your
Hotel and only as we instruct; and (iii) that your unauthorized use of the
Proprietary Marks shall constitute both an infringement of our rights and a
material breach of your obligations under this Agreement. You must notify us
immediately, in writing, if you have any actual or constructive knowledge of any
infringement or challenge to your use of the Proprietary Marks or any
unauthorized use or possible misuse of either the Proprietary Marks, the names
"Microtel Inn," "Microtel Inn and Suites" and "Microtel Suites" or any
Confidential Materials.

<PAGE>

6. RECORDS AND AUDITS.

A. MONTHLY REPORTS. By the third (3rd) day of each month, you agree to
prepare and submit to us a statement for the previous month, certified by your
chief financial or principal accounting officer, listing Gross Room Revenue,
other revenues generated at the Hotel, room occupancy rates, reservation data,
the amounts currently due under Paragraph 3D and other information we deem
useful in connection with the Hotel System (the "Data"). The statement shall be
in such form and detail as we may reasonably request, shall be our property and
may be used by us for all reasonable purposes. We will not knowingly provide
Data on your Hotel as an inducement to develop other hotel brands in your market
area, although you understand that some of the Data may be compiled into
information we provide to prospective licensees in an aggregate manner.

B. PREPARATION AND MAINTENANCE OF RECORDS. You agree to: (i) prepare on
a current basis in a form satisfactory to us, (and preserve for at least four
(4) years), complete and accurate records concerning Gross Room Revenue and all
financial, operating, marketing and other aspects of the Hotel; and (ii)
maintain an accounting system which fully and accurately reflects all financial
aspects of the Hotel, including, but not limited to, books of account, tax
returns, governmental reports, register tapes, daily reports, profit and loss
and cash flow statements, balance sheets and complete quarterly and annual
financial statements. We reserve the right to require you to grant us
independent access to your computer system to permit us to obtain sales
information, occupancy information and other data that we find useful for the
Hotel System.

C. AUDIT. We or our agents may, at any time, examine and copy all books,
records, and tax returns related to your Hotel and, at our option, require an
independent audit. If an inspection or audit reveals that you have understated
payments in any report to us, you shall immediately pay us the amount
understated, in addition to interest from the date such amount was due until
paid, at the lesser of one and one-half percent (1.5%) per month or the maximum
rate permitted by law. In this event, we may also require that all of your
future annual financial statements be audited at your expense by an independent
certified public accounting firm you select and we approve. If an inspection or
audit discloses an underpayment to us of five percent (5%) or more of the total
amount owed during any six (6) month period, you shall, in addition to paying
the understated amount with interest, reimburse us for our costs and expenses in
connection with the inspection or audit, including legal and accounting fees.
These remedies supplement any others we may have under this Agreement.

D. ANNUAL FINANCIAL STATEMENTS. Upon our request, not later than ninety
(90) days after the end of your fiscal year, you must provide us with complete
financial statements for such year certified by your chief financial or
principal accounting officer to be true and correct and prepared in accordance
with generally accepted accounting principles consistently applied. Any false
certification shall be a material breach of this Agreement. Upon our request
from time to time you also agree to provide us with operating statistics for the
Hotel.

7. INDEMNITY AND INSURANCE.

A. INDEMNITY. You agree that nothing in this Agreement authorizes either
party to make any contract, agreement, warranty or representation on the other's
behalf, or to incur any debt or other obligation in the other's name, and that
neither party shall assume liability for, or be deemed liable as a result of any
such action, or by reason of any act or omission of the other party or any claim
or judgment arising therefrom.

<PAGE>

(1) You agree to indemnify, defend and hold harmless us,
our parent, affiliates, subsidiaries and our
respective officers, directors, agents, employees,
successors and assigns (the "Indemnified Parties")
against, and to reimburse the Indemnified Parties
for, any and all claims or actions arising or
alleging to arise directly or indirectly from, as a
result of, or in connection with, your operation of
the Hotel, including, but not limited to, claims
alleging either intentional or negligent conduct,
acts or omissions by you or us relating to the
operation of the Hotel or the Hotel System, as well
as the costs, including attorneys' fees, of defending
against said claims or actions. We reserve the right
to defend any such claim or action against us. You
agree that this indemnity will survive the expiration
or termination of this Agreement. You have no
obligation to indemnify us if a court of competent
jurisdiction makes a final decision not subject to
further appeal that we or our employees directly
engaged in willful misconduct or intentionally caused
the property damage or bodily injury that is the
subject of the claim. You shall notify us immediately
(but not later than five (5) days following your
receipt of notice) of any claim, action or potential
claim or action naming any Indemnified Party as a
defendant or potential defendant (the
"Indemnification Notice"). The Indemnification Notice
shall include copies of all correspondence or court
papers relating to the claim or action.

(2) We shall indemnify you and hold harmless your parent,
affiliates, subsidiaries and respective officers,
directors, agents, and employees against all claims
against you arising as a result of, or in connection
with, a material breach by us which is adjudicated by
a court of competent jurisdiction to be the sole
cause of the claim, as well as the cost of defending
the claim, provided, however, this indemnification
shall be inapplicable if we have exercised our rights
in accordance with this Agreement.

(3) If you fail to comply with this Paragraph 7A, we may
retain attorneys and defend any claim, action or
alleged claim or action at your sole expense. You
agree that our obligations hereunder are exclusively
to you, and no other party may rely on, enforce, or
obtain relief for breach of such obligations.

B. INSURANCE. During the License Term, you shall comply with the
insurance requirements of any applicable law, lease or mortgage covering the
Hotel and our specifications regarding amounts and types of insurance. Prior to
the Opening Date, and thereafter on an annual basis and/or each time you change
the terms of your insurance policy or carrier, you shall provide us with
certificates of insurance which: (i) evidence your liability insurance and its
amounts and the amount of your deductible; (ii) name Microtel Inns and Suites
Franchising, Inc. and U.S. Franchise Systems, Inc. as additional insureds; (iii)
state that your policy may not be canceled, amended or permitted to lapse or
expire without thirty (30) days prior written notice to us. At a minimum, such
certificates must be provided to us prior to construction of the Hotel and prior
to the authorized Opening Date of the Hotel. All insurance policies shall be
written on a fully insured basis. Deductibles and self insurance retentions are
subject to our prior approval. At the minimum, you agree to maintain or cause to
be maintained (as applicable) the following insurance underwritten by an insurer
we approve:

(1) employer's liability and workers' compensation
insurance as prescribed by applicable law; and

<PAGE>

8. TRANSFER.

A. TRANSFER BY US. We have the right to transfer or assign our rights or
obligations under this Agreement to any person or entity and our interests will
bind and inure to the benefit of any transferee, successor or assignee.

B. TRANSFER BY YOU. You agree that the rights and duties created by this
Agreement are personal to you and that we have granted this License in reliance
on the business skill, financial capacity and character of you and your
partners, shareholders or members. You may mortgage the Hotel to any financial
institution without our consent if you remain the mortgagor of the Hotel. Except
as provided in Paragraph 8B(1), neither you, any successor to your interest, or
any individual, partnership, corporation, or other legal entity which directly
or indirectly owns any interest in this License or in you shall sell, assign,
transfer, convey or otherwise encumber any direct or indirect interest in this
License, the Hotel or the assets of the Hotel without our consent.

(1) A transfer of less than a fifty percent (50%) equity
interest in you which does not transfer Control (as
defined below), does not require our consent if you
notify us in writing within thirty (30) days of the
transfer.

(2) A transfer which alone or combined with previous or
simultaneous transfers changes Control of the
License, you, the Hotel, or greater than fifty
percent (50%) of the Hotel's assets requires our
prior written consent.

We may require any or all of the following as
conditions of our consent to a transfer:

(a) your compliance with all terms of this
Agreement;

(b) the transferee entity or individual, and all
shareholders, partners or members of the
transferee (collectively, the "Transferee"),
shall meet our then-current qualifications
for new licensees;

(c) the Transferee shall execute our
then-standard form of license agreement and
other applicable agreements for new Hotel
System licensees (which will include
then-current fees and Contributions),
provided, however, Transferee's fees
(including but not limited to 3D(1)(a) and
3D(1)(b)) shall not be less than the fees
you are currently obligated to pay under
this Agreement;

(d) any new general manager retained by the
Transferee completes our initial training
program;

<PAGE>

(e) the Hotel shall be upgraded within the time
period we set to conform to the then-current
standards and specifications for hotels
operating under the Hotel System;

(f) you or the Transferee must pay us a
$5,000.00 transfer fee unless the transfer
is to the spouse, issue, parent, or sibling
of your partner(s) or shareholder(s), or
from one partner or shareholder to another.
If the Transferee requests approval of a
term exceeding the remainder of the License
Term, the Transferee must pay our
then-current application fee, prorated for
the time period exceeding the License Term;

(g) you execute a general release, in a form
satisfactory to us, of any and all claims by
you against us and our officers, directors,
shareholders, and employees;

(h) the Transferee executes a written
assignment, in a form satisfactory to us,
assuming and agreeing to discharge all of
your obligations under this Agreement; and

(i) you execute all documents we request
evidencing your agreement to remain liable
for all obligations to us and our parent,
subsidiaries and affiliates prior to the
transfer.

(3) "Control" or "Controlling" shall mean the direct or
indirect possession of the power to direct or cause
the direction of the management and policies of any
person or legal entity.

(4) Except as otherwise provided herein, any purported
assignment or transfer without our prior written
consent is null and void, constitutes a material
breach of this Agreement, enables us to terminate
this Agreement without providing you an opportunity
to cure and allows us to seek both injunctive relief
and monetary damages.

(5) If you are an individual, you may transfer this
License without paying a transfer or application fee
if: (i) you retain at least twenty-five percent (25%)
ownership; (ii) we receive your request and
supporting documentation before the Opening Date; and
(iii) the Transferee meets our then-current standards
for new licensees.

C. TRANSFERS OF THE LICENSE OR EQUITY INTEREST IN YOU UPON DEATH. Upon
the death or mental incompetency of you or a person Controlling you, the
executor, administrator, or personal representative ("Representative") of such
person shall transfer within three (3) months his interest to a third party
subject to our approval and the conditions set forth in Paragraph 8B. In the
case of transfer by devise or inheritance, if the heirs or beneficiaries can not
meet the conditions of Paragraph 8B, the Representative shall have six (6)
months from the death or mental incompetency to dispose of the interest, subject
to the transfer provisions of this Agreement, after which time we may terminate
this Agreement.

<PAGE>

law for the sale of any interest in you or your affiliates shall be submitted to
us for review prior to distribution or filing with any government agency,
including any materials to be used in any offering exempt from registration
under federal or state securities laws. No offering by you or your affiliates
shall imply or state (by use of the Proprietary Marks or otherwise) that we are
participating as an underwriter, issuer or your representative. You agree to pay
us a non-refundable fee equal to the greater of $5,000.00 or our costs and
expenses of reviewing each proposed offering including, without limitation,
attorneys' fees. You acknowledge that we may require changes to your offering
materials and a full indemnification from all participants in the offering
before issuing our consent.

E. NON-WAIVER OF CLAIMS. Our consent to a transfer is not a waiver of:
(i) any claims we may have against you; or (ii) our right to demand strict
compliance by the Transferee with the terms of this Agreement.

F. OUR RIGHT OF FIRST REFUSAL. If any party holding any direct or
indirect interest in you or in all or substantially all of the Hotel's assets
desires to accept a BONA FIDE offer from a third party to purchase the interest,
you agree to notify us and provide whatever documentation relating to the offer
we require. If the third party purchaser wishes to remove the Hotel from the
Hotel System, we have the right and option, exercisable within thirty (30) days
after we receive written notification, to inform you that we intend to purchase
the seller's interest on the same terms and conditions offered by the third
party. If we elect to purchase the seller's interest, closing will occur within
ninety (90) days from the date of our notice to the seller. If we elect not to
purchase the seller's interest, any material change thereafter to the terms of
the offer shall constitute a new offer subject to our same rights of first
refusal as in the case of the third party purchaser's initial offer. Our failure
to exercise this option is not a waiver by us of any other provision of this
Agreement. If the consideration, terms, and/or conditions offered by the third
party purchaser are such that we may not reasonably be required to furnish the
same consideration, terms, and/or conditions, then we may purchase the interest
for the reasonable cash equivalent. If the parties cannot agree within thirty
(30) days on the reasonable cash equivalent of the consideration, terms, and/or
conditions offered by the third party purchaser, an independent appraiser whose
determination shall be binding will be designated by us at our expense to
determine the reasonable equivalent cash consideration.

G. NO RIGHT OF FIRST REFUSAL. If a third party meeting our then-current
qualifications offers to purchase the Hotel and wishes to keep the Hotel in the
Hotel System, we shall have no right of first refusal.

9. CONDEMNATION AND CASUALTY.

A. CONDEMNATION. You shall immediately notify us of any proposed taking
of the Hotel by eminent domain. If a taking occurs, we shall use reasonable
efforts (but shall not be obligated) to transfer this Agreement to a location
selected by you and approved by us within four (4) months of the taking. If we
approve the new location and you subsequently open a new hotel at the new
location within two (2) years of the taking, the new hotel shall be deemed to be
the Hotel licensed hereunder. If a taking occurs and the new hotel does not
become the Hotel licensed hereunder (or if it is evident to us that such shall
be the case), this Agreement will terminate, but you will not pay us any
liquidated damages.

<PAGE>

proposed reopening date). If the Hotel is not reopened in accordance with this
Paragraph 9B, this Agreement will terminate and you shall pay us liquidated
damages (see Paragraph 10D), provided, however, that your payment of liquidated
damages shall not exceed the amount of any insurance proceeds you receive.

C. EXTENSIONS OF TERM. The License Term will be extended for the period
the Hotel is not operating as a result of fire or other casualty. You are not
required to make any payments pursuant to Paragraph 3D while the Hotel is closed
by reason of condemnation or casualty unless you receive insurance proceeds.

10. TERMINATION.

A. EXPIRATION OF TERM. This Agreement will expire without notice
effective twenty (20) years from the authorized Opening Date, subject to its
earlier termination as set forth herein. You acknowledge the difficulty of
determining our damages if this Agreement terminates prior to its expiration.
You also acknowledge that the liquidated damages set forth in Paragraph 10D
represent the best estimate of our damages arising from any termination of this
Agreement prior to its expiration. Subject to Paragraph 11A, upon the expiration
of the License Term, you shall comply with our de-identification procedures as
set forth in Paragraph 10C of this Agreement or in the Manual.

B. DEFAULTS.

(1) DEFAULT WITH OPPORTUNITY TO CURE.

(a) If you fail to comply with or violate any
provision of this Agreement, the Manual or
any Hotel System standard, unless this
Agreement, applicable law or any default
notice we send to you provides otherwise,
you shall have thirty (30) days from your
receipt of a written default notice to
remedy such default (the "Cure Period"). If
any default remains uncured after the Cure
Period expires, this Agreement shall
terminate automatically without further
notice to you, effective immediately upon
the expiration of the Cure Period.
Alternatively, instead of considering this
Agreement automatically terminated upon the
expiration of the Cure Period, we may
suspend your access to the CRS or remove
your Hotel from our advertising publications
or the National Directory until your default
is cured to our satisfaction.

(b) If we issue you two (2) written default
notices within any twelve (12) month period,
the Cure Period in the second written
default notice shall be ten (10) days,
unless applicable law provides otherwise.

(c) In any judicial or other proceeding in which
the validity of our termination of this
Agreement is contested, we may cite and rely
upon all of your defaults or violations of
this Agreement, not solely the defaults or
violations referenced in any written default
notice sent to you.

(d) Any notice of termination or suspension of
services we issue to you shall not relieve
you of your obligations that survive
termination of this Agreement, including,
but not limited to, its de-identification,
indemnification and liquidated damages
provisions.

<PAGE>

(e) If you fail to provide us with a copy of the
recorded deed, an executed lease for at
least the License Term or other evidence
satisfactory to us of your Control of the
Hotel on or before commencement of
construction or renovation, we may issue you
a default notice which may lead to us
terminating this Agreement.

(f) If you default on any terms of the Software
License Agreement referred to in Paragraph
3A.

(2) DEFAULT WITHOUT OPPORTUNITY TO CURE (IMMEDIATE
TERMINATION BY US). This Agreement shall terminate
immediately without notice to you if:

(a) you, or any guarantor of your obligations (a
"Guarantor"), shall: (i) not pay its debts
as they become due; (ii) admit its inability
to pay its debts; or (iii) make a general
assignment for the benefit of creditors;

(b) you, or any Guarantor, commence or consent
to any case, proceeding or action seeking:
(i) reorganization, arrangement, adjustment,
liquidation, dissolution or composition of
you or your debts under any law relating to
bankruptcy, insolvency, reorganization or
relief of debtors; or (ii) appointment of a
receiver, trustee, custodian or other
official for any portion of its property;

(c) you, or any Guarantor, take any corporate or
other action to authorize any of the actions
set forth above in Paragraphs 10B(2)(a) or
10B(2)(b);

(d) any case, proceeding, or other action
against you or any Guarantor is commenced
seeking an order for relief against it as
debtor, or seeking reorganization,
arrangement, adjustment, liquidation,
dissolution or composition of it or its
debts under any law relating to bankruptcy,
insolvency, reorganization or relief of
debtors, or seeking appointment of a
receiver, trustee, custodian or other
official for it or for any portion of its
property, and such case, proceeding or other
action: (i) results in an order for relief
against it which is not fully stayed within
seven (7) business days after the entry
thereof; or (ii) remains undismissed for
forty-five (45) days;

(e) an attachment remains on all or any part of
the Hotel or your or any Guarantor's assets
for thirty (30) days;

(f) you or any Guarantor fail, within sixty (60)
days of the entry of a final judgment
against you or any Guarantor in any amount
exceeding $50,000.00, to discharge, vacate
or reverse the judgment, or to stay
execution of it, or if appealed, to
discharge the judgment within thirty (30)
days after a final adverse decision in the
appeal;

(g) you cease to operate the Hotel at the
location designated on Attachment A or under
the Proprietary Marks, or lose possession or
the right to possession of all or a
significant part of the Hotel, except as
otherwise provided herein;

<PAGE>

(h) you contest in any court or proceeding
either all or any portion of our ownership
of the Hotel System or the validity of any
of the Proprietary Marks;

(i) you transfer your rights under this
Agreement in violation of Paragraph 8;

(j) you fail to identify the Hotel to the public
as a Microtel Hotel;

(k) any action is taken to dissolve or liquidate
you or any Guarantor, except due to death;

(l) you or any of your principals or Guarantors
is, or is discovered to have been, convicted
of a felony or any other offense likely to
reflect adversely upon us, the Hotel System,
or the Proprietary Marks, including, but not
limited to, any violation of laws or
regulations relating to discrimination,
equal employment or equal opportunity;

(m) you knowingly maintain false books and
records of account or knowingly submit false
or misleading reports or information to us,
including any information you provide or
fail to provide to us on your franchise
application or otherwise;

(n) you disclose the contents of any
Confidential Materials to any unauthorized
person or fail to exercise reasonable care
to prevent such disclosure; or

(o) in our discretion, we determine a threat or
danger to public health or safety results
from the construction, maintenance or
operation of the Hotel, such that an
immediate shutdown of the Hotel is necessary
to avoid a substantial liability or loss of
goodwill to the Hotel System.
Notwithstanding the foregoing, if we
determine, in our discretion, that both the
threat of danger to public health or safety
is eliminated and the reopening of the Hotel
will not cause a substantial loss of
goodwill to the Hotel System within six (6)
months of the termination of this Agreement,
we will reinstate the Agreement on identical
terms and conditions.

C. DE-IDENTIFICATION OF HOTEL UPON TERMINATION OR EXPIRATION OF THIS
AGREEMENT.

<PAGE>

customer to believe that the Hotel is affiliated with
the Hotel System; and (vii) permit our representative
to enter the Hotel to conduct inspections on a
periodic basis until de-identification is completed
to our satisfaction. Until de-identification is
completed to our satisfaction, you agree to maintain
a conspicuous sign at the registration desk in a form
we specify stating that the Hotel is no longer
associated with the Hotel System. You acknowledge
that the de-identification process intends to
immediately alert the public that the Hotel is not
affiliated with the Hotel System.

(2) If you fail to comply with all of the
de-identification provisions of Paragraph 10C(1)
within the permitted ten (10) day period, you agree
to: (i) pay a royalty fee of $5,000.00 per day until
de-identification is completed to our satisfaction;
and (ii) permit our representative to enter the Hotel
to complete the de-identification process at your
expense.

(3) You agree to pay all our costs and expenses of
enforcing these de-identification provisions,
including, but not limited to, all attorneys' fees.
Nothing contained herein limits our rights or
remedies at law or in equity should you not complete
the de-identification procedures within the permitted
ten (10) day period, including, but not limited to,
our right to seek and obtain an injunction to remove
or cause to be removed, at your sole cost and
expense, all signage from the Hotel.

D. PAYMENT OF LIQUIDATED DAMAGES. If this Agreement terminates after the
first twenty-four (24) months of Hotel operations and prior to its expiration
for any reason other than as set forth in Paragraphs 9A or 9B, you agree to pay
us liquidated damages as set forth below. Your payment of liquidated damages to
us shall not be considered a penalty for your breaching this Agreement, but
rather a reasonable estimate of our damages and lost future fees we would have
received from you under the Agreement. You acknowledge that your obligation to
pay us liquidated damages is in addition to, not in lieu of, your obligations to
pay any amounts then due to us and comply with the de-identification provisions
of Paragraph 10C. You agree to pay us liquidated damages in a lump sum within
thirty (30) days following the date of termination, based on the average
occupancy rate at the Hotel for the twelve (12) months preceding the termination
("Occupancy Rate") as follows:

(1) if the Occupancy Rate was below fifty percent (50%),
you shall pay no liquidated damages;

(2) if the Occupancy Rate was fifty percent (50%) to
fifty-nine and nine-tenths percent (59.9%), you agree
to pay us an amount equal to twelve (12) months of
all fees under Paragraph 3D(1)(a), unless you give us
twelve (12) months prior written notice and your
Occupancy Rate meets the criteria of this Paragraph
10D(2), in which case you shall pay no liquidated
damages;

(3) if the Occupancy Rate was sixty percent (60%) to
sixty-nine and nine-tenths percent (69.9%), you agree
to pay an amount equal to twenty-four (24) months of
fees under Paragraph 3D(1)(a); and

(4) if the Occupancy Rate was seventy percent (70%) or
greater, you agree to pay an amount equal to
thirty-six (36) months of fees under Paragraph
3D(1)(a).

<PAGE>

If this Agreement terminates at any time between its execution and the
end of the first twenty-four (24) months of the operation of the Hotel, you
agree to pay us liquidated damages equal to the greater of: (i) $2,000.00
multiplied by the number of approved Guest Rooms; or (ii) thirty-six (36)
multiplied by the average monthly fees required under Paragraph 3D(1)(a).

11. RENEWAL.

A. REQUIREMENTS. Upon your written submission of our then-current form
of renewal application at least 180 days prior to this Agreement's expiration
date, we shall grant you a ten (10) year renewal term if, in our discretion, the
following criteria are satisfied:

(1) you pay a non-refundable fee equal to one-half of the
then-current franchise application fee;

(2) you received passing Quality Assurance Scores (as
defined in the Manual) during the preceding three (3)
year period;

(3) you agree to upgrade the Hotel to meet our
then-current criteria for the Hotel System; and

(4) you have a favorable operating and payment history.

