The following Management's Discussion and Analysis ("MD&A") is intended to help the reader understand Choice Hotels International, Inc. and its subsidiaries. MD&A is provided as a supplement to - and should be read in conjunction with - our consolidated financial statements and the accompanying notes.

Overview

We are a hotel franchisor with franchise agreements representing 5,827 hotels open and 1,108 hotels under construction, awaiting conversion or approved for development as of December 31, 2008, with 472,526 rooms and 89,105 rooms, respectively, in 49 states, the District of Columbia and over 30 countries and territories outside the United States. Our brand names include Comfort Inn, Comfort Suites, Quality, Clarion, Ascend Collection, Sleep Inn, Econo Lodge, Rodeway Inn, MainStay Suites, Suburban Extended Stay Hotel and Cambria Suites (collectively, the "Choice brands").

The Company conducts its international franchise operations through a combination of direct franchising and master franchising relationships which allow the use of our brands by third parties in foreign countries. The Company has made equity investments in certain non-domestic lodging franchise companies that conduct franchise operations for the Choice brands under master franchising relationships. As a result of our use of master franchising relationships and international market conditions, total revenues from international franchising operations comprised only 8% and 7% of our total revenues in 2008 and 2007, respectively while representing approximately 19% and 20% of our franchise system hotels open at December 31, 2008 and 2007, respectively.

On January 31, 2008, the Company terminated the master franchise agreement with The Real Hotel Company PLC ("RHC") related to RHC's franchised hotels under the Choice brands in the United Kingdom. In conjunction with the termination of the master franchise agreement, the Company acquired RHC's franchise contracts under the master franchise agreement and commenced direct franchising operations in the United Kingdom on this date.

During 2006, the Company acquired 100% of the stock of Choice Hotels Franchise GmbH ("CHG"). CHG was a wholly owned subsidiary of one of the Company's master franchisees, RHC. Under the master franchise agreement with RHC, CHG franchised hotels under the Company's brands in Austria, Germany, Italy, Czech Republic and portions of Switzerland. As a result of this acquisition, the master franchise agreement between the Company and RHC covering these countries terminated. The results of CHG have been consolidated with the Company since October 30, 2006.

During 2006, the Company acquired RHC's assets, including franchise contracts, related to its franchising of hotels under the Company's brands in France, Belgium, Portugal, Spain and portions of Switzerland. As a result of this acquisition, the master franchise agreement between the Company and RHC covering these countries terminated and the Company commenced direct franchising operations in these countries on November 30, 2006.

These transactions enable Choice to continue its strategy of more closely directing the growth of our franchise operations throughout continental Europe and the United Kingdom.

Our Company generates revenues, income and cash flows primarily from initial and continuing royalty fees attributable to our franchise agreements. Revenues are also generated from procurement services vendor arrangements, hotel operations and other sources. The hotel industry is seasonal in nature. For most hotels, demand is lower in December through March than during the remainder of the year. Our principal source of revenues is franchise fees based on the gross room revenues of our franchised properties. The Company's franchise fee revenues and operating income reflect the industry's seasonality and historically have been lower in the first quarter than in the second, third or fourth quarters.

With a focus on hotel franchising instead of ownership, we benefit from the economies of scale inherent in the franchising business. The fee and cost structure of our business provides opportunities to improve operating results by increasing the number of franchised hotel rooms and effective royalty rates of our franchise contracts resulting in increased initial fee revenue; ongoing royalty fees and procurement services revenues. In addition, our operating results can also be improved through our company wide efforts related to improving property level performance. At December 31, 2008, the Company estimates that based on its current domestic portfolio of hotels under franchise that a 1% change in revenue per available room ("RevPAR") or rooms under franchise would increase or decrease royalty revenues by approximately $2.2 million and a 1 basis point change in the Company's effective royalty rate would increase or decrease domestic royalties by approximately $0.5 million. In addition to these revenues, we also collect marketing and reservation system fees to support centralized marketing and reservation activities for the franchise system. As a lodging franchisor, Choice currently has relatively low capital expenditure requirements.

