10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                         to                         

Commission file number 001-13393

CHOICE HOTELS INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)

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

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

Registrant’s telephone number, including area code

(301) 592-5000

Securities registered pursuant to Section 12(b) of the Act:

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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes  x    No ¨

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

Yes  ¨    No  x

The aggregate market value of common stock of Choice Hotels International, Inc. held by non-affiliates was $441,331,235 as of June 28, 2002 based upon a closing price of $20.01 per share.

The number of shares outstanding of Choice Hotels International, Inc.’s common stock at March 18, 2003 was 35,890,141.

DOCUMENTS INCORPORATED BY REFERENCE.

Certain portions of our 2002 Annual Report to Shareholders for the fiscal year ended December 31, 2002 are incorporated by reference under Parts I and II of this Form 10-K. With the exception of the specified information, the 2002 Annual Report to Shareholders is not to be deemed filed as part of this Form 10-K Annual Report. Certain portions of Registrant’s definitive proxy statement, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than April 28, 2003, are incorporated by reference under Part III.

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PART I

FORWARD-LOOKING STATEMENTS

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

Item 1.    Business.

Overview

Choice Hotels International, Inc. and subsidiaries (together the “Company” or “Choice”) is one of the largest hotel franchisors in the world with 4,664 hotels open and 474 hotels under development as of December 31, 2002, representing 373,722 rooms open and 41,565 rooms under development in 48 countries and territories. Choice franchises lodging properties under one of our proprietary brand names (the “Choice brands”): Comfort Inn^®, Comfort Suites^®, Quality^®, Clarion^®, Sleep Inn^®, Econo Lodge^®, Rodeway Inn^®, MainStay Suites^® and Flag Hotels^®. The Company’s franchises operate in all 50 states, Puerto Rico and 38 additional countries and territories. Approximately 96% of the Company’s franchising revenue is derived from hotels franchised in the United States. With recognized brands and a diverse and growing franchisee base, we believe we have a strong foundation for continued growth.

Choice is a lodging franchisor with low capital expenditure requirements. Our direct real estate exposure is limited to three company-owned MainStay Suites^®. With a focus on hotel franchising versus ownership, we benefit from the economies of scale inherent in the franchising business. The fee and cost structure of our business provides significant opportunities to increase profits by increasing the number of franchised properties resulting in increased initial fee revenue and ongoing royalty fees; partner service revenues and other miscellaneous items. In addition to

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

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

Company History

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

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

The Lodging Industry⁽¹⁾

As of December 31, 2002, there were approximately 4.3 million hotel rooms in the United States in hotels/motels containing twenty or more rooms. Of those rooms, approximately

⁽¹⁾ Certain industry statistics included in this section, such as the number of hotel rooms, number of affiliated and non-affiliated rooms, US Lodging Industry Trends From 1995 – 2002, etc. were obtained from Smith Travel Research.

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

Historically, the industry added hotel rooms to its inventory through new construction due largely to a favorable hotel lending environment which encouraged hotel development. As a result, the lodging industry saw an oversupply of rooms and a decrease in industry performance.

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

Prior to 2001, the industry had seen consistent gains in RevPAR, a key operating statistic for the industry. RevPAR is calculated by multiplying the percentage of occupied rooms by the average daily room rate realized. From 1995 through 2000, the lodging industry was able to increase its average daily rate (“ADR”) at a pace faster than the increase in the Consumer Price Index (“CPI”), a common measure of inflation published by the US Department of Labor. The following chart demonstrates these trends:

The US Lodging Industry’s Trends From 1995 - - 2002

Year	Increases in Room Revenue Versus Prior Year		Occupancy Rates		Average Daily Room Rates (ADR)		Increase in ADR Versus Prior Year		Increase in CPI Versus Prior Year		Revenue Per Available Room (RevPAR)		Profits (in billions)		New Rooms Added
1995	6.7	%	65.1	%	$	65.81	4.7	%	2.9	%	$	42.83	$	8.5	64,000
1996	8.9	%	65.0	%	$	70.81	7.6	%	2.9	%	$	46.06	$	12.5	101,000
1997	8.8	%	64.5	%	$	75.16	6.1	%	1.9	%	$	48.50	$	17.0	128,000
1998	7.7	%	64.0	%	$	78.62	4.4	%	2.3	%	$	50.29	$	22.0	143,000
1999	7.4	%	63.3	%	$	81.27	4.0	%	2.7	%	$	51.44	$	23.0	143,148
2000	8.6	%	63.5	%	$	85.24	4.7	%	3.4	%	$	54.13	$	24.0	121,476
2001	-4.7	%	60.1	%	$	84.85	-0.5	%	2.9	%	$	50.99	$	16.7	101,279
2002	-0.7	%	59.2	%	$	83.15	-2.0	%	1.6	%	$	49.22	$	16.1	86,366

However, due to a downturn in the worldwide economy which began to effect the lodging industry during 2001, coupled with the terrorist attacks of September 11, industry and RevPAR performance has suffered. These factors have led to reduced royalties and decreased hotel development. Development of newly constructed hotels is not expected to recover until the lodging industry trends improve and the existing economic/market and geopolitical uncertainty dissipates.

We believe the lodging industry can be divided into three price categories: luxury or upscale, mid-scale and economy. Typically, the upscale category generally has room rates above $80 per night, the mid-scale category generally has room rates between $50 and $79 per night and the economy category generally has room rates less than $50 per night. Additionally, a new category has emerged of extended-stay hotels that primarily serve guests who stay at a hotel five consecutive nights. These hotels span the industry’s three price categories.

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

Our Econo Lodge^® and Rodeway Inn^® brands compete primarily in the limited-service economy market; our Comfort Inn^®, Comfort Suites^®, Quality^®, Sleep Inn^® and Flag Hotels^® brands compete primarily in the limited-service mid-scale market. Our MainStay Suites^® brand competes primarily in the all-suites mid-scale market. Our Clarion^® brand competes primarily in the full-service upscale market.

New hotels opened in recent years typically have been hotels without on-premise food and beverage, as these hotels are less costly to develop, enjoy higher gross margins, and tend to have better access to financing. These hotels typically operate in the economy and mid-scale categories and are located in suburban or highway locations. From 1992 to 2002, the average room count in new hotels declined from 122 to 110 primarily because hotel developers found it difficult to obtain financing for large properties from their primary lending sources (local banks and Small Business Administration-guaranteed loan programs).

In recent years, operators of hotels not owned or managed by major lodging companies have increasingly joined national hotel franchise chains as a means of remaining competitive with hotels owned by or affiliated with national lodging companies. Because a significant portion of the costs of owning and operating a hotel are generally fixed, increases in revenues generated by affiliation with a franchise lodging chain can improve a hotel’s financial performance. Of approximately 1,300 hotel properties that changed their affiliation in 2002, 69% converted from independent status to affiliation with a chain or converted from one chain to another, while only 401 converted from affiliation with a chain to independent status. A total of 375 independent properties switched to a franchise chain in 2002.

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

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

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Franchise Business

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

Our variable overhead costs associated with franchise system growth have historically been less than incremental royalty fees generated from new franchisees.

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

Specific elements of our strategy include: build strong brands, deliver exceptional services, reach more consumers and leverage size, scale and distribution.

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

We have a wide array of well-known and established brands that meet the needs of many types of guests, and can be developed at various price points and can be applied to both new and existing hotels. This ensures that we have opportunities for creating unit growth in various types of markets, with various types of customers, and during both industry contraction and growth cycles. During times of lower industry supply growth and tighter capital markets, we can rely on gaining conversions from existing non-Choice affiliated hotels seeking the awareness and proven performance provided by our brands. Over the past 12 years, the industry has seen a significant movement of hotels from independent to chain affiliation, with affiliated hotels increasing from 46% of the market in 1990 to 56% of the market in 2002. This trend may continue, as industry RevPAR growth remains soft. When industry conditions become more favorable, we believe a greater portion of our unit growth will come from our new construction brands. We believe that a large number of markets can still support our hotel brands, and the growth potential for our brands remains strong.

We will ensure each of our brands remain appealing to hotel owners and guests alike by continuing to leverage each brands’ unique strengths and identify the most appropriate methods for both system growth and RevPAR improvement. We will also focus on creating a customer-

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driven quality assurance program across all of our brands to ensure each hotel is consistently and effectively meeting guest needs.

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

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

Choice will continue to increase awareness of its hotels through its multi-branded national marketing campaign using re-imaged signs and our “Power of Being There. Go” ^® tagline. This campaign is intended to generate the most compelling voice in the limited service segment and utilize Choice’s significant size to create even greater awareness for our brands. Local and regional co-op marketing campaigns will continue to leverage the national marketing programs to drive business to Choice properties at a local level. The Choice Privileges program has also been enhanced through the introduction of airline mile options. We expect our efforts at marketing directly to guests will be enhanced through the implementation of customer relationship management technology. Our continued focus on overall brand quality coupled with these new initiatives is designed to stimulate room demand for our franchised hotels through improved guest satisfaction.

Our central reservations system is well positioned to deliver guests to our franchisees through all available channels, including our proprietary call center and websites, global distribution systems (e.g., SABRE, Amadeus, and new internet distribution sites). We believe our well-known brands, combined with our ability to partner with many of these new sites, serves many benefits for our franchisees, including increased rate and reservations delivered, and reduced cost and operational complexity.

Leverage Size, Scale and Distribution. We will focus on identifying methods for utilizing the significant number of hotels in our system to reduce costs, and increase returns, for hotel owners. We will continue to create partnerships with endorsed vendors that both make low-cost products available to our franchisees and streamline the purchasing process through the use of effective purchasing technology. Other than minor logo amenity items, we do not mandate that our franchisees purchase from the vendors we endorse and we do not control our franchisees’

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purchasing decisions related to products provided by these vendors, in any fashion. We believe these efforts benefit the Company in enhancing brand quality, creating partner services revenues for Choice, and making the selection of a Choice brand even more compelling.

We intend to continue to expand this business and identify new methods for decreasing hotel operating costs by increasing penetration internally, creating new vendor relationships, and identifying opportunities for external growth.

Franchise System

Our franchise hotels operate under one of the Choice brand names: Comfort Inn^®, Comfort Suites^®, Quality^®, Clarion^®, Sleep Inn^®, Econo Lodge^®, Rodeway Inn^®, MainStay Suites^® and Flag Hotels^®. The following table presents key statistics relative to our domestic franchise system over the five fiscal years ended December 31, 2002.

COMBINED DOMESTIC FRANCHISE SYSTEM

	As of and For the Year Ended December 31,
	1998		1999		2000		2001		2002
Number of properties, end of period		3,039		3,123		3,244		3,327		3,482
Number of rooms, end of period		252,357		258,120		265,962		270,514		282,423
Royalty fees ($000)	$	109,240	$	120,932	$	131,702	$	133,244	$	135,381
Average Royalty Rate (1)		3.6%		3.7%		3.8%		3.9%		4.0%
Average occupancy percentage		61.0%		60.5%		59.8%		57.5%		55.6%
Average daily room rate (ADR)	$	56.23	$	58.42	$	61.45	$	62.31	$	61.96
RevPAR (2)	$	34.35	$	35.33	$	36.72	$	35.83	$	34.48

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

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

Approximately 96% of our franchising revenue is generated from domestic franchise operations. Consequently, our analysis of our franchise system is focused on the domestic operations. Currently, no master franchisee or other franchisee accounts for 5% or more of Choice’s royalty revenues or total revenues.

Brand Positioning

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

Comfort.  Our largest brand is Comfort, which primarily operate as either Comfort Inns or Comfort Suites. Comfort Inns offer rooms in the mid-scale without food and beverage category and is targeted to business and leisure travelers. Principal competitor brands include Baymont, Fairfield Inn, Hampton Inn, Holiday Express and LaQuinta. Comfort Suites offer business and leisure guests a large room with separate living and sleeping areas. This product competes in the

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upper portion of the mid-scale without food and beverage category against brands such as AmeriSuites, Hampton Inn and Suites and Spring Hill. At December 31, 2002, there were 1,916 Comfort Inn properties and 352 Comfort Suites properties with a total of 141,574 and 28,176 rooms, respectively, open and operating worldwide. An additional 188 Comfort Inn and Comfort Suites properties with a total of 15,110 rooms were under development. During 2002, we added 284 Comfort properties while terminating 48.

Comfort properties are located in the United States and in Australia, Belgium, Brazil, Canada, Costa Rica, Czech Republic, Denmark, Egypt, France, Germany, India, Ireland, Italy, Japan, Norway, Portugal, Sweden, Switzerland, Thailand, United Kingdom, China, El Salvador, Finland, Morocco and Spain. The following chart summarizes the Comfort system in the United States:

COMFORT DOMESTIC SYSTEM

	As of and For the Year Ended December 31,
	1998		1999		2000		2001		2002
Number of properties, end of period		1,394		1,470		1,568		1,621		1,707
Number of rooms, end of period		110,682		112,727		122,761		126,998		134,326
Royalty fees ($000)	$	61,153	$	68,177	$	75,968	$	78,690	$	81,390
Average occupancy percentage		65.4%		64.8%		63.7%		61.3%		59.7%
Average daily room rate (ADR)	$	58.19	$	60.57	$	63.77	$	65.30	$	65.18
RevPAR	$	38.03	$	39.26	$	40.60	$	40.01	$	38.93

Quality.  Quality Inns, Quality Inns and Suites, and Quality Suites hotels primarily compete in the mid-scale with food and beverage category. Quality Inns, Quality Inns and Suites, and Quality Suites are targeted to business and leisure travelers. Principal competitor brands include Best Western, Holiday Inn, Howard Johnson and Ramada Inn. At December 31, 2002, there were 765 Quality Inn and Quality Inns and Suites properties with a total of 80,119 rooms, and 55 Quality Suites properties with a total of 6,543 rooms open worldwide. An additional 126 Quality Inn, Quality Inns and Suites and Quality Suites properties with a total of 13,472 rooms were under development. During 2002, a total of 112 Quality properties were added while 91 were terminated.

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

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QUALITY DOMESTIC SYSTEM

	As of and For the Year Ended December 31,
	1998		1999		2000		2001		2002
Number of properties, end of period		430		431		436		430		455
Number of rooms, end of period		50,151		49,331		49,191		48,014		48,472
Royalty fees ($000)	$	20,187	$	21,034	$	21,753	$	20,605	$	19,658
Average occupancy percentage		58.9%		58.0%		57.6%		55.3%		52.0%
Average daily room rate (ADR)	$	60.02	$	61.89	$	64.05	$	64.72	$	63.82
RevPAR	$	35.35	$	35.90	$	36.86	$	35.80	$	33.16

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

At December 31, 2002, there were 176 Clarion properties with a total of 25,748 rooms open and operating worldwide and an additional 19 properties with a total of 3,607 rooms under development. During 2002, 32 Clarion properties were added while 16 were terminated. The properties are located in the United States, Australia, Canada, Denmark, France, Germany, Guatemala, Honduras, Indonesia, Ireland, Italy, Japan, Norway, Portugal, Spain and the United Kingdom. The following chart summarizes the Clarion system in the United States:

CLARION DOMESTIC SYSTEM

	As of and For the Year Ended December 31,
	1998		1999		2000		2001		2002
Number of properties, end of period		105		112		114		119		132
Number of rooms, end of period		17,878		18,815		18,537		18,032		20,006
Royalty fees ($000)	$	5,447	$	6,491	$	7,796	$	7,189	$	7,479
Average occupancy percentage		60.5%		59.0%		58.8%		54.3%		51.8%
Average daily room rate (ADR)	$	72.25	$	74.17	$	81.37	$	78.14	$	73.88
RevPAR	$	43.73	$	43.74	$	47.86	$	42.46	$	38.26

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

At December 31, 2002, there were 313 Sleep Inn properties with a total of 24,050 rooms open and operating worldwide. An additional 47 properties with a total of 3,394 rooms were under development. During 2002, 26 Sleep Inn properties were added while 8 were terminated.

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The properties are located in the United States, Brazil, Canada, Japan and the United Kingdom. The following chart summarizes the Sleep system in the United States:

SLEEP DOMESTIC SYSTEM

	As of and For the Year Ended December 31,
	1998		1999		2000		2001		2002
Number of properties, end of period		197		224		261		285		301
Number of rooms, end of period		14,924		17,199		20,158		21,945		23,061
Royalty fees ($000)	$	5,337	$	7,241	$	8,713	$	9,635	$	10,258
Average occupancy percentage		62.0%		60.6%		59.6%		57.5%		56.8%
Average daily room rate (ADR)	$	51.32	$	53.91	$	55.82	$	57.02	$	57.36
RevPAR	$	31.82	$	32.66	$	33.25	$	32.79	$	32.57

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

At December 31, 2002, there were 755 Econo Lodge properties with a total of 46,508 rooms open and operating in the United States and Canada, and an additional 47 properties with a total of 2,734 rooms under development in those two countries. During 2002, 61 Econo Lodge properties were added while 36 were terminated. The following chart summarizes the Econo Lodge system in the United States:

ECONO LODGE DOMESTIC SYSTEM

	As of and For the Year Ended December 31,
	1998		1999		2000		2001		2002
Number of properties, end of period		698		691		684		691		715
Number of rooms, end of period		44,458		43,754		42,611		42,936		44,522
Royalty fees ($000)	$	13,975	$	14,313	$	14,490	$	14,100	$	13,664
Average occupancy percentage		54.3%		54.0%		52.9%		51.4%		49.4%
Average daily room rate (ADR)	$	43.55	$	45.01	$	46.33	$	47.30	$	47.36
RevPAR	$	23.65	$	24.32	$	24.51	$	24.30	$	23.38

Rodeway Inn.  The Rodeway Inn brand competes in the economy category and is primarily targeted to senior citizens. Principal competitor brands include Howard Johnsons, Ramada Limited, Red Roof Inn, Shoney’s Inn, Super 8 and Motel 6. At December 31, 2002, there were 132 Rodeway Inn properties with a total of 8,591 rooms open and operating in the United States and an additional 20 properties with a total of 1,092 rooms under development in the United States and Canada. During 2002, 9 Rodeway properties were added while 19 were terminated. The following chart summarizes the Rodeway system in the United States:

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RODEWAY DOMESTIC SYSTEM

	As of and For the Year Ended December 31,
	1998		1999		2000		2001		2002
Number of properties, end of period		196		166		147		142		132
Number of rooms, end of period		12,447		10,613		9,605		9,179		8,591
Royalty fees ($000)	$	2,678	$	2,552	$	2,391	$	2,171	$	1,962
Average occupancy percentage		50.1%		50.7%		50.3%		47.2%		45.5%
Average daily room rate (ADR)	$	44.03	$	45.57	$	48.25	$	48.94	$	49.00
RevPAR	$	22.04	$	23.09	$	24.25	$	23.11	$	22.29

MainStay Suites.  MainStay Suites, our newest hotel brand, is a midscale extended-stay lodging product targeted to travelers who book hotel rooms for five nights or more. As of December 31, 2002, in the United States, there were 40 open hotels with 3,445 rooms and an additional 12 properties with 1,109 rooms under development. During 2002, 4 MainStay Suites properties were added while 3 were terminated.

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

MAINSTAY DOMESTIC SYSTEM

	As of and For the Year Ended December 31,
	1999		2000		2001		2002
Number of properties, end of period		29		34		39		40
Number of rooms, end of period		2,681		3,099		3,410		3,445
Royalty fees ($000)	$	1,124	$	586	$	853	$	970
Average occupancy percentage		66.0%		70.0%		65.8%		67.9%
Average daily room rate (ADR)	$	58.87	$	63.69	$	64.09	$	61.50
RevPAR	$	38.88	$	44.59	$	42.20	$	41.77

International Franchise Operations

We conduct our international business through master franchise arrangements, direct franchise agreements, and investments in overseas hospitality companies that are involved with both hotel management and franchising. The use of our brands by third parties overseas are governed by master franchising agreements which generally provide the master franchisee with the right to the brands in a specific geographic region, usually for a fee. As of December 31, 2002, we had 1,182 franchise hotels in 39 countries and territories outside of the United States. The following table illustrates the growth of our international operations over the five fiscal years ended December 31, 2002.

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COMBINED INTERNATIONAL FRANCHISE SYSTEM (1)

	As of and For the Year Ended December 31,
	1998		1999		2000		2001		2002
Number of properties, end of period		631		1,125		1,148		1,218		1,182
Number of rooms, end of period		53,095		80,134		84,389		92,035		91,299
Royalty fees ($000)	$	4,902	$	6,949	$	5,286	$	5,215	$	6,335

(1) Reporting of operating statistics (e.g. average occupancy percentage and average daily room rate) of the underlying hotels is not required by all master franchise contracts, thus RevPAR is not included for international franchisees.

Europe.  Through our relationships with C.H.E. Group PLC (“CHE”, formerly known as Friendly Hotels PLC or “Friendly”) and Choice Hotels Scandinavia (“CHS”), we are the second largest branded hotel chain in Europe. As of December 31, 2002, CHE’s portfolio consisted of 355 properties which were owned, managed or franchised. CHS had 137 open properties at December 31, 2002. The master franchise agreements with CHE expire in January 2008, subject to certain renewal rights of CHE. The master franchise agreement with CHS expires in November 2014, but may be terminated in November 2009 by either CHS or Choice.

Canada.  We conduct our operation in Canada through Choice Hotels Canada, Inc. a joint venture owned 50% by us and 50% by InnVest Real Estate Investment Trust. Choice Hotels Canada is one of the largest lodging organizations in Canada with 242 franchised properties open as of December 31, 2002.

Australia.  In July 1998, we entered into a strategic alliance with Flag International Limited (“FIL”). Pursuant to the transaction, a subsidiary of FIL, Flag Choice Hotels (“Flag”), was formed to conduct franchise operations in Australia. On July 1, 2002, the Company acquired a controlling 55% interest in Flag (the “Flag Transaction”). Flag, based in Melbourne, Australia, is a franchisor of certain hotel brands in Australia, New Zealand, Papua New Guinea and Fiji. The acquisition of a controlling interest in Flag gave the Company the ability to control the Choice and Flag brands in Australia, Papua New Guinea and Fiji and the Flag brand in New Zealand. In February 2003, the Company completed the purchase of the remaining 45% interest in Flag at which time Flag became a wholly-owned subsidiary.

As of December 31, 2002, Flag had 191 franchised properties opened under the Choice brands and 160 franchised hotels under the Flag brand.

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

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Franchise Sales

We have identified key market areas for hotel development based on supply/demand relationships and strategic objectives. Development opportunities are typically offered to; (i) existing franchisees; (ii) developers of hotels; (iii) owners of independent hotels and motels; (iv) owners of hotels affiliated with other franchisors’ brands; and; (v) contractors who construct any of the foregoing.

At December 31, 2002, we employed approximately 38 sales directors, each of whom is responsible for a particular region or geographic area. Sales directors contact potential franchisees directly and receive compensation based on sales generated. Franchise sales efforts emphasize the benefits of affiliating with one of the Choice brands, our commitment to improving hotel profitability, our television, radio and print brand advertising campaigns, the Choice central reservation system, our training and support systems (including our proprietary property management system) and our history of growth and profitability. Because retention of existing franchisees is important to our growth strategy, we created a formal Impact Policy in 1992, which was revised in July 1999, which offers existing franchisees the right to object to a same-brand property within a 15-mile radius. The Impact Policy protects franchisees from the opening of a same-brand property within a specific distance, which can range from one to seven miles, depending upon the market in which the property is located.

During 2002, Choice received 648 applications for new franchise agreements (not including relicensings of existing agreements) compared to 544 in 2001. These applications resulted in the execution of 304 new franchise agreements in 2002, compared to 300 in 2001. An application received may not always result in a signed franchise agreement during the year received or at all due to various factors including financing, agreement on financial terms, and other.

Franchise Agreements

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

Either party to a franchise agreement, other than master franchise agreements, can terminate a franchise agreement prior to the conclusion of their term under certain circumstances, such as at certain anniversaries of the agreement. Early termination options give us flexibility in

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eliminating or re-branding properties which become weak performers for reasons other than contractual failure by the franchisee. We also have the right to terminate a franchise agreement if a franchisee fails to bring properties into compliance with contractual or quality standards within specified periods of time. Master franchise agreements typically contain provisions permitting us to terminate the agreement for failure to meet a specified development schedule.

In 2002, we continued to place great focus on enforcing quality standards. However, in 2002, we retained 96% of franchisees which were in our domestic system as of December 31, 2001.

