[PHOTO]

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

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

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

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

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

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

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

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

CONTINUED UNIT GROWTH IN 2002

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

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

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

[LOGO] Comfort Inn

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

[LOGO] COMFORT SUITES

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

LETTER TO SHAREHOLDERS (continued)

[LOGO] QUALITY HOTEL

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

[LOGO] SLEEP INN

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

[LOGO] Econo Lodge

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

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

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

STAYING THE STRATEGIC COURSE

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

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

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

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

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

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

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

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

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

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

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

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

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

DRIVING FORWARD

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

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

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

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

[LOGO] Clarion

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

[LOGO] MainStay Suites

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

[LOGO] RODEWAY INN

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

A CHOICE YEAR IN REVIEW

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

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

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

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

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

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

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

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

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

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

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

FINANCIAL TABLE OF CONTENTS

Financial Highlights...................... F-1

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

Report of Independent Public Accountants.. F-11

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

Notes to Consolidated Financial Statements F-16

Financial Highlights

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

Seven Fiscal
Months Year
Ended Ended
Years Ended December 31, December 31, May 31,
----------------------------------- ------------ --------
2001 2000 1999 1998 1997 1997
-------- -------- -------- -------- ------------ --------
(In millions, except per share data)

Company Results
Total Assets.................................... $ 321.2 $ 484.1 $ 464.7 $ 398.2 $ 386.4 $ 573.1
Long-term Debt.................................. 281.3 297.2 307.4 279.2 282.8 372.0
Franchise Revenues (a).......................... 165.1 160.2 151.6 138.1 82.4 118.2
Total Revenues.................................. 341.4 352.8 324.2 295.4 183.1 274.4
Recurring Net Income (b)........................ 55.6 58.4 57.2 46.7 27.3 34.7
Net Income...................................... 14.3 42.4 57.2 55.3 27.3 34.7
Cash Flow from Operations....................... 101.7 53.9 65.0 40.5 29.1 45.5
Basic Earnings per Share (c).................... $ 0.32 $ 0.80 $ 1.04 $ 0.94 $ 0.46 $ 0.55
Diluted Earnings per Share (c).................. $ 0.32 $ 0.80 $ 1.03 $ 0.93 $ 0.45 $ 0.55
Recurring Diluted Earnings
per Share (b)(c).............................. $ 1.25 $ 1.10 $ 1.03 $ 0.78 $ 0.45 $ 0.55
System Results - Domestic Hotels - Unaudited
Revenues (estimated in millions)................ $ 3,375 $ 3,423 $ 3,256 $ 3,063 $ 1,862 $ 2,678
Franchise Hotels................................ 3,327 3,244 3,123 3,039 2,880 2,781
Franchise Hotels Under Development.............. 462 493 596 866 725 710
Franchise Rooms................................. 270,514 265,962 258,120 252,357 242,161 235,431
Revenue Per Available Room...................... $ 35.83 $ 36.72 $ 35.33 $ 34.35 $ 36.39 $ 32.52

- --------
(a) Reflects franchise revenues exclusive of marketing and reservation pass
through fees (see Note 1).
(b) Recurring income from operations and recurring net income exclude the
impact of restructuring charges, the asset impairment and equity loss on
Friendly Hotels PLC, (gain) loss on sale of investments, write-off of
deferred financing costs and the loss on Sunburst Hospitality Corporation
note.
(c) Note: December 31, 1998 earnings per share includes $0.12 related to the
early extinguishment of certain long-term debt obligations.

F-1

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

Management's Discussion and Analysis

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

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

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

Critical Accounting Policies

Revenue Recognition

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

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

F-2

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

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

Impairment Policy

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

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

Comparison of 2001 Operating Results and 2000 Operating Results

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

F-3

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

As
Revised
2001 2000
-------- --------
(In thousands)

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

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

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

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

F-4

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

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

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

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

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

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

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

F-5

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

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

Comparison of 2000 Operating Results and 1999 Operating Results

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

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

As Revised
------------------
2000 1999
-------- --------
(In thousands)

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

F-6

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

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

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

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

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

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

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

F-7

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

Liquidity and Capital Resources

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

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

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

Cash provided by (utilized in) investing activities for the years ended
December 31, 2001, 2000 and 1999, was $87.7 million, ($16.6 million) and ($36.0
million), respectively. During the years ended December 31, 2001, 2000 and
1999, capital expenditures totaled $13.5 million, $16.6 million, $30.6 million,
respectively. Capital expenditures include the installation of system-wide
property and yield management systems, upgrades to financial and reservation
systems, computer hardware and renovations to the Company's corporate
headquarters (including a franchisee learning and training center).