Notwithstanding the foregoing, if an independent third party chosen by
us determines that the location of the Hotel is inappropriate or obsolete for
the brand we shall not be required to renew your license. We will accept or
reject your written renewal application within thirty (30) days of its receipt
by us. You agree to execute our then-current form of license agreement to
effectuate any renewal.

B. ALTERNATIVE PROCESS. If we determine that you do not meet the above
criteria, you may apply to renew this Agreement for a ten year term by
submitting an application at least 120 days prior to the expiration of the
License Term with a non-refundable renewal fee equal to our then-current
franchise application fee. We will evaluate your application based on your
operating history, the location of the Hotel and your agreement to upgrade the
Hotel. If we accept your application, you will execute our then-current form of
license agreement.

12. RELATIONSHIP OF PARTIES.

A. NO AGENCY RELATIONSHIP. You are an independent contractor. Neither
party is the legal representative or agent of, or has the power to obligate the
other for any purpose. The parties have a business relationship defined entirely
by the express provisions of this Agreement. No partnership, joint venture,
affiliate, agency, fiduciary or employment relationship is intended or created
hereby.

B. YOUR NOTICES TO PUBLIC CONCERNING INDEPENDENT STATUS. You shall take
such steps as we require to minimize the chance of a claim being made against us
for any occurrence at the Hotel, or for acts, omissions or obligations of you or
anyone affiliated with you or the Hotel. Such steps may include giving notice in
private or public rooms or on advertisements, business forms and stationery,
making clear to the public that we are not the owner or operator of the Hotel
and are not accountable for events occurring at the Hotel.

<PAGE>

C. USE OF THE MICROTEL NAME. You shall not use the word "Microtel" or
any similar words in your entity or trade name, internet domain name, or in
connection with any web site, nor authorize or permit such use by anyone else.
You shall not use the word "Microtel" or any other name or mark associated with
the Hotel System to incur any obligation or indebtedness.

13. MISCELLANEOUS.

A. SEVERABILITY AND INTERPRETATION. The remedies provided in this
Agreement are not exclusive. If any provision of this Agreement is held
unenforceable, void or voidable, all remaining provisions shall continue in full
force and effect unless deletion of the provision(s) materially frustrates the
purpose of the parties or makes performance commercially impracticable. If any
provision requires interpretation, such interpretation shall be based on the
reasonable intention of the parties without interpreting any provision in favor
of or against any party hereto by reason of the drafting of the party or its
position relative to the other party.

B. BINDING EFFECT. This Agreement is valid when executed and accepted by
us at our office in Atlanta, Georgia. It is made and entered into in the State
of Georgia and shall be governed and construed under and in accordance with the
laws of the State of Georgia without regard to its conflict of laws principles.
You acknowledge that you have sought, voluntarily accepted, and become
associated with us at our headquarters in Atlanta, Georgia. The choice of law
designation permits but does not require that all lawsuits or proceedings
concerning this Agreement to be filed in the State of Georgia.

C. EXCLUSIVE BENEFIT. This Agreement is exclusively for the benefit of
the parties hereto and shall not create liability to any third party, unless
otherwise set forth herein. No agreement between us and any third party is for
your benefit.

D. ENTIRE AGREEMENT. This is the entire Agreement between the parties
relating to the Hotel. Neither we nor any person on our behalf has made any
representation to you concerning this Agreement, the Hotel or the Hotel System
that is not set forth herein or in our UFOC. No change in this Agreement shall
be valid unless in writing signed by both parties. No failure to require strict
performance or to exercise any right or remedy hereunder shall preclude
requiring strict performance or exercising any right or remedy in the future.
This Agreement may be executed in multiple copies, each of which will be deemed
an original.

E. OUR WITHHOLDING OF CONSENT. Our consent, wherever required, may be
withheld if any default by you exists under this Agreement. Prior to any
deviation by you from any material term of this Agreement, you must obtain our
prior written consent.

F. NOTICES. All notices given under this Agreement shall be in writing,
delivered by any means which provides written evidence of the date received.
Notices shall be deemed given at the date and time receipt is evidenced, to the
respective parties at the following addresses unless and until a different
address is designated by written notice to the other party:

<PAGE>

<TABLE>
<S> <C>
Notices to us: Microtel Inns and Suites Notices to you: ENTITYNAMECAPS
Franchising, Inc. PCADDRESS1
13 Corporate Square, Suite 250 Attention: PCNAME
Atlanta, Georgia 30329
Attn: Doug Shaw
Vice President
Franchise Administration
</TABLE>

Should you refuse to accept any notice we attempt to deliver hereunder or we are
unable to deliver any notice due to your actions, you acknowledge and agree that
such notice shall be deemed received by you if we mail or deliver such notice
for a second time to your address designated in this Section 13F. We reserve the
right to notify both your lender and any or all of your members, partners or
shareholders in the event we issue any notice under this Agreement.

G. DESCRIPTIVE HEADINGS. The headings in this Agreement are for
convenience only and shall not control or affect the meaning or construction of
any provision.

H. MANAGEMENT OF THE HOTEL. You must at all times retain and exercise
direct management control over the business of the Hotel. You shall not enter
into any lease, management agreement or other similar arrangement for the
operation of the Hotel or any part thereof with any independent entity without
our prior written consent, which consent will not be unreasonably withheld.

I. CONVERSION OF OTHER PROPERTIES. We agree not to accept conversions of
existing hotels into the Hotel System. If we violate this provision, you may
terminate this Agreement upon notice to us without paying us liquidated damages.
However, you shall remain responsible for paying us all Royalty Fees and
Contributions owed to us prior to the termination of this Agreement. You also
agree to comply with the de-identification procedures set forth in Paragraph
10C. If you fail to comply with the de-identification procedures in a timely
fashion, you agree to pay us liquidated damages as described in Paragraph 10D.
Alternatively, you may remain in the Hotel System for the License Term without
paying us future Royalty Fees; provided, however, you shall continue to pay us
Contributions as required under Paragraph 3D(1)(b).

J. GUEST ROOM RATES. You shall establish room rates for the Hotel which
must be submitted to us before the deadline for the next National Directory.
With the exception of special event periods, you agree not to charge any rate
exceeding the rate published in the current edition of the National Directory.

K. ATTORNEYS' FEES. If we are a party to any action or proceeding
concerning the Agreement, your operation of the Hotel or due to your actions or
omissions, you will be liable to us for the reasonable attorneys' fees and court
costs we incur in such action or proceeding regardless of whether such action or
proceeding proceeds to judgment. Additionally, if you withhold any amounts due
to us, and we are required to commence an action or proceeding to recover such
amounts and we prevail, you shall reimburse us our costs of collecting such
amounts including reasonable attorneys' fees, court costs and expenses.

[SIGNATURES ON FOLLOWING PAGE]

<PAGE>

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first stated above.

LICENSEE:

ENTITYNAMECAPS

By:
-----------------------------------
SIGNEENAME
SIGNEETITLE

Attest:
-------------------------------

LICENSOR:

MICROTEL INNS AND SUITES
FRANCHISING, INC.

By:
-----------------------------------
Doug Shaw,
Vice President
Franchise Administration

Attest:
-------------------------------

<PAGE>

GUARANTY

As an inducement to Microtel Inns and Suites Franchising, Inc. ("we,"
"our" or "us") to execute that certain license agreement (including any future
amendments thereto) with ______________________ ("Licensee") dated as of
_______________, a copy of which is attached hereto, (collectively, the "License
Agreement"), the undersigned (individually, a "Guarantor" and collectively, the
"Guarantors"), jointly and severally, hereby unconditionally warrant to us and
our parent, successors and assigns that all representations of Licensee
contained in both the License Agreement and the application submitted in
connection therewith are true and correct. The Guarantors also jointly and
severally guarantee the timely payment and performance of all of Licensee's
obligations under the License Agreement.

Upon notice from us that Licensee is in default under any of the terms
of the License Agreement, the Guarantors shall cure any monetary default within
five (5) business days from such notice and immediately perform all other
obligations of Licensee under the License Agreement. Without affecting the
obligations of the Guarantors under this Guaranty, we may without notice to the
undersigned extend, modify or release any indebtedness or obligation of the
Licensee, or settle, adjust or compromise any claims against the Licensee. The
Guarantors waive notice of amendment of the License Agreement and notice of
demand for payment or performance by the Licensee. The Guarantors expressly
acknowledge that their joint and several obligation to cure all defaults and
guaranty the performance of Licensee shall survive the termination of the
License Agreement.

Upon the death of a Guarantor, the estate of such Guarantor shall be
bound by this Guaranty but only for defaults and obligations hereunder existing
at the time of death. The obligations of the surviving Guarantors shall continue
in full force and effect.

This Guaranty constitutes a guaranty of payment and performance and not
of collection, and each of the Guarantors specifically waives any obligation we
may have to proceed against the Licensee on any money or property held by the
Licensee or by any other person or entity as collateral security, by way of set
off or otherwise. The Guarantors further agree that this Guaranty shall continue
to be effective or be reinstated, as the case may be, if at any time payment or
any of the guaranteed obligations is rescinded or must otherwise be restored or
returned by us upon the insolvency, bankruptcy or reorganization of the Licensee
or any Guarantor, all as though such payment has not been made.

Our failure to enforce all or any portion of our rights under this
Guaranty shall not constitute a waiver of our ability to do so at any point in
the future.

Guarantor hereby specifically waives any rights that may be conferred by
Official Code of Georgia Annotated Sections 10-7-23 and 10-7-24 or any similar
provision of the applicable law of any other state.

IN WITNESS WHEREOF, each of the undersigned has signed this Guaranty as
of the date of the License Agreement.

Witnesses: Guarantors:

- ---------------------------- ----------------------------------
GUARANTOR1, Legal Signature

Notarized (with seal):

- ---------------------------- ----------------------------------
GUARANTOR2, Legal Signature

Page 1 of 2

<PAGE>

ATTACHMENT A
THE HOTEL

Facilities (Paragraph 1 ):

Site --- Area and general description: A BRAND hotel located at
HOTELADDRESS1
HOTELADDRESS2

Number of approved Guest Rooms: ROOMS

Number of Suites included:

Ownership of Licensee (Paragraph 8):

ENTITYNAMECAPS 100%

<PAGE>

ATTACHMENT B

TERRITORY
PROPERTYNAME/#IDNUMBER

The Territory is defined as that area bordered by:

<PAGE>

ATTACHMENT C
THE WORK

You acknowledge that every detail of the Hotel System is important to us
and other licensees operating under the Hotel System to develop and maintain the
standards and public image of the Hotel System. You agree to strictly comply
with the details of the Hotel System, as set forth in the Manual or otherwise in
writing. The following constitutes the development schedule for the Hotel.

1) You shall submit preliminary plans (the "Plans"), including site
layout and outline specifications within three (3) months from the date of this
Agreement.

2) You shall attend at your own expense a briefing to acquaint you with
our building process and support structure at our headquarters in Atlanta,
Georgia within four (4) months from the date of this Agreement.

3) You shall submit to us complete working drawings and specifications
for the Hotel, including its proposed equipment, furnishings, facilities and
signs, with such detail and containing such information as we require within
five (5) months from the date of this Agreement. The Plans shall conform to our
then-prevailing Hotel System standards. CONSTRUCTION SHALL NOT BEGIN UNTIL WE
HAVE APPROVED THE PLANS IN WRITING. FOLLOWING OUR APPROVAL OF YOUR PLANS, YOU
SHALL MAKE NO CHANGES TO THE PLANS WITHOUT OUR PRIOR WRITTEN CONSENT, WHICH
CONSENT WILL NOT BE UNREASONABLY WITHHELD. If during the course of construction
changes in the Plans are required, you shall notify us immediately. YOUR FAILURE
TO CONSTRUCT THE HOTEL IN STRICT ACCORDANCE WITH THE PLANS WE APPROVE IN WRITING
SHALL CONSTITUTE A MATERIAL BREACH AND MAY LEAD TO OUR ISSUING A DEFAULT NOTICE
AND SUBSEQUENTLY TERMINATING THIS AGREEMENT. OUR APPROVAL OF THE PLANS IS
INTENDED EXCLUSIVELY TO ENSURE COMPLIANCE WITH OUR THEN-CURRENT STANDARDS.

4) Construction shall commence within seven (7) months from the date of
this Agreement. You shall notify us within (5) days of commencement of
construction, which shall mean commencement of any site work at the Hotel.
Construction shall continue uninterrupted (unless interrupted by FORCE MAJEURE)
until completion of the Hotel. The term "FORCE MAJEURE" shall mean an act of
God, war, civil disturbance, government action, fire, flood, accident,
hurricane, earthquake or other calamity, strike or other labor dispute.

5) The Hotel shall be ready to open for business within twelve (12)
months from the date hereof ("Completion Date"). Within ten (10) days of the
Completion Date you shall ask us to conduct a final inspection, which we shall
promptly conduct. You shall not open for business prior to our written
authorization to do so, and you agree to open within ten (10) days of our
authorization. We will not authorize you to open the Hotel unless and until you
are in full compliance with all terms of this Agreement. Prior to the authorized
Opening Date of the Hotel, you must submit to us written certification that the
Hotel is in compliance with the approved plans and specifications prepared by
the architect and that the Hotel was constructed in compliance with Hotel
standards, and is in compliance with all applicable local jurisdictional
requirements.

<PAGE>

GUARANTY

THIS GUARANTY (the "Guaranty") is executed as of ____________________,
20__, by HAWTHORN SUITES FRANCHISING, INC. (the "Guarantor") in favor of
_____________________________________ ("Licensee").

WHEREAS, Microtel Inns and Suites Franchising, Inc, a Georgia
corporation ("Company"), an affiliate of Guarantor, is the franchisor under
that certain Microtel Inns and Suites Franchising, Inc. License Agreement,
dated as of _______________, 20__, between Company and Licensee (the "License
Agreement"); and

WHEREAS, in order to provide assurance to Licensee that the Company will
fulfill its obligations to Licensee under the License Agreement, Guarantor is
willing to execute this Guaranty.

NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by guarantor, the Guarantor agrees
as follows:

1. GUARANTY. Guarantor hereby guarantees to Licensee the full and prompt
performance of Company's obligations to Licensee arising under the License
Agreement. Guarantor agrees that if Company does not perform the obligations
required to be performed thereunder, then upon written notice from Licensee,
Guarantor will perform or cause to be performed such unperformed obligations as
required by the License Agreement.

2. NO WAIVER BY LICENSEE. No delay or failure of Licensee in the
exercise of any right, power or remedy shall operate as a waiver thereof, and no
single or partial exercise by Licensee of any right, power or remedy shall
preclude any further exercise thereof or the exercise of any other right, any
power or remedy.

3. PLACE OF EXECUTION; GOVERNING LAW. Guarantor acknowledges that this
Guaranty was delivered in Georgia, and shall be governed and construed in
accordance with Georgia law (excluding the laws of conflicts).

4. MODIFICATIONS. This Guaranty may not be changed orally, and no
obligation of Guarantor can be released or waived by Licensee or any officer or
agent of Licensee, except by a writing signed by a duly authorized officer of
Licensee.

5. NOTICES. Any and all notices, elections or demands permitted or
required to be made under this Guaranty shall be in writing, signed by the party
giving such notice, election or demand, and shall be mailed by registered or
certified United States mail, postage prepaid, or otherwise delivered to the
other party at the address set forth below, or at such other address within the
continental United States of America as the addressee may hereafter designate in
writing. The effective date of such notice, election or demand shall be the date
of delivery. For the purposes of this Guaranty:

(a) The address of Licensee is:

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

Page 1 of 2

<PAGE>

(b) The address of Guarantor is:

Hawthorn Suites Franchising, Inc.
13 Corporate Square
Suite 250
Atlanta, Georgia 30329

6. SUCCESSORS AND ASSIGNS. The provisions of this Guaranty shall bind
Guarantor and its successors and assigns and shall benefit Licensee and its
successors and assigns.

IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the date
first written above.

HAWTHORN SUITES FRANCHISING, INC.

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

Page 2 of 2

<PAGE>

AMENDMENT TO MICROTEL INNS AND SUITES FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF CALIFORNIA

In recognition of the requirements of the California Franchise
Investment Law Sections 31000 through 31516, and the California Franchise
Relations Act, California Business and Professions Code Sections 20000 through
20043, the License Agreement for Microtel Inns and Suites Franchising, Inc. (the
"Agreement"), in connection with the offer and sale of franchises for use in the
State of California, shall be amended to include the following:

1. Paragraph 8B(2)(g) of the Agreement, under the heading "Transfer",
shall be amended by inserting a comma after the end thereof and adding
thereafter "excluding only such claims you may have under the California
Franchise Investment Law and the California Franchise Relations Act."

2. If any of the provisions of the Agreement concerning termination is
inconsistent with either the California Franchise Relations Act or with the
Federal Bankruptcy Code (concerning termination of the Agreement upon certain
bankruptcy-related events), then said laws shall apply.

3. The Agreement requires that it be governed by Georgia law. This
requirement may be unenforceable under California law.

4. You must sign a general release if you renew or transfer your
franchise. California Corporations Code 31512 voids a waiver of your rights
under the Franchise Investment Law (California Corporations Code 31000 through
31516). Business and Professions Code 20010 voids a waiver of your rights under
the Franchise Relations Act (Business and Professions Code 20000 through 20043).

5. Each provision of this Amendment shall be effective only to the
extent, with respect to such provision, that the jurisdictional requirements of
the California law applicable to the provision are met independently without
reference to this Amendment.

[SIGNATURES ON THE FOLLOWING PAGE]

Page 1 of 2

<PAGE>

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this California amendment to the License Agreement on the same date as
the License Agreement was executed.

MICROTEL INNS AND SUITES FRANCHISING, INC.
--------------------------------------------
Licensor

By:
------------------------------------------
Title:
---------------------------------------

--------------------------------------------
Licensee

By:
------------------------------------------
Title:
---------------------------------------
By:
------------------------------------------
Title:
---------------------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO MICROTEL INNS AND SUITES FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF HAWAII

In recognition of the requirements of the Hawaii Franchise Investment
Law, Hawaii Rev. Stat. Sections 482E-, ET SEQ., the License Agreement for
Microtel Inns and Suites Franchising, Inc., in connection with the offer and
sale of licenses for use in the State of Hawaii, shall be amended to include the
following:

1. Paragraph 8B(2)(g) of the Agreement, under the heading "Transfer",
shall be amended by inserting a comma after the word "employees" and adding
thereafter "excluding only such claims as you may have under the Hawaii
Franchise Investment Law."

2. Paragraph 13 of the Agreement, under the heading "Miscellaneous",
shall be amended by the addition of the following sentence, which shall be
considered an integral part of this Agreement:

The general release language contained in the Agreement shall
not relieve Licensor or any other person, directly or
indirectly, from liability imposed by the Hawaii Franchise
Investment Law.

3. The Hawaii Franchise Investment Law provides rights to Licensee
concerning nonrenewal, termination and transfer of the Agreement. If any of the
provisions of the License Agreement concerning termination are inconsistent with
the Hawaii Franchise Investment Law, then said law shall apply.

4. Each provision of this Amendment shall be effective only to the
extent, with respect to such provision, that the jurisdictional requirements of
the Hawaii Franchise Investment Law are met independently without reference to
this Amendment.

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this Hawaii amendment to the License Agreement on the same date as the
License Agreement was executed.

MICROTEL INNS AND SUITES FRANCHISING, INC.
--------------------------------------------
Licensor

By:
------------------------------------------
Title:
---------------------------------------

--------------------------------------------
Licensee

By:
------------------------------------------
Title:
---------------------------------------
By:
------------------------------------------
Title:
---------------------------------------

Page 1 of 2

<PAGE>

AMENDMENT TO MICROTEL INNS AND SUITES FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF ILLINOIS

In recognition of the requirements of the Illinois Franchise Disclosure
Act of 1987, Ill. Comp. Stat. Sections 705/1 to 705/44, the parties to the
attached Microtel Inns and Suites Franchising, Inc. License Agreement (the
"Agreement") agree as follows:

1. Paragraph 8B(2)(g) of the Agreement, under the heading "Transfer",
shall be amended by inserting a comma at the end thereof and adding thereafter
"except with respect to claims arising under the Illinois Franchise Disclosure
Act of 1987."

2. Paragraph 10 of the Agreement, under the heading "Termination", shall
be supplemented by the addition of the following new Paragraph 10E, which shall
be considered an integral part of the Agreement:

E. If any of the provisions of this Paragraph 10 concerning termination
are inconsistent with Section 19 of the Illinois Franchise Disclosure
Act of 1987, then said Illinois law shall apply.

3. Paragraph 13B of the Agreement, under the heading "Miscellaneous",
shall be amended by inserting a comma at the end of the second sentence and
adding thereafter "except with respect to claims arising under the Illinois
Franchise Disclosure Act of 1987."

4. This Agreement requires that it be governed by Georgia law. To the
extent that such law conflicts with the Illinois Franchise Disclosure Act, the
Act will control.

5. Each provision of this Amendment shall be effective only to the
extent, with respect to such provision, that the jurisdictional requirements of
the Illinois Franchise Disclosure Act of 1987 are met independently without
reference to this Amendment.

[SIGNATURES ON FOLLOWING PAGE]

Page 1 of 2

<PAGE>

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this Illinois amendment to the License Agreement on the same date as
the License Agreement was executed.

MICROTEL INNS AND SUITES FRANCHISING, INC.
--------------------------------------------
Licensor

By:
------------------------------------------
Title:
---------------------------------------

--------------------------------------------
Licensee

By:
------------------------------------------
Title:
---------------------------------------
By:
------------------------------------------
Title:
---------------------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO MICROTEL INNS AND SUITES FRANCHISING, INC.
LICENSE AGREEMENT REQUIRED
BY THE STATE OF INDIANA

In recognition of the requirements of the Indiana Franchise Disclosure
Law, Indiana Code Sections 23-2-2.5-1 to 23-2-2.5-51, and the Indiana
Deceptive Franchise Practices Act, Indiana Code Sections 23-2-2.7-1 to
23-2-2.7-10, the parties to the attached Microtel Inns and Suites Franchising,
Inc. Agreement (the "Agreement") agree as follows:

1. With respect to Paragraph 2 of the Agreement, the Licensor is
prohibited by Indiana Code Sections 23-2-2.7-1(2) and 23-2-2.7-2(4) from
operating a company-owned hotel substantially identical to that of the
Licensee's within the Licensee's territory regardless of trade name.

2. Paragraph 7 of the Agreement, under the heading "Indemnity and
Insurance", shall be amended by the addition of the following sentence, which
shall be considered an integral part of this Agreement:

The general release language contained in the License shall not relieve
the Licensor or any other person, directly or indirectly, from liability
imposed by the Indiana Franchise Disclosure Law and the Indiana
Deceptive Practices Act.

3. Paragraph 8B(2)(g) of the Agreement, under the heading "Transfer",
shall be amended by inserting a comma after the word "employees" and adding
thereafter "excluding only such claims as you may have under the Indiana
Franchise Disclosure Law and the Indiana Deceptive Practices Act."

4. With respect to Paragraph 10 of the Agreement, the reservation of
right to any specified remedy or limitation of the remedies available to either
party is prohibited pursuant to the Indiana Franchise Disclosure Law, Indiana
Code Section 23-2-2.7-1(10).

5. Paragraph 13B of the Agreement, under the heading "Miscellaneous",
shall be amended by inserting a comma at the end of the second sentence and
adding thereafter "except with respect to any cause of action which arises under
the Indiana Franchise Disclosure Law or the Indiana Deceptive Franchise
Practices Act."