The principal factors that affect the Company's results are: the number and relative mix of franchised hotel rooms; growth in the number of hotel rooms under franchise; occupancy and room rates achieved by the hotels under franchise; the effective royalty rate achieved; and our ability to manage costs. The number of rooms at franchised properties and occupancy and room rates at those properties significantly affect the Company's results because our fees are based upon room revenues at franchised hotels. The key industry standard for measuring hotel-operating performance is 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 franchises. Accordingly, continued growth of our franchise business should enable us to realize benefits from the operating leverage in place and improve operating results.

We are contractually required by our franchise agreements to use the marketing and reservation system fees we collect for system-wide marketing and reservation activities. These expenditures, which include advertising costs and costs to maintain our central reservations system, help to enhance awareness and increase consumer preference for our brands. Greater awareness and preference promotes long-term growth in business delivery to our franchisees, which ultimately increases franchise fees earned by the Company.

Our Company articulates its mission as a commitment to our customers' profitability by providing our customers with hotel franchises that generate the highest return on investment of any hotel franchise. We have developed an operating system dedicated to our franchisees' success that focuses on delivering guests to our franchised hotels and reducing costs for our hotel owners.

We believe that executing our strategic priorities creates value. Our Company focuses on two key value drivers:

Profitable Growth. Our success is dependent on improving the performance of our hotels, increasing our system size by selling additional hotel franchises and effective royalty rate improvement. We attempt to improve our franchisees' revenues and overall profitability by providing a variety of products and services designed to increase business delivery to and/or reduce operating and development costs for our franchisees. These products and services include national marketing campaigns, a central reservation system, property and yield management systems, quality assurance standards and procurement services vendor relationships. We believe that healthy brands, which deliver a compelling return on investment for franchisees, will enable us to sell additional hotel franchises and raise royalty rates. We have established multiple brands that meet the needs of many types of guests, and can be developed at various price points and applied to both new and existing hotels. This ensures that we have brands suitable for creating growth in a variety of market conditions. Improving the performance of the hotels under franchise, growing the system through additional franchise sales and improving franchise agreement pricing while maintaining a disciplined cost structure are the keys to profitable growth.

Maximizing Financial Returns and Creating Value for Shareholders. Our capital allocation decisions, including capital structure and uses of capital, are intended to maximize our return on invested capital and create value for our shareholders. We believe our strong and predictable cash flows create a strong financial position that provides us a competitive advantage. Currently, our business does not require significant capital to operate and grow. Therefore, we can maintain a capital structure that generates high financial returns and use our excess cash flow to increase returns to our shareholders. Historically, we have returned value to our shareholders in two primary ways: share repurchases and dividends. In 1998, we instituted a share repurchase program which has generated substantial value for our shareholders. Through December 31, 2008, we have repurchased 40.8 million shares (including 33.0 million prior to the two-for-one stock split effected in October 2005) of common stock at a total cost of $950.6 million since the program's inception. Considering the effect of the two-for-one stock split, the Company has repurchased 73.8 million shares at an average price of $12.88 per share. On December 12, 2008, the board of directors authorized a five million share increase in the number of shares available for repurchase under the program. At December 31, 2008, the Company had remaining authorization to purchase up to 6.0 million shares under the current stock repurchase authorization of the board of directors. Upon

completion of the current authorization, our board of directors will evaluate the propriety of additional share repurchases. In 2008, we paid cash dividends totaling approximately $43.1 million and we presently expect to continue to pay dividends in the future. Based on our present dividend rate and outstanding share count, aggregate annual dividends for 2009 would be approximately $44.7 million.

Our board of directors has authorized us to enter into programs which permit us to offer investment, financing and guaranty support to qualified franchisees to incent multi-unit franchise development in top markets primarily for the Company's Cambria Suites and extended stay brands. Based on market and other conditions, we expect to deploy this capital opportunistically over the next several years. In addition to these programs, the Company expects to continue to return value to its shareholders through a combination of share repurchases and dividends, subject to market and other conditions.

We believe these value drivers, when properly implemented, will enhance our profitability, maximize our financial returns and continue to generate value for our shareholders. The ultimate measure of our success will be reflected in the items below.