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

F-8

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

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

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

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

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

Impact of Recently Issued Accounting Standards

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

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

F-9

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

Forward-Looking Statements

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

F-10

Report of Independent Public Accountants

Choice Hotels International, Inc. and Subsidiaries

To Choice Hotels International, Inc. and subsidiaries:

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

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

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

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

/s/ Arthur Andersen LLP

Vienna, Virginia
March 20, 2002

F-11

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

As Revised (See Note 1)
Years Ended December 31,
----------------------------
2001 2000 1999
-------- -------- --------
(In thousands, except
per share amounts)

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

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

F-12

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, December 31,
2001 2000
------------ ------------
(In thousands, except
share amounts)

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

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

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

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

F-13

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

As Revised (See Note 1)
Years Ended December 31,
2001 2000 1999
--------- -------- --------
(In thousands)

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

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

F-14

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

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

Common Accumulated
Stock Common Other
Shares Stock Additional Comprehensive Deferred Treasury
Outstanding Amount Paid-in-capital Income (loss) Compensation Stock
----------- ------ --------------- ------------- ------------ ---------

Balance as of December 31, 1998........... 56,726,917 $ 568 $45,097 $ 2,112 $(1,665) $ (54,165)
Comprehensive income
Net income................................ -- -- -- -- -- --
Other comprehensive income.............
Foreign translation adjustments........ -- -- -- -- -- --
Unrealized loss on securities, net of
taxes, net of reclassification
adjustment (Note 15).................. -- -- -- -- -- --

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

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

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

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

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

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

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

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

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

Comprehensive Retained
Income Earnings Total
------------- -------- ---------

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

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

F-15

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Company Information and Significant Accounting Policies

Company Information.

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

Principles of Consolidation.

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

Revenue Recognition.

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

Presentation of Marketing and Reservation Fees and Expenses.

F-16

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

Advertising Costs.

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

Cash and Cash Equivalents.

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

Capitalization Policies.

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

Impairment Policy.

F-17

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Deferred Financing Costs.

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

Investments.

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

Financial Instruments.

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

Use of Estimates.

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

Reclassifications.

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

2. Property and Equipment

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

December 31,
------------------
2001 2000
-------- --------
(In thousands)

Land............................. $ 4,090 $ 2,593
Facilities in progress........... 735 4,075
Building and improvements........ 34,210 29,474
Furniture, fixtures and equipment 86,301 74,812
-------- --------
125,336 110,954
Less: Accumulated depreciation... (54,878) (38,008)
-------- --------
$ 70,458 $ 72,946
======== ========

F-18

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

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

3. Goodwill

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

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

4. Franchise Rights

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

5. Investment in Friendly Hotels

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

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

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

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

F-19

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

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

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

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

Unaudited
- -----------------
December 31,
-----------------
2001 2000
-------- --------
(In thousands)

Current assets......... $ 20,530 $ 27,298
Non-current assets..... 107,744 138,679
Current liabilities.... 59,114 70,541
Non-current liabilities 45,573 60,820
Preferred stock........ 23,104 23,115
Shareholders' equity... 23,587 34,616

F-20

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Summarized unaudited income statement data for Friendly is as follows:

Unaudited
----------------------------
December 31,
----------------------------
2001 2000 1999
-------- -------- --------
(In thousands)

Net revenues...................... $124,845 $138,135 $150,332
Gross profit...................... 69,167 76,032 84,852
Loss from continuing operations... (5,023) (40,193) (8,584)
Net loss after preferred dividends (8,036) (50,640) (31,424)

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

6. Receivable from Marketing and Reservation Funds

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

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

7. Transactions with Sunburst

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

F-21

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

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

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

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

8. Restructuring Programs

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

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

F-22

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9. Accrued Expenses and Other