6. Paragraph 13 of the Agreement, under the heading "Miscellaneous",
shall be supplemented by the addition of the following paragraph:

Notwithstanding anything to the contrary in this provision, Licensee
does not waive any right under the Indiana Franchise Disclosure Law or
the Indiana Deceptive Practices Act with regard to any prior
representations made in the UFOC furnished to Licensee.

7. With respect to the Agreement, any reservation of right to any
specified remedy or limitation of the remedies available to either party is
prohibited pursuant to the Indiana Franchise Disclosure Law, Indiana Code
Section 23-2-2.7-1(10).

8. Indiana law provides rights to you concerning nonrenewal and
termination of the Agreement. To the extent the Agreement contains a provision
that is inconsistent with the Indiana law, Indiana law will control.

Page 1 of 2

<PAGE>

9. Any indemnification under the Agreement excludes indemnification for
liability caused by your proper reliance on and use of the System or materials
provided by us to you which you do not alter or claims based upon our gross
negligence or willful misconduct.

10. Nothing in the Agreement shall abrogate any rights you have under
Indiana law.

11. Each provision of this Amendment shall be effective only to the
extent, with respect to such provision, that the jurisdictional requirements of
the Indiana Franchise Disclosure Law, Indiana Code Sections 23-2-2.5-1 to
23-2-2.5-51, and the Indiana Deceptive Franchise Practices Act, Indiana Code
Sections 23-2-2.7-1 to 23-2-2.7-10, are met independently without reference to
this Amendment.

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this Indiana amendment to the License Agreement on the same date as
the License Agreement was executed.

MICROTEL INNS AND SUITES FRANCHISING, INC.
--------------------------------------------
Licensor

By:
------------------------------------------
Title:
---------------------------------------

--------------------------------------------
Licensee

By:
------------------------------------------
Title:
---------------------------------------
By:
------------------------------------------
Title:
---------------------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO MICROTEL INNS AND SUITES FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF MARYLAND

In recognition of the requirements of the Maryland Franchise
Registration and Disclosure Law, Md. Code Bus. Reg. Sections 14-201 through
14-233, the License Agreement for Microtel Inns and Suites Franchising, Inc., in
connection with the offer and sale of licenses for use in the State of Maryland,
shall be amended to include the following:

2. Paragraph 13B of the Agreement, under the heading "Miscellaneous",
shall be amended by inserting a comma at the end of the second sentence and
adding thereafter "except for claims arising under the Maryland Franchise
Registration and Disclosure Law."

3. Paragraph 13 of the Agreement, under the heading "Miscellaneous",
shall be amended by the addition of the following paragraphs which shall be
considered an integral part of this Agreement:

K. The general release language contained in this Agreement shall not
relieve Licensor or any other person, directly or indirectly, from
liability imposed by the Maryland Franchise Registration and Disclosure
Law (Md. Code Bus. Reg. Sections 14-201 through 14-233).

L. The foregoing acknowledgments are not intended to, nor shall they
act as a release, estoppel or waiver of, any liability incurred under
the Maryland Franchise Registration and Disclosure Law.

4. Under certain circumstances, the Agreement requires you to submit to
a court proceeding in the State of Georgia. These provisions may run contrary to
the Maryland Franchise Registration and Disclosure Law. Therefore, nothing will
preclude you from being able to enter into litigation with us in Maryland, as
long as the nature of the litigation is not the type of dispute, controversy,
claim, action or proceeding which would be subject to arbitration under the
Agreement.

5. Each provision of this Amendment shall be effective only to the
extent, with respect to such provision, that the jurisdictional requirements of
the Maryland Franchise Registration and Disclosure Law (Md. Code. Bus. Reg.
Sections 14-201 through 14-233) are met independently without reference to this
Amendment.

[SIGNATURES ON THE FOLLOWING PAGE]

Page 1 of 2

<PAGE>

IN WITNESS WHEREOF, the parties hereto have duly executed,
sealed, and delivered this Maryland amendment to the License Agreement on the
same date as the License Agreement was executed.

MICROTEL INNS AND SUITES FRANCHISING, INC.
--------------------------------------------
Licensor

By:
------------------------------------------
Title:
---------------------------------------

--------------------------------------------
Licensee

By:
------------------------------------------
Title:
---------------------------------------
By:
------------------------------------------
Title:
---------------------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO MICROTEL INNS AND SUITES FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF MINNESOTA

In recognition of the requirements of the Minnesota Franchises Law,
Minn. Stat. Sections 80C.01 through 80C.22, and of the Rules and Regulations
promulgated thereunder by the Minnesota Commissioner of Commerce, Minn. Rules
Sections 2860.0100 through 2860.9930, the parties to the attached Microtel
Inns and Suites Franchising, Inc. License Agreement (the "Agreement") agree as
follows:

1. Paragraph 5 of the Agreement, under the heading "Proprietary Marks",
shall be amended by the addition of the following language:

D. The Minnesota Department of Commerce requires that Licensor indemnify
Licensee against liability to third parties resulting from claims by
third parties that the Licensee's use of Licensor's trademark infringes
trademark rights of the third party. Licensor does not indemnify against
the consequences of Licensee's use of Licensor's trademark except in
accordance with the requirements of the Agreement, and, as a condition
to indemnification, Licensee must provide notice to Licensor of any such
claim within 10 days and tender the defense of the claim to Licensor. If
Licensor accepts the tender of defense, Licensor has the right to manage
the defense of the claim including the right to compromise, settle or
otherwise resolve the claim, and to determine whether to appeal a final
determination of the claim.

2. Paragraph 7 of the Agreement, under the heading "Indemnity and
Insurance", shall be amended by the addition of the following sentence, which
shall be considered an integral part of this Agreement:

The general release language contained in the License shall not relieve
the Licensor or any other person, directly or indirectly, from liability
imposed by the Minnesota Franchise Law.

3. Paragraph 8B(2)(g) of the Agreement, under the heading "Transfer",
shall be amended by inserting a comma after the word "employees" and adding
thereafter "excluding only such claims as you may have under the Minnesota
Franchises Law and the Rules and Regulations promulgated thereunder by the
Minnesota Commissioner of Commerce."

4. Paragraph 8 of the Agreement, under the heading "Transfer", shall be
amended by the addition of the following paragraph:

H. Minnesota law provides licensees with certain transfer rights. In
sum, Minn. Stat. Section 80C.14 (subd. 5) currently requires, except in
certain specified cases, that consent to the transfer of the license
not be unreasonably withheld.

5. Paragraph 10 of the Agreement, under the heading "Termination", shall
be amended by the addition of the following paragraph:

E. Minnesota law provides licensees with certain termination rights. In
sum, Minn. Stat. Section 80C.14 (subds. 3 and 5) currently require,
except in certain specified cases, that a licensee be given 90 days
notice of termination (with 60 days to cure) and 180 days notice of
non-renewal of this Agreement, and that consent to the transfer of the
license not be unreasonably withheld.

Page 1 of 2

<PAGE>

6. To the extent that provision in the fourth sentence of Paragraph 10D,
with respect to the lump sum payment by Licensee, is a liquidated damages
provision in violation of Minnesota Rule 2860.4400J, such provision shall be
deleted from this Agreement.

7. Paragraph 13 of the Agreement, under the heading "Miscellaneous",
shall be amended by the addition of the following sentence, which shall be
considered an integral part of this Agreement:

The general release language contained in the Agreement shall not relieve
Licensor or any other person, directly or indirectly, from liability imposed by
the Minnesota Franchise Law.

8. Paragraph 13 of the Agreement, under the heading "Miscellaneous",
shall be amended by the addition of the following sentence, which shall be
considered an integral part of the Agreement:

Nothing in the UFOC or the Agreement can abrogate or reduce any of your
rights provided for in Minnesota Statutes, Chapter 80C, or your rights
to any procedure, forum or remedies provided for by the laws of the
jurisdiction.

9. Each provision of this Agreement shall be effective only to the
extent, with respect to such provision, that the jurisdictional requirements of
the Minnesota Franchises Law or the Rules and Regulations promulgated thereunder
by the Minnesota Commissioner of Commerce are met independently without
reference to this Addendum to the Agreement.

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this Minnesota amendment to the License Agreement on the same day as
the License Agreement was executed.

MICROTEL INNS AND SUITES FRANCHISING, INC.
--------------------------------------------
Licensor

By:
-----------------------------------------
Title:
---------------------------------------

--------------------------------------------
Licensee

By:
-----------------------------------------
Title:
---------------------------------------
By:
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Title:
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Page 2 of 2

<PAGE>

AMENDMENT TO MICROTEL INNS AND SUITES FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF NEW YORK

In recognition of the requirements of the General Business Law of the
State of New York, Article 33, Sections 680-695, the License Agreement for
Microtel Inns and Suites Franchising, Inc., in connection with the offer and
sale of licenses for use in the State of New York, shall be amended to include
the following:

1. Notwithstanding any provision of the License Agreement, all rights
enjoyed by Licensee and any causes of action arising in its favor from the
provisions of Article 33 of the General Business Law of the State of New York
and the regulations issued thereunder shall remain in force, it being the intent
of this proviso that the non-waiver provisions of the General Business Law of
the State of New York Sections 687.4 and 687.5 be satisfied.

2. Paragraph 7A(1) of the License Agreement is hereby modified by adding
the following sentence after the initial sentence thereof: "However, you shall
not be required to indemnify for any claims arising out of a breach of this
Agreement by, or other civil wrong of, the Licensor."

3. No new or different requirements imposed on you as a result of any
changes made by Licensor to its Manual or otherwise shall place an unreasonable
economic burden on you.

4. Notwithstanding any provision of the License Agreement to the
contrary, Licensor will not transfer and assign its right and obligations under
the License Agreement unless the transferee will be able to perform the
Licensor's obligations under the License Agreement, in Licensor's good faith
judgment, so long as it remains subject to Article 33 of the General Business
Law of the State of New York.

5. Notwithstanding Paragraph 13B of the License Agreement, the choice of
law provision should not be construed as a waiver of any right conferred upon
you by the provisions of Article 33 of the General Business Law of the State of
New York.

6. Each provision of this Amendment shall be effective only to the
extent, with respect to such provision, that the jurisdictional requirements of
the General Business Law of the State of New York are met independently without
reference to this Amendment.

[SIGNATURES ON FOLLOWING PAGE]

Page 1 of 2

<PAGE>

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this New York amendment to the License Agreement on the same date as
the License Agreement was executed.

MICROTEL INNS AND SUITES FRANCHISING, INC.
--------------------------------------------
Licensor

By:
-----------------------------------------
Title:
---------------------------------------

Licensee

By:
-----------------------------------------
Title:
---------------------------------------
By:
-----------------------------------------
Title:
---------------------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO MICROTEL INNS AND SUITES FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF NORTH DAKOTA

In recognition of the requirements of the North Dakota Franchise
Investment Law, N.D. Cent. Code Sections 51-19-01 through 51-19-17, and the
policies of the office of the State of North Dakota Securities Commission, the
parties to the attached Microtel Inns and Suites Franchising, Inc. License
Agreement (the "Agreement") agree as follows:

1. Paragraph 7 of the Agreement, under the heading "Indemnity and
Insurance", shall be amended by the addition of the following sentence, which
shall be considered an integral part of the Agreement:

The general release language contained in the Agreement shall not
relieve Licensor or any other person, directly or indirectly, from any
liability imposed by the North Dakota Franchise Investment Law.

2. Paragraph 8B(2)(g) of the Agreement, under the heading "Transfer",
shall be amended by inserting a comma after the word "employees" and adding
thereafter "excluding only such claims as Licensee may have under the North
Dakota Franchise Investment Law."

3. To the extent that Paragraph 10D, with respect to the lump sum
payment by Licensee, is a liquidated damages provision in violation of North
Dakota Franchise Investment Law, N.D. Cent. Code Section 51-19-09(1)(a)(9), such
provision shall be deleted from this Agreement.

4. Paragraph 13B of the Agreement, under the heading "Miscellaneous",
shall be amended by inserting a comma at the end of the second sentence and
adding thereafter "except with claims arising under the North Dakota Franchise
Investment Law."

5. Each provision of this Amendment shall be effective only to the
extent, with respect to such provision, that the jurisdictional requirements of
the North Dakota Franchise Investment Law, N.D. Cent. Code Sections 51-19-01
through 51-19-17, are met independently without reference to this Amendment.

[SIGNATURES ON FOLLOWING PAGE]

Page 1 of 2

<PAGE>

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this North Dakota amendment to the License Agreement on the same day
as the License Agreement was executed.

MICROTEL INNS AND SUITES FRANCHISING, INC.
--------------------------------------------
Licensor

By:
---------------------------------------
Title:
---------------------------------------

--------------------------------------------
Licensee

By:
---------------------------------------
Title:
---------------------------------------
By:
---------------------------------------
Title:
---------------------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO MICROTEL INNS AND SUITES FRANCHISING, INC.
LICENSE AGREEMENT REQUIRED
BY THE STATE OF RHODE ISLAND

In recognition of the requirements of the Rhode Island Franchise
Investment Act, Sections 19-28.1-1 through 19-28.1-34, the parties to the
attached Microtel Inns and Suites Franchising, Inc. Agreement (the "Agreement")
agree as follows:

1. Paragraph 13 of the Agreement, under the heading "Miscellaneous",
shall be amended by the addition of the following new paragraph:

K. Section 19-28.1-14 of the Rhode Island Franchise Investment Act
provides that "A provision in a franchise agreement restricting
jurisdiction or venue to a forum outside this state or requiring the
application of the laws of another state is void with respect to a claim
otherwise enforceable under this Act."

2. This Agreement requires that it be governed by Georgia law. To the
extent that such law conflicts with Rhode Island Franchise Investment Act it is
void under Sec. 19-28.1-14.

3. Licensee is required in this Agreement under certain circumstances to
execute a release of claims that might violate the Act or a rule or order under
the Act. Such release shall exclude claims arising under the Rhode Island
Franchise Investment Act.

4. Each provision of this Amendment shall be effective only to the
extent, with respect to such provision, that the jurisdictional requirements of
Rhode Island Franchise Investment Act, Sections 19-28-1.1 through 19-28.1-34,
are met independently without reference to this Amendment.

[SIGNATURES ON FOLLOWING PAGE ]

Page 1 of 2

<PAGE>

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this Rhode Island amendment to the License Agreement on the same date
as the License Agreement was executed.

MICROTEL INNS AND SUITES FRANCHISING, INC.
--------------------------------------------
Licensor

By:
-----------------------------------------
Title:
---------------------------------------

--------------------------------------------
Licensee

By:
-----------------------------------------
Title:
---------------------------------------
By:
-----------------------------------------
Title:
---------------------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO MICROTEL INNS AND SUITES FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF SOUTH DAKOTA

In recognition of the requirements of the South Dakota Franchises for
Brand-Name Goods and Services Law, S.D. Codified Laws Sections 37-5A-1 to
37-5A-87, the parties to the attached Microtel Inns and Suites Franchising, Inc.
License Agreement (the "Agreement") agree as follows:

1. To the extent the provision in the fourth sentence of Paragraph 10D,
with respect to the lump sum payment by Licensee, is a liquidated damages
provision in violation of South Dakota Codified Laws Section 53-9-5, such
provision shall be deleted from this Agreement.

2. Paragraph 13B of the Agreement, under the heading "Miscellaneous",
shall be amended by the addition of the following sentence:

Notwithstanding the above, this provision shall be void with respect to
any cause of action which is otherwise enforceable in the State of South
Dakota.

3. Paragraph 13 of the Agreement, under the heading "Miscellaneous",
shall be amended by the addition of the following language:

K. Notwithstanding anything to the contrary in this Agreement, all
issues relating to franchise registration, employment law, covenants not
to compete, and other matters of local concern shall be governed by the
laws of the State of South Dakota, but as to contractual and all other
matters, the Agreement and all provisions of the Agreement will be and
remain subject to the application, construction, enforcement and
interpretation under the governing laws of Georgia.

L. Notwithstanding anything to the contrary herein, nothing in this
Agreement shall be deemed to constitute a waiver of compliance with any
provision of the South Dakota Franchises for Brand-Name Goods and
Services Act.

4. Regardless of the terms of the Agreement concerning termination, if
you fail to meet performance and quality standards or fail to make any payments
under the Agreement, you will be afforded thirty (30) days' written notice with
an opportunity to cure the default before termination.

5. Pursuant to S.D.C.L. 37-5A086, any acknowledgment, provision,
disclaimer or integration clause or a provision having a similar effect in the
Agreement does not negate or act to remove from judicial review any statement,
misrepresentation or action that would violate the South Dakota Franchise Law
(S.D.C.L. 37-5A), or any administrative regulations promulgated thereunder.

6. Any provision that provides that the parties waive their right to
claim punitive, exemplary, incidental, indirect, special or consequential
damages may not be enforceable under South Dakota law.

Page 1 of 2

<PAGE>

7. Each provision of this Amendment shall be effective only to the
extent, with respect to such provision, that the jurisdictional requirements of
the South Dakota Franchises for Brand-Name Goods and Services Law are met
independently without reference to this Amendment.

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this South Dakota amendment to the License Agreement on the same day
as the License Agreement was executed.

MICROTEL INNS AND SUITES FRANCHISING, INC.
--------------------------------------------
Licensor

By:
-----------------------------------------
Title:
---------------------------------------

--------------------------------------------
Licensee

By:
-----------------------------------------
Title:
---------------------------------------
By:
-----------------------------------------
Title:
---------------------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO MICROTEL INNS AND SUITES FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF WASHINGTON

In recognition of the requirements of the Washington Franchise
Investment Protection Act, Wash. Rev. Code Sections 19.100.010 through
19.100.940, the License Agreement for Microtel Inns and Suites Franchising, Inc.
("MISF") in connection with the offer and sale of licenses for use in the State
of Washington, shall be amended to include the following:

1. The State of Washington has a statute, RCW 19.100.180 which may
supersede the License Agreement in your relationship with us including the areas
of termination and renewal of your license. There may also be court decisions
which may supersede the License Agreement in your relationship with us including
the areas of termination and renewal of your license.

2. In the event of a conflict of laws, the provisions of the Washington
Franchise Investment Protection Act, Chapter 19.100 RCW shall prevail.

3. A release or waiver of rights executed by a licensee or a transferor
shall not include rights under the Washington Franchise Investment Protection
Act except when executed pursuant to a negotiated settlement after the agreement
is in effect and where the parties are represented by independent counsel.
Provisions such as those which unreasonably restrict or limit the statute of
limitations period for claims under the Act, rights or remedies under the Act
such as a right to a jury trial may not be enforceable.

4. Transfer fees are collectable to the extent that they reflect
Licensor's reasonable estimated or actual costs in effecting a transfer.

5. Each provision of this Amendment shall be effective only to the
extent, with respect to such provision, that the jurisdictional requirements of
the Washington Franchise Investment Protection Act, Wash. Rev. Code Sections
19.100.010 through 19.100.940, are met independently without reference to this
Amendment.

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this Washington amendment to the License Agreement on the same date as
the License Agreement was executed.

MICROTEL INNS AND SUITES FRANCHISING, INC.
--------------------------------------------
Licensor

By:
-----------------------------------------
Title:
---------------------------------------

--------------------------------------------
License

By:
-----------------------------------------
Title:
---------------------------------------
By:
-----------------------------------------
Title:
---------------------------------------

Page 1 of 1

<PAGE>

Exhibit 10.36

Location: HOTELADDRESS1
HOTELADDRESS2

ID Number: IDNUMBER

Date: __________________

LICENSE AGREEMENT

between

HAWTHORN SUITES FRANCHISING, INC.

and

ENTITYNAMECAPS

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
1. THE LICENSE..............................................................................................1
A. The Hotel..............................................................................1
B. The Hotel System.......................................................................1

2. GRANT OF LICENSE.........................................................................................1

3. YOUR RESPONSIBILITIES....................................................................................2
A. Operational and Other Requirements.....................................................2
B. Performance of the Work................................................................3
C. Upgrading of the Hotel.................................................................3
D. Fees...................................................................................3
E. No Right to Offset.....................................................................4

4. OUR RESPONSIBILITIES.....................................................................................4
A. Training...............................................................................4
B. Services...............................................................................4
C. Consultation on Operations, Facilities and Marketing...................................4
D. (1) Hawthorn Reservations and Advertising Fund, Inc. ..................................4
(2) Use of Marketing/Reservation Contributions.........................................4
E. Application of Manual..................................................................5
F. Other Arrangements.....................................................................6
G. Inspections/Compliance Assistance......................................................6

5. PROPRIETARY RIGHTS.......................................................................................6
A. Ownership of the Hotel System and Proprietary Marks....................................6
B. Trademark Disputes.....................................................................6
C. Protection of Name and Marks...........................................................6

6. RECORDS AND AUDITS.......................................................................................7
A. Monthly Reports........................................................................7
B. Preparation and Maintenance of Records.................................................7
C. Audit..................................................................................7
D. Annual Financial Statements............................................................7

7. INDEMNITY AND INSURANCE..................................................................................7
A. Indemnity..............................................................................7
B. Insurance..............................................................................8

8. TRANSFER.................................................................................................9
A. Transfer by Us.........................................................................9
B. Transfer by You........................................................................9
C. Transfers of the License or Equity Interest in You Upon Death.........................11
D. Registration of a Proposed Transfer of Equity Interests...............................11
E. Non-Waiver of Claims..................................................................11
F. Our Right of First Refusal............................................................11
G. No Right of First Refusal.............................................................12
</TABLE>

<PAGE>

<TABLE>
<S> <C>
9. CONDEMNATION AND CASUALTY...............................................................................12
A. Condemnation..........................................................................12
B. Casualty..............................................................................12
C. Extensions of Term....................................................................12

10. TERMINATION.............................................................................................12
A. Expiration of Term....................................................................12
B. Defaults..............................................................................12

C. De-identification of Hotel Upon Termination

or Expiration of this Agreement......................................................15
D. Payment of Liquidated Damages.........................................................15

11. RENEWAL.................................................................................................16
A. Requirements..........................................................................16
B. Alternative Process...................................................................17

12. RELATIONSHIP OF PARTIES.................................................................................17
A. No Agency Relationship................................................................17
B. Your Notices to Public Concerning Independent Status..................................17
C. Use of the Hawthorn Name..............................................................17

13. MISCELLANEOUS...........................................................................................17
A. Severability and Interpretation.......................................................17
B. Binding Effect........................................................................17
C. Exclusive Benefit.....................................................................17
D. Entire Agreement......................................................................18
E. Our Withholding of Consent............................................................18
F. Notices...............................................................................18
G. Descriptive Headings..................................................................18
H. Management of the Hotel...............................................................18
I. Guest Room Rates......................................................................18
J. Attorneys' Fees.......................................................................19
</TABLE>

GUARANTY
ATTACHMENT A
ATTACHMENT B
ATTACHMENT C
STATE-SPECIFIC AMENDMENTS

<PAGE>

LICENSE AGREEMENT

This license agreement ("Agreement" or "License Agreement"), dated
____________, 20___, is entered into by and between Hawthorn Suites Franchising,
Inc., a Georgia corporation having an address at 13 Corporate Square, Suite 250,
Atlanta, Georgia 30329 ("we," "our," "us," "HFI" or "Licensor"), and
ENTITYNAMECAPS, a ENTITY having an address at ENTITYADDRESS ("you," "your" or
"Licensee"). In consideration of the following mutual promises, the parties
agree as follows:

1. THE LICENSE.

We have the exclusive right to license a unique concept and system (the
"Hotel System") to establish and operate hotels under the names "Hawthorn
Suites" and "Hawthorn Suites LTD." and certain brand extensions thereof
(collectively, "Hotels" or "Hawthorn Hotels"). Before signing this Agreement,
you have read our Offering Circular for Prospective Franchisees ("UFOC") and
independently evaluated and investigated the risks of investing in the hotel
industry generally and purchasing a Hawthorn franchise specifically, including
such factors as current and potential market conditions, owning a franchise and
various competitive factors. Following your investigation, you wish to enter
into this Agreement to obtain a license to use the Hotel System to operate a
BRAND hotel located at HOTELADDRESS1, HOTELADDRESS2 (the "Hotel").