Results of Operation: Royalty fees, operating income, net income and diluted earnings per share ("EPS") represent key measurements of these value drivers. In 2008, royalty fees revenue totaled approximately $247.4 million, a 5% increase compared to 2007. Operating income totaled $174.6 million for the year ended December 31, 2008, a 6% decline from 2007. Net income for the year ended December 31, 2008 declined $11.1 million from 2007 to $100.2 million and diluted earnings per share were $1.60, a $0.10 decline from 2007. Operating and net income include expenses related to the acceleration of the Company's management succession plan totaling $6.6 million ($4.1 million, net of tax), termination benefits for non-executive employees totaling $3.5 million ($2.2 million, net of tax) and the establishment of reserves for impaired notes receivable totaling $7.6 million ($4.7 million, net of tax). These items represented diluted EPS of $0.18. These measurements will continue to be a key management focus in 2009 and beyond.

Refer to MD&A heading "Operations Review" for additional analysis of our results.

Liquidity and Capital Resources: Historically, the Company has generated significant cash flows from operations. In 2008 and 2007, net cash provided by operating activities was $104.4 million and $145.7 million, respectively. Since our business does not currently require significant reinvestment of capital, we utilize cash in ways that management believes provide the greatest returns to our shareholders which include share repurchases and dividends. We believe the Company's cash flow from operations and available financing capacity is sufficient to meet the expected future operating, investing and financing needs of the business. However, events over the past several months, including recent failures and near failures of a number of large financial service companies have made the capital markets increasingly volatile. As a result of the dislocation in the credit markets, the availability of reasonably priced credit may be limited and therefore reduce the Company's ability to return value to shareholders through dividends and its share repurchase program.

Refer to MD&A heading "Liquidity and Capital Resources" for additional analysis.

Inflation: Inflation has been moderate in recent years and has not had a significant impact on our business.

Operations Review

Comparison of 2008 Operating Results and 2007 Operating Results

The Company recorded net income of $100.2 million for the year ended December 31, 2008, an $11.1 million or 10% decline from $111.3 million for the year ended December 31, 2007. The decline in net income for the year ended December 31, 2008 is primarily attributable to a $10.6 million or 6% decline in operating income and the decline in the fair value of investments held in the Company's non-qualified employee benefit plans

compared to an appreciation of these investments in the prior year period. These declines were partially offset by lower effective borrowing rates. Operating income declined $10.6 million as the Company's selling, general and administrative ("SG&A") costs increased $17.4 million or 17% while franchising revenues (total revenues excluding marketing and reservation revenues and hotel operations) increased $6.3 million or 2%. SG&A expenses for the year ended December 31, 2008 includes a $6.6 million charge related to the Company's acceleration of a previously announced management succession plan as well as termination benefits totaling $3.5 million related to the termination of non-executive employees. In addition, SG&A expenses also reflect the establishment of reserves for impaired notes receivable totaling $7.6 million. SG&A expenses for the year ended December 31, 2007 include termination benefits totaling $3.7 million resulting from the separation of certain executive officers.

Summarized financial results for the years ended December 31, 2008 and 2007 are as follows:

2008 2007 (In thousands, except per share amounts)
REVENUES:

       Royalty fees                                  $    247,435     $ 236,346
       Initial franchise and relicensing fees              27,931        33,389
       Procurement services                                17,148        16,283
       Marketing and reservation                          336,477       316,827
       Hotel operations                                     4,936         4,692
       Other                                                7,753         7,957

       Total revenues                                     641,680       615,494

       OPERATING EXPENSES:
       Selling, general and administrative                118,989       101,590
       Depreciation and amortization                        8,184         8,637
       Marketing and reservation                          336,477       316,827
       Hotel operations                                     3,434         3,241

       Total operating expenses                           467,084       430,295

       Operating income                                   174,596       185,199

       OTHER INCOME AND EXPENSES:
       Interest expense                                    10,932        14,293
       Interest and other investment (income) loss          7,760        (1,750 )
       Equity in net income of affiliates                  (1,414 )      (1,230 )

       Other income and expenses, net                      17,278        11,313

       Income before income taxes                         157,318       173,886
       Income taxes                                        57,107        62,585

       Net income                                    $    100,211     $ 111,301

       Weighted average shares outstanding-diluted         62,521        65,331

       Diluted earnings per share                    $       1.60     $    1.70

Management analyzes its business based on franchising revenues, which is total revenues excluding marketing and reservation revenues and hotel operations, and franchise operating expenses that are reflected as SG&A expenses.

