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

Dear Shareholders:
As I write this year’s report to you, we find ourselves in an economic and geopolitical climate marked by much uncertainty. One might be tempted to fall victim to the “doom and gloom” forecasts of some observers. But I remain optimistic that we will weather the storm ahead and find better days awaiting us in the not-too-distant future.
    Part of this optimism comes from the gratifying results our company has achieved in the past two years, despite the sluggish economy, reduced travel demand and a world in turmoil. It also stems from our commitment to build our business through shared success with our franchisees, vendor partners, associates and shareholders.
    After all, we can only succeed when our various stakeholders succeed. The inherent mutual reliance of a franchise system calls for trust, common goals and hard work if such an enterprise is to prosper.
    Choice Hotels continues to thrive in a turbulent environment because of the fundamental soundness of its franchising business model and the clarity of our business strategy. Using the size, scale and distribution of more than 5,000 hotels open and under development in all 50 states and 48 countries and territories, Choice continues to reach more consumers, deliver exceptional services and build strong brands.
    For the year 2002, our company earned diluted earnings per share of $1.52, compared to $0.32 for 2001. The company also enjoyed domestic unit growth of 4.7% and grew royalty fees by 2.0% while generating system-wide domestic revenues of $3.4 billion. We also generated nearly $100 million in cash flows from operations.
    These results confirm what we already knew—our franchising model is largely resistant to industry fluctuations and economic swings. In fact, customers value the franchise affiliation even more during uncertain economic times. Our royalty revenue stream has steadily increased because of our successful unit growth.
    For our more than 2,500 franchisees, our franchise success system offers stability, performance and value in an unsettled lodging environment. With a stable management team and a sound strategic direction in place, we provide our hotel owners with a high degree of confidence that we can help them compete effectively for market share in a diminished travel market. This franchisee support, in turn, builds the attractiveness of our brands for new development and generates further growth.

Unit Growth Fuels Success
For a franchising business, unit growth is the fuel that fires the engine. In Choice’s case, we have made great strides in building our development expertise and in winning a greater market share of lodging franchises.
    Our product offering, with a mix of new build and conversion hotel brands in the mid-priced and economy segments, provides us with great flexibility to drive unit growth even in tougher economic times.
    In 2002, we saw unit growth increase 4.7% domestically and 2.6% globally, very good numbers relative to the industry. In fact, Choice is one of the very few companies continuing to gain development market share of recent hotel openings among franchisors.
    At year’s end, we had signed 304 new contracts, representing 25,657 rooms, compared to 300 new deals, representing 25,757 rooms, in the prior year. Of our contracts in 2002, 241 or almost 79% were for conversions. At the same time, our retention rate for domestic franchisees remains high, with only 1% of franchisees choosing to leave the system in 2002 while terminations were down 14%. The result is a more stable, growing franchise system that contributes positively to the overall predictability of our business.
    For the near term, our development opportunities remain in the conversion arena, where existing hotels seek new brand affiliations that can build their business. Our enhanced leadership in franchise development, along with a stronger sales staff and a performance pay system, is definitely paying off.
    We have increased the size of our franchise sales staff and improved it by bringing a singular focus to sell all of our brands more effectively. In addition, we have created more cost-effective prototypes for our new construction brands that will position us very well once the hotel market improves.
    A larger Choice franchise system benefits our franchisees by providing even more size, scale and distribution to drive cost efficiencies and deliver more value-added services.