A. THE HOTEL. The Hotel includes all structures, facilities,
appurtenances, furniture, fixtures, equipment, entry, exit and parking areas
located on the real property identified on Attachment A hereto or any other real
property we approve for Hotel expansion, signage or other facilities. You agree
not to make any material changes to the Hotel without our prior written consent,
which consent shall not be unreasonably withheld, including, but not limited to,
any change in the number of rooms or suites at or to be constructed as part of
the Hotel ("Guest Rooms").

B. THE HOTEL SYSTEM. We have designed the Hotel System so that the
public associates the Hotels with high quality standards. The Hotel System
includes, without limitation: (i) the tradenames, trademarks, and service marks
"Hawthorn Suites", "Hawthorn Suites LTD.", "Hawthorn Inn & Suites", "Hawthorn
Hotel & Suites" and "Hawthorn Suites Golf Resort" and such other tradenames,
trademarks, and service marks we hereafter designate for use with the Hotel
System (collectively, the "Proprietary Marks"); (ii) prototypical architectural
plans, designs and layouts, including, without limitation, site, floor, roof,
plumbing, lobby, electrical and landscape plans; (iii) access to a centralized
reservation system ("CRS"); (iv) the national Hawthorn directory (the "National
Directory"); (v) management, personnel and operational training programs,
materials and procedures; (vi) standards and specifications for operations,
marketing, construction, equipment and furnishings described in our confidential
manuals, as amended by us from time to time (collectively, the "Manual"); and
(vii) marketing, advertising and promotional programs.

2. GRANT OF LICENSE.

<PAGE>

(ii) to conduct other business activities under, or license others to use,
hospitality brands that are not part of the Proprietary Marks, whether outside
or within the Territory, even if the other brands or business activities compete
with the Hotel and/or the Hotel System; or (iii) to use or license others to use
the Hotel System within the Territory to replace any previously executed
Hawthorn Hotel license agreement. Continuation of your Territory depends on
being in compliance with your License Agreement. Your Territory will expire upon
the issuance of a notice of default and termination and your failure to cure the
default in the time permitted, or upon termination of the License Agreement.

3. YOUR RESPONSIBILITIES.

A. OPERATIONAL AND OTHER REQUIREMENTS. During the License Term, you
agree to: maintain the Hotel in first class condition and in a clean, safe and
orderly manner; provide efficient, courteous, and high-quality service to the
public while maintaining a high moral and ethical standard and atmosphere at the
Hotel;

(1) operate the Hotel twenty-four (24) hours a day, every
day;

(2) strictly comply in all respects with our requirements
concerning:

(a) the Hotel System, the Manual and all other
policies and procedures we communicate to
you;

(b) our quality standards and the types of
services, products and amenities you may
use, promote or offer at the Hotel;

(d) directory and reservation service listings
of the Hotel; and

(3) agree to participate in, connect with and use the
CRS;

(4) except as provided in Paragraph 4E, adopt all changes
we make to the Hotel System;

(5) strictly comply with all governmental requirements,
including: (i) the payment of taxes; (ii) the filing
and maintenance of trade or fictitious name
registrations; and (iii) the filing and maintenance
of all licenses and permits to operate the Hotel;

(6) permit our representatives to inspect the Hotel at
any time and provide them free lodging during the
inspection period;

<PAGE>

(7) not use the Hotel or the Hotel System to promote a
competing business or other lodging facility;

(8) use your best efforts to create a favorable response
to the names "Hawthorn Suites", "Hawthorn Suites
LTD.", "Hawthorn Inn & Suites", "Hawthorn Hotel &
Suites" and "Hawthorn Suites Golf Resorts" and the
names of any brand extensions we develop;

(9) promptly pay to us and/or our parent, subsidiaries
and affiliates when due all royalties and fees owed
under this Agreement;

(10) use your best efforts to treat the Manual and any
other information or materials we designate as
confidential ("Confidential Materials") and not
duplicate, circulate or distribute any Confidential
Materials to any unauthorized person;

(11) use best efforts to require each employee who will
have access to any Confidential Materials to keep the
Confidential Materials confidential; and

(12) conduct your advertising in a dignified manner. At
our request, you agree to submit to us all
advertising and promotional materials and immediately
discontinue your use of any materials we reasonably
reject.

B. PERFORMANCE OF THE WORK. As a primary inducement for us to enter
into this Agreement, you agree to perform the work listed on Attachment C (the
"Work") in strict accordance with our specifications.

D. FEES.

(a) a "Royalty Fee" equal to five percent (5%)
of Gross Room Revenues (as defined in
Paragraph 3D(2)) of the Hotel;

(b) a "Marketing/Reservation Contribution"
("Contribution") equal to two and one-half
percent (2.5%) of Gross Room Revenues of the
Hotel from the Opening Date until the
expiration or sooner termination of this
Agreement. We may, at any time, increase
your Contribution only if: (i) we
simultaneously impose a similar increase on
all other Hawthorn Hotel licensees whose
license agreements contain fee provisions
similar to this Paragraph 3D; and (ii) at
least sixty-six percent (66%) of the open
Hawthorn Hotels (one vote per open Hotel)
agree to such an increase; and

<PAGE>

(c) any sales, gross receipts, personal
property, or similar tax imposed on us and
calculated solely on any payment required
under this Agreement, unless the tax is an
optional alternative to an income tax
otherwise payable by us.

(4) You agree to pay us a $2,500.00 fee each time you
apply to us to add any Guest Rooms to the Hotel.

(6) You shall pay all fees for global distribution
systems connected to our CRS and pay applicable
commissions to travel agents. You agree to pay: (i)
all commissions and fees for reservations you accept
through any sources (including the Internet), whether
processed through us, our CRS, third party
reservation systems, or billed directly to you; and
(ii) telephone charges and equipment related to the
CRS.

<PAGE>

4. OUR RESPONSIBILITIES.

B. SERVICES. Provided you are in full compliance with your obligations
under this Agreement, you shall have access to the CRS, listings in advertising
publications and the National Directory.

D. (1) HAWTHORN RESERVATIONS AND ADVERTISING FUND, INC. By
executing this Agreement, you agree to become a
member of Hawthorn Reservations and Advertising Fund,
Inc. (the "Fund"), a Georgia not-for-profit
corporation which holds the Contributions. Pursuant
to the terms of a management agreement, we manage the
Fund. For administrative convenience, we collect the
Contributions before passing them on to the Fund.
Copies of the Fund's Bylaws and management agreement
are available upon request.

E. APPLICATION OF MANUAL. All Hawthorn Hotels must comply with the
terms of the Manual, although we may permit limited exceptions based on local
conditions or special circumstances. Each change in the Manual will be explained
to you at least thirty (30) days prior to its effective date. Any change to the
Manual which, in our reasonable discretion, would cause a substantial investment
by you will not be effective unless approved by sixty-six percent (66%) of the
open Hawthorn Hotels. Each open hotel shall have one vote and approval of
sixty-six percent (66%) of the open hotels will be required to implement the

<PAGE>

change. Notwithstanding the foregoing, changes to the Manual which relate to
guest security and/or life/safety issues are not subject to the approval of you
or other licensees even if substantial investments are required.

5. PROPRIETARY RIGHTS.

C. PROTECTION OF NAME AND MARKS. Consistent with their ownership rights
and rights to use the Proprietary Marks, both parties to this Agreement shall
use their reasonable best efforts to protect and maintain the Proprietary Marks
and their distinguishing characteristics. You agree: (i) to execute any
documents we request to obtain or maintain protection for the Proprietary Marks;
(ii) to use the Proprietary Marks only in connection with the operation of your
Hotel and only as we instruct; and (iii) that your unauthorized use of the
Proprietary Marks shall constitute both an infringement of our rights and a
material breach of your obligations under this Agreement. You must notify us
immediately, in writing, if you have any actual or constructive knowledge of any
infringement or challenge to your use of the Proprietary Marks or any
unauthorized use or possible misuse of either the Proprietary Marks, the names
"Hawthorn Suites", "Hawthorn Suites LTD.", "Hawthorn Inn & Suites", "Hawthorn
Hotel & Suites" and "Hawthorn Suites Golf Resort" or any Confidential Materials.

<PAGE>

6. RECORDS AND AUDITS.

A. MONTHLY REPORTS. By the third (3rd) day of each month, you agree to
prepare and submit to us a statement for the previous month, certified by your
chief financial or principal accounting officer, listing Gross Room Revenues,
other revenues generated at the Hotel, room occupancy rates, reservation data,
the amounts currently due under Paragraph 3D and other information we deem
useful in connection with the Hotel System (the "Data"). The statement shall be
in such form and detail as we may reasonably request, shall be our property and
may be used by us for all reasonable purposes. We will not knowingly provide
Data on your Hotel as an inducement to develop other hotel brands in your market
area, although you understand that some of the Data may be compiled into
information we provide to prospective licensees in an aggregate manner.

B. PREPARATION AND MAINTENANCE OF RECORDS. You agree to: (i) prepare on
a current basis in a form satisfactory to us, (and preserve for at least four
(4) years), complete and accurate records concerning Gross Room Revenues and all
financial, operating, marketing and other aspects of the Hotel; and (ii)
maintain an accounting system which fully and accurately reflects all financial
aspects of the Hotel, including, but not limited to, books of account, tax
returns, governmental reports, register tapes, daily reports, profit and loss
and cash flow statements, balance sheets and complete quarterly and annual
financial statements. We reserve the right to require you to grant us
independent access to your computer system to permit us to obtain sales
information, occupancy information and other data that we find useful for the
Hotel System.

C. AUDIT. We or our agents may, at any time, examine and copy all
books, records, and tax returns related to your Hotel and, at our option,
require an independent audit. If an inspection or audit reveals that you have
understated payments in any report to us, you shall immediately pay us the
amount understated, in addition to interest from the date such amount was due
until paid, at the lesser of one and one-half percent (1.5%) per month or the
maximum rate permitted by law. In this event, we may also require that all of
your future annual financial statements be audited at your expense by an
independent certified public accounting firm you select and we approve. If an
inspection or audit discloses an underpayment to us of five percent (5%) or more
of the total amount owed during any six (6) month period, you shall, in addition
to paying the understated amount with interest, reimburse us for our costs and
expenses in connection with the inspection or audit, including legal and
accounting fees. These remedies supplement any others we may have under this
Agreement.

7. INDEMNITY AND INSURANCE.

A. INDEMNITY. You agree that nothing in this Agreement authorizes
either party to make any contract, agreement, warranty or representation on the
other's behalf, or to incur any debt or other obligation in the other's name,
and that neither party shall assume liability for, or be deemed liable as a
result of any

<PAGE>

such action, or by reason of any act or omission of the other party or any claim
or judgment arising therefrom.

(3) If you fail to comply with this Paragraph 7A, we may
retain attorneys and defend any claim, action or
alleged claim or action at your sole expense. You
agree that our obligations under this Agreement are
exclusively to you, and no other party may rely on,
enforce, or obtain relief for breach of such
obligations.

B. INSURANCE. During the License Term, you shall comply with the
insurance requirements of any applicable law, lease or mortgage covering the
Hotel and our specifications regarding amounts and types of insurance. Prior to
the Opening Date, and thereafter on an annual basis and/or each time you change
the terms of your insurance policy or carrier, you shall provide us with
certificates of insurance which: (i) evidence your liability insurance and its
amounts and the amount of your deductible; (ii) name Hawthorn Suites
Franchising, Inc. and U.S. Franchise Systems, Inc. as additional insureds; (iii)
state that your policy may not be canceled, amended or permitted to lapse or
expire without thirty (30) days prior written notice to us. At a minimum, such
certificates must be provided to us prior to construction or renovation of the
Hotel and prior to the authorized Opening Date of the Hotel. All insurance
policies shall be written on a fully insured basis. Deductibles and self
insurance retentions are subject to our prior approval. At the

<PAGE>

minimum, you agree to maintain or cause to be maintained (as applicable) the
following insurance underwritten by an insurer we approve:

(1) employer's liability and workers' compensation
insurance as prescribed by applicable law;

(2) comprehensive general and automobile liability
insurance (with products, completed operations and
independent contractors coverage), all on an
occurrence basis, with single-limit coverage for
personal and bodily injury and property damage of at
least [$10,000,000.00 for Hawthorn Suites, Hawthorn
Hotel & Suites and Hawthorn Suites Golf Resort;
$7,500,000.00 for Hawthorn Suites LTD. and Hawthorn
Inn & Suites] per occurrence which can be met by a
combination of primary liability and umbrella
liability policies. You also agree to cause your
general contractor to maintain comprehensive general
liability insurance of at least [$10,000,000.00 for
Hawthorn Suites, Hawthorn Hotel & Suites and Hawthorn
Suites Golf Resort; $7,500,000.00 for Hawthorn Suites
LTD. and Hawthorn Inn & Suites] per occurrence naming
Hawthorn Suites Franchising, Inc. and U.S. Franchise
Systems, Inc. as additional insureds; and

(3) Dram Shop/Liquor liability insurance, in the same
amounts provided above and naming the same additional
insureds, if you serve alcohol of any kind at the
Hotel. If you begin serving alcohol at any time
during the License Term, you agree to notify us
immediately and provide us with a revised certificate
of insurance evidencing Dram Shop/Liquor liability
insurance coverage.

8. TRANSFER.

A. TRANSFER BY US. We have the right to transfer or assign our rights
or obligations under this Agreement to any person or entity and our interests
will bind and inure to the benefit of any transferee, successor or assignee.

B. TRANSFER BY YOU. You agree that the rights and duties created by
this Agreement are personal to you and that we have granted this License in
reliance on the business skill, financial capacity and character of you and your
partners, shareholders or members. You may mortgage the Hotel to any financial
institution without our consent if you remain the mortgagor of the Hotel. Except
as provided in Paragraph 8B(1), neither you, any successor to your interest, or
any individual, partnership, corporation, or other legal entity which directly
or indirectly owns any interest in this License or in you shall sell, assign,
transfer, convey or otherwise encumber any direct or indirect interest in this
License, the Hotel or the assets of the Hotel without our consent.

<PAGE>

We may require any or all of the following as
conditions of our consent to a transfer:

(a) your compliance with all terms of this
Agreement;

(b) the transferee entity or individual, and all
shareholders, partners or members of the
transferee (collectively, the "Transferee"),
shall meet our then-current qualifications
for new licensees;

(d) any new general manager retained by the
Transferee shall complete our initial
training program;

(e) the Hotel shall be upgraded within the time
period we set to conform to the then-current
standards and specifications for hotels
operating under the Hotel System;

(g) you execute a general release, in a form
satisfactory to us, of any and all claims by
you against us and our officers, directors,
shareholders, and employees;

(h) the Transferee executes a written
assignment, in a form satisfactory to us,
assuming and agreeing to discharge all of
your obligations under this Agreement; and

(i) you execute all documents we request
evidencing your agreement to remain liable
for all obligations to us and our parent,
subsidiaries and affiliates prior to the
transfer.

(3) "Control" or "Controlling" shall mean the direct or
indirect possession of the power to direct or cause
the direction of the management and policies of any
person or legal entity.

<PAGE>

D. REGISTRATION OF A PROPOSED TRANSFER OF EQUITY INTERESTS. Securities
in you or your affiliates may be offered to the public only with our prior
written consent. All materials required by federal or state law for the sale of
any interest in you or your affiliates shall be submitted to us for review prior
to distribution or filing with any government agency, including any materials to
be used in any offering exempt from registration under federal or state
securities laws. No offering by you or your affiliates shall imply or state (by
use of the Proprietary Marks or otherwise) that we are participating as an
underwriter, issuer or your representative. You agree to pay us a non-refundable
fee equal to the greater of $5,000.00 or our costs and expenses of reviewing
each proposed offering including, without limitation, attorneys' fees. You
acknowledge that we may require changes to your offering materials and a full
indemnification from all participants in the offering before issuing our
consent.

F. OUR RIGHT OF FIRST REFUSAL. If any party holding any direct or
indirect interest in you or in all or substantially all of the Hotel's assets
desires to accept a bona fide offer from a third party to purchase the interest,
you agree to notify us and provide whatever documentation relating to the offer
we require. If the third party purchaser wishes to remove the Hotel from the
Hotel System, we have the right and option, exercisable within thirty (30) days
after we receive written notification, to inform you that we intend to purchase
the seller's interest on the same terms and conditions offered by the third
party. If we elect to purchase the seller's interest, closing will occur within
ninety (90) days from the date of our notice to the seller. If we elect not to
purchase the seller's interest, any material change thereafter to the terms of
the offer shall constitute a new offer subject to our same rights of first
refusal as in the case of the third party purchaser's initial offer. Our failure
to exercise this option is not a waiver by us of any other provision of this
Agreement. If the consideration, terms, and/or conditions offered by the third
party purchaser are such that we may not reasonably be required to furnish the
same consideration, terms, and/or conditions, then we may purchase the interest
for the reasonable cash equivalent. If the parties cannot agree within
thirty (30)

<PAGE>

days on the reasonable cash equivalent of the consideration, terms, and/or
conditions offered by the third party purchaser, an independent appraiser whose
determination shall be binding will be designated by us at our expense to
determine the reasonable equivalent cash consideration.

9. CONDEMNATION AND CASUALTY.

B. CASUALTY. If the Hotel is damaged by fire or casualty, you shall
repair the damage in accordance with our standards. If the damage or repair
requires closing all or any portion of the Hotel, you shall: (i) notify us
immediately; (ii) commence reconstruction within four (4) months of closing; and
(iii) reopen for continuous business operations as soon as practicable (but in
any event within twenty-four (24) months after closing of the Hotel and not
without providing us at least ten (10) days advance notice of the proposed
reopening date). If the Hotel is not reopened in accordance with this Paragraph
9B, this Agreement will terminate and you shall pay us liquidated damages (see
Paragraph 10D), provided, however, that your payment of liquidated damages shall
not exceed the amount of any insurance proceeds you receive.

10. TERMINATION.

A. EXPIRATION OF TERM. This Agreement will expire without notice twenty
(20) years from the authorized Opening Date, subject to its earlier termination
as set forth herein. You acknowledge the difficulty of determining our damages
if this Agreement terminates prior to its expiration. You also acknowledge that
the liquidated damages set forth in Paragraph 10D represent the best estimate of
our damages arising from any termination of this Agreement prior to its
expiration. Subject to Paragraph 11A, upon the expiration of the License Term,
you shall comply with our de-identification procedures as set forth in Paragraph
10C of this Agreement and/or in the Manual.

B. DEFAULTS.

(1) DEFAULT WITH OPPORTUNITY TO CURE.

(a) If you fail to comply with or violate any
provision of this Agreement, the Manual or
any Hotel System standard, unless this
Agreement, applicable

<PAGE>

law or any default notice we send to you
provides otherwise, you shall have thirty
(30) days from your receipt of a written
default notice to remedy such default (the
"Cure Period"). If any default remains
uncured after the Cure Period expires, this
Agreement shall terminate automatically
without further notice to you, effective
immediately upon the expiration of the Cure
Period. Alternatively, instead of
considering this Agreement automatically
terminated upon the expiration of the Cure
Period, we may suspend your access to the
CRS or remove your Hotel from our
advertising publications or the National
Directory until your default is cured to our
satisfaction.

(2) DEFAULT WITHOUT OPPORTUNITY TO CURE (IMMEDIATE
TERMINATION BY US). This Agreement shall terminate
immediately without notice to you if:

(b) reorganization, arrangement, adjustment,
liquidation, dissolution or composition of
you or your debts under any law relating to
bankruptcy, insolvency, reorganization or
relief of debtors; or (ii) appointment of a
receiver, trustee, custodian or other
official for any portion of its property;

(c) you, or any Guarantor, take any corporate or
other action to authorize any of the actions
set forth above in Paragraphs 10B(2)(a) or
10B(2)(b);

(d) any case, proceeding, or other action
against you or any Guarantor is commenced
seeking an order for relief against it as
debtor, or seeking

<PAGE>

reorganization, arrangement, adjustment,
liquidation, dissolution or
composition of it or its debts under any law
relating to bankruptcy, insolvency,
reorganization or relief of debtors, or
seeking appointment of a receiver, trustee,
custodian or other official for it or for
any portion of its property, and such case,
proceeding or other action: (i) results in
an order for relief against it which is not
fully stayed within seven (7) business days
after the entry thereof; or (ii) remains
undismissed for forty-five (45) days;

(e) an attachment remains on all or any part of
the Hotel or your or any Guarantor's assets
for thirty (30) days;

(h) you contest in any court or proceeding
either all or any portion of our ownership
of the Hotel System or the validity of any
of the Proprietary Marks;

(i) you transfer your rights under this
Agreement in violation of Paragraph 8;

(j) you fail to identify the Hotel to the public
as a Hawthorn Hotel;

(k) any action is taken to dissolve or liquidate
you or any Guarantor, except due to death;

(n) you disclose the contents of any
Confidential Materials to any unauthorized
person or fail to exercise reasonable care
to prevent such disclosure; or

(o) in our discretion, we determine a threat or
danger to public health or safety results
from the construction, maintenance or
operation of the Hotel, such

<PAGE>

that an immediate shutdown of the Hotel is
necessary to avoid a substantial liability
or loss of goodwill to the Hotel System.
Notwithstanding the foregoing, if we
determine, in our discretion, that both the
threat of danger to public health or safety
is eliminated and the reopening of the Hotel
will not cause a substantial loss of
goodwill to the Hotel System within six (6)
months of the termination of this Agreement,
we will reinstate the Agreement on identical
terms and conditions.

C. DE-IDENTIFICATION OF HOTEL UPON TERMINATION OR EXPIRATION OF
THIS AGREEMENT.

(1) Within ten (10) days of the effective date of
termination or expiration of this Agreement, as the
case may be, you agree to de-identify the Hotel by
taking whatever action we deem necessary to ensure
that the Hotel is no longer identified as a hotel
within the Hotel System and no use is made of any
part of the Hotel System at or in connection with the
Hotel or otherwise. Among the actions you must take
to de-identify the Hotel, you agree to: (i) return
the Manual and all other proprietary materials to us;
(ii) remove all items identifying the Hotel System;
(iii) change the telephone listing for the Hotel;
(iv) remove all items bearing the Proprietary Marks
(including all signage) from the Hotel; (v) cancel
all fictitious or assumed name or equivalent
registrations relating to your use of the Proprietary
Marks; (vi) immediately stop answering the telephone
in any way that would lead a prospective customer to
believe that the Hotel is affiliated with the Hotel
System; and (vii) permit our representative to enter
the Hotel to conduct inspections on a periodic basis
until de-identification is completed to our
satisfaction. Until de-identification is completed to
our satisfaction, you agree to maintain a conspicuous
sign at the registration desk in a form we specify
stating that the Hotel is no longer associated with
the Hotel System. You acknowledge that the
de-identification process intends to immediately
alert the public that the Hotel is not affiliated
with the Hotel System.