Accrued expenses were as follows at:

December 31,
---------------
2001 2000
------- -------
(In thousands)

Accrued salaries and benefits.......... $13,131 $13,027
Accrued interest....................... 2,616 2,606
Accrued restructuring.................. 4,884 5,100
Deferred loyalty program revenues...... 5,492 4,784
Other.................................. 3,931 2,301
------- -------
Total............................... $30,054 $27,818
======= =======

10. Long-Term Debt

Debt consisted of the following at:

December 31,
-----------------
2001 2000
-------- --------
(In thousands)

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

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

Year (In thousands)
---- --------------

2002................................... $ 13,563
2003................................... 17,412
2004................................... 21,237
2005................................... 26,503
2006................................... 102,567
Thereafter............................. 100,014
--------
Total.................................. $281,296
========

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

F-23

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

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

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

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

On December 3, 1999, the Company entered into an interest rate swap
agreement with a notional amount of $115 million to fix certain of its variable
rate debt in order to reduce the Company's exposure to fluctuations in interest
rates. The interest rate differential to be paid or received on the interest
rate swap agreement is accrued as interest rates change and is recognized as an
adjustment to interest expense. On average at December 31, 1999, the interest
rate swap agreement had a life of two months with a fixed rate of 5.85% and
variable rate of 6.12%, and a fair market valuation of approximately $0.1
million. On March 3, 2000, the interest rate swap agreement was settled for
approximately $0.1 million. In accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", the Company reclassified a
deferred gain totaling $0.7 million from prior year hedging activity to other
comprehensive income during 2001.

11. Foreign Operations

The Company accounts for foreign currency translation in accordance with
SFAS No. 52, "Foreign Currency Translation." Revenues generated by foreign
operations for the years ended December 31, 2001, 2000 and 1999 were $5.2
million, $5.3 million and $6.9 million (exclusive of $2.5 million of foreign
dividends), respectively. The Company's foreign operations had net (loss)
income of $(35.2 million), $(12.3 million) and $1.0 million for the years ended
December 31, 2001, 2000 and 1999, respectively.

F-24

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

12. Pension, Profit Sharing, and Incentive Plans

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

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

13. Income Taxes

Income before income taxes were derived from the following:

Years ended December 31,
---------------------------
2001 2000 1999
-------- -------- -------
(In thousands)

Income before income taxes:
Domestic operations................. $ 80,647 $ 80,982 $92,058
Foreign operations.................. (35,230) (11,400) 2,413
-------- -------- -------
Income before income taxes............. $ 45,417 $ 69,582 $94,471
======== ======== =======

The provisions for income taxes are as follows:

Years ended December 31,
-------------------------
2001 2000 1999
------- ------- -------
(In thousands)

Current tax expense
Federal............................. $30,890 $20,707 $22,038
State............................... 3,675 2,434 2,723
Foreign............................. 665 886 1,422

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

F-25

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Deferred tax assets (liabilities) are comprised of the following:

December 31,
------------------
2001 2000
-------- --------
(In thousands)

Depreciation and amortization............... $(21,475) $(21,663)
Prepaid expenses............................ (17,736) (21,247)
Other....................................... (8,950) (6,606)
-------- --------
Gross deferred tax liabilities.............. (48,161) (49,516)
-------- --------
Foreign operations.......................... 19,326 4,352
Accrued expenses............................ 5,723 6,496
Other....................................... 2,578 1,976
-------- --------
Gross deferred tax assets................... 27,627 12,824
-------- --------
Deferred tax liability before valuation
allowance................................. (20,534) (36,692)
Valuation allowance......................... (12,737) --
-------- --------
Net deferred tax liability.................. $(33,271) $(36,692)
======== ========

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

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

Years ended December 31
------------------------------
2001 2000 1999
------ ------ ------
(In thousands,
except Federal income tax rate)

Federal income tax rate................ 35% 35% 35%
Federal taxes at statutory rate........ $15,896 $24,354 $33,065
State income taxes, net of federal tax
benefit.............................. 1,120 1,269 2,172
Unrealized tax benefits................ 12,737 -- --
Other.................................. 1,337 1,514 2,079
------- ------- -------
Income tax expense.................. $31,090 $27,137 $37,316
======= ======= =======