Franchise fees vary among the different Choice brands, but generally are competitive with the industry average within their market group. Franchise fees usually have four components: an initial, one-time affiliation fee; a royalty fee; a marketing fee; and a reservation fee. Proceeds from the marketing fee and reservation fee are used primarily to fund marketing programs and the Company’s reservation systems, respectively. Most marketing fees support marketing programs designed to support all of the Choice brands, while some contribute to brand-specific marketing programs. Royalty fees and affiliation fees are the principal sources of profits for us.

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

QUOTED FEES BY BRAND AS OF DECEMBER 31, 2002

		On-Going Fees as a Percentage of Gross Room Revenues
Brand	Initial Fee Per Room/ Minimum	Royalty Fees		Marketing Fees		Reservation Fees
Comfort Inn	$300/$50,000	5.25	%	2.1	%	1.75	%
Comfort Suites	$300/$50,000	5.25	%	2.1	%	1.75	%
Quality Inn	$300/$35,000	4.0	%	2.1	%	1.75	%
Quality Suites	$300/$50,000	4.0	%	2.1	%	1.25	%
Sleep Inn	$300/$40,000	4.5	%	2.1	%	1.75	%
Clarion	$300/$40,000	3.75	%	1.0	%	1.25	%
Econo Lodge	$250/$25,000	4.0	%	3.5	%(1)	—
MainStay Suites	$300/$30,000	4.5	%	2.5	%(1)	—
Rodeway	$250/$25,000	3.5	%	1.25	%	1.25	%

(1) Fee includes both Marketing and Reservation Fees.

We have increased our average royalty rate since fiscal year 1993, primarily by increasing the number of higher royalty fee contracts in the franchise system and due to the escalation of royalty fees as franchise agreements mature. For the twelve months ended December 31, 2002, our average royalty rate for all Choice domestic brand hotels was 3.97%.

Franchise Operations

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

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Central Reservation System.  On average, approximately 25% of the gross room revenue booked at franchisees’ properties is reserved through a central reservation system, which is supported by our toll-free telephone reservation system, our proprietary internet site, global distribution systems, and other internet reservations sites. Our reservation system consists of a computer reservation system, three reservation centers in North America and several international reservation centers operated by us or our master franchisees. Reservation agents trained on the reservation system can match each caller with a Choice-branded hotel meeting the caller’s needs. It provides an instant data link to our franchised properties as well as to the Amadeus, Galileo, SABRE and Worldspan airline reservation systems that facilitates the reservation process for travel agents. We also offer our rooms for sale on our own proprietary internet site (choicehotels.com) as well as those of other travel companies.

Our reservation agents cross-sell the Choice brands. If a room in the Choice hotel brand requested by a customer is not available in the location or price range that the customer desires, the agent may offer the customer a room in another Choice-branded hotel that meets the customer’s needs. Cross-selling enables Choice and its franchisees to capture additional business.

Property Management System.  Our proprietary property and yield management system, Profit Manager by Choice Hotels, is designed to help franchisees maximize profitability and compete more effectively by managing their rooms inventory, rates and reservations. The Profit Manager system synchronizes each hotel’s inventory with the CHOICE 2001 system, giving reservation sales agents last room sell capabilities at every hotel. Profit Manager includes a revenue management feature that calculates and suggests optimum rates and length of stays based on each hotel’s past performance and projected occupancy.

As of March 14, 2003, approximately 2,800 hotels in the United States and Canada are using Profit Manager, with approximately 2,000 of those hotels utilizing the revenue management function.

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

In 2001, a new multi-branded national marketing campaign, “The Power of Being There, Go” ^®, was introduced.

Numerous marketing and sales programs are conducted which target specific groups, including corporate travelers, senior citizens, automobile club members, families, government and military employees, and meeting planners. Other marketing efforts include domestic and international trade show programs, publication of group and tour rate directories, direct-mail programs, electronic direct marketing e-mail programs, centralized commissions for travel agents, fly-drive programs in conjunction with major airlines, and annual publication of a Travel and Vacation Directory.

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In 1998, we launched a loyalty program called Guest Privileges at four of our brands (Comfort, Clarion, Quality and Sleep) to attract and retain frequent travelers. As of December 31, 2002, the program had approximately 1.5 million members. In 2001, Choice renamed the program Choice Privileges^® in order to communicate the link of the program to Choice Hotels. In 2001, we launched a promotion called EA$Y CHOICE^® at our Econo Lodge and Rodeway Inn brands. The EA$Y CHOICE promotion is a stamp redemption program and has no membership requirement to participate. Additionally, Choice now offers all guests the ability to earn airline miles with Southwest Airlines, United Airlines, American Airlines, US Airways, Delta and Northwest. Choice Privileges and EA$Y CHOICE participants can earn airline miles or points/ stamps.

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

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

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

To encourage compliance with quality standards, various brand-specific incentives and awards are used to reward franchisees that maintain consistent quality standards. We identify franchisees whose properties operate below minimum quality standards and assist them in complying with brand specifications. Franchisees who fail to improve on identified quality matters may be subject to consequences ranging from written warnings to termination of the franchisee’s franchise agreement.

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

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

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

Competition

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

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

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

The ability of a hotel to compete may be affected by a number of factors, including the location and quality of the property, the number and quality of competing properties nearby, its affiliation with a recognized name brand and general regional and local economic conditions. The effect of local economic conditions on our results is substantially reduced by the geographic diversity of our franchised properties, which are located in all 50 states, Puerto Rico and 38 additional countries and territories, as well as our range of products and room rates.

Service Marks and Other Intellectual Property

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

Seasonality

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

Regulation

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

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

Impact of Inflation and Other External Factors

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

We believe industry wide supply and demand for hotel rooms is lower than historical averages. We believe these supply and demand conditions exist because of the current economic and geopolitical uncertainty. We expect to benefit in the form of increased franchise fees from future increases in consumer demand as well as in the supply of hotel rooms, which don’t result in excess lodging industry capacity and demand for hotel rooms. However, a prolonged decline in demand for hotel rooms would negatively impact our business.

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

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

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Employees

We employed domestically approximately 1,600 people as of February 28, 2003. None of our employees are represented by unions or covered by collective bargaining agreements. We consider our relations with our employees to be good.

Company Web Site

The Company’s primary website address is www.choicehotels.com. Since November 15, 2002, the Company has made its annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, available free of charge on or through this website, as soon as reasonably practicable after such material is electronically filed with or furnished to the Commission.

Item 2.    Properties.

Our principal executive offices are located at 10720, 10750 and 10770 Columbia Pike, Silver Spring, MD 20901. The offices are leased from a third party. We own our reservation and property yield system office in Phoenix, AZ, and our reservation centers in Minot, ND and Grand Junction, CO. Management believes that its existing properties are sufficient to meet its present needs and does not anticipate any difficulty in securing additional or alternative space, as needed, on terms acceptable to the Company.

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

Item 3.    Legal Proceedings.

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

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

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2002.

EXECUTIVE OFFICERS OF CHOICE HOTELS INTERNATIONAL, INC.

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

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Name	Age	Position
Stewart Bainum, Jr.	56	Chairman of the Board of Directors
Charles A. Ledsinger, Jr	53	Chief Executive Officer and President
Joseph M. Squeri	37	Senior Vice President, Development and Chief Financial Officer
Michael J. DeSantis	44	Senior Vice President, General Counsel and Secretary
Bruce N. Haase	42	Senior Vice President, International
Thomas Mirgon	46	Senior Vice President, Human Resources and Administration
Janna Morrison	41	Senior Vice President, Franchise Services
Daniel Rothfeld	43	Senior Vice President, Partner Services and Emerging Business Opportunities
Gary Thomson	48	Senior Vice President, Chief Information Officer
Wayne W. Wielgus	48	Senior Vice President, Marketing
David L. White	34	Vice President, Controller

Background of Executive Officers:

Stewart Bainum, Jr.  Director from 1977 to 1996 and since 1997. He has served as Chairman of the Board of Choice Hotels from March 1987 to November 1996 and since October 1997. He has served as Chairman of the Board of Sunburst Hospitality Corporation (“Sunburst”) since November 1996. He was a director of Manor Care, Inc. from September 1998 to September 2002, serving as Chairman from September 1998 until September 2001. From March 1987 to September 1998, he was Chairman and Chief Executive Officer of the former Manor Care, Inc. (now known as Manor Care of America, Inc. (“MCA”)). He served as President of MCA and Chief Executive Officer of ManorCare Health Services, Inc. (“MCHS”) from March 1987 to September, 1998, and as Vice Chairman of MCA from June 1982 to March 1987.

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

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

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

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

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

Janna Morrison.  Senior Vice President, Franchise Services since November 2001; Vice President, Property Systems from 1998 to November 2001; Vice President, Revenue Management from 1995 to 1998.

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

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

Wayne W. Wielgus.  Senior Vice President, Marketing of Choice September 2000. He was Vice President, Marketing of Best Western International, Inc., in Phoenix, Arizona, from 1996 until September 2000 and Senior Vice President, Marketing-Americas from 1993 until 1996 for Forte Hotels PLC.

David L. White.  Vice President, Controller of Choice since December 2002; Vice President, Financial/SEC Reporting from September 2002 to December 2002; He was Senior Manager, Ernst & Young, LLP from May 2002 to September 2002; He was employed by Arthur Andersen LLP as Senior Manager from May 1999 to May 2002, and manager from October 1998 to May 1999. He served as Assistant Controller for the energy marketing division of Statoil Energy, Inc. from May 1997 to September 1998.

Code of Ethics

The Company has adopted a Code of Ethics that applies to its Chief Executive Officer and Chief Financial Officer. A copy of the Code of Ethics is attached hereto as Exhibit 99.1

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PART II

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

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

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

QUARTERLY MARKET PRICE RANGE OF COMMON STOCK

Quarters Ended	Market Price Per Share
	High		Low
FISCAL 2002
March 31,	$	25.40	$	18.75
June 30,		27.00		19.77
September 30,		25.10		18.37
December 31,		24.00		16.30
FISCAL 2001
March 31,	$	15.50	$	11.00
June 30,		16.00		11.90
September 30,		23.80		13.48
December 31,		23.98		16.00

The Company did not declare or pay any cash dividends on its common stock during the twelve month periods ended December 31, 2002 or 2001. The Company does not anticipate the payment of any cash dividends on its common stock in the foreseeable future. Payment of dividends on the Company’s common stock will also be subject to limitations as may be imposed by the Company’s credit facilities from time to time. The declaration of dividends will be subject to the discretion of the Board of Directors.

As of March 10, 2003 there were 3,281 holders of record of the Company’s common stock.

Item 6.    Selected Financial Data.

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Company Results (in millions, except per share data)

	As of and For the year ended December 31,
	1998	1999	2000	2001	2002
	(As revised – See Note 1 to the Consolidated Financial Statements)
Total Revenues	$295.4	$324.2	$352.8	$341.4	$365.6
Net Income	55.3	57.2	42.4	14.3	60.8
Basic Earnings per Share	0.94	1.04	0.80	0.32	1.55
Diluted Earnings per Share	0.93	1.03	0.80	0.32	1.52
Total Assets	398.2	464.7	484.1	321.2	314.4
Long-term Debt	279.2	307.4	297.2	281.3	307.8

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

The information required by Item 7 is included on pages F-2 to F-12 in the 2002 Annual Report to Shareholders and is incorporated herein by reference.

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

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

At December 31, 2002 and December 31, 2001, the Company had $307.8 million and $281.3 million of debt outstanding at an effective interest rate of 4.2% and 4.9%, respectively. A hypothetical change of 10% in the Company’s effective interest rate from December 31, 2002 levels would increase or decrease interest expense by $0.6 million. The Company expects to refinance the $98.0 million variable rate term loan balance remaining at December 31, 2002, as the principal amortizes using the Company’s current Credit Facility. Upon expiration of the Credit Facility in 2006, the Company expects to refinance its obligations.

The Company does not have any derivative financial instruments.

Item 8.    Financial Statements and Supplementary Data.

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The information required by Item 8 is included on pages F-13 to F-40 in the 2002 Annual Report to Shareholders and is incorporated herein by reference. See Item 15 (a) for the index to the consolidated financial statements.

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

None.

PART III

Item 10.    Directors and Executive Officers of the Registrant.

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

Item 11.    Executive Compensation.

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

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

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

Item 13.    Certain Relationships and Related Transactions.

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

Item 14.    Controls and Procedures.

The Company formed a Disclosure Review Committee whose membership includes the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), among others. The Disclosure Review Committee’s procedures are considered by the CEO and CFO in performing

26

their evaluations of the Company’s disclosure controls and procedures and in assessing the accuracy and completeness of the Company’s disclosures.

As of March 25, 2003, an evaluation was performed under the supervision and with the participation of the Company’s CEO and CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of March 25, 2003. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to March 25, 2003.

27

PART IV

Item 15.    Exhibits, Financial Statement Schedules and Reports on Form 8-K.

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

1. Financial Statements

The following information is incorporated herein by reference from the indicated pages of the 2002 Annual Report to Shareholders:

	Page
Report of Independent Accountants	F-13
Report of Independent Public Accountants	F-14
Consolidated Statements of Income	F-15
Consolidated Balance Sheets	F-16
Consolidated Statements of Cash Flows	F-17
Consolidated Statements of Shareholders’ Equity (Deficit) and Comprehensive Income	F-18
Notes to Consolidated Financial Statements	F-19 to F-40

2. Financial Statement Schedules

The following are filed as an exhibit to this Annual Report on Form 10-K.

Report of Independent Accountants on Financial Statement Schedule

Report of Independent Public Accountants on Schedule II

Schedule II—Valuation and Qualifying Accounts

All other schedules are omitted because they are not applicable.

3. Exhibits

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

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4.05(h)	Specimen certificate of 7.125% Senior Note due 2008 (Original Note) (Attached as an exhibit to the Indenture set forth as Exhibit 4.04)
4.06(h)	Specimen certificate of 7.125% Senior Note due 2008 (Exchange Note) (Attached as an exhibit to the Indenture set forth as Exhibit 4.04)
4.07(b)	Supplement No. 1 to the guarantee Agreement dated April 28, 1998 among Choice Hotels International, Inc., Quality Hotels Europe, Inc., QH Europe Partnership and The Chase Manhattan Bank.
4.08(b)	Indemnity, Subrogation and Contribution Agreement, dated April 28, 1998 among Choice Hotels International, Inc., Quality Hotels Europe, Inc., QH Europe Partnership and The Chase Manhattan Bank.
4.09(g)	Rights Agreement, dated as of February 19, 1998, between Choice Hotels International, Inc. and ChaseMellon Shareholder Services, L.L.C., as Rights Agent.
10.01*	Amended and Restated Employment Agreement between Choice Hotels International, Inc. and Charles A. Ledsinger, Jr. dated November 13, 2002.
10.02(d)	Amended and Restated Employment Agreement dated as of October 15, 1997 by and between Choice Hotels Franchising, Inc. (renamed Choice Hotels International, Inc.) and Stewart Bainum, Jr.
10.03(i)	Amended and Restated Employment Agreement dated April 13, 1999 by and between Choice Hotels International, Inc. and Thomas Mirgon
10.04(f)	Choice Hotels International, Inc. Non-Employee Director Stock Option and Deferred Compensation Stock Purchase Plan.
10.05(f)	Choice Hotels International, Inc. 1997 Non-Employee Director Stock Compensation Plan.
10.06(f)	Choice Hotels International, Inc. 1997 Long-Term Incentive Plan.
10.07(i)	Second Amended and Restated Employment Agreement dated April 13, 1999 between Choice Hotels International, Inc. and Michael J. DeSantis.
10.08(j)	Commercial Lease dated May 29, 1998 among Columbia Pike I, LLC and Colesville Road, LLC (each an assignee of Manor Care, Inc.) and Choice Hotels International, Inc.
10.09(i)	Employment Agreement dated June 3, 1999 between Choice Hotels International, Inc. and Joseph M. Squeri.
10.10(n)	Employment Agreement dated May 3, 2000 between Choice Hotels International, Inc. and Daniel Rothfeld.
10.11(n)	Employment Agreement dated August 18, 2000 between Choice Hotels International, Inc. and Wayne Wielgus.
10.12(o)	Amended and Restated Supplemental Executive Retirement Plan.
10.13*	Choice Hotels International, Inc. Executive Deferred Compensation Plan.
13.01*	Annual Report to Shareholders
13.02*	Valuation and Qualifying Accounts
21.01*	Subsidiaries of Choice Hotels International, Inc.
23.01*	Consent of PricewaterhouseCoopers LLP
23.02*	Report of Arthur Andersen LLP
99.1*	Code of Ethics
99.2*	Chief Executive Officer – Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.3*	Chief Financial Officer – Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Filed herewith

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

29

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(b)    No reports on Form 8-K were filed during the last quarter of the fiscal year ended December 31, 2002.

30

WRITTEN STATEMENT

OF

CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

The undersigned hereby certify that the Annual Report on Form 10-K for the year ended December 31, 2002 filed by Choice Hotels International, Inc. with the Securities and Exchange Commission fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the issuer.

Dated: March 28, 2003

By:	/s/    CHARLES A. LEDSINGER, JR.
	Charles A. Ledsinger, Jr. President and Chief Executive Officer

By:	/s/    JOSEPH M. SQUERI
	Joseph M. Squeri Senior Vice President, Development and Chief Financial Officer

31

SIGNATURES

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

CHOICE HOTELS INTERNATIONAL, INC.
By:	/s/    CHARLES A. LEDSINGER, JR.
	Charles A. Ledsinger, Jr President and Chief Executive Officer

Dated: March 28, 2003

32

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

Signature	Title	Date
/s/    STEWART BAINUM, JR.         Stewart Bainum, Jr.	Chairman, Director	March 26, 2003
/s/    CHARLES A. LEDSINGER, JR. Charles A. Ledsinger, Jr.	President, Chief Executive Officer & Director	March 28, 2003
/s/    BARBARA BAINUM Barbara Bainum	Director	March 26, 2003
/s/    LARRY R. LEVITAN Larry R. Levitan	Director	March 18, 2003
/s/    WILLIAM L. JEWS William L. Jews	Director	March 19, 2003
/s/    RAYMOND E. SCHULTZ Raymond E. Schultz	Director	March 17, 2003
/s/    ERVIN R. SHAMES Ervin R. Shames	Director	March 17, 2003
/s/    JERRY E. ROBERTSON Jerry E. Robertson	Director	March 17, 2003
/s/    JOSEPH M. SQUERI Joseph M. Squeri	Senior Vice President, Development and Chief Financial Officer	March 28, 2003

33

TABLE OF CONTENTS

Financial Highlights	F-1
Management’s Discussion and Analysis of Financial Condition and Results of Operations	F-2
Report of Independent Accountants	F-13
Report of Independent Public Accountants	F-14
Consolidated Financial Statements	F-15
Notes to Consolidated Financial Statements	F-19

Financial Highlights

	As of or for the years ended December 31,
	2002		2001		2000		1999		1998
	(in millions, except per share data)
Company Results					As Revised (See Note 1 to the Consolidated Financial Statements)
Total Assets	$	314.4	$	321.2	$	484.1	$	464.7	$	398.2
Long-Term Debt		307.8		281.3		297.2		307.4		279.2
Total Revenues		365.6		341.4		352.8		324.2		295.4
Net Income		60.8		14.3		42.4		57.2		55.3
Cash Flow from Operations		99.0		101.7		53.9		65.0		40.5
Basic Earnings per Share	$	1.55	$	0.32	$	0.80	$	1.04	$	0.94
Diluted Earnings per Share	$	1.52	$	0.32	$	0.80	$	1.03	$	0.93
System Results – (Unaudited)
Domestic:
Revenues (estimated in millions)	$	3,406	$	3,375	$	3,423	$	3,256	$	3,063
Franchise Hotels		3,482		3,327		3,244		3,123		3,039
Franchise Hotels Under Development		310		462		493		596		866
Franchise Rooms		282,423		270,514		265,962		258,120		252,357
Revenue Per Available Room	$	34.48	$	35.83	$	36.72	$	35.33	$	34.35
Total (Domestic and International)
Franchise Hotels		4,664		4,545		4,392		4,248		3,670
Franchise Hotels Under Development		474		689		703		761		1,005
Franchise Rooms		373,722		362,549		350,351		338,254		305,171

F-1

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Choice Hotels International, Inc. and subsidiaries (together “the Company”) is one of the largest hotel franchisors in the world with 4,664 hotels open and 474 hotels under development as of December 31, 2002, representing 373,722 rooms open and 41,565 rooms under development in 48 countries and territories. The Company franchises hotels under the Comfort, Comfort Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites and Flag Choice Hotels brand names. The Company’s franchises operate in all 50 states, Puerto Rico and 38 additional countries and territories. Approximately 96% of the Company’s franchising revenue is 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; operating performance, including occupancy 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. Our variable overhead costs associated with franchise system growth have historically been 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.

Critical Accounting Policies

Revenue Recognition

The Company accounts for initial franchise fees in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 45, “Accounting for Franchise Fee Revenue.” The Company enters into franchise agreements committing to provide franchisees with various marketing services, a centralized reservation system and limited rights to utilize the Company’s registered tradenames and trademarks. These agreements typically have an initial term of twenty years with provisions permitting franchisees to terminate after five, ten, or fifteen years under certain circumstances. In most instances, initial franchise fees are recognized upon execution of the franchise agreement because the initial franchise fee is non-refundable and the Company has no continuing obligations related to the franchisee. The initial franchise fee related to executed franchise agreements which include incentives, such as future potential rebates, are deferred and recognized when the incentive criteria are met or the agreement is terminated, whichever occurs first.

Royalty fees, which are typically based on a percentage of gross room revenues of each franchisee, are recorded when earned. Reserves for uncollectible royalty fees 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, including marketing and reservation fees, which are used exclusively by the Company for expenses associated with providing franchise services such as national marketing, media advertising, central reservation systems and technology services. 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 Company revised its presentation of marketing and reservation revenues during the fourth quarter of 2001 to comply with Emerging Issues Task Force (“EITF”) Issue No. 99-19 “Reporting Revenue Gross as a Principal versus Net as an Agent.” The Company had previously presented these revenues net of related expenses on its consolidated statements of income. EITF 99-19 requires that these revenues be recorded gross and accordingly, the Company has revised its financial statement presentation for all periods presented. In addition,

F-2

net advances to and repayments from the franchise system for marketing and reservation activities have been reclassified to present these activities as cash flows from operating activities for all periods presented. These revisions had no effect on the net income or cash flows reported during the periods revised.

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. Cumulative excess or shortfall amounts from the operation of these programs are recorded as a marketing or reservation fee payable or receivable. Under the terms of the franchise agreements, the Company may advance capital as necessary for marketing and reservation activities and recover such advances through future fees (see Note 6 to the Consolidated Financial Statements).

The Company generates partner services revenues from hotel industry vendors. Partner services revenues are generally earned based on the level of goods or services purchased from endorsed vendors by hotel owners and hotel guests who stay in the Company’s franchised hotels. The Company accounts for these revenues in accordance with Staff Accounting Bulletin No. 101, (“SAB 101”) “Revenue Recognition.” SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The Company recognizes partner services revenues when the services are performed or the product delivered, evidence of an arrangement exists, the fee is fixed and determinable and collectibility is probable. SAB 101 requires the Company to defer the recognition of partner services revenues related to upfront fees. Such upfront fees are generally recognized over a period corresponding to the Company’s estimate of the life of the arrangement.

Impairment Policy

The Company evaluates the impairment of property and equipment and other long-lived assets, including franchise rights and other definite-lived intangibles, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 states that an 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 fair value. The Company did not record any impairment on long-lived assets during the years ended December 31, 2002, 2001 or 2000.

The Company evaluates the impairment of goodwill in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” which 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 segment in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” and related interpretations, 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 did not record any impairment of goodwill in 2002, 2001 or 2000 based on assessments performed by the Company.

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

F-3

on the present value of expected future cash flows, discounted at the loan’s effective interest rate. The Company did not record any impairment charges related to notes receivable during the years ended December 31, 2002 or 2001. During the year ended December 31, 2000, the Company recorded $7.6 million of impairment losses related to its subordinated term note to Sunburst Hospitality Corporation (see Note 7).

Stock Compensation

The Company accounts for its stock-based employee compensation plans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. As such, compensation expense related to fixed employee stock options is recorded only if on the date of grant the fair value of the underlying stock exceeds the exercise price. The Company adopted the disclosure only requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” which allows entities to continue to apply the provisions of APB Opinion No. 25 for transactions with employees and to provide pro forma net income disclosures as if the fair value based method of accounting, described in SFAS No. 123 had been applied to employee stock option grants.