<PAGE>

of our damages and lost future fees we would have received from you under the
Agreement. You acknowledge that your obligation to pay us liquidated damages is
in addition to, not in lieu of, your obligations to pay any amounts then due to
us and comply with the de-identification provisions of Paragraph 10C. You agree
to pay us liquidated damages in a lump sum within thirty (30) days following the
date of termination, based on the average occupancy rate at the Hotel for the
twelve (12) months preceding the termination ("Occupancy Rate") as follows:

(1) if the Occupancy Rate was below fifty percent (50%),
you shall pay no liquidated damages;

(3) if the Occupancy Rate was sixty percent (60%) to
sixty-nine and nine-tenths percent (69.9%), you agree
to pay an amount equal to twenty-four (24) months of
fees under Paragraph 3D(1)(a); and

(4) if the Occupancy Rate was seventy percent (70%) or
greater, you agree to pay an amount equal to
thirty-six (36) months of fees under Paragraph
3D(1)(a).

11. RENEWAL.

(1) you pay a non-refundable fee equal to one-half of the
then-current franchise application fee;

(2) you received passing Quality Assurance Scores (as
defined in the Manual) during the preceding three (3)
year period;

(3) you agree to upgrade the Hotel to meet our
then-current criteria for the Hotel System; and

(4) you have a favorable operating and payment history.

<PAGE>

We will accept or reject your written renewal application within thirty (30)
days of its receipt by us. You agree to execute our then-current form of license
agreement to effectuate any renewal.

B. ALTERNATIVE PROCESS. If we determine that you do not meet the above
criteria, you may apply to renew this Agreement for a ten (10) year term by
submitting an application at least 120 days prior to the expiration of the
License Term with a non-refundable renewal fee equal to our then-current
franchise application fee. We will evaluate your application based on your
operating history, the location of the Hotel and your agreement to upgrade the
Hotel. If we accept your application, you will execute our then-current form of
license agreement.

12. Relationship of Parties.

C. USE OF THE HAWTHORN NAME. You shall not use the word "Hawthorn" or
any similar words in your entity or trade name, internet domain name, or in
connection with any web site, nor authorize or permit such use by anyone else.
You shall not use the word "Hawthorn" or any other name or mark associated with
the Hotel System to incur any obligation or indebtedness.

13. MISCELLANEOUS.

B. BINDING EFFECT. This Agreement is valid when executed and accepted
by us at our office in Atlanta, Georgia. It is made and entered into in the
State of Georgia and shall be governed and construed under and in accordance
with the laws of the State of Georgia without regard to its conflict of laws
principles. You acknowledge that you have sought, voluntarily accepted, and
become associated with us at our headquarters in Atlanta, Georgia. The choice of
law designation permits but does not require that all lawsuits or proceedings
concerning this Agreement be filed in the State of Georgia. This Agreement may
be executed in multiple copies, each of which will be deemed an original.

<PAGE>

F. NOTICES. All notices given under this Agreement shall be in writing,
delivered by any means which provide written evidence of the date received.
Notices shall be deemed given at the date and time receipt is evidenced to the
respective parties at the following addresses unless and until a different
address is designated by written notice to the other party:

<TABLE>
<S> <C>
Notices to us: Hawthorn Suites Franchising, Inc. Notices to you: ENTITYNAMECAPS
13 Corporate Square, Suite 250 PCADDRESS1
Atlanta, Georgia 30329 PCADDRESS2
Attention: Doug Shaw Attention: PCNAME
Vice President
Franchise Administration
</TABLE>

Should you refuse to accept any notice we attempt to deliver hereunder or we are
unable to deliver any notice due to your actions, you acknowledge and agree that
such notice shall be deemed received by you if we mail or deliver such notice to
you for a second time to your address designated in this Section 13F. We reserve
the right to notify both your lender and any or all of your members, partners or
shareholders in the event we issue any notice under this Agreement.

G. DESCRIPTIVE HEADINGS. The headings in this Agreement are for
convenience only and shall not control or affect the meaning or construction of
any provision.

I. GUEST ROOM RATES. With the exception of special event periods, you
agree not to charge any rate exceeding the rates available in the National
Directory.

<PAGE>

J. ATTORNEYS' FEES. If we are a party to any action or proceeding
concerning this Agreement, your operation of the Hotel or due to your actions or
omissions, you will be liable to us for reasonable attorneys' fees and court
costs we incur in such action or proceeding regardless of whether such action or
proceeding proceeds to judgment. Additionally, if you withhold any amounts due
to us, and we are required to commence an action or proceeding to recover such
amounts and we prevail, you shall reimburse us our costs of collecting such
amounts including reasonable attorneys' fees, court costs and expenses.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first stated above.

LICENSEE:

ENTITYNAMECAPS

By:
----------------------------------------
SIGNEENAME
SIGNEETITLE

Attest:
------------------------------------

LICENSOR:

HAWTHORN SUITES FRANCHISING, INC.

By:
----------------------------------------
Doug Shaw

Vice President
Franchise Administration

Attest:
------------------------------------

<PAGE>

GUARANTY

As an inducement to Hawthorn Suites Franchising, Inc. ("we," "our," or
"us") to execute that certain license agreement (including any future amendments
thereto) with _________________________ ("Licensee"), dated as of
______________, a copy of which is attached hereto, (collectively, the "License
Agreement"), the undersigned (individually, a "Guarantor" and collectively, the
"Guarantors"), jointly and severally, hereby unconditionally warrant to us and
our parent, successors and assigns that all representations of Licensee
contained in both the License Agreement and the application submitted in
connection therewith are true and correct. The Guarantors also jointly and
severally guarantee the timely payment and performance of all of Licensee's
obligations under the License Agreement.

Our failure to enforce all or any portion of our rights under this
Guaranty shall not constitute a waiver of our ability to do so at any point in
the future.

Guarantor hereby specifically waives any rights that may be conferred
by Official Code of Georgia Annotated Sections 10-7-23 and 10-7-24 or any
similar provision of the applicable law or any other state.

IN WITNESS WHEREOF, each of the undersigned has signed this Guaranty as
of the date of this License Agreement.

Witnesses: Guarantors:

- ---------------------------- ---------------------------
GUARANTOR1, Legal Signature

Notarized (with seal):

- ---------------------------- ---------------------------
GUARANTOR2, Legal Signature

<PAGE>

ATTACHMENT A
THE HOTEL

Facilities (Paragraph 1 ):

Site --- Area and general description: A BRAND hotel located at
HOTELADDRESS1
HOTELADDRESS2

Number of approved Guest Rooms: ROOMS

Number of approved Guest Suites:

Ownership of Licensee (Paragraph 8):

ENTITYNAMECAPS 100%

Page 1 of 1

<PAGE>

ATTACHMENT B
TERRITORY
PROPERTYNAME/#IDNUMBER

The Territory is defined as that area bordered by:

Page 1 of 1

<PAGE>

ATTACHMENT C
THE WORK

You acknowledge that every detail of the Hotel System is important to
us and other licensees operating under the Hotel System to develop and maintain
the standards and public image of the Hotel System. You agree to strictly comply
with the details of the Hotel System, as set forth in the Manual or otherwise in
writing. The following constitutes the development schedule for the Hotel.

A. New Development

1) You shall submit preliminary plans (the "Plans"), including
site layout and outline specifications within three (3) months
from the date of this Agreement.

2) You shall submit to us complete working drawings and
specifications for the Hotel, including its proposed
equipment, furnishings, facilities and signs, with such detail
and containing such information as we require within six (6)
months from the date of this Agreement. The Plans shall
conform to our then-prevailing Hotel System standards.
Construction shall not begin until we have approved the Plans
in writing. Following our approval of your Plans, you shall
make no changes to the Plans without our prior written
consent, which consent will not be unreasonably withheld. If
during the course of construction changes in the Plans are
required, you shall notify us immediately. Your failure to
construct the Hotel in strict accordance with the Plans we
approve in writing shall constitute a material breach and may
lead to our issuing a default notice and subsequently
terminating this Agreement. Our approval of the Plans is
intended exclusively to ensure compliance with our
then-current standards.

3) Construction shall commence within nine (9) months from the
date of this Agreement. You shall notify us within (5) days of
commencement of construction, which shall mean commencement of
any site work at the Hotel. Construction shall continue
uninterrupted (unless interrupted by force majeure) until
completion of the Hotel. The term "force majeure" shall mean
an act of God, war, civil disturbance, government action,
fire, flood, accident, hurricane, earthquake or other
calamity, strike or other labor dispute.

4) The Hotel shall be ready to open for business within fifteen
(15) months from the date hereof ("Completion Date"). Within
ten (10) days of the Completion Date you shall ask us to
conduct a final inspection, which we shall promptly conduct.
You shall not open for business prior to our written
authorization to do so, and you agree to open within ten (10)
days of our authorization. We will not authorize you to open
the Hotel unless and until you are in full compliance with all
terms of this Agreement. Prior to the authorized Opening Date
of the Hotel, you must submit to us written certification that
the Hotel is in compliance with the approved plans and
specifications prepared by the architect and that the Hotel
was constructed in compliance with Hotel standards, and is in
compliance with all applicable local jurisdictional
requirements.

B. Conversion of an Existing Facility

Page 1 of 2

<PAGE>

we approve the renovation plans, you agree not to make any
subsequent changes without our prior written consent. Our
approval of your renovation plans is exclusively for the
purpose of ensuring compliance with our then-current
standards. Your failure to renovate the Hotel in strict
accordance with the PIP and within the specified time frames
shall constitute a material breach of this Agreement and may
lead to us issuing a default notice and subsequently
terminating this Agreement. Commencement of renovation shall
mean the beginning of any site work at the Hotel.

2) The Hotel shall be ready to open for business not later than
six (6) months from the date hereof, unless otherwise provided
in the PIP ("Completion Date"). Within ten (10) days of the
Completion Date you shall ask us to conduct a final
inspection, which we shall promptly conduct. You shall not
open for business prior to our written authorization to do so,
and you agree to open within ten (10) days of our
authorization. We will not authorize you to open the Hotel
unless and until you are in full compliance with all terms of
this Agreement. Prior to the authorized Opening Date of the
Hotel, you must submit to us written certification that the
Hotel is in compliance with the approved plans and
specifications prepared by the architect and that the Hotel
was constructed in compliance with Hotel standards, and is in
compliance with all applicable local jurisdictional
requirements.

Page 2 of 2

<PAGE>

AMENDMENT TO HAWTHORN SUITES FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF CALIFORNIA

In recognition of the requirements of the California Franchise
Investment Law Sections 31000 through 31516 , and the California Franchise
Relations Act, California Business and Professions Code Sections 20000 through
20043, the License Agreement for Hawthorn Suites Franchising, Inc. (the
"Agreement"), in connection with the offer and sale of franchises for use in the
State of California, shall be amended to include the following:

1. Paragraph 8B(2)(g) of the Agreement, under the heading "Transfer",
shall be amended by inserting a comma at the end thereof and adding thereafter
"excluding only such claims you may have under the California Franchise
Investment Law and the California Relations Act."

3. The Agreement requires that it be governed by Georgia law. This
requirement may be unenforceable under California law.

4. Each provision of this Amendment shall be effective only to the
extent, with respect to such provision, that the jurisdictional requirements of
the California law applicable to the provision are met independently without
reference to this Amendment.

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed and
delivered this California Amendment to the License Agreement on the same date as
the License Agreement was executed.

HAWTHORN SUITES FRANCHISING, INC.

Licensor

By:
-------------------------------------
Title:
----------------------------------

----------------------------------------
Licensee

By:
-------------------------------------
Title:
----------------------------------
By:
-------------------------------------
Title:

Page 1 of 2

<PAGE>

AMENDMENT TO
HAWTHORN SUITES FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF HAWAII

In recognition of the requirements of the Hawaii Franchise Investment
Law, Hawaii Rev. Stat. Sections 482E-, ET SEQ., the License Agreement for
Hawthorn Suites Franchising, Inc., in connection with the offer and sale of
licenses for use in the State of Hawaii, shall be amended to include the
following:

2. Paragraph 13 of the Agreement, under the heading "Miscellaneous",
shall be amended by the addition of the following sentence, which shall be
considered an integral part of this Agreement:

The general release language contained in the Agreement shall
not relieve Licensor or any other person, directly or indirectly, from
liability imposed by the Hawaii Franchise Investment Law.

3. The Hawaii Franchise Investment Law provides rights to you
concerning nonrenewal, termination and transfer of the Agreement. If any of the
provisions of the License Agreement concerning termination are inconsistent with
the Hawaii Franchise Investment Law, then said law shall apply.

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this Hawaii amendment to the License Agreement on the same date as the
License Agreement was executed.

HAWTHORN SUITES FRANCHISING, INC.
Licensor

By:
----------------------------------
Title:
-------------------------------

-------------------------------------
Licensee

By:
----------------------------------
Title:
-------------------------------
By:
----------------------------------
Title:
-------------------------------

Page 1 of 1

<PAGE>

AMENDMENT TO HAWTHORN SUITES FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF ILLINOIS

In recognition of the requirements of the Illinois Franchise Disclosure
Act of 1987, Ill. Comp. Stat. Sections 705/1 to 705/44, the parties to the
attached Hawthorn Suites Franchising, Inc. License Agreement (the "Agreement")
agree as follows:

1. Paragraph 8(B)(2)(g) of the Agreement, under the heading "Transfer",
shall be amended by inserting a comma at the end thereof and adding thereafter
"except with respect to claims arising under the Illinois Franchise Disclosure
Act of 1987."

2. Paragraph 10 of the Agreement, under the heading "Termination",
shall be supplemented by the addition of the following new Paragraph 10E, which
shall be considered an integral part of the Agreement:

E. If any of the provisions of this Paragraph 10 concerning termination
are inconsistent with Section 19 of the Illinois Franchise Disclosure
Act of 1987, then said Illinois law shall apply.

3. The second sentence of 13B of the Agreement, under the heading
"Miscellaneous", shall be amended by inserting a comma at the end of the second
sentence and adding thereafter "except with respect to claims arising under the
Illinois Franchise Disclosure Act of 1987."

4. This Agreement requires that it be governed by Georgia law. To the
extent that such law conflicts with the Illinois Franchise Disclosure Act, the
Act will control.

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this Illinois amendment to the License Agreement on the same date as
the License Agreement was executed.

HAWTHORN SUITES FRANCHISING, INC.
Licensor

By:
-------------------------------
Title:
----------------------------

----------------------------------
Licensee

By:
-------------------------------
Title:
----------------------------
By:
-------------------------------
Title:
----------------------------

Page 1 of 1

<PAGE>

AMENDMENT TO THE HAWTHORN SUITES FRANCHISING, INC.
LICENSE AGREEMENT REQUIRED
BY THE STATE OF INDIANA

In recognition of the requirements of the Indiana Franchise Disclosure
Law, Indiana Code Sections 23-2-2.5-1 to 23-2-2.5-51, and the Indiana
Deceptive Franchise Practices Act, Indiana Code Sections 23-2-2.7-1 to
23-2-2.7-10, the parties to the attached Hawthorn Suites Franchising, Inc.
License Agreement (the "Agreement") agree as follows:

2. Paragraph 7 of the Agreement, under the heading "Indemnity and
Insurance", shall be amended by the addition of the following sentence, which
shall be considered an integral part of this Agreement:

The general release language contained in the License shall not relieve
the Licensor or any other person, directly or indirectly, from
liability imposed by the Indiana Franchise Disclosure Law and the
Indiana Deceptive Practices Act.

6. Paragraph 13 of the Agreement, under the heading "Miscellaneous",
shall be supplemented by the addition of the following paragraph:

8. Indiana law provides rights to you concerning nonrenewal of the
Agreement. To the extent the Agreement contains a provision that is inconsistent
with the Indiana law, Indiana law will control.

Page 1 of 2

<PAGE>

10. Nothing in the Agreement shall abrogate or reduce any rights you
have under Indiana law.

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this Indiana amendment to the License Agreement on the same date as
the License Agreement was executed.

HAWTHORN SUITES FRANCHISING, INC.
Licensor

By:
--------------------------------
Title:
-----------------------------

-----------------------------------
Licensee

By:
--------------------------------
Title:
-----------------------------
By:
--------------------------------
Title:
-----------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO HAWTHORN SUITES FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF MARYLAND

In recognition of the requirements of the Maryland Franchise
Registration and Disclosure Law, Md. Code Bus. Reg. Sections 14-201 through
14-233, the License Agreement for Hawthorn Suites Franchising, Inc., in
connection with the offer and sale of licenses for use in the State of Maryland,
shall be amended to include the following:

1. Paragraph 8B(2)(g) of the Agreement, under the heading "Transfer",
shall be amended by inserting a comma after the word "employees" and adding
thereafter "excluding only such claims as transferor may have under the Maryland
Franchise Registration and Disclosure Law (Md. Code Bus. Reg. Sections 14-201
through 14-233)."

3. Paragraph 13 of the Agreement, under the heading "Miscellaneous",
shall be amended by the addition of the following paragraphs, which shall be
considered an integral part of this Agreement:

J. The general release language contained in this Agreement shall not
relieve Licensor or any other person, directly or indirectly, from
liability imposed by the Maryland Franchise Registration and Disclosure
Law (Md. Code Bus. Reg. Sections 14-201 through 14-233).

K. The foregoing acknowledgments are not intended to, nor shall they
act as a release, estoppel or waiver of, any liability incurred under
the Maryland Franchise Registration and Disclosure Law.

[SIGNATURES ON FOLLOWING PAGE]

Page 1 of 2

<PAGE>

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this Maryland amendment to the License Agreement on the same date as
the License Agreement was executed.

HAWTHORN SUITES FRANCHISING, INC.
----------------------------------
Licensor

By:
-------------------------------
Title:
----------------------------

----------------------------------
Licensee

By:
-------------------------------
Title:
----------------------------
By:
-------------------------------
Title:
----------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO HAWTHORN SUITES FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF MINNESOTA

In recognition of the requirements of the Minnesota Franchises Law,
Minn. Stat. Sections 80C.01 through 80C.22, and of the Rules and Regulations
promulgated thereunder by the Minnesota Commissioner of Commerce, Minn. Rules
Sections 2860.0100 through 2860.9930, the parties to the attached Hawthorn
Suites Franchising, Inc. License Agreement (the "Agreement") agree as follows:

1. Paragraph 5 of the Agreement, under the heading "Proprietary Marks",
shall be amended by the addition of the following language:

D. The Minnesota Department of Commerce requires that Licensor
indemnify Licensee against liability to third parties resulting from
claims by third parties that the Licensee's use of Licensor's trademark
infringes trademark rights of the third party. Licensor does not
indemnify against the consequences of Licensee's use of Licensor's
trademark except in accordance with the requirements of the Agreement,
and, as a condition to indemnification, Licensee must provide notice to
Licensor of any such claim within 10 days and tender the defense of the
claim to Licensor. If Licensor accepts the tender of defense, Licensor
has the right to manage the defense of the claim including the right to
compromise, settle or otherwise resolve the claim, and to determine
whether to appeal a final determination of the claim.

2. Paragraph 7 of the Agreement, under the heading "Indemnity and
Insurance", shall be amended by the addition of the following sentence, which
shall be considered an integral part of this Agreement:

The general release language contained in the License shall not relieve
the Licensor or any other person, directly or indirectly, from
liability imposed by the Minnesota Franchises Law.

3. Paragraph 8B(2)(g) of the Agreement, under the heading "Transfer",
shall be amended by inserting a comma after the word "employees" and adding
thereafter "excluding only such claims as you may have under the Minnesota
Franchises Law and the Rules and Regulations promulgated thereunder by the
Minnesota Commissioner of Commerce."

4. Paragraph 8 of the Agreement, under the heading "Transfer", shall be
amended by the addition of the following paragraph:

5. Paragraph 10 of the Agreement, under the heading "Termination",
shall be amended by the addition of the following paragraph:

Page 1 of 2

<PAGE>

6. To the extent that provision in the fourth sentence of Paragraph
10D, with respect to the lump sum payment by Licensee, is a liquidated damages
provision in violation of Minnesota Rule 2860.4400J, such provision shall be
deleted from this Agreement.

7. Paragraph 13 of the Agreement, under the heading "Miscellaneous",
shall be amended by the addition of the following sentence, which shall be
considered an integral part of this Agreement:

The general release language contained in the Agreement shall not
relieve Licensor or any other person, directly or indirectly, from
liability imposed by the Minnesota Franchise Law.

8. Paragraph 13 of the Agreement, under the heading "Miscellaneous",
shall be amended by the addition of the following sentence, which shall be
considered an integral part of the Agreement:

Nothing in the offering circular or agreement can abrogate or reduce
any of your rights as provided for in Minnesota statutes, Chapter 80C,
or your rights to any procedure, forum, or remedies provided for by the
laws of the jurisdiction.

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this Minnesota amendment to the License Agreement on the same day as
the License Agreement was executed.

HAWTHORN SUITES FRANCHISING, INC.
Licensor

By:
---------------------------------
Title:
------------------------------

------------------------------------
Licensee

By:
---------------------------------
Title:
------------------------------
By:
---------------------------------
Title:
------------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO HAWTHORN SUITES FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF NEW YORK

In recognition of the requirements of the General Business Law of the
State of New York, Article 33, Sections 680-695, the License Agreement for
Hawthorn Suites Franchising, Inc., in connection with the offer and sale of
licenses for use in the State of New York, shall be amended to include the
following:

2. Paragraph 7A(1) of the License Agreement is hereby modified by
adding the following sentence after the initial sentence thereof: "However, you
shall not be required to indemnify for any claims arising out of a breach of
this Agreement by, or other civil wrong of, the Licensor."

3. No new or different requirements imposed on you as a result of any
changes made by Licensor to its Manual or otherwise shall place an unreasonable
economic burden on you.

5. Notwithstanding Paragraph 13B of the License Agreement, the choice
of law provision should not be construed as a waiver of any right conferred upon
you by the provisions of Article 33 of the General Business Law of the State of
New York.

[SIGNATURES ON FOLLOWING PAGE]

Page 1 of 2

<PAGE>

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this New York amendment to the License Agreement on the same date as
the License Agreement was executed.

HAWTHORN SUITES FRANCHISING, INC.
Licensor

By:
-----------------------------------
Title:
--------------------------------

--------------------------------------
Licensee

By:
-----------------------------------
Title:
--------------------------------
By:
-----------------------------------
Title:
--------------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO HAWTHORN SUITES FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF NORTH DAKOTA

In recognition of the requirements of the North Dakota Franchise
Investment Law, N.D. Cent. Code Sections 51-19-01 through 51-19-17, and the
policies of the office of the State of North Dakota Securities Commission, the
parties to the attached Hawthorn Suites Franchising, Inc. License Agreement (the
"Agreement") agree as follows:

1. Paragraph 7 of the Agreement, under the heading "Insurance and
Indemnity", shall be amended by the addition of the following sentence, which
shall be considered an integral part of the Agreement:

2. Paragraph 8B(2)(g) of the Agreement, under the heading "Transfer",
shall be amended by inserting a comma after the word "employee" and adding
thereafter "excluding only such claims as Licensee may have under the North
Dakota Franchise Investment Law."

3. To the extent the provisions of Paragraph 10D, with respect to the
lump sum payment by Licensee, is a liquidated damages provision in violation of
North Dakota Franchise Investment Law, N.D. Cent. Code Section
51-19-09(1)(a)(9), such provision shall be deleted from this Agreement.

4. Paragraph 13B of the Agreement, under the heading "Miscellaneous",
shall be amended by inserting a comma at the end of the second sentence and
adding thereafter "except with respect to claims arising under the North Dakota
Franchise Investment Law."

[SIGNATURES ON FOLLOWING PAGE]

Page 1 of 2

<PAGE>

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this North Dakota amendment to the License Agreement on the same day
as the License Agreement was executed.