Proven Strategy for All Scenarios
In my report last year, I stated our commitment to pursuing our overarching strategic goals of reaching more consumers, delivering exceptional services and building strong brands. Underpinning these three cornerstones is our drive to leverage our size, scale and distribution.
    Our strategy remains unchanged. It has proven the right course in a challenging economic time and has the opportunity to be even more successful when the economy and the lodging industry rebound.
    In terms of reaching more consumers, we have adopted a multi-brand marketing approach that increases the visibility of all Choice brands efficiently while driving local market penetration through effective co-op marketing with our franchisee associations.
    Our seasonal promotions aimed at both leisure and business travelers have relied on value-added promotions with key partners through co-branding. For example, we have teamed up with the major domestic airlines to offer triple miles promotions to drive more business travelers to our hotels. In the summer, our brands have linked up with McDonald’s, major gasoline companies and Lowe’s Home Improvement Warehouse in special promotions aimed at the leisure traveler.
    On the reservations side of the business, we continue to see a continued shift away from the toll-free telephone to the Internet as the primary tool for booking reservations. As a result, we have revamped our proprietary Web site, choicehotels.com, to improve functionality and enhance content for consumers.
    We also are working to improve our positioning through negotiated contracts and co-op marketing with third-party Web sites. In this manner, we can help our franchisees deal with the complexity of a multitude of Internet travel sites and better manage their inventory.
    This year we have already created a Best e-Rate Guarantee for our Choice Internet site and also will leverage technology for one-on-one marketing with our frequent traveler program members.
    Our drive to deliver exceptional services to our franchisees calls for providing a complete life-cycle service that meets their needs, from site selection and prototypes through construction and training, and finally on to sales and marketing, purchasing and operations.
    In a time when our franchisees are under pressure to preserve rates and occupancy, our field services are focused on providing the tools and technology needed to maximize profitability for our franchisees. Historical data collected through our central reservations system and our property management systems can help them forecast individual hotel performance. We also work with the hotels to analyze competitive rates across all distribution channels to better manage inventory and maximize rate potential.
    Through our Partner Services capabilities, we offer on-line purchasing with endorsed vendors for lodging goods and services that saves money and simplifies operations for hotel owners while generating revenue for Choice.
    We already have a broad portfolio of well-recognized brands that offer franchisees excellent opportunities for success. Part of building strong brands is our emphasis on better integrating brand and development strategy in order to enhance consumer brand positioning through attention to rate, location, amenities and service. We are improving brand consistency through more control at the franchise point-of-entry and focusing our brands where they can attract the most business. In this manner, we can protect the investment of those franchisees who support our standards and goals. We also can improve overall system quality.
    We continue to build brand equity by increasing brand awareness and enhancing the images of our brands. Now we have to sharpen our focus to make sure the brands deliver on the guest experience they promise. This year we have set a goal of instituting a new Quality Assurance System that will involve direct guest feedback and should result in greater guest satisfaction.

Facing Our Future with Confidence
When I assumed the role of president and chief executive officer a little over four years ago, I encountered a franchisor-franchisee relationship that was strained. Management changes and shifts in strategy had left franchisees confused about the company’s direction.
    Since then, I, along with our management team and all Choice associates, have worked tirelessly to forge a more trusting and consistent relationship with our franchisees. Today I can say that our franchisees have a much better understanding of our strategy and much greater faith in our commitment to shared success.
    I also enjoy the benefit of a very fine Board of Directors, whose wise counsel and strong support mean so much to the success of Choice Hotels. I am especially pleased that we welcomed Ervin Shames to the Board this past April. His consumer marketing background has added considerable value.
    Together we have weathered a great deal of challenge in the face of real uncertainty and adversity. The mutual success of the past four years has built a much stronger foundation for the future and a much healthier Choice franchise system.
    During my tenure, we also have worked diligently to strengthen our balance sheet and increase shareholder value through targeted stock repurchases. For a business that generates significant free cash flow, stock buybacks have proven to be an efficient way to build shareholder value and help generate strong EPS.
    The future we face together may seem cloudy and uncertain. But it is a future we face with confidence, knowing that we already have endured some of the worst days our industry has ever faced. And, it is a future that holds great promise once the geopolitical climate stabilizes and the economy begins to grow more vigorously.
    I thank our franchisees, hotel guests, vendor partners, associates, Board members and all of you for your support. With a firm commitment to shared success, Choice Hotels can continue to grow and prosper in the years ahead.

Charles A. Ledsinger, Jr.
President and Chief Executive Officer
March 20, 2003