Franchising Revenues: Franchising revenues were $300.3 million for the year ended December 31, 2008 compared to $294.0 million for the year ended December 31, 2007. The growth in franchising revenues is primarily due to increases in royalty and procurement services revenues of approximately 5% and 5%, respectively partly offset by a 16% decline in initial and relicensing fees.

Domestic royalty fees increased $7.7 million to $221.8 million from $214.1 million in 2007, an increase of 3.6%. The increase in royalties is attributable to a combination of factors including a 5.6% increase in the number of domestic franchised hotel rooms and an increase in the effective royalty rate of the domestic hotel system from 4.14% to 4.20%, partially offset by a 1.8% decline in RevPAR. System-wide RevPAR declined due to a 260 basis point decline in occupancy, which was partially offset by a 2.8% increase in average daily rates.

A summary of the Company's domestic franchised hotels operating information for the years ending December 31 is as follows:

                                             2008*                                        2007*                                         Change
                              Average                                      Average                                     Average
                             Daily Rate      Occupancy       RevPAR       Daily Rate      Occupancy       RevPAR      Daily Rate       Occupancy           RevPAR
Comfort Inn                 $      79.84          60.1 %     $ 48.01     $      77.14          63.1 %     $ 48.70            3.5 %          (300 ) bps       (1.4 )%
Comfort Suites                     89.49          61.3 %       54.82            87.23          65.5 %       57.11            2.6 %          (420 ) bps       (4.0 )%
Sleep                              71.91          58.5 %       42.10            69.67          62.5 %       43.52            3.2 %          (400 ) bps       (3.3 )%

Midscale without Food &
Beverage                           80.90          60.2 %       48.66            78.23          63.5 %       49.70            3.4 %          (330 ) bps       (2.1 )%

Quality                            71.42          52.0 %       37.15            70.30          54.2 %       38.09            1.6 %          (220 ) bps       (2.5 )%
Clarion                            84.48          50.0 %       42.21            80.86          51.7 %       41.79            4.5 %          (170 ) bps        1.0 %

Midscale with Food &
Beverage                           74.18          51.6 %       38.26            72.74          53.6 %       38.97            2.0 %          (200 ) bps       (1.8 )%

Econo Lodge                        55.58          46.9 %       26.05            54.40          48.0 %       26.10            2.2 %          (110 ) bps       (0.2 )%
Rodeway                            55.04          47.5 %       26.16            53.24          47.6 %       25.32            3.4 %           (10 ) bps        3.3 %

Economy                            55.44          47.0 %       26.08            54.14          47.9 %       25.93            2.4 %           (90 ) bps        0.6 %

MainStay                           73.72          64.2 %       47.34            70.04          68.5 %       47.98            5.3 %          (430 ) bps       (1.3 )%
Suburban                           42.93          62.4 %       26.80            40.13          67.3 %       27.01            7.0 %          (490 ) bps       (0.8 )%

Extended Stay                      51.14          62.9 %       32.17            47.10          67.6 %       31.83            8.6 %          (470 ) bps        1.1 %

Total                       $      74.11          55.3 %     $ 40.98     $      72.07          57.9 %     $ 41.75            2.8 %          (260 ) bps       (1.8 )%

* Operating statistics represent hotel operations from December through November and exclude Ascend Collection for 2008 and Cambria Suites for 2008 and 2007.

The number of domestic rooms on-line increased to 373,884 as of December 31, 2008 from 354,139 as of December 31, 2007, an increase of 5.6%. The total number of domestic hotels on-line grew 6.1% to 4,716 as of December 31, 2008 from 4,445 as of December 31, 2007.