Effective January 1, 2003, the Company adopted, in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” the fair value based method of accounting for stock option awards granted on or after January 1, 2003.

Comparison of 2002 Operating Results and 2001 Operating Results

The Company recorded net income of $60.8 million for the year ended December 31, 2002, an increase of $46.5 million from net income of $14.3 million for the year ended December 31, 2001. Net income in 2001 included an impairment charge of $22.7 million associated with the Company’s determination to write-off its entire investment in Friendly Hotels PLC (currently known as C.H.E. Group PLC) (“Friendly”). Net income for 2001 also reflects $10.3 million of equity losses (net of taxes) in Friendly.

F-4

Summarized financial results for the years ended December 31, 2002 and 2001 are as follows:

	2002			2001
	(In thousands)
REVENUES:
Royalty fees	$	142,943		$	140,185
Initial franchise and relicensing fees		12,881			12,887
Partner services		11,860			12,042
Marketing and reservation		190,145			168,170
Hotel operations		3,331			3,215
Other		4,402			4,929
Total revenues		365,562			341,428
OPERATING EXPENSES:
Selling, general and administrative		54,904			56,075
Restructuring charges		1,616			5,940
Impairment of Friendly investment		—			22,713
Depreciation and amortization		11,251			12,452
Marketing and reservation expense		190,145			168,170
Hotel operations		2,946			2,501
Total operating expenses		260,862			267,851
Operating income		104,700			73,577
Interest expense		13,136			15,445
Interest and other investment income		(4,549	)		(4,329	)
Equity in net losses of affiliates		71			16,436
Other		224			608
Income before income taxes		95,818			45,417
Income taxes		34,974			31,090
Net income	$	60,844		$	14,327

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

Franchise Revenues:  Net franchise revenues were $172.1 million for the year ended December 31, 2002 compared to $170.0 million for the year ended December 31, 2001. Royalty fees increased $2.7 million to $142.9 million from $140.2 million in 2001, an increase of 1.9%. The increase in royalties is primarily attributable to a 4.4% increase in the number of domestic franchised hotel rooms and an increase in the effective royalty rate of the domestic hotel system to 3.97% from 3.95%, offset by a 3.8% decrease in RevPAR. Domestic initial fee revenue, included in the initial franchise and relicensing fees caption above, generated from executed franchise contracts increased 7.8% to $8.3 million for the year ended December 31, 2002 from $7.7 million for the year ended December 31, 2001. Relicensing fees declined 11.5% to $4.6 million for the year ended December 31, 2002 from $5.2 million for the year ended December 31, 2001. Relicensing fees are charged to the new property owner of a franchised property whenever an ownership change occurs and the property remains in the franchise system. The decrease in relicensing fees in 2002 reflects a lower number of such ownership changes in 2002 compared to 2001. Total domestic franchise agreements executed in 2002 were 304, compared to 300 total agreements executed in 2001. The number of rooms covered by contracts executed were 25,657 in 2002 compared to 25,757 in 2001. Revenues generated from partner services was $11.9 million, compared to $12.0 million in 2001.

F-5

The number of domestic rooms on-line increased to 282,423 from 270,514, an increase of 4.4% for the year ended December 31, 2002. For 2002, the total number of domestic hotels on-line grew 4.7% to 3,482 from 3,327 for 2001. International rooms on-line decreased slightly to 91,299 as of December 31, 2002 from 92,035 as of December 31, 2001, a decrease of 0.8%. The total number of international hotels on-line decreased to 1,182 from 1,218, a decrease of 3.0% for the year ended December 31, 2002. The decrease in international hotels online is primarily due to termination of certain Flag properties which failed to maintain the Company’s brand standards or which declined to formalize a franchise relationship following the Company’s acquisition of a controlling interest in Flag Choice Hotels during 2002. As of December 31, 2002, the Company had 310 franchised hotels with 23,766 rooms either in design or under construction in its domestic system. The Company has an additional 164 franchised hotels with 17,799 rooms under development in its international system as of December 31, 2002.

Franchise Expenses:  The cost to operate the franchising business is reflected in selling, general and administrative expenses. Selling, general and administrative expenses were $54.9 million for the year ended December 31, 2002, a decrease of $1.2 million from the year ended December 31, 2001 total of $56.1 million. As a percentage of net franchise revenues, selling, general and administrative expenses declined to 31.9% in 2002 from 33.0% in 2001. This decline, which increased franchising margins from 67.0% to 68.1%, was largely due to reductions in selling, general and administrative expenses resulting from the Company’s 2001 and 2000 restructurings.

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 for expenses associated with providing franchise services such 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.

Total marketing and reservation revenues were $190.1 million and $168.2 million for the years ended December 31, 2002 and 2001, respectively. Depreciation and amortization attributable to marketing and reservation activities was $13.0 million and $11.8 million for the years ended December 31, 2002 and 2001, respectively. Interest expense attributable to reservation activities was $1.4 million and $2.0 million for the years ended December 31, 2002 and 2001, respectively. Marketing and reservation activities provided a positive cash flow of $17.2 million and $20.3 million for the years ended December 31, 2002 and 2001, respectively. As of December 31, 2002 and 2001, the Company’s balance sheet includes a receivable of $44.9 million and $49.4 million, respectively, for marketing and reservation fees. The Company has the contractual authority to require that the franchisees in the system at any given point repay the Company for any deficits related to marketing and reservation activities. The Company’s current franchisees are legally obliged to pay any assessment the Company imposes on its franchisees to obtain reimbursement of such deficit regardless of whether those constituents continue to generate gross room revenue. The Company has no present intention to accelerate repayment of the deficit from current franchisees.

Hotel Operations:  In September 2000, the Company received title to three MainStay properties from Sunburst Hospitality Corporation (“Sunburst”) as consideration for $16.3 million of the then $149 million amount due under a note receivable from Sunburst. Revenues from hotel operations were $3.3 million and $3.2 million for the years ended December 31, 2002 and 2001, respectively. Selling, general and administrative expenses from hotel operations were $2.9 million and $2.5 million for those years, respectively.

Depreciation and Amortization:  Depreciation and amortization decreased to $11.3 million in the year ended December 31, 2002 from $12.5 million in the year ended December 31, 2001. This decrease is primarily attributable to the Company’s adoption of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, pursuant to which the Company stopped amortizing goodwill effective January 1, 2002.

F-6

Friendly:  The Company’s entire investment in Friendly was written off in 2001, accordingly, the Company’s 2002 results of operations do not include any equity method losses or other amounts related to Friendly. In addition to the $22.7 million impairment described below, the Company recorded equity method losses associated with its investment in Friendly totaling $10.3 million (net of tax) for the year ended December 31, 2001.

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 that 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.

Interest and Other:  Interest expense of $13.1 million in the year ended December 31, 2002 is down $2.3 million from $15.4 million in the year ended December 31, 2001 due primarily to lower effective interest rates. The Company’s weighted average interest rate as of December 31, 2002 was 4.39% compared to 4.52% as of December 31, 2001. Included in the results for 2002 and 2001 is approximately $4.6 million and $4.2 million, respectively, of interest income earned on the note receivable from Sunburst. The note from Sunburst accrued interest up until June 2002, at which point interest became payable semi-annually in arrears. As of December 31, 2002, the Company’s balance sheet includes an interest receivable from Sunburst of $2.3 million which is included in other current assets in the accompanying consolidated balance sheets and was paid to the Company by Sunburst in January 2003.

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. 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-7

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

	2001			2000
	(In thousands)
				As Revised
REVENUES:
Royalty fees	$	140,185		$	137,721
Initial franchise and relicensing fees		12,887			12,154
Partner services		12,042			10,300
Marketing and reservation		168,170			185,367
Hotel operations		3,215			1,249
Other		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 expense		168,170			185,367
Hotel operations		2,501			609
Total operating expenses		267,851			260,414
Operating income		73,577			92,427
Interest expense		15,445			18,490
Interest and other investment 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:  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 to 25,757 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 9.1%. The total number of international hotels on-line increased to 1,218 from 1,148, an increase of 6.1% for the

F-8

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, a decrease 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 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 attributable to marketing and reservation activities was $11.8 million and $10.5 million for the years ended December 31, 2001 and 2000, respectively. Interest expense attributable to reservation activities was $2.0 million and $4.8 million for the years ended December 31, 2001 and 2000, respectively. Marketing and reservation activities 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 for marketing and reservation activities.

Hotel Operations:  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.

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 that 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.

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.

F-9

Liquidity and Capital Resources

Net cash provided by operating activities was $99.0 million for the year ended December 31, 2002, representing a slight decrease of $2.7 million from $101.7 million for the year ended December 31, 2001. The decrease in cash provided by operating activities was primarily due to lower repayments related to marketing and reservation activities offset by improved management of working capital. As of December 31, 2002, the total long-term debt outstanding for the Company was $307.8 million, $23.8 million of which matures in the next twelve months.

During each of the past three years, the Company has realigned its corporate structure to increase its strategic focus on delivering value-added services and support 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 recorded a $1.6 million restructuring charge in 2002 of which approximately $0.4 million was paid in 2002. The restructuring charges represented employee severance and termination benefits. The restructuring was initiated and completed in 2002 and the Company expects the remaining liability to be paid during 2003. The Company paid $3.1 million related to the 2001 restructuring liability during the year ended December 31, 2002, and expects the remaining $0.6 million liability to be substantially paid in 2003. The Company paid $0.2 million related to the 2000 restructuring liability for the year ended December 31, 2002, which completed the restructuring.

The Company received net cash repayments related to marketing and reservation activities totaling $17.2 million and $20.3 million during the years ended December 31, 2002 and 2001, respectively. The 2002 and 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 Company expects marketing and reservation activities to generate positive cash flows between $16.0 million and $19.0 million in 2003.

Cash (utilized in) provided by investing activities for the years ended December 31, 2002, 2001 and 2000, was ($14.7 million), $87.7 million and ($16.6 million), respectively. During the years ended December 31, 2002, 2001 and 2000, capital expenditures totaled $12.2 million, $13.5 million and $16.6 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). During 2001, the Company received a cash payment of $101.9 million from Sunburst related to a note receivable due to the Company.

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. In connection with an amendment of the strategic alliance agreement between the Company and Sunburst, effective October 15, 2000, interest payable on the Old Note accrued at a rate of 11% per annum compounded daily. The Company implemented this amendment prospectively beginning on January 1, 1999, and recognized interest on the outstanding principal and accrued interest amounts at an effective rate of 10.58%. Total interest accrued at December 31, 2000 was $42.2 million. 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 accrued interest up until June 2002, at which point interest became payable semi-annually in arrears. As of December 31, 2002, the Company’s balance sheet includes an interest receivable from Sunburst of $2.3 million which is included in other current assets in the accompanying consolidated balance sheets and was paid to the Company by Sunburst in January 2003.

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 $115 million and a revolving credit facility

F-10

of $150 million, $37 million of which is available in foreign currency borrowings. As of December 31, 2002, the Company had $98.7 million of term loans and $102.0 million of revolving loans outstanding. The term loan is payable over the next four years, $17.3 million of which is due in 2003. 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 are 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.

In August 2002, the Company entered into a new $10.0 million revolving line of credit with a maturity of August 2003. The new line of credit includes customary financial and other covenants that require the maintenance of certain ratios identical to those included in the Company’s existing senior credit facility. Borrowings under the line of credit bear interest at rates established at the time of borrowing based on prime minus 175 basis points. The Company had $6.4 million outstanding at December 31, 2002 under this line of credit.

Through December 31, 2002, the Company had repurchased 26.5 million shares of its common stock at a total cost of $434.9 million, including 5.4 million shares at a cost of $120.9 million during the year ended December 31, 2002. Subsequent to December 31, 2002 and through March 11, 2003, the Company repurchased 1.3 million shares of common stock at a total cost of $30.3 million.

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

Impact of Recently Issued Accounting Standards

In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145, among other matters, updates and clarifies existing accounting pronouncements related to gains and losses from the extinguishment of debt and certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of SFAS No. 145 were generally effective as of May 15, 2002. The adoption of SFAS No. 145 did not have a material impact on our results of operations or financial position.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires companies to recognize costs associated with exit (including restructuring) or disposal activities at fair value when the related liability is incurred rather than at the date of a commitment to an exit or disposal plan as previously required. Costs covered by the standard include certain contract termination costs, certain employee termination benefits and other costs to consolidate or close facilities and relocate employees that are associated with an activity being exited or long-lived assets being disposed. As permitted by SFAS No. 146, we adopted SFAS No. 146 in 2002.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Such Interpretation elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees issued. It

F-11

also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this Interpretation apply to guarantees issued or modified after December 31, 2002. We will adopt these provisions on January 1, 2003. The disclosure provisions of this Interpretation are effective for financial statements with annual periods ending after December 15, 2002. We have applied the disclosure provisions of this Interpretation as of December 31, 2002, as required (See Note 19 to the Consolidated Financial Statements).

On December 31, 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” This standard amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This standard also requires prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We have applied the disclosure provisions of SFAS No. 148 as of December 31, 2002. (See Note 1 to the Consolidated Financial Statements).

As permitted by SFAS No. 123, during 2002, we measured stock-based compensation using the intrinsic value approach under Accounting Principles Board Opinion No. 25. Accordingly, we did not recognize compensation expense upon the issuance of our stock options because the option terms were fixed and the exercise price equaled the market price of the underlying common stock on the grant date. We complied with the provisions of SFAS No. 123 by providing pro forma disclosures of net income and related per share data giving consideration to the fair value method provisions of SFAS No. 123.

On January 1, 2003, we adopted the fair value method of accounting for stock-based compensation provisions of SFAS No. 123, which is considered by the FASB to be the preferable accounting method for stock-based employee compensation, and have elected to use the prospective method permitted by SFAS No. 148. Therefore, the transition provisions of SFAS No. 148 will be adopted concurrently with the fair value based recognition provisions of SFAS No. 123 on January 1, 2003. Subsequently, we will expense all future employee stock awards over the vesting period based on the fair value of the award on the date of grant in accordance with the prospective transition method.

Forward-Looking Statements

Certain statements in this report that are not historical facts constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act. Words such as “believes,” “anticipates,” “expects,” “intends,” “estimates,” “projects,” and other similar expressions, which are predictions of or indicate future events and trends, typically identify forward-looking statements. Such statements are subject to a number of risks and uncertainties which could cause actual results to differ materially from those projected, including: competition within each of our business segments; business strategies and their intended results; the balance between supply of and demand for hotel rooms; our ability to obtain new franchise agreements; our ability to develop and maintain positive relations with current and potential hotel owners; the effect of international, national and regional economic conditions and geopolitical events such as acts of war or terrorism; the availability of capital to allow us and potential hotel owners to fund investments in 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-12

Report of Independent Accountants

To the Board of Directors and Stockholders

of Choice Hotels International, Inc. and subsidiaries:

In our opinion, the accompanying consolidated balance sheet as of December 31, 2002 and the related consolidated statements of income, shareholders’ equity (deficit) and comprehensive income and cash flows present fairly, in all material respects, the financial position of Choice Hotels International, Inc. and it’s subsidiaries at December 31, 2002, and the results of their operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The financial statements of the Company as of December 31, 2001, and for each of the two years in the period ended December 31, 2001, were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements in their report dated March 20, 2002.

As discussed above, the financial statements of the Company as of December 31, 2001, and for each of the two years in the period ended December 31, 2001, were audited by other independent accountants who have ceased operations. As described in Note 3, these financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, which was adopted by the Company as of January 1, 2002. We audited the transitional disclosures described in Note 3. In our opinion, the transitional disclosures for 2001 and 2000 in Note 3 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 or 2000 financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 or 2000 financial statements taken as a whole.

PricewaterhouseCoopers LLP

Washington, DC

February 7, 2003

F-13

WE ARE INCLUDING IN THIS REPORT, PURSUANT TO RULE 2-02(E) OF REGULATION S-X, A COPY OF THE LATEST SIGNED AND DATED REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS FROM OUR PRIOR INDEPENDENT PUBLIC ACCOUNTANTS, ARTHUR ANDERSEN LLP. THIS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS WAS PREVIOUSLY ISSUED BY ARTHUR ANDERSEN, FOR FILING WITH OUR ANNUAL REPORT ON FORM 10-K FILED BY CHOICE HOTELS INTERNATIONAL, INC. WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 2002, AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. NOTE THAT THIS PREVIOUSLY ISSUED REPORT INCLUDES REFERENCES TO CERTAIN FISCAL YEARS AND PERIODS, WHICH ARE NOT REQUIRED TO BE PRESENTED IN THE ACCOMPANYING FINANCIAL STATEMENTS AS OF AND FOR THE FISCAL YEARS ENDED DECEMBER 31, 2002.

Report of Independent Public Accountants

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.

Vienna, Virginia

March 20, 2002

F-14

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	Years Ended December 31,
	2002			2001			2000
	(In thousands, except per share amounts)
							As Revised (See Note 1)
REVENUES:
Royalty fees	$	142,943		$	140,185		$	137,721
Initial franchise and relicensing fees		12,881			12,887			12,154
Partner services		11,860			12,042			10,300
Marketing and reservation		190,145			168,170			185,367
Hotel operations		3,331			3,215			1,249
Other		4,402			4,929			6,050
Total revenues		365,562			341,428			352,841
OPERATING EXPENSES:
Selling, general and administrative		54,904			56,075			57,178
Restructuring charges		1,616			5,940			5,637
Impairment of Friendly investment		—			22,713			—
Depreciation and amortization		11,251			12,452			11,623
Marketing and reservation expense		190,145			168,170			185,367
Hotel operations		2,946			2,501			609
Total operating expenses		260,862			267,851			260,414
Operating income		104,700			73,577			92,427
OTHER INCOME AND EXPENSES:
Interest expense		13,136			15,445			18,490
Interest and other investment income		(4,549	)		(4,329	)		(15,534	)
Equity in net losses of affiliates		71			16,436			12,071
Loss (gain) on disposition of property		224			(42	)		253
Write-off of deferred financing costs		—			650			—
Loss on Sunburst note		—			—			7,565
Total other income and expenses		8,882			28,160			22,845
Income before income taxes		95,818			45,417			69,582
Income taxes		34,974			31,090			27,137
Net income	$	60,844		$	14,327		$	42,445
Weighted average shares outstanding-basic		39,333			44,174			52,895
Weighted average shares outstanding-diluted		40,057			44,572			53,253
Basic earnings per share	$	1.55		$	0.32		$	0.80
Diluted earnings per share	$	1.52		$	0.32		$	0.80

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

F-15

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,			December 31,
	2002			2001
	(In thousands, except share amounts)
ASSETS:
Current assets
Cash and cash equivalents	$	12,227		$	16,871
Receivables (net of allowance for doubtful accounts of $6,035 and $5,392, respectively)		32,451			25,223
Other current assets		3,349			889
Total current assets		48,027			42,983
Property and equipment, at cost, net		64,650			70,458
Goodwill		60,620			60,620
Franchise rights, net		36,336			36,257
Receivable—marketing and reservation fees		44,916			49,358
Note receivable from Sunburst		41,318			39,059
Other assets		18,515			22,443
Total assets	$	314,382		$	321,178
LIABILITIES AND SHAREHOLDERS’ DEFICIT:
Current liabilities
Current portion of long-term debt	$	23,796		$	13,563
Accounts payable		23,142			24,724
Accrued expenses and other		29,686			30,054
Income taxes payable		8,879			2,836
Total current liabilities		85,503			71,177
Long-term debt		283,995			267,733
Deferred income taxes and other liabilities		58,683			46,807
Total liabilities		428,181			385,717
Commitments and Contingencies
SHAREHOLDERS’ DEFICIT:
Common stock, $ .01 par value; 160,000,000 shares authorized; 62,755,708 shares issued; 37,163,216 and 41,997,637 shares outstanding at December 31, 2002 and 2001, respectively		371			420
Additional paid-in-capital		73,100			70,130
Accumulated other comprehensive income (loss)		42			(354	)
Deferred compensation		(3,492	)		(2,857	)
Treasury stock (25,592,492 and 20,758,071 shares at December 31, 2002 and 2001, respectively)		(423,839	)		(311,053	)
Retained earnings		240,019			179,175
Total shareholders’ deficit		(113,799	)		(64,539	)
Total liabilities and shareholders’ deficit	$	314,382		$	321,178

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

F-16

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2002			2001			2000
	(In thousands)						As Revised (See Note 1)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	60,844		$	14,327		$	42,445
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		11,251			12,452			11,623
Non-cash interest and other investment income		(2,128	)		(4,219	)		(15,170	)
Provision for bad debts		1,256			476			(585	)
Non-cash stock compensation and other charges		1,666			2,210			787
Equity in net losses of affiliates		71			16,436			12,071
Impairment of Friendly investment		—			22,713			—
Write-off of deferred financing costs		—			650			—
Loss on early prepayment of Sunburst note		—			—			6,520
Changes in assets and liabilities, net of acquisitions:
Receivables		(5,360	)		6,465			(2,245	)
Prepaid expenses and other current assets		—			—			30
Receivable—marketing and reservation fees, net		17,219			20,267			(14,532	)
Current liabilities		(4,054	)		9,381			1,714
Income taxes payable/receivable and other assets		5,391			6,361			(278	)
Deferred income taxes and other liabilities		12,881			(5,807	)		11,499
Net cash provided by operating activities		99,037			101,712			53,879
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment		(12,233	)		(13,532	)		(16,590	)
Investment in Flag Choice Hotels		(2,173	)		—			—
Proceeds from Sunburst note		—			101,954			—
Other items, net		(296	)		(684	)		(27	)
Net cash (used in) provided by investing activities		(14,702	)		87,738			(16,617	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt		314,400			772,028			85,500
Principal payments of long-term debt		(288,220	)		(790,795	)		(95,757	)
Purchase of treasury stock		(120,931	)		(185,807	)		(20,893	)
Proceeds from exercise of stock options		5,772			12,294			1,739
Net cash used in financing activities		(88,979	)		(192,280	)		(29,411	)
Net change in cash and cash equivalents		(4,644	)		(2,830	)		7,851
Cash and cash equivalents at beginning of period		16,871			19,701			11,850
Cash and cash equivalents at end of period	$	12,227		$	16,871		$	19,701
Supplemental disclosure of cash flow information
Cash payments during the year for:
Income taxes, net of refunds	$	14,674		$	29,013		$	15,674
Interest		14,132			18,039			22,145
Non-cash investing activities:
Conversion of note receivable into Flag equity interest	$	1,061		$	—		$	—
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	$	1,762		$	3,895		$	1,602

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

F-17

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) AND COMPREHENSIVE INCOME

(In thousands, except share amounts)

	Common Stock Shares Outstanding		Common Stock Amount			Additional Paid-in-capital			Accumulated Other Comprehensive Income (Loss)			Deferred Compensation			Treasury Stock			Comprehensive Income			Retained Earnings		Total
Balance as of December 31, 1999	53,833,911		$	538		$	52,386		$	1,205		$	(1,937	)	$	(108,294	)				$	121,718	$	65,616
Comprehensive income
Net income	—			—			—			—			—			—		$	42,445			42,445		42,445
Other comprehensive income:
Foreign currency translation adjustments	—			—			—			—			—			—			(1,786	)		—		(1,786	)
Unrealized gain on securities, net of taxes, net of reclassification adjustment (Note 15)	—			—			—			—			—			—			527			—		527
Other comprehensive loss	—			—			—			(1,259	)		—			—			(1,259	)		—		—
Comprehensive income																		$	41,186
Exercise of stock options/grants, net	288,634			3			3,362			—			—			—						—		3,365
Issuance of restricted stock	14,052			—			182			—			(182	)		—						—		—
Amortization of deferred compensation	—			—			—			—			819			—						—		819
Treasury purchases	(1,575,029	)		(15	)		—			—			—			(20,878	)					—		(20,893	)
Liquidation of foreign subsidiaries	—			—			(685	)		—			—			—						685		—
Balance as of December 31, 2000	52,561,568		$	526		$	55,245		$	(54	)	$	(1,300	)	$	(129,172	)				$	164,848	$	90,093
Comprehensive income
Net income	—			—			—			—			—			—			14,327			14,327		14,327
Other comprehensive income:
Foreign currency translation adjustments	—			—			—			—			—			—			(414	)		—		(414	)
Unrealized loss on securities, net of taxes, net of reclassification adjustment (Note 15)	—			—			—			—			—			—			(310	)		—		(310	)
Other comprehensive loss	—			—			—			(724	)		—			—			(724	)		—		—
Comprehensive income																		$	13,603
Deferred gain on hedge	—			—			—			424			—			—						—		424
Exercise of stock options/grants, net	1,287,454			13			14,885			—			—			1,503						—		16,401
Issuance of restricted stock	155,515			1			—			—			(2,304	)		2,303						—		—
Amortization of deferred compensation	—			—			—			—			747			—						—		747
Treasury purchases	(12,006,900	)		(120	)		—			—			—			(185,687	)					—		(185,807	)
Balance as of December 31, 2001	41,997,637		$	420		$	70,130		$	(354	)	$	(2,857	)	$	(311,053	)				$	179,175	$	(64,539	)
Comprehensive income
Net income	—			—			—			—			—			—			60,844			60,844		60,844
Other comprehensive income:
Foreign currency translation adjustments	—			—			—			—			—			—			341			—		341
Amortization of deferred gain																			(67	)				(67	)
Unrealized loss on securities, net of taxes, net of reclassification adjustment (Note 15)	—			—			—			—			—			—			122			—		122
Other comprehensive income	—			—			—			396			—			—			396			—		—
Comprehensive income																		$	61,240
Exercise of stock options/grants, net	442,869			4			1,762			—			—			5,768						—		7,534
Issuance of restricted stock	109,894			1			—			—			(2,301	)		2,300						—		—
Stock compensation related restructuring	—			—			1,208			—			—			—			—			—		1,208
Amortization of deferred compensation	—			—			—			—			1,666			—						—		1,666
Treasury purchases	(5,387,184	)		(54	)		—			—			—			(120,854	)					—		(120,908	)
Balance as of December 31, 2002	37,163,216			371		$	73,100		$	42		$	(3,492	)	$	(423,839	)				$	240,019	$	(113,799	)

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

F-18

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 (together “the Company”) is in the business of hotel franchising. As of December 31, 2002, the Company had franchise agreements with 4,664 open hotels and 474 hotels under development in 48 countries and territories under the following brand names: Comfort, Comfort Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites and Flag.