HAWTHORN SUITES FRANCHISING, INC.
Licensor

By:
------------------------------
Title:
---------------------------

---------------------------------
Licensee

By:
------------------------------
Title:
---------------------------
By:
------------------------------
Title:
---------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO THE HAWTHORN SUITES FRANCHISING, INC.
LICENSE AGREEMENT REQUIRED
BY THE STATE OF RHODE ISLAND

In recognition of the requirements of the Rhode Island Franchise
Investment Act, Sections 19-28.1-1 through 19-28.1-34, the parties to the
attached Hawthorn Suites Franchising, Inc. Agreement (the "Agreement") agree as
follows:

1. Paragraph 13 of the Agreement, under the heading "Miscellaneous",
shall be amended by the addition of the following new paragraph:

J. Section 19-28.1-14 of the Rhode Island Franchise Investment Act
provides that "A provision in a franchise agreement restricting
jurisdiction or venue to a forum outside this state or requiring the
application of the laws of another state is void with respect to a
claim otherwise enforceable under this Act."

2. This Agreement requires that it be governed by Georgia law. To the
extent that such law conflicts with Rhode Island Franchise Investment Act it is
void under Sec. 19-28.1-14.

3. You are required in this Agreement under certain circumstances to
execute a release of claims that might violate the Act or a rule or order under
the Act. Such release shall exclude claims arising under the Rhode Island
Franchise Investment Act.

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this Rhode Island amendment to the License Agreement on the same date
as the License Agreement was executed.

HAWTHORN SUITES FRANCHISING, INC.
Licensor

By:
-------------------------------
Title:
----------------------------

----------------------------------
Licensee

By:
-------------------------------
Title:
----------------------------
By:
-------------------------------
Title:
----------------------------

Page 1 of 1

<PAGE>

AMENDMENT TO HAWTHORN SUITES FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF SOUTH DAKOTA

In recognition of the requirements of the South Dakota Franchises for
Brand-Name Goods and Services Law, S.D. Codified Laws Sections 37-5A-1 to
37-5A-87, the parties to the attached Hawthorn Suites Franchising, Inc. License
Agreement (the "Agreement") agree as follows:

2. Paragraph 13B of the Agreement, under the heading "Miscellaneous",
shall be amended by the addition of the following sentence:

Notwithstanding the above, this provision shall be void with respect to
any cause of action which is otherwise enforceable in the State of
South Dakota.

3. Paragraph 13 of the Agreement, under the heading "Miscellaneous",
shall be supplemented by the addition of the following language:

J. Notwithstanding anything to the contrary in this Agreement, all
issues relating to franchise registration, employment law, covenants
not to compete, and other matters of local concern shall be governed by
the laws of the State of South Dakota, but as to contractual and all
other matters, the Agreement and all provisions of the Agreement will
be and remain subject to the application, construction, enforcement and
interpretation under the governing laws of Georgia.

K. Notwithstanding anything to the contrary herein, nothing in this
Agreement shall be deemed to constitute a waiver of compliance with any
provision of the South Dakota Franchises for Brand-Name Goods and
Services Act.

4. Regardless of the terms of the Agreement concerning termination, if
you fail to meet performance and quality standards or fail to make any payments
under the Agreement, you will be afforded thirty (30) day' written notice with
an opportunity to cure the default before termination.

5. Pursuant to S.D.C.L. 37-5A-86, any acknowledgment, provision,
disclaimer or integration clause or a provision having a similar effect in the
Agreement does not negate or act to remove from judicial review any statement,
misrepresentation or action that would violate the South Dakota Franchise Law
(S.D.C.L. 37-5A), or any administration regulations promulgated thereunder.

6. Any provision that provides that the parties waive their right to
claim punitive, exemplary, incidental, indirect, special or consequential
damages may not be enforceable under South Dakota law.

[SIGNATURES ON FOLLOWING PAGE]

Page 1 of 2

<PAGE>

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this South Dakota amendment to the License Agreement on the same day
as the License Agreement was executed.

HAWTHORN SUITES FRANCHISING, INC.
Licensor

By:
--------------------------------
Title:
-----------------------------

-----------------------------------
Licensee

By:
--------------------------------
Title:
-----------------------------
By:
--------------------------------
Title:
-----------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO HAWTHORN SUITES FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF WASHINGTON

In recognition of the requirements of the Washington Franchise
Investment Protection Act, Wash. Rev. Code Sections 19.100.010 through
19.100.940, the License Agreement for Hawthorn Suites Franchising, Inc. ("HFI"),
in connection with the offer and sale of licenses for use in the State of
Washington, shall be amended to include the following:

1. The state of Washington has a statute, RCW 19.100.180 which may
supersede the License Agreement in your relationship with HFI including the
areas of termination and renewal of your license. There may also be court
decisions which may supersede the License Agreement in your relationship with
HFI including the areas of termination and renewal of your license.

2. In the event of a conflict of laws, the provisions of the Washington
Franchise Investment Protection Act, Chapter 10.100 RCW shall prevail.

4. Transfer fees are collectable to the extent that they reflect
Licensor's reasonable estimated or actual costs in effecting a transfer.

IN WITNESS WHEREOF, the parties hereto have duly executed, sealed, and
delivered this Washington amendment to the License Agreement on the same date as
the License Agreement was executed.

HAWTHORN SUITES FRANCHISING, INC.
Licensor

By:
---------------------------------
Title:
------------------------------

------------------------------------
Licensee

By:
---------------------------------
Title:
------------------------------
By:
---------------------------------
Title:
------------------------------

Page 1 of 1

<PAGE>

Exhibit 10.37

Location: HOTELADDRESS1
HOTELADDRESS2

ID Number: IDNUMBER

Date:
---------------

LICENSE AGREEMENT

between

BEST FRANCHISING, INC.

and

ENTITYNAMECAPS

<PAGE>

TABLE OF CONTENTS

PAGE
<S> <C> <C>
1. THE LICENSE......................................................................................1
A. The Hotel...................................................................................1
B. The Hotel System............................................................................1

2. GRANT OF LICENSE.................................................................................2

3. YOUR RESPONSIBILITIES............................................................................2
A. Operational and Other Requirements..........................................................2
B. Performance of the Work.....................................................................4
C. Upgrading of the Hotel......................................................................4
D. Fees........................................................................................4
E. No Right to Offset..........................................................................6

4. OUR RESPONSIBILITIES.............................................................................6
A. Training....................................................................................6
B. Services....................................................................................6
C. Consultation on Operations, Facilities and Marketing........................................6
D. (1) Best Reservations Corp..............................................................6
(2) Use of Marketing/Reservation Contributions..........................................6
E. Application of Manual.......................................................................7
F. Other Arrangements..........................................................................7
G. Inspections/Compliance Assistance...........................................................7

5. PROPRIETARY RIGHTS...............................................................................7
A. Ownership of the Hotel System and Proprietary Marks.........................................7
B. Trademark Disputes..........................................................................8
C. Protection of Name and Marks................................................................8

6. RECORDS AND AUDITS...............................................................................9
A. Monthly Reports.............................................................................9
B. Preparation and Maintenance of Records......................................................9
C. Audit.......................................................................................9
D. Annual Financial Statements.................................................................9

7. INDEMNITY AND INSURANCE.........................................................................10
A. Indemnity..................................................................................10
B. Insurance..................................................................................11

8. TRANSFER........................................................................................12
A. Transfer by Us.............................................................................12
B. Transfer by You............................................................................12
C. Transfers of the License or Equity Interest in You Upon Death..............................14
D. Registration of a Proposed Transfer of Equity Interests....................................14

</TABLE>

<PAGE>

<S> <C> <C> <C>
E. Non-Waiver of Claims........................................................................14
F. Our Right of First Refusal..................................................................14
G. No Right of First Refusal...................................................................15

9. CONDEMNATION AND CASUALTY........................................................................15
A. Condemnation................................................................................15
B. Casualty....................................................................................15
C. Extensions of Term..........................................................................15

10. TERMINATION......................................................................................16
A. Expiration of Term..........................................................................16
B. Defaults....................................................................................16
C. De-identification of Hotel Upon Termination or Expiration of this Agreement
................................................................................................19
D. Payment of Liquidated Damages...............................................................20

11. RENEWAL..........................................................................................21
A. Requirements................................................................................21
B. Alternative Process.........................................................................21

12. RELATIONSHIP OF PARTIES..........................................................................22
A. No Agency Relationship......................................................................22
B. Your Notices to Public Concerning Independent Status........................................22
C. Use of the Best Name........................................................................22

13. MISCELLANEOUS....................................................................................22
A. Severability and Interpretation.............................................................22
B. Binding Effect..............................................................................22
C. Exclusive Benefit...........................................................................23
D. Entire Agreement............................................................................23
E. Our Withholding of Consent..................................................................23
F. Notices.....................................................................................24
G. Descriptive Headings........................................................................24
H. Management of the Hotel.....................................................................24
I. Guest Room Rates............................................................................24
J. Attorneys' Fees.............................................................................24

14. SPECIAL STIPULATIONS.............................................................................24
A. Conditional Opening.........................................................................24

ii
<PAGE>

</TABLE>

GUARANTY OF LICENSEE
ATTACHMENT A
ATTACHMENT B
ATTACHMENT C
GUARANTY BY HAWTHORN SUITES FRANCHISING, INC.
STATE - SPECIFIC AMENDMENTS

LICENSE AGREEMENT

This license agreement ("Agreement" or "License Agreement"), dated
______________, 20___, is entered into by and between Best Franchising, Inc., a
Georgia corporation having an address at 13 Corporate Square, Suite 250,
Atlanta, Georgia 30329 ("we," "our," "us" or "Licensor"), and ENTITYNAMECAPS, a
ENTITYTYPE, having an address at ENTITYADDRESS ("you," "your" or "Licensee"). In
consideration of the following mutual promises, the parties agree as follows:

1. THE LICENSE.

We have the exclusive right to license a unique concept and system (the
"Hotel System") to establish and operate "mid-level economy" hotels under the
names "Best Inns," "Best Suites," "Best Inns & Suites," "Best Hotel" and "Best
Hotel & Suites" and certain brand extensions thereof (collectively, "Hotels" or
"Best Hotels"). Before signing this Agreement, you read our Offering Circular
for Prospective Franchisees ("UFOC") and independently evaluated and
investigated the risks of investing in the hotel industry generally and
purchasing a Best franchise specifically, including such factors as current and
potential market conditions, owning a franchise and various competitive factors.
Following your investigation, you wish to enter into this Agreement to obtain a
license to use the Hotel System to operate a BRAND hotel located at
HOTELADDRESS1, HOTELADDRESS2 (the "Hotel").

A. THE HOTEL. The Hotel includes all structures, facilities,
appurtenances, furniture, fixtures, equipment, entry, exit and parking areas
located on the real property identified on Attachment A hereto or any other real
property we approve for Hotel expansion, signage or other facilities. You agree
not to make any material changes to the Hotel without our prior written consent,
which consent shall not be unreasonably withheld, including, but not limited to,
any change in the number of rooms or suites at or to be constructed as part of
the Hotel ("Guest Rooms").

1
<PAGE>

"Proprietary Marks"); (ii) prototypical architectural plans, designs and
layouts, including, without limitation, site, floor, roof, plumbing, lobby,
electrical and landscape plans; (iii) a national toll free number system for
central reservation referrals, as renovated by us from time to time
(collectively, the "CRS"); (iv) the national Best directory (the "National
Directory"); (v) management, personnel and operational training programs,
materials and procedures; (vi) standards and specifications for operations,
marketing, construction, equipment and furnishings described in our confidential
manuals, as amended by us from time to time (collectively, the "Manual"); and
(vii) marketing, advertising and promotional programs.

2. GRANT OF LICENSE.

We hereby grant to you a license (this "License") to use the Hotel
System to build or convert and operate the Hotel in accordance with the terms of
and commencing on the date of this Agreement and terminating as provided in
Paragraph 10 (the "License Term"). During the License Term, neither we nor any
of our affiliates or franchisees will develop or license any Best Hotels within
the area described in Attachment B (the "Territory"). This Agreement does not
limit our right, or the rights of our parent, subsidiaries or affiliates, (i) to
use or license others to use any part of the Hotel System outside the
Territory; (ii) to conduct other business activities under, or license others to
use, hospitality brands that are not part of the Proprietary Marks, whether
outside or within the Territory, even if the other brands or business activities
compete with the Hotel and/or the Hotel System; or (iii) to use or license
others to use the Hotel System within the Territory to replace any previously
executed Best Hotel license agreement.

3. YOUR RESPONSIBILITIES.

A. OPERATIONAL AND OTHER REQUIREMENTS. During the License Term,
you agree to:

(1) maintain the Hotel in first class condition and in a
clean, safe and orderly manner;

(2) provide efficient, courteous, and high-quality
service to the public while maintaining a high moral
and ethical standard and atmosphere at the Hotel;

(3) operate the Hotel twenty-four (24) hours a day, every
day;

(4) strictly comply in all respects with our requirements
concerning:

(a) the Hotel System, the Manual and all other
policies and procedures we communicate to
you;

<PAGE>

(b) our quality standards and the types of
services, products and amenities you may
use, promote or offer at the Hotel;

(d) directory and reservation service listings
of the Hotel; and

(5) execute our then-current Software License Agreement,
including payment of a $1,500 software license fee,
to participate in, connect with and use the CRS;

(6) except as provided in Paragraph 4E, adopt all changes
we make to the Hotel System;

(8) permit our representatives to inspect the Hotel at
any time and provide them free lodging during the
inspection period;

(9) not use the Hotel or the Hotel System to promote a
competing business or other lodging facility;

(10) use your best efforts to create a favorable response
to the names "Best Inns," "Best Suites," "Best Inns &
Suites," "Best Hotel" and "Best Hotel & Suites" and
the names of any brand extensions we develop;

(11) promptly pay to us and/or our parent, subsidiaries
and affiliates when due all royalties and fees owed
under this Agreement;

(12) use your best efforts to treat the Manual and any
other information or materials we designate, as
confidential ("Confidential Materials") and not
duplicate, circulate or distribute any Confidential
Materials to any unauthorized person;

<PAGE>

(13) use best efforts to require each employee who will
have access to any Confidential Materials to keep the
Confidential Materials confidential; and

B. PERFORMANCE OF THE WORK. As a primary inducement for us to enter
into this Agreement, you agree to perform the work listed on Attachment C (the
"Work") in strict accordance with our specifications.

D. FEES.

(a) a "Royalty Fee" equal to the following
percentages of Gross Room Revenues (as
defined in Paragraph 3D(2)) of the Hotel:
(i) three percent (3%) during the first
twelve (12) month period following the
Opening Date ("Year 1"); (ii) four percent
(4%) during the twelve (12) month period
following Year 1 ("Year 2"); and five
percent (5%) for each month after Year 2
until the expiration or sooner termination
of this Agreement.

(b) a "Marketing/Reservation Contribution"
("Contribution") equal to two and one-half
percent (2.5%) of Gross Room Revenues of the
Hotel from the Opening Date until the
expiration or sooner termination of this
Agreement. Beginning in Year 3, we may, at
any time, increase your Contribution only
if: (i) we simultaneously increase the
Contributions of all other licensees whose
agreements contain fee provisions similar to
this Paragraph 3D; and (ii) at least
sixty-six percent (66%) of the open Best
Hotels (one

<PAGE>

vote per open Hotel) agree to such an
increase; and

(4) You agree to pay us a $2,500.00 fee each time you
apply to us to add any Guest Rooms to the Hotel.

(6) You will participate in any global distribution
system connected to the CRS and pay applicable

<PAGE>

commissions to travel agents. You agree to pay: (i)
all commissions and fees for reservations you accept
through any sources (including the Internet), whether
processed through us, the CRS, third party
reservation systems, or billed directly to you; and
(ii) CRS related telephone and equipment charges.

E. NO RIGHT TO OFFSET. Licensee acknowledges and agrees that it will
not, for any reason, withhold payment of any Royalty Fees, Contributions or any
other fees or payments due Licensor pursuant to this Agreement. Licensee will
not have the right to withhold or offset any liquidated or unliquidated amounts,
damages or other monies allegedly due Licensee by Licensor against any Royalty
Fees, Contributions or any other fees due Licensor under this Agreement.

4. OUR RESPONSIBILITIES.

B. SERVICES. Provided you are in full compliance with your obligations
under this Agreement, you shall have access to the CRS, listings in advertising
publications and the National Directory.

C. CONSULTATION ON OPERATIONS, FACILITIES AND MARKETING. On an ongoing
basis, you may consult with us in connection with Hotel operations, including
suppliers for fixtures, furnishings, signs and other equipment.

D. (1) BEST RESERVATIONS CORP. By executing this Agreement,
you agree to become a member of Best Reservations
Corp. (the "Fund"), an Illinois not-for-profit
corporation with a Board of Directors which we
control. The Fund holds the Contributions and for
administrative convenience, we collect the
Contributions before passing them on to the Fund.

<PAGE>

certain individuals who work for our reservation or
marketing departments. We will neither profit
financially from nor use the Contributions to pay for
marketing directly related to our sale of franchises.
The Fund is not obligated to spend funds for
marketing or reservation services exceeding the
Contributions received from licensees using the Hotel
System. If the Fund has a surplus of Contributions at
the end of any taxable year, all expenditures in the
following taxable year(s) shall be made first out of
earnings accumulated from previous years' surplus
contributions, next out of current year earnings from
surplus contributions, and finally from current year
Contributions. Upon your written request, we will
provide you with an annual statement regarding
Contributions.

E. APPLICATION OF MANUAL. All Best Hotels must comply with the terms of
the Manual, although we may permit limited exceptions based on local conditions
or special circumstances. Each change in the Manual will be explained to you at
least thirty (30) days prior to its effective date. Any change to the Manual
which, in our reasonable discretion, would cause a substantial investment by you
will not be effective unless approved by sixty-six percent (66%) of the open
Best Hotels. Each open hotel shall have one vote and approval of sixty-six
percent (66%) of the open hotels will be required to implement the change.
Notwithstanding the foregoing, changes to the Manual which relate to guest
security and/or life/safety issues are not subject to the approval of you or
other licensees even if substantial investments are required.

5. PROPRIETARY RIGHTS.

<PAGE>

any element(s) or component(s) thereof; (ii) that we are the owner or exclusive
licensee of all right, title and interest in and to the Proprietary Marks
together with the goodwill they symbolize; or (iii) the validity or ownership of
the Proprietary Marks. All improvements and additions to or associated with the
Hotel System made by you or anyone else and all goodwill arising from your use
of the Proprietary Marks shall inure to our benefit and become our property.
Upon expiration or termination of this Agreement, no monetary amount shall be
attributed to any goodwill associated with your use of the Hotel System or
portion thereof.

B. TRADEMARK DISPUTES. We have the sole right to handle third
party disputes concerning the use of all or any part of the Hotel System, and
you shall, at your reasonable expense, extend your full cooperation to us in all
matters relating to the operation of the Hotel. All recoveries made as a result
of disputes with third parties regarding use of the Hotel System or any part
thereof belong solely to us. We are not required to initiate lawsuits against
alleged imitators or infringers and may settle any dispute in our discretion.
You shall not initiate any lawsuit or proceeding against alleged imitators or
infringers or any other lawsuit or proceeding to enforce or protect the Hotel
System without our prior written consent.

C. PROTECTION OF NAME AND MARKS. Consistent with their
ownership rights and rights to use the Proprietary Marks, both parties to this
Agreement shall use their reasonable best efforts to protect and maintain the
Proprietary Marks and their distinguishing characteristics. You agree: (i) to
execute any documents we request to obtain or maintain protection for the
Proprietary Marks; (ii) to use the Proprietary Marks only in connection with the
operation of your Hotel and only as we instruct; and (iii) that your
unauthorized use of the Proprietary Marks shall constitute both an infringement
of our rights and a material breach of your obligations under this Agreement.
You must notify us immediately, in writing, if you have any actual or
constructive knowledge of any infringement or challenge to your use of the
Proprietary Marks or any unauthorized use or possible misuse of either the
Proprietary Marks, the names "Best Inns," "Best Suites" or "Best Hotel" or any
Confidential Materials.

<PAGE>

6. RECORDS AND AUDITS.

A. MONTHLY REPORTS. By the third (3rd) day of each month, you agree to
prepare and submit to us a statement for the previous month, certified by your
chief financial or principal accounting officer, listing Gross Rooms Revenue,
other revenues generated at the Hotel, room occupancy rates, reservation data,
the amounts currently due under Paragraph 3D and other information we deem
useful in connection with the Hotel System (the "Data"). The statement shall be
in such form and detail as we may reasonably request, shall be our property and
may be used by us for all reasonable purposes. We will not knowingly provide
Data on your Hotel as an inducement to develop other hotel brands in your market
area, although you understand that some of the Data may be compiled into
information we provide to prospective licensees.

B. PREPARATION AND MAINTENANCE OF RECORDS. You agree to: (i) prepare on
a current basis in a form satisfactory to us, (and preserve for at least four
(4) years), complete and accurate records concerning Gross Rooms Revenue and all
financial, operating, marketing and other aspects of the Hotel; and (ii)
maintain an accounting system which fully and accurately reflects all financial
aspects of the Hotel, including, but not limited to, books of account, tax
returns, governmental reports, register tapes, daily reports, profit and loss
and cash flow statements, balance sheets and complete quarterly and annual
financial statements. We reserve the right to require you to grant us
independent access to your computer system to permit us to obtain sales
information, occupancy information and other data that we find useful for the
Hotel System.

C. AUDIT. We or our agents may, at any time, examine and copy, all
books, records, and tax returns related to your Hotel and, at our option,
require an independent audit. If an inspection or audit reveals that you have
understated payments in any report to us, you shall immediately pay us the
amount understated, in addition to interest from the date such amount was due
until paid, at the lesser of one and one-half percent (1.5%) per month or the
maximum rate permitted by law. In this event, we may also require that all of
your future annual financial statements be audited at your expense by an
independent certified public accounting firm you select and we approve. If an
inspection or audit discloses an underpayment to us of five percent (5%) or more
of the total amount owed during any six (6) month period, you shall, in addition
to paying the understated amount with interest, reimburse us for our costs and
expenses in connection with the inspection or audit, including legal and
accounting fees. These remedies supplement any others we may have under this
Agreement.

<PAGE>

accepted accounting principles consistently applied. Any false certification
shall be a material breach of this Agreement. Upon our request from time to time
you also agree to provide us with operating statistics for the Hotel.

7. INDEMNITY AND INSURANCE.

A. INDEMNITY. You agree that nothing in this Agreement authorizes
either party to make any contract, agreement, warranty or representation on the
other's behalf, or to incur any debt or other obligation in the other's name,
and that neither party shall assume liability for, or be deemed liable as a
result of any such action, or by reason of any act or omission of the other
party or any claim or judgment arising therefrom.

(1) You agree to indemnify, defend and hold harmless us,
our parent, affiliates, subsidiaries and our
respective, officers, directors, agents, employees,
successors and assigns (the "Indemnified Parties")
against, and to reimburse the Indemnified Parties
for, any and all claims or actions arising or
alleging to arise directly or indirectly from, as a
result of, or in connection with, your operation of
the Hotel, including, but not limited to, claims
alleging either intentional or negligent conduct,
acts or omissions by you or us relating to the
operation of the Hotel or the Hotel System, as well
as the costs, including attorneys' fees, of defending
against said claims or actions. We reserve the right
to defend any such claim or action against us. You
agree that this indemnity will survive the expiration
or termination of this Agreement. You have no
obligation to indemnify us if a court of competent
jurisdiction makes a final decision not subject to
further appeal that we or our employees directly
engaged in willful misconduct or intentionally caused
the property damage or bodily injury that is the
subject of the claim. You shall notify us immediately
(but not later than five (5) days following your
receipt of notice) of any claim, action or potential
claim or action naming any Indemnified Party as a
defendant or potential defendant (the
"Indemnification Notice"). The Indemnification Notice
shall include copies of all correspondence or court
papers relating to the claim or action.

