Choice Hotels International, Inc. and Subsidiaries

Summarized financial results for the seven months ended December 31, 1997 and 1996 are as follows:

Franchise Revenues: Net franchise revenues were $83.8 million for the seven months ended December 31, 1997 and $74.3 million for the seven months ended December 31, 1996. Royalties increased $8.5 million to $70.3 million from $61.8 million for the seven months ended December 31, 1996, an increase of 13.7%. The increase in royalties is attributable to a net increase of 264 franchised hotels during the period representing an additional 19,881 rooms added to the system, an improvement in domestic RevPAR of 2.4% and an increase in the effective royalty rate of the domestic hotel system to 3.5% from 3.4%. Domestic initial fee revenue generated from franchise contracts signed declined to $6.4 million from $7.8 million for the seven months ended December 31, 1997 as compared to the seven months ended December 31, 1996. Total franchise agreements signed for the seven months ended December 31, 1997 were 368, down 14.0% from the total contracts signed during the seven months ended December 31, 1996 of 428. The decline in initial fees is partly a result of the Company’s sales force reorganization and the resulting temporary displacement of the sales force. The reorganization of the regional market management sales and support force was completed in September 1997. Revenues generated from partner service relationships increased to $3.5 million from $1.5 million for the seven months ended December 31, 1996.

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

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

Marketing and Reservations: The total marketing and reservation fees received by the Company (previously reported as revenue) were $72.3 million and $66.3 million for the seven months ended December 31, 1997 and December 31, 1996, respectively. Depreciation and amortization charged to the marketing and reservation funds was $2.2 million and $1.4 million for the seven months ended December 31, 1997 and December 31, 1996, respectively.

Product Sales: Sales made to franchisees through the Company’s group purchasing program declined $1.2 million to $13.5 million for the seven months ended December 31, 1997 from $14.7 million for the seven months ended December 31, 1996. Similarly, product cost of sales decreased $0.4 million (or 3.3%) for the seven months ended December 31, 1997. The product services margins decreased for the seven months ended December 31, 1997 to 3.6% from 8.4% for the seven months ended December 31, 1996.