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

14. Capital Stock

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

F-26

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

$1.0 million on the grant date. The shares vest over a three to five year
period with 11,016 shares vesting over a three year period, 32,180 shares
vesting over a four year period and 27,064 shares vesting over a five year
period. A total of 9,130, 11,850 and 6,150 shares of restricted stock were
forfeited in 2001, 2000 and 1999, respectively. The Company incurred
compensation expense totaling $0.7 million, $0.8 million and $0.7 million
related to the vesting of restricted stock during the years ended December 31,
2001, 2000 and 1999, respectively. The Company has recorded $0.3 million of
compensation expense related to the vesting of restricted stock as part of its
2001 restructuring accrual related to 46,064 shares.

The Company has stock option plans for which it is authorized to grant
options to purchase up to 9.0 million shares of the Company's common stock, of
which 1.9 million shares remain available for grant as of December 31, 2001.
Stock options may be granted to officers, key employees and non-employee
directors with an exercise price not less than the fair market value of the
common stock on the date of grant.

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

2001 2000 1999
-------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------- ---------- -------------- --------- -------------- --------- --------------

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

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

Options Outstanding Options Exercisable
---------------------------------------------- -----------------------------
Weighted
Number Average Weighted Number Weighted
Range of Exercise Outstanding at Remaining Average Exercisable at Average
Prices 12/31/01 Contractual Life Exercise Price 12/31/01 Exercise Price
------ -------------- ---------------- -------------- -------------- --------------

$ 5.00 to 9.00.... 193,860 3.8 years $ 7.15 134,953 $ 6.79
9.00 to 13.00.... 1,283,341 6.3 years $12.10 733,255 $11.94
13.00 to 17.65.... 1,598,388 7.4 years $15.46 506,187 $14.88
17.65 to 30.00.... 20,000 9.9 years $17.80 -- --
--------- ---------
3,095,589 1,374,395
========= =========

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

F-27

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

2001 2000 1999
-------- -------- --------

Risk-free interest rate................ 5.03% 5.10% 6.45%
Volatility............................. 43.3% 56.6% 38.0%
Expected Lives......................... 10 years 10 years 10 years
Dividend Yield......................... 0% 0% 0%

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

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

15. Comprehensive Income

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

December 31,
--------------------
2001 2000 1999
----- ----- ------
(In thousands)

Unrealized gains (losses) on available-for-sale
securities..................................... $(202) $ 108 $ (419)
Foreign currency translation adjustments......... (576) (162) 1,624
Deferred gain on prior year hedging activity..... 424 -- --
----- ----- ------
Total accumulated other comprehensive income
(loss)......................................... $(354) $ (54) $1,205
===== ===== ======

F-28

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

Amount Before Income Tax Amount Net
Taxes (Expense)/Benefit of Taxes
------------- ----------------- ----------
(In thousands)

2001
Net unrealized losses............................ $ (179) $(131) $ (310)
Foreign currency translation adjustment, net..... (414) -- (414)
------- ----- -------
Total other comprehensive loss................... $ (593) $(131) $ (724)
======= ===== =======
2000
Net unrealized gains............................. $ 844 $(317) $ 527
Foreign currency translation adjustment, net..... (1,786) -- (1,786)
------- ----- -------
Total other comprehensive income (loss).......... $ (942) $(317) $(1,259)
======= ===== =======
1999
Net unrealized losses............................ $(1,024) $ 225 $ (799)
Foreign currency translation adjustment, net..... (108) -- (108)
------- ----- -------
Total other comprehensive income (loss).......... $(1,132) $ 225 $ (907)
======= ===== =======

Below represents the detail of other comprehensive income:

2001 2000 1999
----- ------- -------
(In thousands)

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

F-29

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

16. Earnings Per Share

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

Years Ended
December 31,
-----------------
2001 2000 1999
----- ----- -----
(In millions, except per share amounts)