<PAGE>

to be the sole cause of the claim, as well as the
cost of defending the claim.

B. INSURANCE. During the License Term, you shall comply with the
insurance requirements of any applicable law, lease or mortgage covering the
Hotel and our specifications regarding amounts and types of insurance. Prior
to the Opening Date, and thereafter on an annual basis and/or each time you
change the terms of your insurance policy or carrier, you shall provide us
with certificates of insurance which: (i) evidence your liability insurance,
its amounts and the amount of your deductible; (ii) name Best Franchising,
Inc. and U.S. Franchise Systems, Inc. as additional insureds; (iii) state
that your policy may not be canceled, amended or permitted to lapse or expire
without thirty (30) days prior written notice to us. At a minimum, such
certificates must be provided to us prior to construction or renovation of
the Hotel and prior to the authorized Opening Date of the Hotel. All
insurance policies shall be written on a fully insured basis. Deductibles and
self insurance retentions are subject to our prior approval. At the minimum,
you agree to maintain or cause to be maintained (as applicable) the following
insurance underwritten by an insurer we approve:

(1) employer's liability and workers' compensation
insurance as prescribed by applicable law;

<PAGE>

certificate of insurance evidencing Dram Shop/Liquor
liability insurance coverage.

8. TRANSFER.

A. TRANSFER BY US. We have the right to transfer or assign our rights
or obligations under this Agreement to any person or entity and our interests
will bind and inure to the benefit of any transferee, successor or assignee.

B. TRANSFER BY YOU. You agree that the rights and duties created by
this Agreement are personal to you and that we have granted this License in
reliance on the business skill, financial capacity and character of you and your
partners, shareholders or members. You may mortgage the Hotel to any financial
institution without our consent if you remain the mortgagor of the Hotel. Except
as provided in Paragraph 8B(1), neither you, any successor to your interest, nor
any individual, partnership, corporation, or other legal entity which directly
or indirectly owns any interest in this License or in you shall sell, assign,
transfer, convey or otherwise encumber any direct or indirect interest in this
License, the Hotel or the assets of the Hotel without our prior written consent.

We may require any or all of the following as conditions
of our consent to a transfer:

(a) your compliance with all terms of this
Agreement;

(b) the transferee entity or individual, and all
shareholders, partners or members of the
transferee (collectively, the "Transferee"),
shall meet our then-current qualifications
for new licensees;

(c) the Transferee shall execute our
then-standard forms of license agreement and
other applicable agreements for new Hotel
System licensees (which will include
then-current fees and Contributions),
provided, however, Transferee's fees
(including but not limited

<PAGE>

to all fees under Paragraphs 3D(1)(a) and
3D(1)(b)), shall not be less than the fees
you are obligated to pay at the time of the
transfer under this Agreement;

(d) any new general manager retained by the
Transferee completes our initial training
program;

(e) the Hotel shall be upgraded within the time
period we set to conform to the then-current
standards and specifications for hotels
operating under the Hotel System;

(g) you execute a general release, in a form
satisfactory to us, of any and all claims by
you against us and our officers, directors,
shareholders, and employees;

(h) the Transferee executes a written
assignment, in a form satisfactory to us,
assuming and agreeing to discharge all of
your obligations under this Agreement; and

(i) you execute all documents we request
evidencing your agreement to remain liable
for all obligations to us and our parent,
subsidiaries and affiliates prior to the
transfer.

(3) "Control" or "Controlling" shall mean the direct or
indirect possession of the power to direct or cause
the direction of the management and policies of any
person or legal entity.

<PAGE>

(90) days from the date of our notice to the seller. If we elect not to purchase
the seller's interest, any material change thereafter to the terms of the offer
shall constitute a new offer subject to our same rights of first refusal as in
the case of the third party purchaser's initial offer. Our failure to exercise
this option is not a waiver by us of any other provision of this Agreement. If
the consideration, terms, and/or conditions offered by the third party purchaser
are such that we may not reasonably be required to furnish the same
consideration, terms, and/or conditions, then we may purchase the interest for
the reasonable cash equivalent. If the parties cannot agree within thirty (30)
days on the reasonable cash equivalent of the consideration, terms, and/or
conditions offered by the third party purchaser, an independent appraiser whose
determination shall be binding will be designated by us at our expense to
determine the reasonable equivalent cash consideration.

9. CONDEMNATION AND CASUALTY.

C. EXTENSIONS OF TERM. The License Term will be extended for the period
the Hotel is not operating as a result of fire or other casualty. You are not
required to make any payments pursuant

<PAGE>

to Paragraph 3D while the Hotel is closed by reason of condemnation or casualty
unless you receive insurance proceeds.

10. TERMINATION.

B. DEFAULTS.

(1) DEFAULT WITH OPPORTUNITY TO CURE.

<PAGE>

(f) If you default on any terms of the Software
License Agreement referred to in Paragraph
3A.

(2) DEFAULT WITHOUT OPPORTUNITY TO CURE (IMMEDIATE
TERMINATION BY US). This Agreement shall terminate
immediately without notice to you if:

(c) you, or any Guarantor, take any corporate or
other action to authorize any of the actions
set forth above in Paragraphs 10B(2)(a) or
10B(2)(b);

<PAGE>

custodian or other official for it or for
any portion of its property, and such case,
proceeding or other action: (i) results in
an order for relief against it which is not
fully stayed within seven (7) business days
after the entry thereof; or (ii) remains
undismissed for forty-five (45) days;

(e) an attachment remains on all or any part of
the Hotel or your or any Guarantor's assets
for thirty (30) days;

(h) you contest in any court or proceeding
either all or any portion of our ownership
of the Hotel System or the validity of any
of the Proprietary Marks;

(i) you transfer your rights under this
Agreement in violation of Paragraph 8;

(j) you fail to identify the Hotel to the public
as a Best Hotel;

(k) any action is taken to dissolve or liquidate
you or any Guarantor, except due to death;

(m) you knowingly maintain false books and
records of account or knowingly submit false
or misleading reports or information to us,

<PAGE>

including any information you provide or
fail to provide to us on your franchise
application or otherwise;

(n) you disclose the contents of any
Confidential Materials to any unauthorized
person or fail to exercise reasonable care
to prevent such disclosure; or

C. DE-IDENTIFICATION OF HOTEL UPON TERMINATION OR EXPIRATION OF THIS
AGREEMENT.

<PAGE>

we specify stating that the Hotel is no longer
associated with the Hotel System. You acknowledge
that the de-identification process intends to
immediately alert the public that the Hotel is not
affiliated with the Hotel System.

D. PAYMENT OF LIQUIDATED DAMAGES. If this Agreement terminates after
the first twenty-four (24) months of Hotel operations and prior to its
expiration for any reason other than as set forth in Paragraphs 9A or 9B, you
agree to pay us liquidated damages as set forth below. Your payment of
liquidated damages to us shall not be considered a penalty for your breaching
this Agreement, but rather a reasonable estimate of our damages and lost future
fees we would have received from you under the Agreement. You acknowledge that
your obligation to pay us liquidated damages is in addition to, not in lieu of,
your obligations to pay any amounts then due to us and comply with the
de-identification provisions of Paragraph 10C. You agree to pay us liquidated
damages in a lump sum within thirty (30) days following the date of termination,
based on the average occupancy rate at the Hotel for the twelve (12) months
preceding the termination ("Occupancy Rate") as follows:

(1) if the Occupancy Rate was below fifty percent (50%),
you shall pay no liquidated damages;

<PAGE>

Paragraph 10D(2), in which case you shall pay no
liquidated damages;

(3) if the Occupancy Rate was sixty percent (60%) to
sixty-nine and nine-tenths percent (69.9%), you agree
to pay an amount equal to twenty-four (24) months of
fees under Paragraph 3D(1)(a); and (4) if the
Occupancy Rate was seventy percent (70%) or greater,
you agree to pay an amount equal to thirty-six (36)
months of fees under Paragraph 3D(1)(a).

11. RENEWAL.

(1) you pay a non-refundable fee equal to one-half of the
then-current franchise application fee;

(2) you received passing Quality Assurance Scores (as defined in
the Manual) during the preceding three (3) year period;

(3) you agree to upgrade the Hotel to meet our then-current
criteria for the Hotel System; and

(4) you have a favorable operating and payment history.

Notwithstanding the foregoing, if an independent third party chosen by
us determines that the location of the Hotel is inappropriate or obsolete for
the brand we shall not be required to renew your license. We will accept or
reject your written renewal request within thirty (30) days of its receipt by
us. You agree to execute our then-current form of license agreement to
effectuate any renewal.

<PAGE>

If we accept your application, you will execute our then-current form of license
agreement.

12. RELATIONSHIP OF PARTIES.

C. USE OF THE BEST NAME. You shall not use the word "Best" or any
similar words in your entity or trade name, internet domain name, or in
connection with any web site, nor authorize or permit such use by anyone else.
You shall not use the word "Best" or any other name or mark associated with the
Hotel System to incur any obligation or indebtedness.

13. MISCELLANEOUS.

B. BINDING EFFECT. This Agreement is valid when executed and accepted
by us at our office in Atlanta, Georgia. It is made and entered into in the
State of Georgia and shall be governed and construed under and in accordance
with the laws of the State of Georgia without regard to its conflict of law
principles. You acknowledge that you have sought, voluntarily accepted, and
become associated with us at our headquarters in Atlanta, Georgia. The choice of
law designation permits but does not require that all lawsuits or proceedings
concerning this Agreement be filed in the State of Georgia.

<PAGE>

Notices to us: Best Franchising, Inc. Notices to you:
ENTITYNAMECAPS
13 Corporate Square, Suite 250
PCADDRESS1
Atlanta, Georgia 30329 PCADDRESS2
Attention: Doug Shaw Attention:
PCNAME
Vice President
Franchise Administration

We reserve the right to notify both your lender and any or all of your members,
partners or shareholders in the event we issue any notice under this Agreement.

G. DESCRIPTIVE HEADINGS. The headings in this Agreement are for
convenience only and shall not control or affect the meaning or construction of
any provision.

I. GUEST ROOM RATES. You shall establish room rates for the Hotel which
must be submitted to us before the deadline for the next National Directory.
With the exception of special event periods, you agree not to charge any rate
exceeding the rate published in the current edition of the National Directory.

14. SPECIAL STIPULATIONS

A. CONDITIONAL OPENING. Prior to the authorized opening of the Hotel as
a BRAND, you must submit satisfactory evidence of

<PAGE>

termination of the current franchise agreement in accordance with applicable
legal requirements.

[SIGNATURES TO FOLLOW ON NEXT PAGE]

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first stated above.

LICENSEE:

ENTITYNAMECAPS

By:
-----------------------------------------
SIGNEENAME
SIGNEETITLE

Attest/Witness:
-----------------------------
(Any other corporate officer or notary
public with seal)

LICENSOR:

BEST FRANCHISING, INC.

By:
-----------------------------------------
Doug Shaw
Vice President, Franchise Administration

Attest:
-------------------------------------
25

<PAGE>

GUARANTY

As an inducement to Best Franchising, Inc. ("we," "our" or "us") to
execute that certain license agreement (including any future amendments thereto)
with ______________ ("Licensee") dated as of _______________, a copy of which is
attached hereto, (collectively, the "License Agreement"), the undersigned
(individually, a "Guarantor" and collectively, the "Guarantors"), jointly and
severally, hereby unconditionally warrant to us and our parent, successors and
assigns that all representations of Licensee contained in both the License
Agreement and the application submitted in connection therewith are true and
correct. The Guarantors also jointly and severally guarantee the timely payment
and performance of all of Licensee's obligations under the License Agreement.

Our failure to enforce all or any portion of our rights under this
Guaranty shall not constitute a waiver of our ability to do so at any point in
the future.

Guarantor hereby specifically waives any rights that may be conferred
by Official Code of Georgia Annotated Sections 10-7-23 and 10-7-24 or any
similar provision of the applicable law of any other state.

IN WITNESS WHEREOF, each of the undersigned has signed this Guaranty as
of ____________, the date of the License Agreement.

Witnesses: Guarantors:

-------------------------------------
GUARANTOR1, Legal Signature

Notarized (with seal):

-------------------------------------
GUARANTOR2, Legal Signature

<PAGE>

ATTACHMENT A
THE HOTEL

FACILITIES (PARAGRAPH 1):

SITE --- AREA AND GENERAL DESCRIPTION: A BRAND hotel located at
HOTELADDRESS1
HOTELADDRESS2

NUMBER OF APPROVED GUEST ROOMS: ROOMS

NUMBER OF SUITES INCLUDED: None

OWNERSHIP OF LICENSEE (PARAGRAPH 8):
ENTITYNAMECAPS 100%

<PAGE>

ATTACHMENT B
TERRITORY
PROPERTYNAME/#IDNUMBER

The Territory is defined as that area bordered by:

<PAGE>

ATTACHMENT C
THE WORK

You acknowledge that every detail of the Hotel System is important to
us and other licensees operating under the Hotel System to develop and maintain
the standards and public image of the Hotel System. You agree to strictly comply
with the details of the Hotel System, as set forth in the Manual or otherwise in
writing. The following constitutes the development schedule for the Hotel.

A. Conversion of an Existing Facility

1) You agree to renovate the Hotel in strict accordance
and within the time frames set forth on the attached
property improvement plan ("PIP"). If requested by
us, you agree to submit renovation plans for the
Hotel for our approval. If we require you to submit
renovation plans, renovations shall not begin until
we approve the renovation plans in writing. Once we
approve the renovation plans, you agree not to make
any subsequent changes without our prior written
consent. Our approval of your renovation plans is
exclusively for the purpose of ensuring compliance
with our then-current standards. Your failure to
renovate the Hotel in strict accordance with the PIP
and within the specified time frames shall constitute
a material breach of this Agreement and may lead to
us issuing a default notice and subsequently
terminating this Agreement. Commencement of
renovation shall mean the beginning of any site work
at the Hotel.

2) The Hotel shall be ready to open for business not
later than six (6) months from the date hereof,
unless otherwise provided in the PIP ("Completion
Date"). Within ten (10) days of the Completion Date
you shall ask us to conduct a final inspection, which
we shall promptly conduct. You shall not open for
business prior to our written authorization to do so,
and you agree to open within ten (10) days of our
authorization. We will not authorize you to open the
Hotel unless and until you are in full compliance
with all terms of this Agreement. Prior to the
authorized Opening Date of the Hotel, you must submit
to us written certification that the Hotel is in
compliance with the approved plans and specifications
prepared by the architect and that the Hotel was
constructed in compliance with Hotel standards, and
is in compliance with all applicable local
jurisdictional requirements.

B. New Development

1) You shall submit preliminary plans (the "Plans"),
including site layout and outline specifications
within three (3) months from the date of this
Agreement.

2) You shall submit to us complete working drawings and
specifications for the Hotel, including its proposed

<PAGE>

equipment, furnishings, facilities and signs, with
such detail and containing such information as we
require within five (5) months from the date of this
Agreement. The Plans shall conform to our
then-prevailing Hotel System standards. Construction
shall not begin until we have approved the Plans in
writing. Following our approval of your Plans, you
shall make no changes to the Plans without our prior
written consent, which consent will not be
unreasonably withheld. If during the course of
construction changes in the Plans are required, you
shall notify us immediately. Your failure to
construct the Hotel in strict accordance with the
Plans we approve in writing shall constitute a
material breach and may lead to our issuing a default
notice and subsequently terminating this Agreement.
Our approval of the Plans is intended exclusively to
ensure compliance with our then-current standards.

3) Construction shall commence within seven (7) months
from the date of this Agreement. You shall notify us
within (5) days of commencement of construction,
which shall mean commencement of any site work at the
Hotel. Construction shall continue uninterrupted
(unless interrupted by force majeure) until
completion of the Hotel. The term "force majeure"
shall mean an act of God, war, civil disturbance,
government action, fire, flood, accident, hurricane,
earthquake or other calamity, strike or other labor
dispute.

4) The Hotel shall be ready to open for business within
twelve (12) months from the date hereof ("Completion
Date"). Within ten (10) days of the Completion Date
you shall ask us to conduct a final inspection, which
we shall promptly conduct. You shall not open for
business prior to our written authorization to do so,
and you agree to open within ten (10) days of our
authorization. We will not authorize you to open the
Hotel unless and until you are in full compliance
with all terms of this Agreement. Prior to the
authorized Opening Date of the Hotel, you must submit
to us written certification that the Hotel is in
compliance with the approved plans and specifications
prepared by the architect and that the Hotel was
constructed in compliance with Hotel standards, and
is in compliance with all applicable local
jurisdictional requirements.

<PAGE>

GUARANTY

THIS GUARANTY (the "Guaranty") is executed as of ____________________,
20__ by HAWTHORN SUITES FRANCHISING, INC. (the "Guarantor") in favor of
_____________________________________ ("Licensee").

WHEREAS, Best Franchising, Inc, a Georgia corporation ("Company"), an
affiliate of Guarantor, is the franchisor under that certain Best Franchising,
Inc. License Agreement, dated as of _______________, 20___, between Company and
Licensee (the "License Agreement"); and

WHEREAS, in order to provide assurance to Licensee that the Company
will fulfill its obligations to Licensee under the License Agreement, Guarantor
is willing to execute this Guaranty.

NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by guarantor, the Guarantor agrees
as follows:

1. GUARANTY. Guarantor hereby guarantees to Licensee the full and
prompt performance of Company's obligations to Licensee arising under the
License Agreement. Guarantor agrees that if Company does not perform the
obligations required to be performed thereunder, then upon written notice from
Licensee, Guarantor will perform or cause to be performed such unperformed
obligations as required by the License Agreement.

Page 1 of 2

<PAGE>

notice, election or demand shall be the date of delivery. For the purposes of
this Guaranty:

(a) The address of Licensee is:

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

(b) The address of Guarantor is:

Hawthorn Suites Franchising, Inc.
13 Corporate Square
Suite 250
Atlanta, Georgia 30329

6. SUCCESSORS AND ASSIGNS. The provisions of this Guaranty shall bind
Guarantor and its successors and assigns and shall benefit Licensee and its
successors and assigns.

IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the date
first written above.

HAWTHORN SUITES FRANCHISING, INC.

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

Page 2 of 2
<PAGE>

AMENDMENT TO BEST FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF CALIFORNIA

In recognition of the requirements of the California Franchise
Investment Law Sections 31000 through 31516, and the California Franchise
Relations Act, California Business and Professions Code Sections 20000 through
20043, the License Agreement, for Best Franchising , Inc. (the "Agreement"), in
connection with the offer and sale of franchises for use in the State of
California, shall be amended to include the following:

1. Paragraph 8B(2)(g) of the Agreement, under the heading
"Transfer," shall be amended by inserting a comma at the end thereof and adding
thereafter "excluding only such claims you may have under the California
Franchise Investment Law and the California Franchise Relations Act."

2. If any of the provisions of the Agreement concerning
termination is inconsistent with either the California Franchise Relations Act
or with the Federal Bankruptcy Code (concerning termination of the Agreement
upon certain bankruptcy-related events), then said laws shall apply.

3. The Agreement requires that it be governed by Georgia law.
This requirement may be unenforceable under California law.

4. Each provision of this Amendment shall be effective only to
the extent, with respect to such provision, that the jurisdictional requirements
of the California law applicable to the provision are met independently without
reference to this Amendment.

[SIGNATURES ON FOLLOWING PAGE]

Page 1 of 2
<PAGE>

IN WITNESS WHEREOF, the parties hereto have duly executed,
sealed and delivered this California Amendment to the License Agreement on the
same date as the License Agreement was executed.

BEST FRANCHISING, INC.
-----------------------------------------
Licensor

By:
--------------------------------------
Title:
-----------------------------------

-----------------------------------------
Licensee

By:
--------------------------------------
Title:
-----------------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO BEST FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF HAWAII

In recognition of the requirements of the Hawaii Franchise
Investment Law, Hawaii Rev. Stat. Sections 482E-1, ET seq., the License
Agreement for Best Franchising, Inc., in connection with the offer and sale of
licenses for use in the State of Hawaii, shall be amended to include the
following:

1. Paragraph 8B(2)(g) of the Agreement, under the heading
"Transfer," shall be amended by inserting a comma after the word "employees" and
adding thereafter "excluding only such claims as you may have under the Hawaii
Franchise Investment Law."

2. Paragraph 13 of the Agreement, under the heading
"Miscellaneous," shall be amended by the addition of the following sentence,
which shall be considered an integral part of this Agreement:

The general release language contained in
the Agreement shall not relieve Licensor or any other person,
directly or indirectly, from liability imposed by the Hawaii
Franchise Investment Law.

3. The Hawaii Franchise Investment Law provides rights to
Licensee concerning nonrenewal, termination and transfer of the Agreement. If
any of the provisions of the License Agreement concerning termination are
inconsistent with the Hawaii Franchise Investment Law, then said law shall
apply.

4. Each provision of this Amendment shall be effective only to
the extent, with respect to such provision, that the jurisdictional requirements
of the Hawaii Franchise Investment Law are met independently without reference
to this Amendment.

IN WITNESS WHEREOF, the parties hereto have duly executed,
sealed, and delivered this Hawaii amendment to the License Agreement on the same
date as the License Agreement was executed.

BEST FRANCHISING, INC.
-----------------------------------------
Licensor

By:
--------------------------------------
Title:
------------------------------------

-----------------------------------------
Licensee

By:
--------------------------------------
Title:
------------------------------------

By:
--------------------------------------
Title:
-----------------------------------

Page 1 of 59

<PAGE>

AMENDMENT TO BEST FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF ILLINOIS

In recognition of the requirements of the Illinois Franchise
Disclosure Act of 1987, Ill. Comp. Stat. Sections 705/1 to 705/44, the parties
to the attached Best Franchising, Inc. License Agreement (the "Agreement") agree
as follows:

1. Paragraph 8B(2)(g) of the Agreement, under the heading
"Transfer," shall be amended by inserting a comma at the end thereof and adding
thereafter "except with respect to claims arising under the Illinois Franchise
Disclosure Act of 1987."

2. Paragraph 10 of the Agreement, under the heading
"Termination," shall be supplemented by the addition of the following new
Paragraph 10E, which shall be considered an integral part of the Agreement:

E. If any of the provisions of this Paragraph 10 concerning
termination are inconsistent with Section 19 of the Illinois
Franchise Disclosure Act of 1987, then said Illinois law shall
apply.

3 Paragraph 13B of the Agreement, under the heading
"Miscellaneous," shall be amended by inserting a comma at the end of the second
sentence and adding thereafter "except with respect to claims arising under the
Illinois Franchise Disclosure Act of 1987."

4. This Agreement requires that it be governed by Georgia law.
To the extent that such law conflicts with the Illinois Franchise Disclosure

Act, the Act will control.

5. Each provision of this Amendment shall be effective only to
the extent, with respect to such provision, that the jurisdictional requirements
of the Illinois Franchise Disclosure Act of 1987 are met independently without
reference to this Amendment.

IN WITNESS WHEREOF, the parties hereto have duly executed,
sealed, and delivered this Illinois amendment to the License Agreement on the
same date as the License Agreement was executed.