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.

On July 1, 2002, the Company acquired a controlling interest in Flag Choice Hotels (“Flag”). Flag, based in Melbourne, Australia, is a franchisor of hotels in Australia, Papua New Guinea, Fiji and New Zealand. The results of Flag have been consolidated since that date.

Revenue Recognition.

The Company accounts for initial franchise fees in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 45, “Accounting for Franchise Fee Revenue.” The Company enters into franchise agreements committing to provide franchisees with various marketing services, a centralized reservation system and limited rights to utilize the Company’s registered tradenames and trademarks. These agreements typically have an initial term of twenty years with provisions permitting franchisees to terminate after five, ten, or fifteen years under certain circumstances. In most instances, initial franchise fees are recognized upon execution of the franchise agreement because the initial franchise fee is non-refundable and the Company has no continuing obligations related to the franchisee. The initial franchise fee related to executed franchise agreements which include incentives, such as future potential rebates, are deferred and recognized when the incentive criteria are met or the agreement is terminated, whichever occurs first.

Royalty fees, which are typically based on a percentage of gross room revenues of each franchisee, are recorded when earned. Reserves for uncollectible royalty fees are charged to bad debt expense and are included in selling, general and administrative expenses in the accompanying consolidated statements of income.

The Company generates partner services revenues from hotel industry vendors. Partner services revenues are generally earned based on the level of goods or services purchased from endorsed vendors by hotel owners and hotel guests who stay in the Company’s franchised hotels. The Company accounts for these revenues in accordance with Staff Accounting Bulletin No. 101, (“SAB 101”) “Revenue Recognition.” SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. The Company recognizes partner services revenues when the services are performed or the product delivered, evidence of an arrangement exists, the fee is fixed and determinable and collectibility is probable. SAB 101 requires the Company to defer the recognition of partner services revenues related to upfront fees. Such upfront fees are generally recognized over a period corresponding to the Company’s estimate of the life of the arrangement.

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

F-19

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

accordance with the franchise agreements; as such, no income or loss to the Company is generated. As described 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 Revenues and Expenses.

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

Credit Risk and Exposure.

Substantially all of the Company’s trade receivables as well as the receivable for marketing and reservation fees are due from hotel franchisees. However, the Company considers its credit risk associated with trade receivables and the marketing and reservation fees minimal due to the dispersion of the Company’s receivables across a large number of geographically diverse franchisees.

The Company records bad debt expense which is included in selling, general and administrative expenses in the accompanying consolidated statements of income based on its assessment of the ultimate realizability of receivables considering historical collection experience and the economic environment. When the Company determines that an account is not collectible, the account is written-off to the associated allowance for doubtful accounts. Bad debts have historically been minimal.

Advertising Costs.

The Company expenses advertising costs as the advertising occurs in accordance with American Institute of Certified Public Accountants, Statement of Position 93-7, “Reporting on Advertising Costs”. Advertising expense was $41.8 million, $55.1 million and $48.4 million for the years ended December 31, 2002, 2001, and 2000, 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. As of December 31, 2002 and 2001, $5.0 million and $8.6 million, respectively, of book overdrafts representing outstanding checks in excess of funds on deposit have been classified in accounts payable in the accompanying consolidated balance sheets.

Capitalization Policies.

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Major renovations, replacements and interest incurred during construction are capitalized. 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 consolidated statements of income. Maintenance, repairs and minor replacements are charged to expense as incurred.

F-20

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Impairment Policy.

The Company evaluates the impairment of property and equipment and other long-lived assets, including franchise rights and other definite-lived intangibles, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 states that an 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 fair value. The Company did not record any impairment on long-lived assets during the three years ended December 31, 2002.

The Company evaluates the impairment of goodwill in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” which 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 segment in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” and related interpretations, 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 did not record any impairment of goodwill in 2002, 2001 or 2000 based on assessments performed by the Company.

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 did not record any impairment charges related to notes receivable during the years ended December 31, 2002 or 2001. During the year ended December 31, 2000, the Company recorded $7.6 million of impairment losses related to its subordinated term note to Sunburst Hospitality Corporation (see Note 7).

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, 2002 and 2001, deferred financing costs were $2.1 million and $2.7 million, respectively, and are included in other non-current assets on the accompanying consolidated balance sheets.

Investments.

The Company accounts for its investments in the common stock of Choice Hotels Scandinavia (“CHS”) 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 Choice Hotels Canada, Inc. (“CHC”) in accordance with Accounting Principles Board Opinion (“APB”) No. 18 “The Equity Method of Accounting for Investments in Common Stock.”

F-21

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Derivatives.

SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” establishes 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 balance sheet, 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. Except for the Flag put option discussed in Note 11, the Company has no derivative financial instruments.

Stock-based compensation.

The Company accounts for its stock-based employee compensation plans in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. As such, compensation expense related to fixed employee stock options is recorded only if on the date of grant the fair value of the underlying stock exceeds the exercise price. The Company adopted the disclosure only requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” which allows entities to continue to apply the provisions of APB Opinion No. 25 for transactions with employees and to provide pro forma net income disclosures as if the fair value based method of accounting, described in SFAS No. 123, had been applied to employee stock option grants.

The Company’s stock option plans are described more fully in Note 14. No compensation expense related to the Company’s stock option plans was reflected in net income for the three years ended December 31, 2002, as all options granted under those plans had an exercise price equal to market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of SFAS No. 123.

	Years Ended December 31,
	2002			2001			2000
	(In millions, except per share amounts)
Net income, as reported	$	60.8		$	14.3		$	42.4
Total stock-based employee compensation expense determined under fair value method for all awards, net of tax effects		(2.6	)		(3.0	)		(3.9	)
Pro forma net income	$	58.2		$	11.3		$	38.5
Earnings per share:
Basic—as reported	$	1.55		$	0.32		$	0.80
Basic—pro forma	$	1.48		$	0.25		$	0.72
Diluted—as reported	$	1.52		$	0.32		$	0.80
Diluted—pro forma	$	1.45		$	0.25		$	0.73

Effective January 1, 2003, the Company adopted, in accordance with SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” the fair value based method of accounting for stock option awards granted on or after January 1, 2003.

Notes Receivable.

From time to time, the Company provides financing to franchisees for property improvements and other purposes in the form of interest free notes. The notes typically have a term of 10 years and are forgiven and amortized over that time period if the franchisee remains in the system in good standing. As of December 31, 2002 and 2001, other assets included $5.0 million and $1.8 million, respectively, of these notes. Amortization expense related to the notes was $0.4 million, $0.1 million and $35,000, respectively, for the years ended December 31, 2002, 2001 and 2000.

F-22

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Income Taxes.

Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or income tax returns. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted rates expected to apply to taxable income in the years in which those differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Earnings per Share.

Basic earnings per share excludes dilution and is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share, assumes dilution and is computed based on the weighted-average number of common shares outstanding after consideration of the dilutive effect of stock options.

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.

2.    Property and Equipment

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

	December 31,
	2002			2001
	(In thousands)
Land	$	4,117		$	4,090
Facilities in progress		1,631			735
Building and improvements		35,861			34,210
Furniture, fixtures and equipment		94,691			86,301
		136,300			125,336
Less: Accumulated depreciation		(71,650	)		(54,878	)
	$	64,650		$	70,458

As facilities in progress are completed and placed in service, they are transferred to appropriate fixed asset categories and depreciation begins. Depreciation expense, excluding amounts attributable to marketing and reservation activities, for the years ended December 31, 2002, 2001 and 2000 was $5.6 million, $4.6 million and $3.0 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 is based follows:

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

3.    Goodwill

Goodwill primarily relates to the excess of the purchase price of the Company’s stock in excess of the recorded minority interest acquired. Prior to January 1, 2002, the Company amortized goodwill on a straight-line basis over 40 years. Such amortization amounted to $2.0 million and $2.3 million for the years ended December 31, 2001 and 2000, respectively.

F-23

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

On January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” pursuant to which the Company is no longer permitted to amortize goodwill. The impact of the adoption of SFAS No. 142 on net income, basic EPS and diluted EPS for the years ended December 31, 2001 and 2000, as if the adoption had taken place on January 1, 2000 is as follows:

	Years Ended December 31,
	2001		2000
	(In thousands, except per share amounts)
Reported net income	$	14,327	$	42,445
Add back: Goodwill amortization		1,995		2,290
Adjusted net income	$	16,322	$	44,735
Basic earnings per share:
Reported net income	$	0.32	$	0.80
Goodwill amortization		0.05		0.04
Adjusted basic earnings per share	$	0.37	$	0.84
Diluted earnings per share:
Reported net income	$	0.32	$	0.80
Goodwill amortization		0.04		0.04
Adjusted diluted earnings per share	$	0.36	$	0.84

4.    Franchise Rights and Other Intangibles

Franchise rights represent the unamortized purchase price assigned to acquired long-term franchise contracts. As of December 31, 2002 and 2001, the unamortized balance relates primarily to the Econo Lodge and Flag franchise rights. The franchise rights are being amortized over lives ranging from 5 to 15 years. Amortization expense for the years ended December 31, 2002, 2001 and 2000 amounted to $3.1 million, $3.0 million and $3.9 million, respectively. Franchise rights are net of accumulated amortization of $35.1 million and $32.0 million at December 31, 2002 and 2001, respectively. The estimated annual amortization expense related to the Company’s franchise rights for 2003 through 2007 is $3.0 million for each of the years then ended.

Other assets includes approximately $5.1 million and $4.8 million of intangible assets related to trademarks at December 31, 2002 and 2001, respectively. The trademarks are being amortized over ten years. Amortization expense for each of the three years ended December 31, 2002 was $0.4 million. The estimated annual amortization expense related to the Company’s trademarks for 2003 through 2007 is $0.3 million for each of the years they ended.

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 appointed three directors to the board of Friendly giving the Company ability to exercise significant influence over the operations of Friendly. Accordingly, the Company was required to apply the equity method of accounting.

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 for granting the master franchise rights to Friendly, the Company received Friendly common stock and was to receive $8.0 million payable in cash in eight equal annual installments from Friendly.

F-24

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 related to the master franchise agreement and provided Friendly with a £7.8 million (approximately US $11.4 million) secured letter of credit in consideration for, among other things, a reduction in the conversion price of the Company’s convertible preferred shares from 150p to 60p. The letter of credit was secured by substantially all of Friendly’s assets in France, valued in excess of £4.2 million (approximately US $6.1 million). Other modifications to the Company’s convertible preferred shares included a change in the dividend rate from 5.75% (payable in cash) to 2% per annum, (payable in additional convertible preferred shares). Friendly was also permitted to 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 £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 £5.0 million (approximately US $7.3 million) as of January 21, 2002. The letter of credit was terminated on January 28, 2003.

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 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 in 2001.

The Company also recognized $1.1 million in royalty revenue from Friendly for the year ended December 31, 2000. The Company waived its royalty fees from Friendly for the periods from 2001 through 2005 as part of Friendly’s restructuring. No dividends were accrued during 2001 or 2000.

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

	December 31,
	2001
	Unaudited (In thousands)
Current assets	$	20,530
Non-current assets		107,744
Current liabilities		59,114
Non-current liabilities		45,573
Preferred stock		23,104
Shareholders’ equity		23,587

F-25

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Summarized unaudited income statement data for Friendly is as follows:

	For the Years Ended December 31,
	2001			2000
	Unaudited (In thousands)
Net revenues	$	124,845		$	138,135
Gross profit		69,167			76,032
Loss from continuing operations		(5,023	)		(40,193	)
Net loss after preferred dividends		(8,036	)		(50,640	)

On February 21, 2002, Friendly announced that it had been unable to find an acceptable buyer for its business and would terminate efforts to sell its business. Given this 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 wrote-off its entire investment in Friendly through a $22.7 million charge to reflect the permanent impairment of this asset as of December 31, 2001.

6.    Receivable-Marketing and Reservation Fees

The Company’s franchise agreements require the payment of franchise fees which include marketing and reservation fees. The Company is obligated to use the marketing and reservation fees it assesses against the current franchisees comprising its various hotel brand systems to provide marketing and reservation services appropriate for the successful operation of the 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 for reimbursement. The franchise agreements provide the Company the right to advance monies to the franchise system when the needs of the system surpass the balances currently available.

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 related to marketing and reservation activities. The Company’s current franchisees are legally obliged to pay any assessment the Company imposes on its franchisees to obtain reimbursement of such deficit regardless of whether those constituents continue to generate gross room revenue. The Company has no present intention to accelerate repayment of the deficit from current franchisees.

The marketing and reservation fees receivable at December 31, 2002 and 2001 was $44.9 million and $49.4 million, respectively. Depreciation and amortization expense attributable to marketing and reservation activities was $13.0 million and $11.8 million for the years ended December 31, 2002 and 2001, respectively. Interest expense attributable to reservation activities was $1.4 million and $2.0 million for the years ended December 31, 2002 and 2001, respectively.

F-26

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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. As it relates to development commitments, the strategic alliance agreement ended October 15, 2002. Liquidated damage provisions extend through the life of existing franchise agreements. The franchise fee credit provisions end in October 2003.

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”). In connection with an amendment of the strategic agreement discussed above, effective October 15, 2000 interest on the Old Note 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 scheduled to mature in full, along with accrued interest, on October 15, 2002.

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 the 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 accrued interest up until June 2002, at which point interest became payable semi-annually in arrears. As of December 31, 2002, the Company’s balance sheet includes an interest receivable from Sunburst of $2.3 million which is included in other current assets in the accompanying consolidated balance sheets and was paid to the Company by Sunburst in January 2003.

The Company recognized interest income of $4.6 million, $4.2 million and $15.2 million for years ended December 31, 2002, 2001 and 2000, respectively.

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 $6.1 million, $7.8 million and $10.3 million for the years ended December 31, 2002, 2001 and 2000, respectively.

8.    Restructuring Programs

During 2002, the Company recognized a restructuring charge expense of $1.6 million pursuant to Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The restructuring charge related to employee severance and termination benefits for 23 employees resulting from

F-27

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

corporate realignment initiatives. The restructuring was initiated and completed in 2002. Approximately $0.3 million of the expense related to stock compensation for certain severed employees and was credited directly to additional paid-in capital. The Company paid approximately $0.4 million in cash related to this restructuring during 2002 and the remaining liability of $0.9 million, included in accrued expenses and other in the accompanying consolidated balance sheet, is expected to be paid in cash during 2003.

During 2001, the Company recognized a restructuring charge expense of $5.9 million, pursuant to Emerging Issues Task Force (“EITF”) No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. 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. Through December 31, 2002, the Company has paid cash of $4.4 million related to this restructuring. Approximately $0.9 million of the expense related to stock compensation for certain severed employees was reclassified from the restructuring liability during 2002 to additional paid-in capital. As of December 31, 2002, a $0.6 million liability is included in accrued expenses and other on the accompanying consolidated balance sheet. The Company expects the remaining liability to be substantially paid in 2003.

During 2000, the Company recognized a restructuring charge expense of $5.6 million, pursuant to Emerging Issues Task Force (“EITF”) No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. 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. The Company paid $0.2 million related to the 2000 restructuring liability for the year ended December 31, 2002, which completed the restructuring.

9.    Accrued Expenses and Other

Accrued expenses and other consisted of the following at:

	December 31,
	2002		2001
	(In thousands)
Accrued salaries and benefits	$	15,175	$	13,131
Accrued interest		2,343		2,616
Accrued restructuring		1,518		4,884
Deferred loyalty program		6,569		6,397
Other		4,081		3,026
Total	$	29,686	$	30,054

Deferred loyalty program accrued expenses consist primarily of liabilities associated with the Company’s Choice Privileges program. Choice Privileges is a frequent guest incentive program that enables members to earn points based on their spending levels at participating brands. The points may be redeemed for free accommodation or other benefits. Points can not be redeemed for cash.

F-28

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company collects 5% of program member’s room revenue from participating franchises. Revenues are deferred equal to the fair value of the future redemption obligation. Actuarial methods are used to estimate the eventual redemption rates and point values. Upon redemption of points, the Company recognizes the previously deferred revenue as well as the corresponding expense relating to the cost of the awards redeemed.

10.    Long-Term Debt

Debt consisted of the following at:

	December 31,
	2002		2001
	(In thousands)
$265 million competitive advance and multi-currency revolving credit facility with an effective rate of 3.05% and 3.69% at December 31, 2002 and 2001, respectively	$	200,708	$	180,525
$100 million senior notes with an effective rate of 7.22% at December 31, 2002 and 2001		99,655		99,591
$10 million line of credit with an effective rate of 2.50% at December 31, 2002		6,400		—
Other notes with an average effective rate of 3.30% and 4.90% at December 31, 2002 and 2001, respectively		1,028		1,180
Total debt	$	307,791	$	281,296

Scheduled maturities of debt as of December 31, 2002 were as follows:

Year	(In thousands)
2003	$	23,796
2004		21,237
2005		26,503
2006		136,177
2007		146
Thereafter		99,932
Total	$	307,791

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 originally provided 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 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. As amended, the 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. As of December 31, 2002, the Company is in compliance with all covenants under the New Credit Facility. The term loan ($98.7 million of which is outstanding at December 31, 2002) is payable over five years, $17.3 million of which is due in 2003. 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.

F-29

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 is paid semi-annually.

In August 2002, the Company entered into a new $10.0 million revolving line of credit with a maturity of August 2003. The new line of credit includes customary financial and other covenants that require the maintenance of certain ratios identical to those included in the Company’s existing senior credit facility. Borrowings under the line of credit bear interest at rates established at the time of borrowing based on prime minus 175 basis points. The Company had $6.4 million outstanding at December 31, 2002 under this line of credit.

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, 2002, 2001 and 2000 were $6.3 million, $5.2 million and $5.3 million, respectively. Net income (loss) attributable to the Company’s foreign operations was $2.4 million, $(35.2 million) and $(12.3 million) for the years ended December 31, 2002, 2001 and 2000, respectively.

Flag Choice Hotels

On July 1, 2002, the Company acquired a controlling interest in Flag Choice Hotels (“Flag”) (the “Flag Transaction”). Flag, based in Melbourne, Australia, is a franchisor of certain hotel brands in Australia, Papua New Guinea, Fiji and New Zealand. The acquisition of a controlling interest in Flag gave the Company the ability to control the Choice and Flag brands in Australia, Papua New Guinea and Fiji and the Flag brand in New Zealand.

Pursuant to the Flag Transaction, the Company converted an existing $1.1 million convertible note due from Flag into an additional 15% of Flag’s equity (beyond the 15% equity interest held prior to the Flag Transaction) and purchased an additional 25% of Flag’s equity for approximately $1.6 million. As of July 1, 2002, the Company’s total ownership in Flag is 55%.

Pursuant to the Flag Transaction, the Company gave the seller the right to “put” the remaining 45% equity interest in Flag to the Company for approximately $1.1 million. The put right was permitted to be exercised between January 1, 2003 and June 30, 2007. The Company accounts for the put right in accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS 133 requires the recognition of all derivatives, except certain qualifying hedges, as either assets or liabilities measured at fair value, with changes in value reflected as current period income or loss unless specific hedge accounting criteria are met. The fair value of the put rights was $0 at December 31, 2002, and accordingly, there was no impact on reported net income for the year ended December 31, 2002. The seller exercised the put right in January 2003 for the remaining 45%. The put transaction closed in February 2003, at which time Flag became a wholly-owned subsidiary.

The Company accounted for the Flag Transaction in accordance with SFAS No. 141, “Business Combinations”. The excess of the purchase price over the net tangible assets acquired of approximately $3.1 million has been allocated to identifiable intangible assets as follows:

	Estimated Fair Value		Estimated Useful Lives
	($000)
Trademarks and non-compete agreements	$	235	5 years
Franchise rights		2,904	5-15 years
	$	3,139

F-30

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The purchase price allocation is preliminary and further refinements may be made. The Company began consolidating the results of Flag on July 1, 2002. The pro forma results of operations as if Flag had been combined at the beginning of 2001 and 2002, would not be materially different from the Company’s reported results for those periods.

Choice Hotels Scandinavia

The Company accounts for its investment in the common stock of Choice Hotels Scandinavia (“CHS”) as an available for sale security in accordance with SFAS 115. The investment is included in other non-current assets in the accompanying consolidated balance sheets at fair value. As of December 31, 2002 and 2001, the fair value of the Company’s investment in CHS was $0.6 million, based on quoted market prices. During the years ended December 31, 2002, 2001 and 2000, the Company recognized approximately $89,000, $178,000 and $176,000, respectively of unrealized gains (losses) related to this investment as a component of other comprehensive income or loss.

Choice Hotels Canada, Inc.

The Company has a 50% interest in Choice Hotels Canada, Inc. (“CHC”), a joint venture with a third party. During 2002, the Company recorded $476,000 of dividend income related to this investment in the accompanying consolidated statements of income. The dividend was received by Choice in January 2003 and is included in accounts receivable on the accompanying consolidated balance sheet.

12.    Pension, Profit Sharing, and Incentive Plans

During 2002, 2001 and 2000, employees of the Company participated in a 401(k) retirement plan sponsored by the Company. For the years ended December 31, 2002, 2001 and 2000, the Company recorded compensation expense of $1.5 million, $1.7 million and $1.6 million, respectively, related to the plan. In accordance with the plan, the Company is permitted to make its matching contribution with Company stock. On an annual basis, the Company purchases shares with a fair value equal to the Company’s matching contribution and deposits the shares in the participant’s accounts with the plan investment custodian.

The Company has adopted the Choice Hotels International, Inc. Amended and Restated Supplemental Executive Retirement Plan (the “SERP”), a non-qualified defined benefit plan for certain senior executives. The Company accounts for the SERP in accordance with Statement of Financial Accounting Standards No. 87, “Employers Accounting for Pensions”. For the years ended December 31, 2002, 2001 and 2000, the Company recorded $0.3 million, $0.2 million and $0.2 million, respectively, of expense related to the SERP which was included in selling, general and administrative expense in the accompanying consolidated statements of income. As of December 31, 2002 and 2001, a liability of $1.1 million and $0.8 million, respectively, related to the SERP was included in other non-current liabilities in the accompanying consolidated balance sheets.