Computation of Basic Earnings Per Share:
Net income....................................... $14.3 $42.4 $57.2
----- ----- -----
Weighted average shares outstanding--basis....... 44.2 52.9 54.9
----- ----- -----
Basic earnings per share......................... $0.32 $0.80 $1.04
===== ===== =====
Computation of Diluted Earnings Per Share:
Net income for diluted earnings per share........ $14.3 $42.4 $57.2
Weighted average shares outstanding--basis....... 44.2 52.9 54.9
Effect of Dilutive Securities:
Employee stock option plan....................... 0.4 0.4 0.8
----- ----- -----
Weighted average shares outstanding--diluted..... 44.6 53.3 55.7
----- ----- -----
Diluted earning per share........................ $0.32 $0.80 $1.03
===== ===== =====

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

17. Leases

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

2002 2003 2004 2005 2006 Thereafter Total
------- ------- ------ ------ ------ ---------- --------
(In thousands)

Minimum lease payments....... $ 9,923 $ 6,493 $4,180 $3,423 $3,427 $23,698 $ 51,144
Minimum sublease rentals..... (6,311) (3,111) (849) -- -- -- (10,271)
------- ------- ------ ------ ------ ------- --------
$ 3,612 $ 3,382 $3,331 $3,423 $3,427 $23,698 $ 40,873
======= ======= ====== ====== ====== ======= ========

18. Reportable Segment Information

The Company has a single reportable segment encompassing its franchising
business. Franchising revenues are comprised of royalty fees, initial franchise
and relicensing fees, marketing and reservation fees and partner services
revenue and other. The Company is obligated under its franchise agreements to
provide marketing and reservation services appropriate for the successful
operation of its systems. These funds do not represent separate

F-30

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

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

Year Ended December 31, 2001
-----------------------------------------------------
Elimination
Franchising Corporate & Other Adjustments Consolidated
----------- ----------------- ----------- ------------
(In thousands)

Revenues............................... $338,213 $ 3,215 $ -- $341,428
Operating income (loss)................ 138,988 (65,411) -- 73,577
Equity loss on Friendly investment..... -- (16,436) -- (16,436)
Depreciation and amortization.......... 12,485 11,769 (11,802) 12,452
Capital expenditures................... 6,997 6,535 -- 13,532
Total assets........................... 215,381 105,797 -- 321,178

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

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

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

F-31

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

19. Commitments and Contingencies

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

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

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

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

20. Fair Value of Financial Instruments

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

21. Impact of Recently Issued Accounting Standards

F-32

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

22. Selected Quarterly Financial Data - (Unaudited)

2001 First Second Third Fourth Total Year
---- ------- ------- ------- -------- ----------
(In thousands, except per share data)

Revenues............................... $67,755 $84,460 $97,179 $ 92,034 $341,428
Operating income....................... 17,451 26,356 35,409 (5,639) 73,577
Income before income taxes............. 12,132 22,238 20,854 (9,807) 45,417
Net income.......................... 7,400 13,565 12,508 (19,146) 14,327

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

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

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

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

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

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

F-33

BOARD OF DIRECTORS

Stewart Bainum Jr.
Chairman of the Board
Sunburst Hospitality Corporation

Director
Manor Care, Inc.

Barbara Bainum
Vice Chairman
Commonweal Foundation

Vice Chairman
Realty Investment Company, Inc.

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

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

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

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

Lawrence R. Levitan
Chairman
IRS Oversight Board

Retired Managing Partner
Andersen Consulting's
Worldwide Communications Industry Group

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

Director
Coherent Inc.
Steris Corp.

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

Director
Equity Inns, Inc.
TBC Corporation

CORPORATE EXECUTIVE OFFICERS

Stewart Bainum Jr.
Chairman of the Board

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

Steven T. Schultz*
Executive Vice President, Domestic Hotels

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

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

Bruce N. Haase
Senior Vice President, International

Thomas Mirgon
Senior Vice President, Administration

Janna Morrison
Senior Vice President, Franchise Services

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

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

Gary Thomson
Senior Vice President and
Chief Information Officer

Wayne W. Wielgus
Senior Vice President, Marketing

CORPORATE OFFICERS

Don Brockway
Vice President, Reservations Operations

Gregory Bublitz
Vice President, Finance, and Controller

Kevin M. Rooney
Associate General Counsel and
Assistant Secretary

CORPORATE INFORMATION

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

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

Independent Auditors
Arthur Andersen LLP
Washington, D.C.

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

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

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

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