BEST FRANCHISING, INC.
-----------------------------------------
Licensor

By:
--------------------------------------
Title:
------------------------------------

-----------------------------------------
Licensee

By:
--------------------------------------
Title:
------------------------------------

Page 1 of 59

<PAGE>

AMENDMENT TO BEST FRANCHISING, INC.
LICENSE AGREEMENT REQUIRED
BY THE STATE OF INDIANA

In recognition of the requirements of the Indiana Franchise
Disclosure Law, Indiana Code Sections 23-2-2.5-1 to 23-2-2.5-51, and the Indiana
Deceptive Franchise Practices Act, Indiana Code Sections 23-2-2.7-1 to
23-2-2.7-7 (the "Act"), the parties to the attached Best Franchising, Inc.
Agreement (THE "Agreement") agree as follows:

1. Paragraph 7 of the Agreement, under the heading "Indemnity
and Insurance," shall be amended by the addition of the following sentence,
which shall be considered an integral part of this Agreement:

The general release language contained in this License shall
not relieve the Licensor or any other person, directly or
indirectly, from liability imposed by the Indiana Franchise
Disclosure Law and the Indiana Deceptive Practices Act.

2. Paragraph 8B(2)(g) of the Agreement, under the heading
"Transfer," shall be amended by inserting a comma after the word "employees" and
adding thereafter "excluding only such claims as you may have under the Indiana
Franchise Disclosure Law and the Indiana Deceptive Practices Act."

3. Paragraph 13B of the Agreement, under the heading
"Miscellaneous," shall be amended by inserting a comma at the end of the second
sentence and adding thereafter "except with respect to any cause of action which
arises under the Indiana Franchise Disclosure Law or the Indiana Deceptive
Franchise Practices Act."

4. Paragraph 13 of the Agreement, under the heading
"Miscellaneous," shall be amended by the addition of the following sentence:

Notwithstanding anything to the contrary in this provision,
Licensee does not waive any right under the Indiana Franchise
Disclosure Law or the Indiana Deceptive Practices Act with
regard to any prior representations made in the UFOC furnished
to Licensee.

5. With respect to the Agreement, any reservation of right to
any specified remedy or limitation of the remedies available to either party is
prohibited pursuant to the Indiana Franchise Disclosure Law, Indiana Code
Section 23-2-2.7-1(10).

6. Indiana law provides rights to Licensee concerning
nonrenewal and termination of the Agreement. To the extent the Agreement
contains a provision that is inconsistent with the Indiana law, Indiana law will
control.

7. Any indemnification under the Agreement excludes
indemnification for liability caused by Licensee's proper reliance on and use of
the System or materials provided by Licensor to Licensee which Licensee does not
alter or claims based upon Licensor's gross negligence or willful misconduct.

8. Nothing in the Agreement shall abrogate or reduce any
rights you have under Indiana law.

Page 1 of 2
<PAGE>

9. Each provision of this Amendment shall be effective only to
the extent, with respect to such provision, that the jurisdictional requirements
of the Indiana Franchise Disclosure Law, Indiana Code Sections 23-2-2.5-1 to
23-2-2.5-51, and the Indiana Deceptive Franchise Practices Act, Indiana Code
Sections 23-2-2.7-1 to 23-2-2.7-7, are met independently without reference to
this Amendment.

IN WITNESS WHEREOF, the parties hereto have duly executed,
sealed, and delivered this Indiana amendment to the License Agreement on the
same date as the License Agreement was executed.

BEST FRANCHISING, INC.
-----------------------------------------
Licensor

By:
--------------------------------------
Title:
------------------------------------

-----------------------------------------
Licensee

By:
--------------------------------------
Title:
------------------------------------
By:
--------------------------------------
Title:
------------------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO BEST FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF MARYLAND

In recognition of the requirements of the Maryland Franchise
Registration and Disclosure Law, Md. Code Bus. Reg. Sections 14-201 through
14-233, the License Agreement for Best Franchising, Inc., in connection with the
offer and sale of licenses for use in the State of Maryland, shall be amended to
include the following:

2. Paragraph 13B of the Agreement, under the heading
"Miscellaneous," shall be amended by inserting a comma at the end of the second
sentence and adding thereafter "except for claims arising under the Maryland
Franchise Registration and Disclosure Law."

3. Paragraph 13 of the Agreement, under the heading
"Miscellaneous," shall be amended by the addition of the following paragraphs,
which shall be considered an integral part of this Agreement:

J. The general release language contained in this Agreement
shall not relieve Licensor or any other person, directly or
indirectly, from liability imposed by the Maryland Franchise
Registration and Disclosure Law (Md. Code Bus. Reg. Sections
14-201 through 14-233).

K. The foregoing acknowledgments are not intended to, nor
shall they, act as a release, estoppel or waiver of any
liability incurred under the Maryland Franchise Registration
and Disclosure Law.

4. Each provision of this Amendment shall be effective only to
the extent, with respect to such provision, that the jurisdictional requirements
of the Maryland Franchise Registration and Disclosure Law (Md. Code. Bus. Reg.
Sections 14-201 through 14-233) are met independently without reference to this
Amendment.

[SIGNATURES ON FOLLOWING PAGE]

Page 1 of 2
<PAGE>

IN WITNESS WHEREOF, the parties hereto have duly executed,
sealed, and delivered this Maryland amendment to the License Agreement on the
same date as the License Agreement was executed.

BEST FRANCHISING, INC.
-----------------------------------------
Licensor

By:
--------------------------------------
Title:
------------------------------------

-----------------------------------------
Licensee

By:
--------------------------------------
Title:
------------------------------------
By:
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Title:
------------------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO BEST FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF MINNESOTA

In recognition of the requirements of the Minnesota Franchises
Law, Minn. Stat. Sections 80C.01 through 80C.22, and of the Rules and
Regulations promulgated thereunder by the Minnesota Commissioner of Commerce,
Minn. Rules Sections 2860.0100 through 2860.9930, the parties to the attached
Best Franchising, Inc. License Agreement (the "Agreement") agree as follows:

1. Paragraph 5 of the Agreement, under the heading
"Proprietary Rights," shall be amended by the addition of the following
language:

D. The Minnesota Department of Commerce requires that Licensor
indemnify Licensee against liability to third parties
resulting from claims by third parties that Licensee's use of
Licensor's trademark infringes trademark rights of the third
party. Licensor does not indemnify against the consequences of
Licensee's use of Licensor's trademark except in accordance
with the requirements of this Agreement, and, as a condition
to indemnification, Licensee must provide notice to Licensor
of any such claim within 10 days and tender the defense of the
claim to Licensor. If Licensor accepts the tender of defense,
Licensor has the right to manage the defense of the claim
including the right to compromise, settle or otherwise resolve
the claim, and to determine whether to appeal a final
determination of the claim.

2. Paragraph 7 of the Agreement, under the heading "Indemnity
and Insurance," shall be amended by the addition of the following sentence,
which shall be considered an integral part of this Agreement:

The general release language contained in the License shall
not relieve the Licensor or any other person, directly or
indirectly, from liability imposed by the Minnesota Franchise
Law.

3. Paragraph 8B(2)(g) of the Agreement, under the heading
"Transfer," shall be amended by inserting a comma after the word "employees" and
adding thereafter "excluding only such claims as you may have under the
Minnesota Franchises Law and the Rules and Regulations promulgated thereunder by
the Minnesota Commissioner of Commerce."

4. Paragraph 8 of the Agreement, under the heading "Transfer,"
shall be amended by the addition of the following paragraph:

H. Minnesota law provides licensees with certain transfer
rights. In sum, Minn. Stat. Section 80C.14 (subd. 5) currently
requires, except in certain specified cases, that consent to
the transfer of the license not be unreasonably withheld.

5. Paragraph 10 of the Agreement, under the heading
"Termination," shall be amended by the addition of the following paragraph:

E. Minnesota law provides licensees with certain termination
rights. In sum, Minn. Stat. Section 80C.14 (subds. 3 and 5)
currently require, except in certain specified cases, that a
licensee be

Page 1 of 2

<PAGE>

given 90 days notice of termination (with 60 days to cure) and
180 days notice of non-renewal of this Agreement, and that
consent to the transfer of the license not be unreasonably
withheld.

6. To the extent that the provision in the fifth sentence of
Paragraph 10D, with respect to the lump sum payment by Licensee, is a liquidated
damages provision in violation of Minnesota Rule 2860.4400J, such provision
shall be deleted from this Agreement.

7. Paragraph 13 of the Agreement, under the heading
"Miscellaneous," shall be amended by the addition of the following sentence,
which shall be considered an integral part of this Agreement:

The general release language contained in the Agreement shall
not relieve Licensor or any other person, directly or
indirectly, from liability imposed by the Minnesota Franchise
Law.

8. Paragraph 13 of the Agreement, under the heading
"Miscellaneous," shall be amended by the addition of the following sentence,
which shall be considered an integral part of the Agreement:

Minn. Stat. Sec 80C.21 and Minn. Rule 2860.4400J prohibit us
from requiring litigation to be conducted outside Minnesota.
Nothing in the UFOC or the Agreement can abrogate or reduce
any of your rights provided for in Minnesota Statutes, Chapter
80C, or your rights to any procedure, forum or remedies
provided for by the laws of the jurisdiction.

9. Each provision of this Agreement shall be effective only to
the extent, with respect to such provision, that the jurisdictional requirements
of the Minnesota Franchises Law or the Rules and Regulations promulgated
thereunder by the Minnesota Commissioner of Commerce are met independently
without reference to this Addendum to the Agreement.

IN WITNESS WHEREOF, the parties hereto have duly executed,
sealed, and delivered this Minnesota Amendment to the License Agreement on the
same day as the License Agreement was executed.

BEST FRANCHISING, INC.
-----------------------------------------
Licensor

By:
--------------------------------------
Title:
-----------------------------------

-----------------------------------------
Licensee

By:
--------------------------------------
Title:
-----------------------------------
By:
--------------------------------------
Title:
-----------------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO BEST FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF NEW YORK

In recognition of the requirements of the General Business Law
of the State of New York, Article 33, Sections 680-695, the License Agreement
for Best Franchising, Inc., in connection with the offer and sale of licenses
for use in the State of New York, shall be amended to include the following:

1. Notwithstanding any provision of the License Agreement, all
rights enjoyed by Licensee and any causes of action arising in its favor from
the provisions of Article 33 of the General Business Law of the State of New
York and the regulations issued thereunder shall remain in force, it being the
intent of this proviso that the non-waiver provisions of the General Business
Law of the State of New York Sections 687.4 and 687.5 be satisfied.

2. Paragraph 7A(1) of the License Agreement is hereby modified
by adding the following sentence after the initial sentence thereof: "However,
you shall not be required to indemnify for any claims arising out of a breach of
this Agreement by, or other civil wrong of, the Licensor."

3. No new or different requirements imposed on you as a result
of any changes made by Licensor to its Manual or otherwise shall place an
unreasonable economic burden on you.

4. Notwithstanding any provision of the License Agreement to
the contrary, Licensor will not transfer and assign its rights and obligations
under the License Agreement unless the transferee will be able to perform the
Licensor's obligations under the License Agreement, in Licensor's good faith
judgment, so long as it remains subject to Article 33 of the General Business
Law of the State of New York.

5. Notwithstanding Paragraph 13B of the License Agreement, the
choice of law provision should not be construed as a waiver of any right
conferred upon you by the provisions of Article 33 of the General Business Law
of the State of New York.

6. Each provision of this Amendment shall be effective only to
the extent, with respect to such provision, that the jurisdictional requirements
of the General Business Law of the State of New York are met independently
without reference to this Amendment.

[SIGNATURES ON FOLLOWING PAGE]

Page 1 of 2

<PAGE>

IN WITNESS WHEREOF, the parties hereto have duly executed,
sealed, and delivered this New York amendment to the License Agreement on the
same date as the License Agreement was executed.

BEST FRANCHISING, INC.
-----------------------------------------
Licensor

By:
--------------------------------------
Title:
------------------------------------

-----------------------------------------
Licensee

By:
--------------------------------------
Title:
------------------------------------
By:
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Title:
------------------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO BEST FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF NORTH DAKOTA

In recognition of the requirements of the North Dakota
Franchise Investment Law, N.D. Cent. Code Sections 51-19-01 through 51-19-17,
and the policies of the office of the State of North Dakota Securities
Commission, the parties to the attached Best Franchising, Inc. License Agreement
(the "Agreement") agree as follows:

1. Paragraph 7 of the Agreement, under the heading "Indemnity
and Insurance," shall be amended by the addition of the following sentence,
which shall be considered an integral part of the Agreement:

The general release language contained in this Agreement shall
not relieve Licensor or any other person, directly or
indirectly, from any liability imposed by the North Dakota
Franchise Investment Law.

2. Paragraph 8B(2)(g) of the Agreement, under the heading
"Transfer," shall be amended by inserting a comma after the word "employees" and
adding thereafter "excluding only such claims as Licensee may have under the
North Dakota Franchise Investment Law."

3. To the extent that Paragraph 10D, with respect to the lump
sum payment by Licensee, is a liquidated damages provision in violation of North
Dakota Franchise Investment Law, N.D. Cent.

Code Section 51-19-09(1)(a)(9), such provision shall be deleted from this
Agreement.

4. Paragraph 13B of the Agreement, under the heading
"Miscellaneous," shall be amended by inserting a comma at the end of the second
sentence and adding thereafter "except with respect to claims arising under the
North Dakota Franchise Investment Law."

5. Each provision of this Amendment shall be effective only to
the extent, with respect to such provision, that the jurisdictional requirements
of the North Dakota Franchise Investment Law, N.D. Cent. Code Sections 51-19-01
through 51-19-17, are met independently without reference to this Amendment.

[SIGNATURES ON FOLLOWING PAGE]

Page 1 of 2

<PAGE>

IN WITNESS WHEREOF, the parties hereto have duly executed,
sealed, and delivered this North Dakota amendment to the License Agreement on
the same day as the License Agreement was executed.

BEST FRANCHISING, INC.
-----------------------------------------
Licensor

By:
--------------------------------------
Title:
------------------------------------

-----------------------------------------
Licensee

By:
---------------------------------------
Title:
------------------------------------
By:
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Title:
------------------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO BEST FRANCHISING, INC.
LICENSE AGREEMENT REQUIRED
BY THE STATE OF RHODE ISLAND

In recognition of the requirements of the Rhode Island
Franchise Investment Act, Sections 19-28.1-1 through 19-28.1-34, the parties to
the attached Best Franchising, Inc. Agreement (the "Agreement") agree as
follows:

1. Paragraph 13 of the Agreement, under the heading
"Miscellaneous," shall be amended by the addition of the following new
paragraph:

J. Section 19-28.1-14 of the Rhode Island Franchise Investment
Act provides that "A provision in a franchise agreement
restricting jurisdiction or venue to a forum outside this
state or requiring the application of the laws of another
state is void with respect to a claim otherwise enforceable
under this Act."

2. This Agreement requires that it be governed by Georgia law.
To the extent that such law conflicts with Rhode Island Franchise Investment Act
it is void under Sec. 19-28.1-14.

3. Licensee is required in this Agreement under certain
circumstances to execute a release of claims that might violate the Act or a
rule or order under the Act. Such release shall exclude claims arising under the
Rhode Island Franchise Investment Act.

4. Each provision of this Amendment shall be effective only to
the extent, with respect to such provision, that the jurisdictional requirements
of Rhode Island Franchise Investment Act, Sections 19-28- 1.1 through
19-28.1-34, are met independently without reference to this Amendment.

IN WITNESS WHEREOF, the parties hereto have duly executed,
sealed, and delivered this Rhode Island amendment to the License Agreement on
the same date as the License Agreement was executed.

BEST FRANCHISING, INC.
-----------------------------------------
Licensor

By:
--------------------------------------
Title:
------------------------------------

-----------------------------------------
Licensee

By:
--------------------------------------
Title:
------------------------------------
By:
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Title:
------------------------------------

Page 1 of 1

<PAGE>

AMENDMENT TO BEST FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF SOUTH DAKOTA

In recognition of the requirements of the South Dakota
Franchises for Brand-Name Goods and Services Law, S.D. Codified Laws Sections
37-5A-1 to 37-5A-87, the parties to the attached Best Franchising, Inc. License
Agreement (the "Agreement") agree as follows:

1. To the extent the provision in the fifth sentence of
Paragraph 10D, with respect to the lump sum payment by Licensee, is a liquidated
damages provision in violation of South Dakota Codified Laws Section 53-9-5,
such provision shall be deleted from this Agreement.

2. Paragraph 13B of the Agreement, under the heading
"Miscellaneous," shall be amended by the addition of the following sentence:

Notwithstanding the above, this provision shall be void with
respect to any cause of action which is otherwise enforceable
in the State of South Dakota.

3. Paragraph 13 of the Agreement, under the heading
"Miscellaneous," shall be amended by the addition of the following language:

J. Notwithstanding anything to the contrary in this Agreement,
all issues relating to franchise registration, employment law,
covenants not to compete, and other matters of local concern
shall be governed by the laws of the State of South Dakota,
but as to contractual and all other matters, the Agreement and
all provisions of the Agreement will be and remain subject to
the application, construction, enforcement and interpretation
under the governing laws of Georgia.

K. Notwithstanding anything to the contrary herein, nothing in
this Agreement shall be deemed to constitute a waiver of
compliance with any provision of the South Dakota Franchises
for Brand-Name Goods and Services Act.

4. Regardless of the terms of the Agreement concerning
termination, if Licensee fails to meet performance and quality standards or
fails to make any payments under the Agreement, Licensee will be afforded thirty
(30) days' written notice with an opportunity to cure the default before
termination.

5. Pursuant to S.D.C.L. 37-5A-86, any acknowledgment,
provision, disclaimer or integration clause or a provision having a similar
effect in the Agreement does not negate or act to remove from judicial review
any statement, misrepresentation or action that would violate the South Dakota
Franchise Law (S.D.C.L. 37-5A), or any administrative regulations promulgated
thereunder.

6. Any provision that provides that the parties waive their
right to claim punitive, exemplary, incidental, indirect, special or
consequential damages may not be enforceable under South Dakota law.

7. Each provision of this Amendment shall be effective only to
the extent, with respect to such provision, that the jurisdictional requirements
of the South Dakota Franchises for Brand-Name Goods and Services Law are met
independently without reference to this Amendment.

Page 1 of 2

<PAGE>

IN WITNESS WHEREOF, the parties hereto have duly executed,
sealed, and delivered this South Dakota amendment to the License Agreement on
the same day as the License Agreement was executed.

BEST FRANCHISING, INC.
-----------------------------------------
Licensor

By:
---------------------------------------
Title:
------------------------------------

-----------------------------------------
Licensee

By:
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Title:
------------------------------------
By:
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Title:
------------------------------------

Page 2 of 2

<PAGE>

AMENDMENT TO BEST FRANCHISING, INC.
LICENSE AGREEMENT
REQUIRED BY THE STATE OF WASHINGTON

In recognition of the requirements of the Washington Franchise
Investment Protection Act, Wash. Rev. Code Sections 19.100.010 through
19.100.940, the License Agreement for Best Franchising, Inc. ("BFI"), in
connection with the offer and sale of licenses for use in the State of
Washington, shall be amended to include the following:

1. The State of Washington has a statute, RCW 19.100.180,
which may supersede the License Agreement in your relationship with BFI,
including the areas of termination and renewal of your license. There also may
be court decisions which may supersede the License Agreement in your
relationship with BFI, including the areas of termination and renewal of your
license.

2. In the event of a conflict of laws, the provisions of the
Washington Franchise Investment Protection Act, Chapter 19.100 RCW shall
prevail.

3. A release or waiver of rights executed by a licensee or a
transferor shall not include rights under the Washington Franchise Investment
Protection Act, except when executed pursuant to a negotiated settlement after
the Agreement is in effect and where the parties are represented by independent
counsel. Provisions such as those which unreasonably restrict or limit the
statute of limitations period for claims under the Act, or rights or remedies
under the Act such as a right to a jury trial, may not be enforceable.

4. Transfer fees are collectable to the extent that they
reflect Licensor's reasonable estimated or actual costs in effecting a transfer.

5. Each provision of this Amendment shall be effective only to
the extent, with respect to such provision, that the jurisdictional requirements
of the Washington Franchise Investment Protection Act, Wash. Rev. Code Sections
19.100.010 through 19.100.940, are met independently without reference to this
Amendment.

IN WITNESS WHEREOF, the parties hereto have duly executed,
sealed, and delivered this Washington amendment to the License Agreement on the
same date as the License Agreement was executed.

BEST FRANCHISING, INC.
-----------------------------------------
Licensor

By:
---------------------------------------
Title:
------------------------------------

-----------------------------------------
Licensee

By:
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Title:
------------------------------------
By:
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Title:
------------------------------------

Page 1 of 1

<PAGE>

EXHIBIT 21.1
LIST OF SUBSIDIARIES OF U.S. FRANCHISE SYSTEMS, INC.

SUBSIDIARY STATE OF INCORPORATION/ORGANIZATION

Microtel Inns and Suites Franchising, Inc. Georgia

Hawthorn Suites Franchising, Inc. Georgia

Microtel Inns Realty Corp. Georgia

Microtel International, Inc. Georgia

U.S. Funding Corp. Georgia

U.S. Franchise Capital, Inc. Georgia

USFS Equity, LLC Delaware

Tempe Inns Realty Corp. Georgia

Chandler Inns Realty Corp. Georgia

HSA Properties, LLC Delaware

Best Acquisition, Inc. Georgia

USFS Management, Inc. Georgia

Best Franchising, Inc. Georgia

Hawthorn International, Inc. Georgia

<PAGE>

EXHIBIT 23.1
CONSENT OF DELOITTE & TOUCHE, LLP

We consent to the incorporation by reference in Registration Statement Nos.
333-36629 and 333-50707 of U.S. Franchise Systems, Inc. on Form S-8 of our
report dated March 14, 2000, appearing in this Annual Report on Form 10-K of
U.S. Franchise Systems, Inc. for the year ended December 31, 1999.

/s/ DELOITTE & TOUCHE, LLP

Atlanta, Georgia
March 30, 2000

<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from U.S.
Franchise Systems, Inc. consolidated financial statements for the years ended
December 31, 1999, 1998 and 1997, respectively and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1999 JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<CASH> 6,339 15,966 15,890
<SECURITIES> 0 0 0
<RECEIVABLES> 3,177 2,182 268
<ALLOWANCES> 862 74 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 13,652 21,123 20,299
<PP&E> 2,141 3,396 5,595
<DEPRECIATION> 316 365 140
<TOTAL-ASSETS> 70,712 84,176 36,351
<CURRENT-LIABILITIES> 7,304 5,187 8,155
<BONDS> 0 0 19,412
0 0 0
0 0 0
<COMMON><F1> 491 491 420
<OTHER-SE> 56,347 69,218 3,778
<TOTAL-LIABILITY-AND-EQUITY> 70,712 84,176 36,351
<SALES> 19,696 10,584 1,867
<TOTAL-REVENUES> 19,696 10,584 1,867
<CGS> 0 0 0
<TOTAL-COSTS><F3> 33,382 13,468 10,814
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 1,905
<INCOME-PRETAX> (13,686) (2,884) (8,947)
<INCOME-TAX> 62 0 0
<INCOME-CONTINUING> 0 (2,884) (8,947)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (13,748) (2,884) (8,947)
<EPS-BASIC><F2> (.69) (0.16) (0.71)
<EPS-DILUTED><F2> (.69) (0.16) (0.71)

</TABLE>