A summary of the domestic hotels and available rooms at December 31, 2008 and 2007 by brand is as follows:

                                     December 31,       December 31,
                                         2008               2007                        Variance
                                   Hotels    Rooms    Hotels    Rooms    Hotels       %        Rooms        %
Comfort Inn                         1,462   114,573    1,434   112,042       28       2.0 %     2,531       2.3 %
Comfort Suites                        541    42,152      481    37,358       60      12.5 %     4,794      12.8 %
Sleep                                 365    26,867      346    25,728       19       5.5 %     1,139       4.4 %

Midscale without Food & Beverage    2,368   183,592    2,261   175,128      107       4.7 %     8,464       4.8 %

Quality                               908    85,055      828    79,276       80       9.7 %     5,779       7.3 %
Clarion                               150    21,497      167    23,319      (17 )   (10.2 )%   (1,822 )    (7.8 )%

Midscale with Food & Beverage       1,058   106,552      995   102,595       63       6.3 %     3,957       3.9 %

Econo Lodge                           816    50,812      825    50,403       (9 )    (1.1 )%      409       0.8 %
Rodeway                               346    20,302      276    16,523       70      25.4 %     3,779      22.9 %

Economy                             1,162    71,114    1,101    66,926       61       5.5 %     4,188       6.3 %

MainStay                               35     2,694       30     2,258        5      16.7 %       436      19.3 %
Suburban                               60     7,256       54     6,773        6      11.1 %       483       7.1 %

Extended Stay                          95     9,950       84     9,031       11      13.1 %       919      10.2 %

Ascend Collection                      21     1,353       -         -        21        NM       1,353        NM
Cambria Suites                         12     1,323        4       459        8     200.0 %       864     188.2 %

Total Domestic Franchises           4,716   373,884    4,445   354,139      271       6.1 %    19,745       5.6 %

International available rooms increased to 98,642 as of December 31, 2008 from 97,888 as of December 31, 2007. The total number of international hotels on-line declined from 1,125 as of December 31, 2007 to 1,111 as of December 31, 2008.

As of December 31, 2008, the Company had 987 franchised hotels with 78,915 rooms under construction, awaiting conversion or approved for development in its domestic system as compared to 1,004 hotels and 79,342 rooms at December 31, 2007. The number of new construction franchised hotels in the Company's domestic pipeline declined 1% to 723 at December 31, 2008 from 728 at December 31, 2007. The Company had an additional 121 franchised hotels with 10,190 rooms under construction, awaiting conversion or approved for development in its international system as of December 31, 2008 compared to 89 hotels and 8,640 rooms at December 31, 2007. While the Company's hotel pipeline provides a strong platform for growth, a hotel in the pipeline does not always result in an open and operating hotel due to various factors.

A summary of the domestic franchised hotels under construction, awaiting conversion or approved for development at December 31, 2008 and 2007 by brand is as follows:

                                              December 31, 2008                   December 31, 2007                                  Variance
                                                                                                                                        New
                                                       New                                 New                  Conversion         Construction            Total
                                      Conversion   Construction   Total   Conversion   Construction   Total   Units      %        Units        %       Units      %
Comfort Inn                                   51            125     176           54            135     189      (3 )     (6 )%      (10 )     (7 )%     (13 )    (7 )%
Comfort Suites                                 3            279     282            1            278     279       2      200 %         1        0 %        3       1 %
Sleep                                          2            157     159           -             138     138       2       NM          19       14 %       21      15 %

Midscale without Food & Beverage              56            561     617           55            551     606       1        2 %        10        2 %       11       2 %

Quality                                       69             14      83           71             15      86      (2 )     (3 )%       (1 )     (7 )%      (3 )    (3 )%
Clarion                                       36              9      45           30              7      37       6       20 %         2       29 %        8      22 %

Midscale with Food & Beverage                105             23     128          101             22     123       4        4 %         1        5 %        5       4 %

Econo Lodge                                   45              5      50           46              3      49      (1 )     (2 )%        2       67 %        1       2 %
Rodeway                                       58              2      60           68              3      71     (10 )    (15 )%       (1 )    (33 )%     (11 )   (15 )%
. . .