The Company maintains a non-qualified retirement savings and investment plan for certain employees whose pre-tax deferrals are limited under the Company’s 401(k) Plan. Employee and Company contributions are maintained in an irrevocable trust. Legally, the assets remain those of the Company; however, access to the trust assets is severely restricted. The trust cannot be revoked by the employer or an acquiror, but the assets are subject to the claims of the Company’s general creditors. The employee has no right to assign or transfer contractual rights in the trust. The Company accounts for the plan in accordance with Emerging Issues Task Force (“EITF”) No. 97-14, “Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested.” Pursuant to EITF 97-14, as of December 31, 2002 and 2001, the Company has recorded a deferred compensation liability of $8.6 million and $9.0 million, respectively, in other non-current liabilities in the accompanying consolidated balance sheets. The change in the deferred compensation obligation related to

F-31

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

changes in the fair value of the diversified assets held in trust is recorded in compensation expense. The diversified assets held in trust were $7.9 million and $8.2 million as of December 31, 2002 and 2001, respectively, and are recorded at their fair value, based on quoted market prices, in other non-current assets on the accompanying consolidated balance sheets. The change in the fair value of the diversified assets held in trust is recorded in accordance with SFAS 115 as trading security income (loss).

13.    Income Taxes

Income before income taxes were derived from the following:

	Years ended December 31,
	2002		2001			2000
	(In thousands)
Income before income taxes:
Domestic operations	$	93,418	$	80,647		$	80,982
Foreign operations		2,400		(35,230	)		(11,400	)
Income before income taxes	$	95,818	$	45,417		$	69,582

The provisions for income taxes are as follows:

	Years ended December 31,
	2002			2001			2000
	(In thousands)
Current tax expense
Federal	$	21,374		$	30,890		$	20,707
State		631			3,675			2,434
Foreign		661			665			886
Deferred tax (benefit) expense
Federal		11,297			(3,602	)		3,598
State		1,012			(597	)		(481	)
Foreign		(1	)		59			(7	)
Income taxes	$	34,974		$	31,090		$	27,137

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

	December 31,
	2002			2001
	(In thousands)
Depreciation and amortization	$	(20,171	)	$	(21,475	)
Prepaid expenses		(16,083	)		(17,736	)
Other		(9,572	)		(8,950	)
Gross deferred tax liabilities		(45,826	)		(48,161	)
Foreign operations		2,549			19,326
Accrued expenses		6,239			5,723
Other		4,270			2,578
Gross deferred tax assets		13,058			27,627
Deferred tax liability before valuation allowance		(32,768	)		(20,534	)
Valuation allowance		(12,737	)		(12,737	)
Net deferred tax liability	$	(45,505	)	$	(33,271	)

F-32

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Included in the accompanying consolidated balance sheet as follows:

	December 31,
	2002			2001
Current net deferred tax assets	$	2,229		$	1,888
Non-current net deferred tax liabilities		(47,734	)		(35,159	)
Net deferred tax liability		(45,505	)		(33,271	)

No provision has been made for U.S. federal deferred income taxes on approximately $12 million of accumulated and undistributed earnings of foreign subsidiaries at December 31, 2002 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,
	2002			2001			2000
	(In thousands, except Federal income tax rate)
Federal income tax rate		35	%		35	%		35	%
Federal taxes at statutory rate	$	33,536		$	15,896		$	24,354
State income taxes, net of federal tax benefit		1,068			1,120			1,269
Unrealized tax benefits		—			12,737			—
Other		370			1,337			1,514
Income tax expense	$	34,974		$	31,090		$	27,137

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

The Company has stock option plans for which it is authorized to grant options to purchase up to 9.3 million shares of the Company’s common stock, of which 1.4 million shares remain available for grant as of December 31, 2002. Stock options may be granted to officers, key employees and non-employee directors with an exercise price not less than the fair market value of the common stock on the date of grant.

In 2002, the Company granted key employees and non-employee directors 109,894 restricted shares of common stock with a fair value of $2.3 million on the date of grant, all of which vest over five years. 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 date of grant. 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 date of grant. The shares vest over a three year period. A total of 9,130 and 11,850 shares of restricted stock were forfeited in 2001 and 2000, respectively. The Company incurred compensation expense totaling $1.7 million, $0.7 million and $0.8 million related to the vesting of restricted stock during the years ended December 31, 2002, 2001 and 2000, respectively. The Company also 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.

F-33

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

A summary of the option activity under the stock option plans is as follows as of December 31, 2002, 2001 and 2000:

	2002				2001				2000
Fixed Options	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding at beginning of year	3,095,589		$	13.56	4,306,584		$	12.39	3,907,326		$	11.19
Granted	601,895		$	21.53	348,836			15.08	1,187,845			15.71
Exercised	(442,869	)	$	13.01	(1,363,050	)		9.90	(288,634	)		7.22
Cancelled	(142,624	)	$	16.83	(196,781	)		15.52	(499,953	)		15.10
Outstanding at end of year	3,111,991		$	15.03	3,095,589		$	13.56	4,306,584		$	12.39
Options exercisable at year end	1,533,471		$	12.96	1,374,395		$	12.52	2,035,332		$	10.49
Weighted average fair value of options granted during the year			$	8.95			$	7.67			$	3.78

The following table summarizes information about stock options outstanding at December 31, 2002:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding at 12/31/02	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable at 12/31/02	Weighted Average Exercise Price
$  5.00 to   9.00	111,741	3.8 years	$	7.27	75,741	$	7.01
9.01 to 13.00	1,206,076	5.2 years	$	12.09	887,267	$	12.02
13.01 to 17.00	1,208,147	6.2 years	$	15.59	566,463	$	15.20
17.01 to 21.00	40,000	9.0 years	$	19.36	4,000	$	17.80
21.01 to 25.00	506,027	9.0 years	$	21.22	—		—
25.01 to 29.00	40,000	6.5 years	$	26.06	—		—
	3,111,991	6.2 years	$	15.03	1,533,471	$	12.96

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.

For purposes of the pro forma disclosure included in the stock based compensation section of Note 1, 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 the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 2002, 2001 and 2000:

	2002	2001	2000
Risk-free interest rate	3.58%	5.03%	5.10%
Volatility	35.43%	43.3%	56.6%
Expected Lives	6 years	10 years	10 years
Dividend Yield	0%	0%	0%

The Company announced a stock repurchase program on June 25, 1998. Treasury stock is carried at cost in the accompany consolidated balance sheets and consolidated statements of shareholders’ equity (deficit) and comprehensive income. Through December 31, 2002, the Company had repurchased 26.5 million shares of its

F-34

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

common stock at a total cost of $434.9 million, including 5.4 million shares of common stock at a total cost of $120.9 million during the year ended December 31, 2002. During 2002, the Company repurchased 1.7 million shares at a total cost of $41.7 million from the Company’s largest shareholder and family. From December 31, 2002 through March 11, 2003, the Company has purchased 1.3 million shares at a total cost of $30.3 million, including 0.5 million shares at a total cost of $12.3 million from the Company’s largest shareholder and family.

The Company paid approximately $41,000 to and received approximately $104,000 from corporations owned or controlled by family members of the Company’s largest shareholder related to the lease of personal and real property during 2002.

15. Comprehensive Income

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

	December 31,
	2002			2001			2000
	(In thousands)
Unrealized (losses) gains on available-for-sale securities	$	(80	)	$	(202	)	$	108
Foreign currency translation adjustments		(235	)		(576	)		(162	)
Deferred gain on hedging activity		357			424			—
Total accumulated other comprehensive income (loss)	$	42		$	(354	)	$	(54	)

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

	Amount Before Taxes			Income Tax (Expense)/Benefit			Amount Net of Taxes
	(In thousands)
2002
Net unrealized gains	$	195		$	(73	)	$	122
Foreign currency translation adjustment, net		341			—			341
Amortization of deferred gain on hedge		(67	)		—			(67	)
Total other comprehensive income	$	469		$	(73	)	$	396
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 loss	$	(942	)	$	(317	)	$	(1,259	)

Below represents the detail of other comprehensive income:

	December 31,
	2002			2001			2000
Unrealized holding gains (losses) arising during the period, net	$	122		$	(352	)	$	(176	)
Less: reclassification adjustments for losses/gains included in net income		—			42			703
Net unrealized holding gains (losses) arising during the period	$	122		$	(310	)	$	527
Foreign currency translation adjustments	$	341		$	(414	)	$	(291	)
Plus: reclassification of loss on liquidation of foreign subsidiaries		—			—			(1,495	)
Net foreign currency translation adjustments	$	341		$	(414	)	$	(1,786	)
Amortization of deferred gain on hedging activity	$	(67	)	$	—		$	—

F-35

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In December 1999, the Company entered into an interest rate swap agreement to fix certain of its variable rate debt in order to reduce the Company’s exposure to fluctuations in interest rates. On March 3, 2000, the interest rate swap agreement was settled resulting in a deferred gain. In accordance with SFAS 133, the unamortized gain was reclassified in 2001 to other comprehensive income and is being amortized over the remaining life of the related debt as a reduction of interest expense. Amortization of approximately $67,000 was recorded in 2002 related to this deferred gain.

16.    Earnings Per Share

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

	Years Ended December 31,
	2002		2001		2000
(In millions, except per share amounts)
Computation of Basic Earnings Per Share:
Net income	$	60.8	$	14.3	$	42.4
Weighted average shares outstanding-basic		39.3		44.2		52.9
Basic earnings per share	$	1.55	$	0.32	$	0.80
Computation of Diluted Earnings Per Share:
Net income for diluted earnings per share	$	60.8	$	14.3	$	42.4
Weighted average shares outstanding-basic		39.3		44.2		52.9
Effect of Dilutive Securities:
Employee stock option plan		0.8		0.4		0.4
Weighted average shares outstanding-diluted		40.1		44.6		53.3
Diluted earning per share	$	1.52	$	0.32	$	0.80

The effect of dilutive securities is computed using the treasury stock method and average market prices during the period. In 2002 and 2000, the Company excluded 50,000 and 2,725,696 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 $12.9 million, $12.0 million and $10.2 million for the years ended December 31, 2002, 2001 and 2000, respectively. The Company received sublease rental income related to computer equipment leased to franchisees totaling $9.1 million, $7.6 million and $5.0 million during the years ended December 31, 2002, 2001 and 2000, respectively. Future minimum lease payments are as follows:

	2003			2004			2005			2006		2007		Thereafter		Total
	(In thousands)
Minimum lease payments	$	9,395		$	7,258		$	4,685		$	3,457	$	3,547	$	20,051	$	48,393
Minimum sublease rentals		(6,213	)		(3,988	)		(1,323	)		—		—		—		(11,524	)
	$	3,182		$	3,270		$	3,362		$	3,457	$	3,547	$	20,051	$	36,869

F-36

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

18.    Reportable Segment Information

The Company has a single reportable segment encompassing its franchising business. Revenues from the franchising business include royalty fees, initial franchise and relicensing fees, marketing and reservation fees, partner services revenue and other revenue. The Company is obligated under its franchise agreements to provide marketing and reservation services appropriate for the successful operation of its systems. These services do not represent separate 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 for marketing and reservation activities to calculate franchising operating income. Corporate and other revenue consists of 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, 2002
	Franchising		Corporate & Other			Elimination Adjustments		Consolidated
	(In thousands)
Revenues	$	362,231	$	3,331		—		$	365,562
Operating income (loss)		136,182		(31,482	)	—			104,700
Depreciation and amortization		13,817		10,460		(13,026	)		11,251
Capital expenditures		4,925		7,308		—			12,233
Total assets		215,427		98,955		—			314,382
	Year Ended December 31, 2001
	Franchising		Corporate & Other			Elimination 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
	Franchising		Corporate & Other			Elimination 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

Long-lived assets related to international operations were $8.1 million, $7.1 million and $10.9 million as of December 31, 2002, 2001 and 2000, respectively. All other long-lived assets of the Company are associated with domestic activities.

F-37

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 £7.8 million (approximately US$11.4 million) to guarantee additional credit facilities from Friendly’s banks. At December 31, 2001 and 2002, the balance was $7.6 million and $4.4 million, respectively. The balance available on the letter of credit was reduced to £5.0 million (approximately US$7.3 million) during 2002. The letter of credit was terminated on January 28, 2003.

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 expires in December 2003.

In the ordinary course of business, the Company enters into numerous agreements that contain standard guarantees and indemnities whereby the Company indemnifies another party for breaches of representations and warranties. Such guarantees or indemnifications are granted under various agreements, including those governing (i) purchases or sales of assets or businesses, (ii) leases of real estate, (iii) licensing of trademarks, (iv) access to credit facilities, and (v) issuances of debt or equity securities. The guarantees or indemnifications issued are for the benefit of the (i) buyers in sale agreements and sellers in purchase agreements, (ii) landlords in lease contracts, (iii) franchisees in a licensing agreements, (iv) financial institutions in credit facility arrangements, (v) underwriters in debt or equity security issuances and (vi) other operating agreements. In addition, these parties are also indemnified against any third party claim resulting from the transaction that is contemplated in the underlying agreement. While some of these guarantees extend only for the duration of the underlying agreement, many survive the expiration of the term of the agreement or extend into perpetuity (unless subject to a legal statute of limitations). There are no specific limitations on the maximum potential amount of future payments that the Company could be required to make under these guarantees, nor is the Company able to develop an estimate of the maximum potential amount of future payments to be made under these guarantees as the triggering events are not subject to predictability. With respect to certain of the aforementioned guarantees, such as indemnifications of landlords against third party claims for the use of real estate property leased by the Company, the Company maintains insurance coverage that mitigates any potential payments to be made.

20.    Fair Value of Financial Instruments

The balance sheet carrying amount of cash and cash equivalents and receivables approximates fair value due to the short term nature of these items. Long-term debt consists of bank loans and senior notes. Interest rates on the Company’s bank loans adjust frequently based on current market rates; accordingly, the carrying amount of the Company’s bank loans approximates fair value. The $100 million unsecured senior notes have an approximate fair value at December 31, 2002 and 2001 of $102.5 million and $95.9 million, respectively, based on quoted market prices. The New Note from Sunburst has an approximate fair value of $42.7 and $40.5 million at December 31, 2002 and 2001, respectively.

F-38

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

21.    Impact of Recently Issued Accounting Standards

In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145, among other matters, updates and clarifies existing accounting pronouncements related to gains and losses from the extinguishment of debt and certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of SFAS No. 145 were generally effective as of May 15, 2002. The adoption of SFAS No. 145 did not have a material impact on our results of operations or financial position.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires companies to recognize costs associated with exit (including restructuring) or disposal activities at fair value when the related liability is incurred rather than at the date of a commitment to an exit or disposal plan under prior practice. Costs covered by the standard include certain contract termination costs, certain employee termination benefits and other costs to consolidate or close facilities and relocate employees that are associated with an activity being exited or long-lived assets being disposed. As permitted by SFAS No. 146, we adopted SFAS No. 146 in 2002.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Such Interpretation elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this Interpretation apply to guarantees issued or modified after December 31, 2002. We will adopt these provisions on January 1, 2003. The disclosure provisions of this Interpretation are effective for financial statements with annual periods ending after December 15, 2002. We have applied the disclosure provisions of this Interpretation as of December 31, 2002, as required (see Note 19—Commitments and Contingencies to our Consolidated Financial Statements).

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition and disclosure provisions of SFAS No. 148 are effective for financial statements for interim and fiscal years ending after December 15, 2002, with early application permitted for entities with a fiscal year ending prior to December 15, 2002. We have adopted the disclosure provisions of SFAS No. 148 effective December 31, 2002 and the transition provisions effective January 1, 2003.

F-39

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

22.    Selected Quarterly Financial Data– (Unaudited)

2002	First		Second		Third		Fourth			Total Year
	(In thousands, except per share data)
Revenues	$	75,753	$	100,469	$	105,030	$	84,310		$	365,562
Operating income		16,109		27,447		36,585		24,559			104,700
Income before income taxes		14,056		25,178		33,723		22,861			95,818
Net income		8,574		15,306		21,867		15,097			60,844
Per basic share:
Net income	$	0.21	$	0.38	$	0.55	$	0.41		$	1.55
Per diluted share:
Net income	$	0.20	$	0.38	$	0.54	$	0.40		$	1.52
2001	First		Second		Third		Fourth			Total Year
	(In thousands, except per share data)
	As Revised (See Note 1)
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	)

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

F-40

EX-10.01

                                                                   EXHIBIT 10.01

                              AMENDED AND RESTATED
                              EMPLOYMENT AGREEMENT

     This Agreement ("Agreement") dated this 13th day of November, 2002 between
Choice Hotels International, Inc. ("Employer"), a Delaware corporation with
principal offices at 10750 Columbia Pike, Silver Spring, Maryland 20901, and
Charles A. Ledsinger ("Employee"), amends and restates that employment agreement
dated July 31, 1998 and sets forth the terms and conditions governing the
employment relationship between Employee and Employer.

     1.   Employment. During the term of this Agreement, as hereinafter defined,
Employer hereby employs Employee as President and Chief Executive Officer
("CEO"). Employee hereby accepts such employment upon the terms and conditions
hereinafter set forth and agrees to faithfully and to the best of his ability
perform such duties as may be from time to time assigned by Employer's Board of
Directors, such duties to be rendered at the principal office of Employer,
subject to reasonable travel. The Employer shall assign to Employee only those
duties consistent with his position as President and CEO. The Employee, in his
position as President and CEO, shall report directly to the Employer's Board of
Directors and all senior executives of the Employer shall report either directly
to Employee or indirectly through other senior executives. Employee also agrees
to perform his duties in accordance with policies established by Employer's
Board of Directors, which may be changed from time to time. During the term of
this Agreement, Employee shall be nominated by the Board of Directors for
re-election to the Employer's Board of Directors as a Class III director.

     2.   Term. Subject to the provisions for termination hereinafter provided,
the term of this Agreement shall begin on November 13, 2002 ("Effective Date")
and shall terminate four (4) years thereafter (the "Termination Date"). The
Agreement shall automatically be extended for successive one-year terms unless
either party gives written notice no less than 270 days prior to the Termination
Date that it elects not to extend the Termination Date.

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

          (a)  Salary. A base salary of Six Hundred Fourteen Thousand Eight
          Hundred Dollars ($614,800) per annum payable in equal bi-weekly
          installments. Such salary shall be reviewed by the Compensation
          Committee of the Board of Directors of Employer on the next annual
          review of officers and each annual review thereafter and may be
          increased at the discretion of Employer.

          (b)  Incentive Bonus. Employee shall have the opportunity to earn a
          target bonus of Sixty-Five Percent (65%) per annum of the base salary
          set forth in subparagraph 3(a) above in Employer's bonus plans as
          adopted from time to time by Employer's Board of Directors.



          (c)  Restricted Stock. At the Effective Date, Employer shall issue to
          Employee 100,000 restricted shares of Choice Hotels common stock
          ("Common Stock"). The restrictions on such shares shall lapse upon
          vesting, which shall occur in five (5) equal annual installments
          beginning one year from the Effective Date; provided, however, vesting
          of any then unvested shares shall accelerate and shall occur
          immediately upon the death, Constructive Termination (as defined in
          Section 7(c) below) or Change of Control Termination (as defined in
          Section 11(d)) of Employee.

          (d)  Automobile. Employer shall provide Employee with an allowance for
          automobile expenses of $1,100 per month beginning on the Effective
          Date.

          (e)  Club Membership. Employer shall provide Employee with an
          appropriate corporate membership, including initial and annual fees,
          at a dining and/or recreational club at the choice of Employee for the
          purpose of business entertainment.

          (f)  Stock Awards. Employee shall be eligible to receive annual awards
          under the Choice Hotels International, Inc. Long Term Incentive Plan
          ("LTIP"), or similar plan, to purchase Common Stock in accordance with
          the policy of the Choice Hotels Board as in effect from time to time.

          (g)  SERP and Deferred Compensation Plan. At the Commencement Date,
          Employee shall participate in the Choice Hotels International, Inc.
          Supplemental Executive Retirement Plan ("SERP") and the Choice Hotels
          International Executive Deferred Compensation Plan approved September
          25, 2002 ("Deferred Comp Plan"). As applied to the Employee:

            .  Section 1.10 of the SERP shall be amended by adding the following
               at the end thereto:

               "From and after attaining age 55, the Participant's Years of
               Service shall be deemed to be his actual Years of Service plus 10
               years";

            .  For purposes of Section 5.1 of the Deferred Comp Plan, Employee
               upon attaining age fifty-five, shall be deemed to have ten Years
               of Services.

          (h)  Other Benefits. Employee shall, when eligible, be entitled to
          participate in all other fringe benefits, including vacation policy,
          generally accorded the most senior executive officers of Employer as
          are in effect from time to time on the same basis as such other senior
          executive officers.

     4.   Extent of Services. Employee shall devote his full professional time,
attention, and energies to the business of Employer, and shall not during the
term of this Agreement be

                                        2



engaged in any other business activity whether or not such business activity is
pursued for gain, profit, or other pecuniary advantage; but the foregoing shall
not be construed as preventing Employee from investing his assets in (i) the
securities of public companies, or (ii) the securities of private companies or
limited partnerships outside the lodging industry, if such holdings are passive
investments of one percent (1%) or less of outstanding securities and Employee
does not hold positions of officer, employee or general partner. Employee shall
be permitted to serve as a director of companies outside of the lodging industry
so long as such service does not inhibit his performance of services to the
Employer. Employee shall not be permitted to serve as a director of any company
within the lodging industry unless (i) the Corporate Compliance officer of the
Employer has determined that there is no conflict of interest and (ii) such
service does not inhibit his performance of services to the Employer. Employee
warrants and represents that he has no contracts or obligations to others which
would materially inhibit the performance of his services under this Agreement.

     5.   Disclosure and Use of Confidential Information; Non-Compete.

     (a) Employee recognizes and acknowledges that information about Employer's
and affiliates' present and prospective clients, customers, franchises,
management contracts, acquisitions and personnel, as they may exist from time to
time, and to the extent it has not been otherwise disclosed, is a valuable,
special and unique asset of Employer's business ("Confidential Information").
Throughout the term of this Agreement and for a period of two (2) years after
its termination or expiration for whatever cause or reason except as required by
applicable law, Employee shall not directly or indirectly, or cause others to,
make use of or disclose to others any Confidential Information. Notwithstanding
the foregoing, Confidential Information does not include information which (i)
was or becomes generally available to the public other than as a result of a
disclosure by Employee or (ii) is developed by Employee or on his behalf without
reliance on information furnished to Employee by Employer or its agents.

     (b) For a period of two years after the expiration or termination of the
Employee's employment with the Employer, the Employee will not, except with the
prior written consent of the Board, directly or indirectly, own, manage,
operate, join, control, finance or participate in the ownership, management,
operation, control or financing of, or be connected as an officer, director,
employee, partner, principal, agent, representative, consultant or otherwise
with, or use or permit Employee's name to be used in connection with, any
business or enterprise which is engaged in the mid-market or economy hotel
franchising business or any other line of business in which the Employer is
materially engaged at the time of termination ("Competing Business"); provided,
however, the foregoing shall not be construed as preventing Employee from (i)
investing his assets in (A) the securities of any Competing Business that is a
public company or (B) the securities of any Competing Business that is a
privately-held corporation, limited partnership, limited liability company or
other business entity, if such holdings are passive investments of one percent
(1%) or less of such entity's outstanding securities or (ii) becoming an
employee, agent or representative of, consultant to, or otherwise connected with
any business entity that has multiple lines of business, some of which are not a
Competing Business, if

                                        3



Employee's services for such entity are restricted so that he will provide no
services or other assistance in support of, and will not otherwise be involved
with, any such Competing Business conducted by such entity.

     (c) During the term of this Agreement and for a period of two years after
its expiration or termination, Employee agrees not to solicit for employment,
directly or indirectly, on his behalf or on behalf of any person or entity,
other than on behalf of Employer, any person employed by Employer, or its
subsidiaries or affiliates during such period, unless Employer consents in
writing. Additionally, during such period, Employee agrees not to solicit for
business nor to solicit to end their relationship with Employer any person or
entity who was a franchisee of Employer (or its subsidiaries) during the Term of
this Agreement; provided, however, the foregoing shall not be construed as
preventing Employee from soliciting business from any such franchisee that is
for a line of business other than any Competing Business.

     (d) The Employee acknowledges and agrees that the restrictions contained in
this Section are reasonable and necessary to protect and preserve the legitimate
interests, properties, goodwill and business of the Employer, that the Employer
would not have entered into this Agreement in the absence of such restrictions
and that irreparable injury will be suffered by the Employer should the Employee
breach any of those provisions. Employee represents and acknowledges that (i)
the Employee has been advised by the Employer to consult Employee's own legal
counsel in respect of this Agreement, and (ii) that the Employee has had full
opportunity, prior to execution of this Agreement, to review thoroughly this
Agreement with the Employee's counsel. The Employee further acknowledges and
agrees that a breach of any of the restrictions in this Section cannot be
adequately compensated by monetary damages and that the Employer shall be
entitled to seek preliminary and permanent injunctive relief, without the
necessity of proving actual damages, as well as any other appropriate equitable,
which rights shall be cumulative and in addition to any other rights or remedies
to which the Employer may be entitled. In the event that any of the provisions
of this Section should ever be adjudicated to exceed the time, geographic,
service, or other limitations permitted by applicable law in any jurisdiction,
it is the intention of the parties that the provision shall be amended to the
extent of the maximum time, geographic, service, or other limitations permitted
by applicable law, that such amendment shall apply only within the jurisdiction
of the court that made such adjudication and that the provision otherwise be
enforced to the maximum extent permitted by law.

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

     7.   Constructive Termination.

                                        4



     (a) Nothing contained in this Agreement is intended to nor shall be
construed to abrogate, limit or affect the powers, rights and privileges of the
Board of Directors or stockholders to remove Employee from the positions set
forth in Section 1, with or without Cause (as defined in Section 10 below),
during the term of this Agreement or to elect someone other than Employee to
those positions, as provided by law and the By-Laws of Employer.

     (b) If Employee is Constructively Terminated (as defined in Section 7(c)
below), it is expressly understood and agreed that Employee's rights under this
Agreement shall in no way be prejudiced. Accordingly, Employee shall be entitled
to receive all forms of compensation referred to in Section 3 above through the
expiration of the term specified in Section 2, including bonuses (calculated
based only on the actual payout of the EPS portion of the bonus as all
Employer's officers receive in a given year) but excluding ungranted stock
options. Additionally, all unvested Restricted Stock and stock options then held
by Employee shall become immediately fully vested. From and after the date of
Constructive Termination, Employee shall have no further obligation to provide
any services to Employer under this Agreement, and shall not be required to
mitigate damages but nevertheless shall be entitled in his sole discretion to
pursue other employment. If Employee chooses to pursue and accept other
employment after Constructive Termination, Employer shall be entitled to receive
as offset, and thereby reduce its payment, the amount received by Employee from
any other active employment. As a condition to Employee receiving his
compensation from Employer, Employee agrees to permit verification of his
employment records and Federal income tax returns by an independent attorney or
accountant, selected by Employer but reasonably acceptable to Employee, who
agrees to preserve the confidentiality of the information disclosed by Employee
except to the extent required to permit Employer to verify the amount received
by Employee from other active employment. Employer shall receive credit for
unemployment insurance benefits, social security insurance or like amounts
actually received by Employee.

     (c) For purposes of this Agreement, "Constructively Terminated" shall mean
(i) Employer's removal or termination of Employee other than in accordance with
Section 10, (ii) failure of the Employer to place Employee's name in nomination
for re-election to the Employer's Board, (iii) assignment of duties by the
Employer inconsistent with Section 1, (iv) a decrease in Employee's compensation
or benefits (unless a similar decrease is imposed on all senior executives), (v)
a change in Employee's title or the line of reporting set forth in Section 1,
(vi) a significant reduction in the scope of Employee's authority, position,
duties or responsibilities, (vii) a significant change in Employer's annual
bonus program which adversely affects Employee, or (viii) any other material
breach of this Agreement by Employer, provided Employer shall be given fourteen
(14) days advance written notice of such claim of material breach, which written
notice shall specify in reasonable detail the grounds for such claim of material
breach, and "Constructive Termination" shall mean the occurrence of the
foregoing. Except in the case of bad faith, Employer shall have an opportunity
to cure the basis for Constructive Termination during the fourteen (14) day
period after written notice. If Employer fails to cure the material breach
within such fourteen (14) day period, Employee shall be Constructively
Terminated as of the last day of such fourteen (14) day period.

                                        5



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

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

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

     (a)  Upon expiration of its term;

     (b)  For Cause, which means Employee's gross negligence, willful
     misconduct, willful nonfeasance, material breach of this Agreement,
     conviction following final disposition of any available appeal of a felony,
     or pleading guilty or no contest to a felony. Employee shall be entitled to
     fourteen (14) days advance written notice of termination, except where the
     basis for termination constitutes willful conduct on the part of Employee
     involving dishonesty or bad faith, in which case the termination shall be
     effective upon the sending of notice. Such written notice shall specify in
     reasonable detail the grounds for Cause and Employee shall have an
     opportunity to contest or cure the basis for termination during the
     fourteen (14) day period after written notice.

     (c)  Subject to state and federal laws, if Employee is unable to perform
     the essential functions of the services described herein, after reasonable
     accommodation, for more than 180 days (whether or not consecutive) in any
     period of 365 consecutive days, Employer shall have the right to terminate
     this Agreement by written notice to Employee. In the event of such
     termination, all non-vested stock option and other non-vested obligations
     of Employer to Employee pursuant to this Agreement shall terminate.

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

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

     11.  Change of Control Severance.

     (a)  If, within twelve (12) months after a Change in Control, as defined in
     Section 11(c), there occurs a Change of Control Termination, as defined in
     Section 11(d), Employee may elect to receive as severance compensation
     either (i) the amount of salary and bonuses payable to him under this
     Agreement through the end of the term, such

                                        6



     compensation to be paid and to be subject to offset as provided n Section
     7(b), or (ii) a severance payment in an amount equal to 250% of his base
     salary at the rate in effect at the time of termination plus 250% of the
     amount of any full year bonus awarded to Employee for the year immediately
     preceding the Change of Control (or the maximum target bonus if no bonus
     was awarded in the prior year). Employee may make this election by giving
     written notice to the Employer no later than sixty (60) days after the date
     of the date of employment termination. If Employee makes this election, the
     Employer shall pay the severance payment to Employee no later than thirty
     (30) days after the date on which Employee gives notice of such election.
     Regardless of which alternative form of severance compensation is elected
     by Employee, all unvested Restricted Stock and stock options then held by
     Employee shall automatically become fully vested as of the date of the
     Change of Control Termination.

     (b)  Employee's right to receive the benefits described in Section 11(a)
     shall be conditioned upon Employee executing Employer's standard release
     agreement in which Employee releases all claims against Employer.

     (c)  A Change in Control of the Employer shall occur upon the happening of
     the earliest to occur of the following:

          1. Any "person" as such term is used in Sections 13(d) and 14(d) of
     the Securities Exchange Act of 1934, as amended (other than (i) the
     Employer, (ii) any trustee or other fiduciary holding securities under an
     employee benefit plan of the Employer, (iii) any corporations owned,
     directly or indirectly, by the stockholders of the Employer in
     substantially the same proportions as their ownership of stock, (iv)
     Stewart Bainum, his wife, their lineal descendants and their spouses (so
     long as they remain spouses) and the estate of any of the foregoing
     persons, and any partnership, trust, corporation or other entity to the
     extent shares of common stock (or their equivalent) are considered to be
     beneficially owned by any of the persons or estates referred to in the
     foregoing provisions of this subsection 11(b) or any transferee thereof, or
     (v) the Baron Entities, unless such entities, in the aggregate,
     beneficially own more than 19,715,000 shares of the Employer's common
     stock) becomes the "beneficial owner" (as defined in Rule 13d-3 under the
     Exchange Act), directly or indirectly, of securities of the Employer
     representing 33% or more of the combined voting power of the Employer's
     then outstanding voting securities.

          2. Individuals constituting the Board on the Effective Date and the
     successors of such individuals ("Continuing Directors") cease to constitute
     a majority of the Board. For this purpose, a director shall be a successor
     if and only if he or she was nominated by a Board (or a Nominating
     Committee thereof) on which individuals constituting the Board on the
     Effective Date and their successors (determined by prior application of
     this sentence) constituted a majority.

                                        7



          3. The stockholders of the Employer approve a plan of merger or
     consolidation ("Combination") with any other corporation or legal person,
     other than a Combination which would result in stockholders of the Employer
     immediately prior to the Combination owning, immediately thereafter, more
     than sixty-five percent (65%) of the combined voting power of either the
     surviving entity or the entity owning directly or indirectly all of the
     common stock, or its equivalent, of the surviving entity; provided,
     however, that if stockholder approval is not required for such Combination,
     the Change in Control shall occur upon the consummation of such
     Combination.

          4. The stockholders of the Employer approve a plan of complete
     liquidation of the Employer or an agreement for the sale or disposition by
     the Employer of all or substantially all of the Employer's stock and/or
     assets, or accept a tender offer for substantially all of the Employer's
     stock (or any transaction having a similar effect); provided, however, that
     if stockholder approval is not required for such transaction, the Change in
     Control shall occur upon consummation of such transaction.

     For purposes of this Section 11(c), Baron Entities shall mean Baron Capital
     Group, Inc., BAMCO, Inc., Baron Capital Management, Inc., Baron Asset Fund
     and Ronald Baron.

          (d)  A Change of Control Termination shall mean and include the
     termination of Employee's employment with Employer at any time during the
     twelve (12) month period after the Change of Control if such termination is
     (i) by the Employer, (ii) a Constructive Termination or (iii) by the
     resignation of Employee, in his discretion, upon written notice to Employer
     given no less than sixty (60) days prior to the date of termination.

     12.  Excise Taxes.

          (a)  Anything in this Agreement to the contrary notwithstanding, if it
shall be determined that any payment or distribution to the Employee or for the
Employee's benefit (whether paid or payable or distributed or distributable)
pursuant to the terms of this Agreement or otherwise (the "Payment") would be
subject to the excise tax imposed by section 4999 of the Internal Revenue Code
(the "Excise Tax"), then the Employee shall be entitled to receive from Employer
an additional payment (the "Gross-Up Payment") in an amount such that the net
amount of the Payment and the Gross-Up Payment retained by the Employee after
the calculation and deduction of all Excise Taxes (including any interest or
penalties imposed with respect to such taxes) on the payment and all federal,
state and local income tax, employment tax and Excise Tax (including any
interest or penalties imposed with respect to such taxes) on the Gross-Up
Payment provided for in this Section, and taking into account any lost or
reduced tax deductions on account of the Gross-Up Payment, shall be equal to the
Payment;

                                        8



          (b)  All determinations required to be made under this Section,
including whether and when the Gross-Up Payment is required and the amount of
such Gross-Up Payment, and the assumptions to be utilized in arriving at such
determinations shall be made by Accountants which Employer shall request provide
the Employee and Employer with detailed supporting calculations with respect to
such Gross-Up Payment at the time the Employee is entitled to receive the
Payment. For the purposes of this Section, the "Accountants" shall mean
Employer's independent certified public accountants. All fees and expenses of
the Accountants shall be borne solely by Employer. For the purposes of
determining whether any of the Payments will be subject to the Excise Tax and
the amount of such Excise Tax, such Payments will be treated as "parachute
payments" within the meaning of section 280G of the Code, and all "parachute
payments" in excess of the "base amount" (as defined under section 280G(b)(3) of
the Code) shall be treated as subject to the excise Tax, unless and except to
the extent that in the opinion of the Accountants such Payments (in whole or in
part) either do not constitute "parachute payments" or represent reasonable
compensation for services actually rendered (within the meaning of section
280G(b)(4) of the Code) in excess of the "base amount," or such "parachute
payments" are otherwise not subject to such Excise Tax; for purposes of
determining the amount of the Gross-Up Payment the Employee shall be deemed to
pay Federal income taxes at the highest applicable marginal rate of Federal
income taxation for the calendar year in which the Gross-Up Payment is to be
made and to pay any applicable state and local income taxes at the highest
applicable marginal rate of taxation for the calendar year in which the Gross-Up
Payment is to be made, net of the maximum reduction in Federal income taxes
which could be obtained from the deduction of such state or local taxes if paid
in such year (determined without regard to limitations on deductions based upon
the amount of the Employee's adjusted gross income); and to have otherwise
allowable deductions for Federal, state and local income tax purposes at least
equal to those disallowed because of the inclusion of the Gross-Up Payment in
the Employee's adjusted gross income. Any Gross-Up Payment with respect to any
Payment shall be paid by Employer at the time the Employee is entitled to
receive the Payment. Any determination by the Accountants shall be binding upon
Employer and the Employee. As a result of uncertainty in the application of
section 4999 of the Code at the time of the initial determination by the
Accountants hereunder, it is possible that the Gross-Up Payment made will have
been an amount less than Employer should have paid pursuant to this Section (the
"Underpayment"). In the event that Employer exhausts its remedies and the
Employee is required to make a payment of any Excise Tax, the Underpayment shall
be promptly paid by Employer to or for the Employee's benefit.

     13.  Legal Fees. Employer shall reimburse the Employee for all reasonable
attorneys fees incurred in connection with the negotiation and execution of this
Agreement.

     14.  Condition to Effectiveness. This Agreement shall not be effective
until approved by Employer's Board of Directors.

     15.  Entire Agreement. This instrument contains the entire agreement of the
parties. It

                                        9



may be changed only by an agreement in writing signed by the party against whom
enforcement of any waiver, change, modification, extension or discharge is
sought. This Agreement supersedes all previous agreements between the parties
with respect to the matters contained herein. This Agreement shall be governed
by the laws of the State of Maryland, and any disputes arising out of or
relating to this Agreement shall be brought and heard in any court of competent
jurisdiction in the State of Maryland.

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

                                         Employer:

                                         CHOICE HOTELS INTERNATIONAL, INC.


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

                                         Employee:


                                         ------------------------------------
                                         Charles A. Ledsinger

                                       10

EX-10.13

                        CHOICE HOTELS INTERNATIONAL, INC.

                      EXECUTIVE DEFERRED COMPENSATION PLAN


                            Effective January 1, 2003




                                TABLE OF CONTENTS



                                                                                                       PAGE
                                                                                                       ----
                                                                                                     
ARTICLE I--PURPOSE AND EFFECTIVE DATE.................................................................. 1

ARTICLE II--DEFINITIONS................................................................................ 1

  2.1   Account........................................................................................ 1
  2.2   Administrative Committee....................................................................... 1
  2.3   Beneficiary.................................................................................... 1
  2.4   Board.......................................................................................... 1
  2.5   Change in Control.............................................................................. 1
  2.6   Code........................................................................................... 2
  2.7   Company........................................................................................ 2
  2.8   Compensation................................................................................... 3
  2.9   Deferral Election.............................................................................. 3
  2.10  Disability..................................................................................... 3
  2.11  Discretionary Contribution..................................................................... 3
  2.12  Effective Date................................................................................. 3
  2.13  Elected Deferred Compensation.................................................................. 3
  2.14  Employer....................................................................................... 3
  2.15  Financial Hardship............................................................................. 3
  2.16  Hardship Distribution.......................................................................... 4
  2.17  Match Rate..................................................................................... 4
  2.18  Matching Contribution.......................................................................... 4
  2.19  Moody's Rate of Return......................................................................... 4
  2.20  Moody's Plus Rate of Return.................................................................... 4
  2.21  Participant.................................................................................... 4
  2.22  Participation Agreement........................................................................ 4
  2.23  Plan........................................................................................... 5
  2.24  Plan Year...................................................................................... 5
  2.25  Small Benefit.................................................................................. 5
  2.26  Transfer Contribution.......................................................................... 5
  2.27  Year of Service................................................................................ 5

ARTICLE III--PARTICIPATION AND DEFERRAL ELECTIONS...................................................... 5

  3.1   Eligibility and Participation.................................................................. 5
  3.2   Deferral Elections............................................................................. 5
  3.3   Commencement, Duration and Modification of Deferral Election................................... 6


                                                                             (i)



                                TABLE OF CONTENTS



                                                                                                       PAGE
                                                                                                       ----
                                                                                                     
ARTICLE IV--DEFERRED COMPENSATION ACCOUNTS.............................................................  6

  4.1   Accounts.......................................................................................  6
  4.2   Crediting of Deferrals.........................................................................  6
  4.3   Basic Account..................................................................................  6
  4.4   Matching Contribution Account..................................................................  6
  4.5   Discretionary Contribution Account.............................................................  7
  4.6   Transfer Contribution..........................................................................  7
  4.7   Vesting of Accounts............................................................................  7
  4.8   Statement of Accounts..........................................................................  8

ARTICLE V--INVESTMENT AND EARNINGS.....................................................................  8

  5.1   Plan Investments...............................................................................  8
  5.2   Crediting Investment Gains and Losses..........................................................  8

ARTICLE VI--PLAN BENEFITS..............................................................................  8

  6.1   Commencement and Distribution Options..........................................................  8
  6.2   Death Benefits.................................................................................  9
  6.3   Disability Benefits............................................................................  9
  6.4   Hardship Distribution.......................................................................... 10
  6.5   Accelerated Distribution....................................................................... 10
  6.6   Small Benefit.................................................................................. 10
  6.7   Withholding and Payroll Taxes.................................................................. 10
  6.8   Payment to Guardian............................................................................ 11

ARTICLE VII--BENEFICIARY DESIGNATION................................................................... 11

  7.1   Beneficiary Designation........................................................................ 11
  7.2   Changing Beneficiary........................................................................... 11
  7.3   No Beneficiary Designation..................................................................... 11
  7.4   Effect of Payment.............................................................................. 12

ARTICLE VIII--ADMINISTRATION........................................................................... 12

  8.1   Committee; Duties.............................................................................. 12
  8.2   Agents......................................................................................... 12
  8.3   Binding Effect of Decisions.................................................................... 12
  8.4   Indemnity of Committee......................................................................... 12
  8.5   Election of Committee After Change in Control.................................................. 12


                                                                            (ii)



                                TABLE OF CONTENTS



                                                                                                      PAGE
                                                                                                      ----
                                                                                                     
ARTICLE IX--CLAIMS PROCEDURE........................................................................... 13

  9.1   Claim.......................................................................................... 13
  9.2   Denial of Claim................................................................................ 13
  9.3   Review of Claim................................................................................ 13
  9.4   Final Decision................................................................................. 13

ARTICLE X--AMENDMENT AND TERMINATION OF PLAN........................................................... 13

  10.1  Amendment...................................................................................... 13
  10.2  Company's Right to Terminate................................................................... 14

ARTICLE XI--MISCELLANEOUS.............................................................................. 15

  11.1  Unfunded Plan.................................................................................. 15
  11.2  Unsecured General Creditor..................................................................... 15
  11.3  Trust Fund..................................................................................... 15
  11.4  Nonassignability............................................................................... 15
  11.5  Not a Contract of Employment................................................................... 16
  11.6  Protective Provisions.......................................................................... 16
  11.7  Governing Law.................................................................................. 16
  11.8  Validity....................................................................................... 16
  11.9  Gender......................................................................................... 16
  11.10 Notice......................................................................................... 16
  11.11 Successors..................................................................................... 16


                                                                           (iii)



                        CHOICE HOTELS INTERNATIONAL, INC.

                      EXECUTIVE DEFERRED COMPENSATION PLAN

                      ARTICLE I--PURPOSE AND EFFECTIVE DATE

          The purpose of this Executive Deferred Compensation Plan is to provide
current tax planning opportunities as well as supplemental funds upon the
retirement or death of certain key employees of Employer. It is intended that
the Plan will aid in attracting and retaining employees of exceptional ability
by providing them with these benefits.

                             ARTICLE II--DEFINITIONS

          For the purposes of this Plan, the following terms shall have the
meanings indicated, unless the content clearly indicates otherwise:

2.1       Account

          "Account" means the interest of a Participant in the Plan as
represented by the hypothetical bookkeeping entries kept by Employer. Separate
Accounts shall be established for each Participant in accordance with the
provisions of Section 4.1 of the Plan.

2.2       Administrative Committee

          "Administrative Committee" means the committee appointed by the
Company's Chief Executive Officer to administer the Plan pursuant to Article
VIII.

2.3       Beneficiary

          "Beneficiary" means the person, persons or entity (including, without
limitation, any trustee) entitled to receive the benefits specified hereunder,
in the event of the Participant's death, as determined pursuant to the
provisions of Article VII.

2.4       Board

          "Board" means the Board of Directors of the Company.

2.5       Change in Control

          "Change in Control" of the Company means, and shall be deemed to have
occurred upon, the first to occur of any of the following events:

               (a)  Any "Person" (other than those Persons in control of the
          Company as of the Effective Date, or other than a trustee or other
          fiduciary holding securities under an employee benefit plan of the
          Company, or a corporation owned directly or indirectly by the
          stockholders of the Company in substantially the same proportions as
          their ownership of stock of the Company) becomes the "Beneficial
          Owner," directly or indirectly, of securities of the Company
          representing twenty-

PAGE 1 - EXECUTIVE DEFERRED COMPENSATION PLAN



          five percent (25%) or more of the combined voting power of the
          Company's then outstanding securities; or

               (b)  During any period of two (2) consecutive years after an
          employee becomes a Plan Participant, individuals who at the beginning
          of such period constitute the Board (and any new Director, whose
          election by the Company's stockholders was approved by a vote of at
          least two-thirds (2/3) of the Directors then still in office who
          either were Directors at the beginning of the period or whose election
          or nomination for election was so approved), cease for any reason to
          constitute a majority thereof; or

               (c)  The stockholders of the Company approve:

                    (i)   A plan of complete liquidation of the Company; or

                    (ii)  An agreement for the sale or disposition of all or
               substantially all of the Company's assets; or

                    (iii) A merger, consolidation, or reorganization of the
               Company with or involving any other corporation, other than a
               merger, consolidation, or reorganization that would result in the
               voting securities of the Company outstanding immediately prior
               thereto continuing to represent (either by remaining outstanding
               or by being converted into voting securities of the surviving
               entity) at least fifty percent (50%) of the combined voting power
               of the voting securities of the Company (or such surviving
               entity) outstanding immediately after such merger, consolidation,
               or reorganization.

               However, in no event shall a "Change in Control" be deemed to
          have occurred, with respect to the Participant, if the Participant is
          part of a purchasing group which consummates the Change in Control
          transaction. The Participant shall be deemed "part of a purchasing
          group" for purposes of the preceding sentence if the Participant is an
          equity participant in the purchasing company or group except for:

                    (i)   Passive ownership of less than two percent (2%) of the
               stock of the purchasing company; or

                    (ii)  Ownership of equity participation in the purchasing
               company or group which is otherwise not significant, as
               determined prior to the Change in Control by a majority of the
               nonemployee continuing Directors.

          For purposes of this Section, the terms "Person" and "Beneficial
Owner" shall have the meanings given those terms in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, and Rule 13d-3 under that Act.

2.6       Code

          "Code" means the Internal Revenue Code of 1986, as amended.

2.7       Company

          "Company" means Choice Hotels International, Inc., or any successor to
the business thereof.

PAGE 2 - EXECUTIVE DEFERRED COMPENSATION PLAN



2.8       Compensation

          "Compensation" means the base salary and bonus payable to a
Participant for services performed for the Employer and considered to be wages
for purposes of federal income tax withholding. Inclusion of any other forms of
Compensation is subject to the sole discretion of the Committee, which need not
be applied on a uniform basis among all Participants. Compensation shall be
calculated before reduction for any amounts deferred by the Participant pursuant
to the Employer's tax qualified plans which may be maintained under Code Section
401(a) or a plan maintained under Code Section 125, or under this Plan.

2.9       Deferral Election

          "Deferral Election" means a commitment by a Participant to defer a
portion of Compensation to this Plan and for which a Participation Agreement has
been submitted by the Participant to the Administrative Committee.

2.10      Disability

          "Disability" means a physical or mental condition that prevents the
Participant from satisfactorily performing the Participant's usual duties for
Employer. The Administrative Committee shall determine the existence of
Disability and may rely on advice from a medical examiner satisfactory to the
Administrative Committee in making the determination.

2.11      Discretionary Contribution

          "Discretionary Contribution" means an Employer contribution credited
to a Participant's Account pursuant to Section 4.5 of this Plan.

2.12      Effective Date

          This Plan shall be effective as of January 1, 2003.

2.13      Elected Deferred Compensation

          "Elected Deferred Compensation" means the amount of Compensation that
a Participant elects to defer pursuant to a Deferral Election.

2.14      Employer

          "Employer" means the Company and any affiliated or subsidiary entities
designated by the Board as participating in this Plan.

2.15      Financial Hardship

          "Financial Hardship" means an unforeseeable emergency due to an
illness or accident of the Participant or Beneficiary, the Participant's or
Beneficiary's spouse or the Participant's or Beneficiary's dependant (as defined
in Section 152(a)) of the Code; loss of the Participant's or Beneficiary's
property due to casualty; or other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond the control of the
Participant or the Beneficiary that would result in severe financial hardship if
early withdrawal were not permitted. Financial Hardship will not exist if the
financial need can be relieved through reimbursement or compensation from
insurance or otherwise; by liquidation of the

PAGE 3 - EXECUTIVE DEFERRED COMPENSATION PLAN



Participant's assets, to the extent the liquidation of such assets would not
itself cause severe financial hardship; or by cessation of deferrals under the
Plan.

2.16      Hardship Distribution

          "Hardship Distribution" means a distribution pursuant to Section 6.4
of the Plan made on account of the Participant or Beneficiary's Financial
Hardship. Such distribution must be limited to the amount reasonably necessary
to satisfy the Financial Hardship (which may include any amounts necessary to
pay any federal, state, or local income taxes or penalties reasonably
anticipated to result from the distribution).

2.17      Match Rate

          "Match Rate" means the rate at which base salary deferrals are matched
determined by reference to the Participant's Years of Service as of the first
day of the Plan Year. The Match Rate shall be as follows:

    1                              2
 YEARS OF
 SERVICE                      MATCH RATE
- ----------------------------------------
1-5                                 50%
6-9                                 75
10 or More                         100
========================================

2.18      Matching Contribution

          "Matching Contribution" means an Employer contribution credited to a
Participant's Account pursuant to Section 4.4 of this Plan.

2.19      Moody's Rate of Return

          "Moody's Rate of Return" means, with respect to any calendar month,
the monthly equivalent of three percentage points (3%) greater than the annual
yield of the Moody's Average Corporate Bond Yield Index for the preceding
calendar month as published by Moody's Investor Services, Inc. (or any successor
thereto), or, if such index is no longer published, a substantially similar
index selected by the Board.

2.20      Participant

          "Participant" means any individual who is participating in this Plan
as provided in Article III.

2.21      Participation Agreement

          "Participation Agreement" means the agreement, whether written or
provided through electronic means, to defer Compensation submitted by a
Participant to the Administrative Committee or its delegates prior to the
commencement of the period in which the Elected Deferred Compensation is to be
earned.

PAGE 4 - EXECUTIVE DEFERRED COMPENSATION PLAN



2.22      Plan

          "Plan" means this Choice Hotels International, Inc. Executive Deferred
Compensation Plan as set forth in this document and as the same may be amended
from time to time.

2.23      Plan Year

          "Plan Year" means each calendar year beginning on January 1 and ending
on December 31.

2.24      Small Benefit

          "Small Benefit" means a lump-sum payment pursuant to Section 6.6 of
the Plan.

2.25      Transfer Contribution

          "Transfer Contribution" means a Participant's contribution credited to
a Participant's Account pursuant to Section 4.6 of the Plan.

2.26      Year of Service

          "Year of Service" shall be complete twelve (12) month periods
beginning on the Participant's date of hire.

                ARTICLE III--PARTICIPATION AND DEFERRAL ELECTIONS

3.1       Eligibility and Participation

               (a)  Eligibility. The Company's Chief Executive Officer (CEO)
          and executive employees who report directly to the CEO shall be
          eligible to participate in the Plan.

               (b)  Participation. An eligible employee may elect to participate
          in the Plan with respect to a Plan Year by submitting a Participation
          Agreement to the Administrative Committee prior to the beginning of
          such Plan Year.

               (c)  Part-Year Participation. In the event an employee first
          becomes eligible to participate in the Plan on other than the first
          day of a Plan Year, a Participation Agreement may be submitted to the
          Administrative Committee within thirty (30) days after the
          Administrative Committee notifies such employee of eligibility to
          participate in the Plan. The Deferral Election shall be effective only
          with regard to Compensation earned following submission of the
          Participation Agreement to the Administrative Committee.

3.2       Deferral Elections

          A Participant may file with the Administrative Committee a
Participation Agreement to defer any or all of the following:

               (a)  Salary Deferrals. A Participant may elect to defer up to
          ninety percent (90%) of base salary. The amount to be deferred shall
          be stated as a whole percentage of base salary.

PAGE 5 - EXECUTIVE DEFERRED COMPENSATION PLAN



               (b)  Bonus Deferrals. A Participant may elect to defer all or
          any portion of each bonus to be paid by the Employer. The amount to be
          deferred shall be stated as a whole percentage of each bonus payment.

               (c)  Changes to Deferral Elections. Participants may modify a
          salary deferral election at any time; however, such modification shall
          only be effective for salary earned after the date of modification.
          The Administrative Committee may change the maximum percentage of base
          salary and/or bonus that may be deferred by giving written notice to
          all Participants. No such change may affect a Deferral Election
          entered into prior to the Administrative Committee's action.

3.3       Commencement, Duration and Modification of Deferral Election

               (a)  Commencement. A Deferral Election shall become effective
          on the first day of the Plan Year immediately following the date a
          Participation Agreement for such Deferral Election is filed with the
          Administrative Committee.

               (b)  Duration. A Deferral Election shall remain in effect for
          the Plan Year.

               (c)  Modification. A Deferral Election shall terminate on the
          date a Participant terminates employment, receives a Hardship
          Distribution pursuant to Section 6.4 or an Accelerated Distribution
          pursuant to Section 6.5 of the Plan.

                   ARTICLE IV--DEFERRED COMPENSATION ACCOUNTS

4.1       Accounts

          For recordkeeping purposes only, Employer shall maintain at least
three (3) separate Accounts for each Participant. The Accounts shall be known as
the Basic Account, Matching Contribution Account, and Discretionary Contribution
Account.

4.2       Crediting of Deferrals

          A Participant's Elected Deferred Compensation which consists of
deferred base salary shall be credited to the Participant's Accounts as of the
date when the corresponding nondeferred portion of the Participant's base salary
is paid or would have been paid but for the Deferral Election. Beginning January
1 of each Plan Year, a Participant's Elected Deferred Compensation which
consists of deferred bonus shall be credited to the Participant's Accounts as of
the date of each year on which the corresponding bonus is paid or would have
been paid but for the Deferral Election.

4.3       Basic Account

          A Participant may establish a Basic Account by filing a Participation
Agreement to defer Compensation into the Account and to receive benefits from
such Account as elected by the Participant.

PAGE 6 - EXECUTIVE DEFERRED COMPENSATION PLAN



4.4       Matching Contribution Account

          There shall be credited to each Participant's Matching Contribution
Account an amount equal to (a) less (b), where:

               (a)  Equals total base salary (up to fifteen percent (15%)
          total) deferred under this Plan and the Company's 401(k) plan, times
          the Participant's Match Rate; and

               (b)  Equals the match to the Company's 401(k) plan which is
          allocated to such Participant's account in the 401(k) plan, after all
          necessary adjustments have been made to reflect any applicable
          nondiscrimination rules.

          The amount credited to the Matching Contribution Account shall be as
of the date designated by the Administrative Committee.

4.5       Discretionary Contribution Account

          The Employer may make contributions in such amount and at such times
as recommended by the Administrative Committee and approved by the Compensation
Committee of the Board, or as the Board, in its sole discretion, shall
determine. Such amount shall be credited to the Participant's Discretionary
Contribution Account as of the date designated by the Administrative Committee.

4.6       Transfer Contribution

          Any Eligible Participant who has one or more account balance in the
Company's Deferred Compensation Plan or in the Company's Nonqualified Retirement
Savings and Investment shall have their balances in such plans transferred to
this Plan as of the date or dates selected by the Committee. Such transfers to
this Plan shall include the vested and nonvested portions of the Participant's
balances in such Plans, and such amounts shall be appropriately allocated among
the Participant's Termination Account and Matching Contribution Account,
respectively.

4.7       Vesting of Accounts

          Each Participant shall be vested in the amounts credited to such
Participant's Account as follows:

               (a)  Elected Deferred Compensation. A Participant shall be
          one hundred percent (100%) vested at all times in his Elected Deferred
          Compensation and any gains or losses thereon.

               (b)  Matching Contributions. A Participant's Matching
          Contribution Account shall be vested at the rate of twenty percent
          (20%) for each completed Year of Service; except, a Participant shall
          become one hundred percent (100%) vested at death or Disability. In
          addition, the Compensation Committee of the Board, or the Board, may,
          in its sole discretion, accelerate all or any portion of a
          Participant's Matching Contribution Account at any time and from time
          to time.

               (c)  Discretionary Contributions. A Participant's Discretionary
          Contribution Account shall become vested as determined by the
          Compensation Committee of the Board, or by the Board.

PAGE 7 - EXECUTIVE DEFERRED COMPENSATION PLAN



4.8       Statement of Accounts

          From time to time, but not less frequently than annually, the
Administrative Committee shall provide to each Participant a benefit statement
setting forth the balance of the Accounts maintained for the Participant.

                       ARTICLE V--INVESTMENT AND EARNINGS

5.1       Plan Investments

          A Participant shall complete a portfolio allocation form electing from
among a series of hypothetical investment options designated by the
Administrative Committee into which the Participant's Elected Deferred
Compensation, Transfer Contribution and all Employer contributions shall be
credited. In addition to the hypothetical investment options designated by the
committee, the Moody's Plus Rate of Return shall also be available as a
hypothetical investment for all active Participants and any Participant who
terminates after age fifty-five (55) with ten (10) or more Years of Service. For
Participants who terminate before age fifty-five (55) and ten (10) Years of
Service, the Moody's Rate of Return shall be available. In the event a
Participant terminates employment prior to age fifty-five (55) or prior to
having completed ten (10) or more Years of Service and does not terminate with
the approval of the Board, then from and after such termination, the Moody's
Rate of Return shall not be an available hypothetical investment option as to
such Participant.

          The performance of the Participant's Accounts shall be measured based
upon the investment options selected. The Participant's Accounts shall be
credited with such hypothetical crediting rates calculated after any applicable
investment managers' expenses have been deducted but before any
insurance-related or other expenses have been deducted. Investment options may
be changed monthly by following such procedures as may be determined by the
Administrative Committee. A revised or changed investment allocation shall be
effective on the first business day of the next month following the
Participant's request for a change.

5.2       Crediting Investment Gains and Losses

          Participant Accounts shall be credited daily with investment gains and
losses as if such Account(s) were invested in one (1) or more of the Plan's
investment options, as selected by the Participant, less administrative charges
applied against the particular investment options.

                            ARTICLE VI--PLAN BENEFITS

6.1       Commencement and Distribution Options

               (a)  Commencement. Benefits shall commence based upon an election
          made by the Participant. Participants may elect to commence benefits
          upon termination or a January selected by the Participant. Such date
          may not be later than January following the Participant's sixty-fifth
          (65th) birthday.

               (b)  Form of Payment. Benefits payable due to the Participant's
          election or the death of the Participant may be made in one (1) or a
          combination of the following forms:

PAGE 8 - EXECUTIVE DEFERRED COMPENSATION PLAN



                    (i)   Lump Sum. One (1) lump-sum payment.

                    (ii)  Installment Payments. Annual installment payments
               amortized over a period of up to twenty (20) years, as elected by
               the Participant. The first installment payment shall be paid as
               soon as is administratively feasible after the Participant's
               elected date or death. Subsequent installments shall be paid at
               the beginning of each subsequent Plan Year based on the remaining
               Account balance as of the immediately preceding December 31, as
               adjusted for gains and losses, and the remaining number of
               installment payments. Adjustments for investment gains and losses
               shall continue on unpaid Account balances.

                    (iii) If a Participant has made no election, benefit
               payments shall be paid in a lump sum upon termination.

               (c)  Change in Form and Time of Payment. A Participant's
          election as to the form and time of distribution shall be irrevocable,
          except that a Participant may file a new form and time of payment
          election which shall supersede his most recent prior election provided
          the election is made at least sixty (60) days prior to the date of
          scheduled benefit commencement or death. An election filed within the
          sixty (60) days preceding scheduled benefit commencement or death
          shall be null and void and the next preceding timely election filed by
          the Participant shall be controlling.

6.2       Death Benefits

               (a)  Pre-Benefit Commencement. A Beneficiary shall receive
          all of the Participant's Account balances in the form elected by the
          Participant pursuant to Section 6.1 of the Plan.

               (b)  Post-Benefit Commencement. If a Participant dies following
          the commencement of benefit payments, the Employer shall continue to
          pay to the Beneficiary any remaining installment payments that would
          have been paid to the Participant had the Participant survived.

                    If a Participant dies after all Account balances have been
          completely distributed, no death benefit shall be payable to the
          Beneficiary under the Plan.

               (c)  Investment Direction. The Beneficiary shall succeed to the
          Participant's right to direct investments pursuant to Section 5.1 of
          the Plan following the Participant's death.

               (d)  Subsequent Beneficiaries. If a Beneficiary who is receiving
          payments dies before all payments have been paid, any subsequent
          Beneficiary (as determined and provided for in Article VII) shall be
          paid any remaining Account balances in a lump sum as soon as practical
          after the death of the first Beneficiary.

6.3       Disability Benefits

          Upon a finding that a Participant has suffered a Disability, the
Administrative Committee may, in its sole discretion, modify the Participant's
current Deferral Election or make distributions notably from the Participant's
Accounts in an amount reasonably necessary to meet the Participant's needs
resulting from the Disability. Such distribution shall not exceed the
Participant's vested balance in the Participant's Accounts and shall be paid in
a single lump sum.

PAGE 9 - EXECUTIVE DEFERRED COMPENSATION PLAN



6.4       Hardship Distribution

          Upon finding that a Participant or Beneficiary has suffered a
Financial Hardship, the Administrative Committee may, in its sole discretion,
make distributions from the Participant's Account prior to the time specified
for payment of benefits under the Plan. The Hardship Distribution shall be made
ratably from all Accounts. The amount of such distribution shall be limited to
the amount reasonably necessary to meet the Participant's or Beneficiary's
requirements during the Financial Hardship.

          Applications for a Hardship Distribution and determinations thereon by
the Administrative Committee shall be in writing, and a Participant or
Beneficiary may be required to furnish written proof of the Financial Hardship,
as determined by the Administrative Committee in its sole discretion.

          Upon receiving a Hardship Distribution, a Participant's Deferral
Election shall cease and such Participant shall not participate in the Plan
until the first day of the Plan Year following twelve (12) months from the date
of the Hardship Distribution.

6.5       Accelerated Distribution

          Notwithstanding any other provision of the Plan, at any time a
Participant shall be entitled to receive, upon written request to the
Administrative Committee, a lump-sum distribution equal to ninety percent (90%)
(ninety-four percent (94%) if requested within thirty-six (36) months of a
Change in Control) of the vested balance of his Accounts on the last day of the
month immediately preceding the date on which the Administrative Committee
receives the written request. The remaining balance of such Accounts plus any
nonvested amounts shall be forfeited by the Participant. Notwithstanding any
provision in the Plan to the contrary, a distribution pursuant to this Section
6.5 shall be made as soon as administratively feasible but in no event later
than thirty (30) days after the request is received by the Administrative
Committee. Such Participant's Deferral Election shall cease at the time the
request is filed with the Administrative Committee and such Participant shall
not be eligible to make a new Deferral Election until the first day of the Plan
Year following a period of twelve (12) months from the date of distribution.

6.6       Small Benefit

          Notwithstanding any election made by the Participant, if, on the
Participant's date of termination or date of death, the vested balance of his
Accounts is less than fifty thousand dollars ($50,000), such Account shall be
paid to the Participant or Beneficiary in a single lump sum.

6.7       Withholding and Payroll Taxes

          The Employer shall withhold from Plan payments and, in the case of
Social Security and Medicare taxes, shall withhold from Elected Deferred
Compensation, any taxes required to be withheld under federal, state or local
law. Such taxes shall be withheld from the Plan payments to the maximum extent
possible with any excess being withheld from the Participant's nondeferred base
salary or bonus to the maximum extent possible , and then from the Participant's
Elected Deferred Compensation. Each Participant shall bear the ultimate
responsibility for payment of all taxes owed under this Plan.

PAGE 10 - EXECUTIVE DEFERRED COMPENSATION PLAN



6.8       Payment to Guardian

          If a Plan benefit is payable to a minor or a person declared
incompetent or to a person incapable of handling the disposition of his
property, the Administrative Committee may direct payment to the guardian,
conservator, legal representative or person having the care and custody of such
minor, incompetent or incapacitated person. The Administrative Committee may
require proof of minority, incompetency, incapacity, conservatorship or
guardianship as it may deem appropriate prior to distribution. Such distribution
shall completely discharge the Administrative Committee from all liability with
respect to such benefit.

                      ARTICLE VII--BENEFICIARY DESIGNATION

7.1       Beneficiary Designation

          Each Participant shall have the right, at any time, to designate one
(1) or more persons or entity as Beneficiary (both primary as well as secondary)
to whom benefits under this Plan shall be paid in the event of Participant's
death prior to complete distribution of the Participant's vested Account
balance. Each Beneficiary designation shall be in a written form prescribed by
the Administrative Committee and shall be effective only when filed with the
Administrative Committee during the Participant's lifetime.

          For married Participants living in a community property state, the
Participant's spouse shall be entitled to fifty percent (50%) interest in any
benefit due the Participant unless such spouse waives the right to receive such
benefit by executing a written consent acknowledging the effect of the
Beneficiary designation, or it is established that such consent cannot be
obtained because the spouse cannot be located.

          If the Participant's validly designated Beneficiary survives the
Participant but dies prior to the complete distribution of the Participant's
benefits, the remaining benefits will be paid to the deceased Beneficiary's
estate in accordance with Section 6.2(d).

7.2       Changing Beneficiary

          Any Beneficiary designation may be changed by a Participant living
outside a community property state without the consent of the previously named
Beneficiary by the filing of a new Beneficiary designation with the
Administrative Committee.

          A married Participant living in a community property state may change
Beneficiary designation by filing a new Beneficiary designation with the
Administrative Committee with the consent of the Participant's spouse as
provided for in Section 7.1 above. The filing of a new designation shall
supercede all designations previously filed.

7.3       No Beneficiary Designation

          If any Participant fails to designate a Beneficiary in the manner
provided above, if the designation is void, or if the Beneficiary dies before
the Participant, the Participant's Beneficiary shall be the person in the first
of the following classes in which there is a survivor:

               (a)  The Participant's surviving spouse;

PAGE 11 - EXECUTIVE DEFERRED COMPENSATION PLAN



               (b)  The Participant's children in equal shares, except that if
          any of the children predecease the Participant with surviving issue,
          then such issue shall take by right of representation;

               (c)  The Participant's estate.

7.4       Effect of Payment

          Payment to the Beneficiary shall completely discharge the Employer's
obligations under this Plan.

                          ARTICLE VIII--ADMINISTRATION

8.1       Committee; Duties

          The Plan shall be administered by an Administrative Committee
consisting of at least three (3) members as may be appointed by the Company's
Chief Executive Officer except after a Change in Control, as provided in Section
8.5 below. The Administrative Committee shall have the authority to make, amend,
interpret and enforce all appropriate rules and regulations for the
administration of the Plan and decide or resolve any and all questions,
including interpretations of the Plan, as may arise in such administration. A
majority vote of the Administrative Committee members in office at the time of
the vote shall control any decision. Members of the Administrative Committee may
be Participants in this Plan.

8.2       Agents

          The Administrative Committee may employ agents and delegate to them
such administrative duties as it sees fit, and may consult with counsel who may
be counsel to the Company.

8.3       Binding Effect of Decisions

          The decision or action of the Administrative Committee with respect to
any question arising out of or in connection with the administration,
interpretation and application of the Plan and the rules and regulations
promulgated hereunder shall be final, conclusive and binding upon all persons
having any interest in the Plan.

8.4       Indemnity of Committee

          The Company shall indemnify and hold harmless the members of the
Administrative Committee against any and all claims, loss, damage, expense or
liability arising from any action or failure to act with respect to this Plan on
account of such person's service on the Administrative Committee, except in the
case of gross negligence or willful misconduct.

8.5       Election of Committee After Change in Control

          After a Change in Control, vacancies on the Administrative Committee
shall be filled by majority vote of the remaining Administrative Committee
members and Administrative Committee members may be removed only by such a vote.
If no Administrative Committee members remain, a new Administrative Committee
shall be elected by majority vote of the Participants in the Plan immediately
preceding such Change in Control. No amendment shall be made to Article VIII or
other Plan provisions regarding

PAGE 12 - EXECUTIVE DEFERRED COMPENSATION PLAN



Administrative Committee authority with respect to the Plan without prior
approval by the Administrative Committee.

                          ARTICLE IX--CLAIMS PROCEDURE

9.1       Claim

          Any person claiming a benefit, requesting an interpretation or ruling
under the Plan, or requesting information under the Plan, shall present the
request in writing to the Administrative Committee which shall respond in
writing within thirty (30) days.

9.2       Denial of Claim

          If the claim or request is denied, the written notice of denial shall
state:

               (a)  The reason for denial, with specific reference to the Plan
          provisions on which the denial is based.

               (b)  A description of any additional material or information
          required and an explanation of why it is necessary.

               (c)  An explanation of the Plan's claim review procedure.

9.3       Review of Claim

          Any person whose claim or request is denied may request review by
notice given in writing to the Administrative Committee. Such notice must be
received by the Administrative Committee within sixty (60) days following the
end of the thirty (30) day review period. The claim or request shall be reviewed
by the Administrative Committee who may, but shall not be required to, grant the
claimant a hearing. On review, the claimant may have representation, examine
pertinent documents, and submit issues and comments in writing.

9.4       Final Decision

          The decision on review shall normally be made within sixty (60) days
after the claim or request is received by the Administrative Committee. If an
extension of time is required for a hearing or other special circumstances, the
claimant shall be notified and the time limit shall be one hundred twenty (120)
days. The decision shall be in writing and shall state the reason and the
relevant Plan provisions. All decisions on review shall be final and bind all
parties concerned.

                  ARTICLE X--AMENDMENT AND TERMINATION OF PLAN

10.1      Amendment

               (a)  The Board may at any time amend the Plan by a written
          instrument subject to subsection (e) below.

PAGE 13 - EXECUTIVE DEFERRED COMPENSATION PLAN



               (b)  The Administrative Committee may adopt any technical,
          clerical, conforming or clarifying amendment or other change,
          provided:

                    (i)   The Administrative Committee deems it necessary or
               advisable to:

                          (A) Correct any defect, supply any omission or
                    reconcile any inconsistency in order to carry out the intent
                    and purposes of the Plan;

                          (B) Maintain the Plan's status as a "top-hat" plan for
                    purposes of ERISA; or

                          (C) Comply with law or the Internal Revenue Service's
                    regulations;

                    (ii)  The amendment or change does not, without the consent
               of the Board, result in current annual additional costs to the
               Employer of maintaining the Plan in excess of $50,000; and

                    (iii) Any formal amendment adopted by the Administrative
               Committee shall be in writing, signed by a member of the
               Committee and promptly reported to the Board.

               (c)  To the extent permitted under subsection (e) below,
          amendments may have an immediate, prospective or retroactive effective
          date.

               (d)  Amendments do not require the consent of any Participant or
          Beneficiary.

               (e)  Amendments are subject to the following limitations:

                    (i)   Preservation of Account Balance. No amendment shall
               reduce the amount credited or to be credited to any Account as of
               the date notice of the amendment is given to Participants.

                    (ii)  Preservation of Crediting Rate. After a Change in
               Control, no amendment shall reduce the crediting rate, including
               Moody's Rate of Return on deferrals made prior to, or elected
               prior to, the date notice of the amendment is given to
               Participant.

                    (iii) After a Change in Control, no amendment may limit the
               Participant payout options under Section 6.1 or in anyway force
               Participants to accelerate the receipt of Benefits.

10.2      Company's Right to Terminate

          The Board may at any time partially or completely terminate the Plan
if, in its judgment, the tax, accounting or other effects of the continuance of
the Plan, or potential payments thereunder would not be in the best interests of
the Company.

               (a)  Partial Termination. The Board may partially terminate the
          Plan by instructing the Administrative Committee not to credit any
          additional Elected Deferred Compensation to the Plan. If such a
          partial termination occurs, the Plan shall continue to operate and be
          effective with regard to amounts credited prior to the effective date
          of such partial termination.

PAGE 14 - EXECUTIVE DEFERRED COMPENSATION PLAN



               (b)  Complete Termination. The Board may completely terminate
          the Plan by instructing the Administrative Committee not to accept any
          additional Elected Deferred Compensation, and by terminating all
          ongoing Deferral Elections. If such a complete termination occurs, the
          Plan shall cease to operate and the Employer shall pay out each
          Account. Prior to a Change in Control, payment shall be made in the
          manner prescribed below, notwithstanding any election made by the
          Participant. After a Change in Control, the existing election of
          Participants regarding the distribution of benefits shall continue to
          apply. Earnings shall continue to be credited on any unpaid Account
          balances.

                ACCOUNT BALANCE                             PAYOUT PERIOD
          --------------------------------------------------------------------
          Less than $50,000                            Lump Sum
          $50,000 but not more than $100,000           3 annual installments
          $100,000 or more                             5 annual installments
          ====================================================================

                            ARTICLE XI--MISCELLANEOUS

11.1      Unfunded Plan

          This Plan is an unfunded plan maintained primarily to provide deferred
compensation benefits for a select group of "management or highly-compensated
employees" within the meaning of Sections 201, 301 and 401 of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and therefore is
exempt from the provisions of Parts 2, 3 and 4 of Title I of ERISA.

11.2      Unsecured General Creditor

          Participants and Beneficiaries shall be unsecured general creditors,
with no secured or preferential right to any assets of the Company or any other
party for payment of benefits under this Plan. Any property held by any Employer
for the purpose of generating the cash flow for benefit payments shall remain
its general, unpledged and unrestricted assets. The obligation of the Employer
under the Plan shall be an unfunded and unsecured promise to pay money in the
future.

11.3      Trust Fund

          At its discretion, the Company may establish one (1) or more trusts,
with such trustees as the Board may approve, for the purpose of providing for
the payment of benefits owed under the Plan. Although such a trust may be
irrevocable, its assets must be held for payment to Employer's general creditors
in the event of insolvency or bankruptcy. To the extent any benefits provided
under the Plan with respect to an Employer's Participants are paid from any such
trust, that Employer shall have no further obligation to pay such benefits. If
not paid from the trust, such benefits shall remain the obligation solely of
such Employer.

11.4      Nonassignability

          Neither a Participant nor any other person shall have any right to
commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise
encumber, transfer, hypothecate or convey in advance of actual receipt the
amounts, if any, payable hereunder, or any part thereof. Such payments, and all
rights thereto are expressly declared to be unassignable and nontransferable. No
part of the amounts payable shall, prior to actual payment, be subject to
seizure or sequestration for the payment of any debts, judgments,

PAGE 15 - EXECUTIVE DEFERRED COMPENSATION PLAN



alimony or separate maintenance owed by a Participant or any other person, nor
be transferable by operation of law in the event of a Participant's or any other
person's bankruptcy or insolvency.

11.5      Not a Contract of Employment

          This Plan shall not constitute a contract of employment between
Employer and the Participant. Nothing in this Plan shall give a Participant the
right to be retained in the service of Employer or to interfere with the right
of Employer to discipline or discharge a Participant at any time.

11.6      Protective Provisions

          A Participant shall cooperate with Employer by furnishing any and all
information requested by Employer in order to facilitate the payment of benefits
hereunder, and by taking such physical examinations as Employer may deem
necessary and taking such other action as may be requested by Employer.

11.7      Governing Law

          The provisions of this Plan shall be construed and interpreted
according to the laws of the State of Maryland, except as preempted by federal
law.

11.8      Validity

          In case any provision of this Plan shall be held illegal or invalid
for any reason, said illegality or invalidity shall not affect the remaining
parts hereof, but this Plan shall be construed and enforced as if such illegal
and invalid provision had never been inserted herein.

11.9      Gender

          The masculine gender shall include the feminine and the singular shall
include the plural, except where the context expressly dictates otherwise.

11.10     Notice

          Any notice required or permitted under the Plan shall be sufficient if
in writing and sent by first-class mail. Such notice shall be deemed as given as
of the date of delivery or, if delivery is made by mail, as of the date that is
three (3) business days after the mailing date. Mailed notice to the
Administrative Committee shall be directed to the Company's address. Mailed
notice to a Participant or Beneficiary shall be directed to the individual's
last known address in Employer's records.

11.11     Successors

          The provisions of this Plan shall bind and inure to the benefit of
Company and its successors and assigns. The term successors as used herein shall
include any corporate or other business entity which shall, whether by merger,
consolidation, purchase or otherwise acquire all or substantially all of the
business and assets of Company, and successors of any such corporation or other
business entity.

PAGE 16 - EXECUTIVE DEFERRED COMPENSATION PLAN



                                              CHOICE HOTELS INTERNATIONAL, INC.

                                              By:
                                                 -------------------------------
                                                 Its:

                                           Dated:
                                                 -------------------------------

PAGE 17 - EXECUTIVE DEFERRED COMPENSATION PLAN

EX-13.02

                                                                   Exhibit 13.02

                      Report of Independent Accountants on
                          Financial Statement Schedule


To the Board of Directors
of Choice Hotels International, Inc. and subsidiaries:

Our audits of the consolidated financial statements referred to in our report
dated February 7, 2003 appearing in the 2002 Annual Report to Shareholders of
Choice Hotels International, Inc. and subsidiaries (which report and
consolidated financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the financial statement schedule
listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.



PricewaterhouseCoopers LLP


Washington, DC
February 7, 2003




WE ARE INCLUDING IN THIS REPORT, PURSUANT TO RULE 2-02(E) OF REGULATION S-X, A
COPY OF THE LATEST SIGNED AND DATED REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
FROM OUR PRIOR INDEPENDENT PUBLIC ACCOUNTANTS, ARTHUR ANDERSEN LLP. THIS REPORT
OF INDEPENDENT PUBLIC ACCOUNTANTS WAS PREVIOUSLY ISSUED BY ARTHUR ANDERSEN, FOR
FILING WITH OUR ANNUAL REPORT ON FORM 10-K FILED BY CHOICE HOTELS INTERNATIONAL,
INC. WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 2002, AND HAS NOT
BEEN REISSUED BY ARTHUR ANDERSEN LLP.

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Choice Hotels International, Inc. and subsidiaries:

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

                                      /s/ Arthur Andersen LLP

Vienna, Virginia
March 20, 2002




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



                                                                                     
                                                             Charges
                                           Balance at      (Credits) to                     Balance at
                                          Beginning of        Profit      Write-Offs/           End
             Description                     Period          and Loss     Deductions         of Period
             -----------                    -------          --------     ----------         ---------
Accounts Receivable:

Year ended December 31, 2002                $ 5,392          $ 1,843       $ (1,200)          $ 6,035
                                            =======          =======       ========           =======
    Allowance for doubtful accounts


Year ended December 31, 2001

    Allowance for doubtful accounts         $ 5,754          $ 1,388       $ (1,750)          $ 5,392
                                            =======          =======       ========           =======

Year ended December 31, 2000

    Allowance for doubtful accounts         $ 6,691          $  (585)      $   (352)          $ 5,754
                                            =======          =======       ========           =======


                                           Balance at       Charges to                      Balance at
                                          Beginning of        Profit      Write-Offs/           End
                                             Period          And Loss     Deductions         of Period
                                             ------          --------     ----------         ---------
Deferred Tax Asset Valuation
Allowance:

Year ended December 31, 2002                $12,737          $    -        $     -            $12,737
                                            =======          =======       ========           =======
    Deferred

Year ended December 31, 2001                $    -           $12,737       $     -            $12,737
                                            =======          =======       ========           =======

EX-21.01

                                  Exhibit 21.01

                                  SUBSIDIARIES


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

EX-23.01

                                                                   Exhibit 23.01

                       CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-36819, No. 333-38942, No. 333-41355, No.
333-41357 and No. 333-67737) of Choice Hotels International, Inc. of our reports
dated February 7, 2003 relating to the financial statements and financial
statement schedule, which appear in this Form 10-K.

PricewaterhouseCoopers LLP

Washington, DC
March 26, 2003

EX-23.02

                                                                   Exhibit 23.02

WE ARE INCLUDING IN THIS REPORT, PURSUANT TO RULE 2-02(E) OF REGULATION S-X, A
COPY OF THE LATEST SIGNED AND DATED REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
FROM OUR PRIOR INDEPENDENT PUBLIC ACCOUNTANTS, ARTHUR ANDERSEN LLP. THIS REPORT
OF INDEPENDENT PUBLIC ACCOUNTANTS WAS PREVIOUSLY ISSUED BY ARTHUR ANDERSEN, FOR
FILING WITH OUR ANNUAL REPORT ON FORM 10-K FILED BY CHOICE HOTELS INTERNATIONAL,
INC. WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 2002, AND HAS NOT
BEEN REISSUED BY ARTHUR ANDERSEN LLP.


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


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

                                         /s/  Arthur Andersen LLP


Vienna, Virginia
March 25, 2002

EX-99.1

                        CHOICE HOTELS INTERNATIONAL, INC.
                             CORPORATE ETHICS POLICY

PURPOSE AND SCOPE

          The Board of Directors of Choice Hotels International, Inc. and its
subsidiaries ("Choice") established and updates this Corporate Ethics Policy
("Policy") to aid each director, officer and employee in each Choice operating
unit, facility, and department, in making ethical and legal decisions in your
daily work. Please direct all your questions on the Policy and how to use it
effectively to Choice's Corporate Compliance Officer ("CCO"), appointed by the
Chief Executive Officer.

          Choice requires you to conduct our Company's business using good
judgment and the highest legal and ethical standards including the ethical
handling of actual or apparent conflicts on interest between personal and
professional relationships. Although the Policy is based on common sense and
courtesy, Choice understands that you often encounter work situations that
challenge your judgment. As a Choice director, officer or employee faced with
such challenges, you should refer to the Policy's consistent and uniform
guidelines to evaluate and respond in a way that meets Choice's moral and legal
standards. Use this Policy frequently to ensure that you act within the Policy's
spirit and that you react to challenges facing you in compliance with each
principle and standard. Your consistently ethical behavior helps Choice prosper
by earning the trust and respect of our customers, suppliers, shareholders,
competitors, and community.

STANDARDS OF CONDUCT

          Each Choice director, officer and employee must:

          1. Comply with all laws, rules and regulations. Compliance with
applicable governmental laws, rules and regulations does not comprise our entire
ethical responsibility. Rather, it is a minimum, essential condition for
performance of your duties. If you suspect that you, a co-worker or Choice may
have done or may be about to do something that violates this Policy, other
Choice policies, or any regulation or law, immediately contact your supervisor,
the CCO, or the Legal Department. They are there to help you interpret the
Policy, applicable laws, rules and regulations before you act. If you don't
notify one of these people when you know or suspect a violation, you may
jeopardize yourself, your employment, and Choice.

          2. Be honest and true. You must always give accurate information to
Choice's customers and vendors, and to the public. If you are involved in
proposals, bid preparations, or contract negotiations, you must be certain that
all statements, communications, and representations to prospective customers are
accurate and truthful. Do not misrepresent Choice's services when you sell, or
Choice's needs when you buy, or any other information in your negotiations,
contracts and daily work. Your estimates and projections should be reasonably
based on available facts and logical




assumptions, and formulated without bias that could skew your results.
Generally, avoid giving estimates and projections in public disclosures. If you
are issuing information to the public or media, clear it first with Choice's
Legal Department and Chief Financial Officer.

          3. Honor individual and corporate obligations. Make commitments to
customers, suppliers, business partners and your co-workers that you and Choice
expect to fulfill. Recognize also that Choice makes corporate commitments, and
communicate with other departments to make sure your proposed commitments
support, and do not conflict with, established ones. Meeting your commitments is
an individual accomplishment, while meeting Choice's commitments enhances our
corporate integrity.

          4. Obtain and Use Choice Assets Wisely. Proper use of Choice property,
electronic communications systems, information resources, material facilities
and equipment is your responsibility. Use and maintain these assets with the
utmost care and respect, guarding against theft, waste and abuse, and never
borrow or remove them from Choice property without management's permission.
While these assets are intended to be used for Choice business, occasional
personal use by employees may be permitted if it does not adversely affect the
interests of Choice and permission is given. Personal use of Choice assets must
always be in accordance with other Choice policies--consult your supervisor for
guidance and permission. (See also Communications System and Internet Services
Policy).

          5. Negotiate fairly and quickly. Solicit, buy and sell on the basis of
quality, service and price. Refrain from negotiating reciprocal agreements or
coercing vendors to deal with Choice. Report to the CCO any party negotiating
with Choice who infers that a Choice board member, officer, or employee demands
a certain deal outcome.

          6. Compete fairly and do not disrupt free trade or restrict
competition. Antitrust laws prohibit agreements and practices "in restraint of
trade" such as price fixing and boycotting suppliers or customers. They also bar
pricing intended to run a competitor out of business; disparaging,
misrepresenting or harassing a competitor; stealing trade secrets; bribery; and
kickbacks. Unless you have a legitimate and legal purpose, do not discuss with,
or reveal Choice prices, rate establishing methods, terms, or service schedules
to parties outside Choice. Avoid using misrepresentation or innuendo that
injures or discredits a legitimate competitor.

          To ensure that our customers can purchase goods or services at the
same or better price as others in similar conditions, use price variances only
if there are differences in the quantity or cost of providing the goods or
services, if you are matching a competitor's price in good faith, or if
conditions change that effect the marketability of the goods or services.

          7. Do Not Usurp Business Opportunities. You are prohibited from (a)
taking for yourself personally opportunities or benefits that are discovered
through the use of



your position or Choice property or information, (b) using your position or
Choice property or information for personal gain, and (c) competing with Choice.
You owe a duty to Choice to advance its legitimate interests when the
opportunity to do so arises.

          8. Generally avoid gifts. Choice's business dealings should always be
free from even the perception that favorable treatment was sought, received, or
given in exchange for gifts or favors. You must neither give nor accept business
courtesies that constitute, or could be reasonably perceived as constituting,
unfair business inducements or that would violate law, regulation or policies of
Choice or a customer, or could cause embarrassment to or reflect negatively on
Choice's reputation. As a matter of respect for the rich and diverse customs
practiced among our business relations internationally, permissive conduct may
differ somewhat in accordance with applicable policy or upon guidance from the
Legal Department.

          Report immediately to your supervisor and the CCO any actual or
apparent offer of a gift to you or a co-worker that appears to be an attempt to
commercially or politically bribe you or Choice in the form of money, goods or
services.

          GIFTS, GRATUITIES, AND BUSINESS COURTESIES TO U.S., STATE, AND LOCAL
          GOVERNMENT EMPLOYEES

          Federal, state and local government departments and agencies are
governed by law and regulations concerning acceptance by their employees of
entertainment, meals, gifts, gratuities, and other things of value from firms
and persons with whom those government departments and agencies do business or
over whom they have regulatory authority. It is the policy of Choice to comply
strictly with those laws and regulations.

          BUSINESS COURTESIES TO NON-GOVERNMENT PERSONS

          Meals, Refreshments and Entertainment

          It is an acceptable practice for Choice employees to provide meals,
          refreshments, entertainment, and other business courtesies of
          reasonable value to non-government persons in support of business
          activities, provided:

               .    The practice does not violate any law or regulation or the
                    standards of conduct of the recipient's organization. It is
                    your responsibility to inquire about prohibitions or
                    limitations of the recipient's organization before offering
                    any business courtesy; and

               .    The business courtesy must be consistent with marketplace
                    practices, infrequent in nature, and may not be lavish or
                    extravagant. While it is difficult to define "lavish or
                    extravagant" by means of a specific dollar amount, a common
                    sense determination should be made consistent with
                    reasonable marketplace practices.



          GIFTS

          Choice employees are prohibited from offering or giving tangible gifts
          (including tickets to sporting, recreational, or other events) having
          a market value of $100.00 or more, to a person or entity with whom the
          Company does or seeks to do business, unless specifically approved by
          his or other supervisor, and the CCO.

          BUSINESS COURTESIES TO FOREIGN GOVERNMENT PERSONNEL AND PUBLIC
          OFFICIALS

          Choice may be restricted from giving meals, gifts, gratuities,
          entertainment, or other things of value to personnel of foreign
          governments and foreign public officials by the Foreign Corrupt
          practices Act and by laws of other countries. You must obtain prior
          Legal Department approval.

          9. Tread carefully in political matters. Choice encourages its
employees to become involved in civic affairs and to participate in the
political process. You must understand, however, that your involvement and
participation must be on an individual basis, on your own time, and at your own
expense. Federal law prohibits Choice from donating corporate funds, goods or
services, directly or indirectly to candidates for federal office--this includes
employee work time. Local and state laws also govern political contributions and
activities by corporations.

          Report immediately to the CCO or your supervisor any efforts by Choice
or co-workers to coerce or influence your decision to make political
contributions.

          10. Keep outside interests from conflicting with your job. The Board
of Directors must approve any material transactions between Choice and its
directors, officers, stockholders, employees, agents or affiliates, and members
of their immediate family. This includes any transactions with third parties
(e.g., vendors, franchisees) in which such persons have a material interest. If
you encounter any such transactions, forward them to the Legal Department.

          Conflicts of interest can arise when you or a member of your family
receive improper personal benefit because of your position with Choice. Do not
take actions, conduct business, or make statements that create real or potential
conflicts with Choice's interests, including taking a personal, proprietary or
financial interest in an entity with which Choice does business or competes, or
which could adversely, or appear to adversely, influence you in your Choice
employment.

          You may not have an outside job, business, financial interest or
activity that, because of its size, significance or nature, adversely affects
your job performance or that conflicts or appears to conflict with Choice's
interests. Get the approval of the CEO, or, in some cases, the Board of
Directors, before you get a job outside Choice that pays you money or other
consideration.



          You may invest in entities that supply or purchase goods or services
to or from Choice so long as the entity is listed on a national securities
exchange or regularly traded by national securities dealers and you purchase
only 1% or less of the market value of the entity's outstanding securities. If
you want to purchase from entities not meeting this standard, or in greater
quantities, you must receive the Board of Director's approval before investing.
You may invest in Manor Care, Inc. or Sunburst Hospitality Corporation and their
affiliates without such limitation or prior approval.

          11. Keep confidential information here. In your daily work, you will
receive information about Choice, other companies, or individuals that the
public does not know. That information is confidential, and unless the
information is public knowledge or is required to be disclosed by law, you must
not share the information outside of Choice.

          Never use confidential information that you get at work for your
personal gain or to give or get an unfair advantage in a personal or competitive
business transaction. You may not trade on, share or disclose information that
may affect the value of Choice stock until that information is made public. If
you do so, you could be criminally prosecuted for insider trading.

          You may also receive confidential information and data about Choice's
business plans, trademarks, new products, revenues, expenses, profits, methods,
systems, franchisee lists, employee rosters and/or vendor lists. If so, you have
access to a trade secret that is Choice's valuable asset, and that, if you
disclosed it outside the company, may harm Choice. For this reason, you may not
disclose trade secrets to the public or use them for purposes other than as
required in your work at Choice.

          12. Respect individual dignity. Be fair and impartial with co-workers
and those outside Choice, offering everyone an equal opportunity to achieve
their full business potential. Do not discriminate against or harass any fellow
employee, franchisee, or any other outside person. You and Choice must never
discriminate on the basis of race, color, creed, religion, sex, sexual
preference, national origin, disability or any other status recognized by civil
rights law. While everyone who works for Choice must comply with these
provisions, our executives and supervisors assume a special responsibility for
fostering a work environment that is free from discrimination, harassment and
the fear or retribution. Supervisors must be careful in words and conduct to
avoid placing, or seeming to place, pressure on subordinates that could cause
them to deviate from acceptable ethical behavior.

          Report immediately and completely to your supervisor, Human Resources
and the CCO any action, word, or practice you believe is discrimination,
harassment or retaliation. (See also, Anti-Harassment Policy).

          13. Know the rules in government contracts. If you assist Choice in
fulfilling a government contract, know and comply with that contract and the
contracting



agency's applicable laws, rules and regulations. If you have a question
concerning compliance with a government contract, contact your supervisor or the
CCO.

          Choice will not employ or contract for services with any person who
Choice knows was convicted of a criminal offense related to a government program
or who Choice knows was debarred or excluded from participating in a government
program.

          14. Maintain clear and accurate records. Maintain complete, clear and
dated financial and other records. Choice relies on the trustworthiness and
professionalism of your accounting, record keeping, and reporting. Never
misstate, exaggerate or fabricate files that pertain to Choice's business.

          15. Special Obligations of the CEO and Certain Financial Officers. The
CEO, the chief financial officer, the chief accounting officer, and the
controller have an obligation to ensure that all publicly filed reports and
other public communications related to Choice's financial condition or results
of operations contain full, fair, accurate, timely and understandable
disclosures of all material facts.

OTHER POLICIES

          Choice maintains and publishes other policies that supplement many of
the obligations in this Policy. Such policies include:

               .    Insider Trading Policy
               .    Anti-Harassment Policy
               .    Communications Systems and Internet Services Policy

You may obtain copies of these policies from the CCO or www.choicecentral.com
under the link Departments--Legal.

SEEKING GUIDANCE/REPORTING A VIOLATION

          You are encouraged to talk to your supervisor, the Legal Department or
the CCO if you have when you have questions about this Policy or are in doubt of
the best course of action. Additionally, it is your obligation to report
suspected violations of laws or this Policy. You will not be retaliated against
for any report made in good faith.

          CONTACT INFORMATION:

          CCO - Michael DeSantis, Sr. Vice President & General Counsel

                    OR

          Employee Hotline: (888) xxx-xxxx or [e-mail address]



          If, after 30 days, you do not believe that your report of a violation
has been sufficiently responded to, you should contact the Audit Committee of
the Choice Board of Directors by e-mailing to [e-mail address].

SANCTIONS

          Recognizing that employee ethics violations can mean extensive court
costs, lost business and diminished goodwill, Choice will investigate any
reported ethical violation promptly and completely. If Choice determines that
you violated the Policy, you will be punished in proportion to the severity of
your violation, which may include terminating your employment.

IMPLEMENTATION

          Choice believes in and adheres to this Policy and requires you to
read, use and adhere to the Policy as well. To ensure that you are always aware
of the current Policy, Choice:

          1. Provides you with the current form of this Policy when you start
working at Choice. You must sign a document saying that you have read and
understand the Policy, and that you agree to work under the Policy rules. Choice
will keep that document in your employee file.

          2. Posts the Policy on intranet and internet web sites.

EX-99.2

                                                                    Exhibit 99.2

                                 CERTIFICATIONS

I, Charles A. Ledsinger, Jr. , certify that:

1. I have reviewed this annual report on Form 10-K of Choice Hotels
International, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

      a) designed such disclosure controls and procedures to ensure that
      material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this annual report is
      being prepared;

      b) evaluated the effectiveness of the registrant's disclosure controls and
      procedures as of a date within 90 days prior to the filing date of this
      annual report (the "Evaluation Date"); and

      c) presented in this annual report our conclusions about the effectiveness
      of the disclosure controls and procedures based on our evaluation as of
      the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

      a) all significant deficiencies in the design or operation of internal
      controls which could adversely affect the registrant's ability to record,
      process, summarize and report financial data and have identified for the
      registrant's auditors any material weaknesses in internal controls; and

      b) any fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal
      controls; and



6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date: March 28, 2003


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



A signed original of this written statement required by Section 906 has been
provided to Choice Hotels International, Inc. and will be retained by Choice
Hotels International, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.

EX-99.3

                                                                    Exhibit 99.3

I, Joseph M. Squeri, certify that:

1. I have reviewed this annual report on Form 10-K of Choice Hotels
International, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

      a) designed such disclosure controls and procedures to ensure that
      material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this annual report is
      being prepared;

      b) evaluated the effectiveness of the registrant's disclosure controls and
      procedures as of a date within 90 days prior to the filing date of this
      annual report (the "Evaluation Date"); and

      c) presented in this annual report our conclusions about the effectiveness
      of the disclosure controls and procedures based on our evaluation as of
      the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

      a) all significant deficiencies in the design or operation of internal
      controls which could adversely affect the registrant's ability to record,
      process, summarize and report financial data and have identified for the
      registrant's auditors any material weaknesses in internal controls; and

      b) any fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal
      controls; and



6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date: March 28, 2003



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



A signed original of this written statement required by Section 906 has been
provided to Choice Hotels International, Inc. and will be retained by Choice
Hotels International, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.