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

Basis of Presentation

As discussed in Note 1 of the accompanying consolidated financial statements, the Company adopted FASB Staff Position Emerging Issues Task Force No. 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities", which is now included in FASB ASC 260 "Earnings Per Share". This guidance clarified that all share-based payment awards that contain rights to non-forfeitable dividends participate in undistributed earnings with common shareholders. Therefore, awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied rather than the treasury stock method. In addition, this guidance requires that all prior period earnings per share data presented be adjusted retrospectively to conform to the current year presentation.

The Company's outstanding unvested restricted stock awards contain rights to non-forfeitable dividends and as a result, the Company applied this guidance in the first quarter of 2009. The two-class method of calculating earnings per share is more dilutive to both basic and diluted shares outstanding than the previously utilized treasury stock method. The Company has retrospectively adjusted its basic and diluted shares outstanding for the three and nine months ended September 30, 2008. As a result, basic and diluted earnings per share for the nine months ended September 30, 2008 were revised from $1.31 to $1.30 and $1.30 to $1.29 per share, respectively. Basic earnings per share for the three months ended September 30, 2008 has been revised from $0.58 to $0.57 per share and diluted earnings per share for the three months ended September 30, 2008 remained unchanged. Additionally, basic and diluted earnings per share for the year ended December 31, 2008 were reduced from $1.62 to $1.61 and $1.60 to $1.59 per share, respectively. See Note 12 "Earnings Per Share" of the accompanying consolidated financial statements for additional information.

Overview

We are a hotel franchisor with franchise agreements representing 6,006 hotels open and 860 hotels under construction, awaiting conversion or approved for development as of September 30, 2009, with 487,212 rooms and 68,541 rooms, respectively, in 49 states, the District of Columbia and over 35 countries and territories outside the United States. Our brand names include Comfort Inn®, Comfort Suites®, Quality®, Clarion®, Sleep Inn®, Econo Lodge®, Rodeway Inn®, MainStay Suites®, Suburban Extended Stay Hotel®, Cambria Suites® and Ascend Collection® (collectively, the "Choice brands").

The Company conducts its international franchise operations through a combination of direct franchising and master franchising relationships that allow the use of the Choice 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 7% of our total revenues for both the three and nine month periods ended September 30, 2009, while representing approximately 19% of hotels open at September 30, 2009.

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. 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 annual domestic royalty revenues by approximately $2.2 million and a 1 basis point change in the Company's effective royalty rate would increase or decrease annual domestic royalties by approximately $0.5 million. In addition to these revenues, we also collect marketing and reservation fees to support centralized marketing and reservation activities for the franchise system. As a lodging franchisor, the Company 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 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 franchisees' profitability by providing them 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 provide 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. During the nine months ended September 30, 2009, the Company repurchased 2.1 million shares of its common stock under the share repurchase program at a total cost of $55.3 million. Since the program's inception through September 30, 2009, we have repurchased 42.8 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 $1.0 billion. Considering the effect of the two-for-one stock split, the Company has repurchased 75.8 million shares at an average price of $13.26 per share. At September 30, 2009, the Company had remaining authorization to purchase up to 3.9 million shares under the current stock repurchase authorization. Upon completion of the current authorization, our board of directors will evaluate the propriety of additional share repurchases. During the nine months ended September 30, 2009, we paid cash dividends totaling approximately $33.3 million and we presently expect to continue to pay dividends in the future, subject to future business performance, economic conditions and changes in income tax regulations. Based on our present dividend rate and outstanding share count, aggregate annual dividends for 2009 would be approximately $44.3 million.

Our Board 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. Notwithstanding 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 the three months ended September 30, 2009, royalty fees revenue totaled $66.4 million, a 13% decrease from the same period in 2008. Operating income totaled $48.1 million for the three months ended September 30, 2009, a $13.7 million or 22% decline from the same period in 2008. Net income decreased $3.1 million or 9% from the same period of the prior year to $32.8

million. Diluted earnings per share for the quarter ended September 30, 2009 were $0.55 compared to $0.57 for the three months ended September 30, 2008. 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 the nine months ended September 30, 2009 and 2008, net cash provided by operating activities was $80.0 million and $92.4 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 are sufficient to meet the expected future operating, investing, and financing needs of the business. However, events over the past year, 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.

Operations Review

Comparison of Operating Results for the Three-Month Periods Ended September 30, 2009 and September 30, 2008

The Company recorded net income of $32.8 million for the three months ended September 30, 2009, a $3.1 million, or 9% decline from the $35.9 million for the quarter ended September 30, 2008. The decrease in net income for the three months ended September 30, 2009, is primarily attributable to a $13.7 million or 22% decline in operating income partially offset by lower effective borrowing rates and the appreciation in the fair value of investments held in the Company's non-qualified employee benefit plans compared to the prior year. Operating income declined $13.7 million as the Company's franchising revenues (total revenues excluding marketing and reservations revenues and hotel operations) declined $14.5 million or 16%. The decline in franchising revenues was primarily due to a 15.9% decline in RevPAR and fewer initial and relicensing fee contracts executed compared to the prior year. The decline in franchising revenues was partially offset by a $1.1 million or 4% decline in SG&A costs from the same period of the prior year. SG&A expenses for the three months ended September 30, 2009 included charges totaling $1.5 million resulting from employee termination benefits compared to $0.5 million during the same period of the prior year.

Summarized financial results for the three months ended September 30, 2009 and 2008 are as follows:

      (in thousands, except per share amounts)          2009           2008
      REVENUES:
      Royalty fees                                    $  66,401      $  76,595
      Initial franchise and relicensing fees              2,957          7,012
      Procurement services                                3,922          3,836
      Marketing and reservation                          90,465        100,811
      Hotel operations                                      934          1,353
      Other                                               1,297          1,604

      Total revenues                                    165,976        191,211


      OPERATING EXPENSES:
      Selling, general and administrative                24,517         25,579
      Depreciation and amortization                       2,105          2,038
      Marketing and reservation                          90,465        100,811
      Hotel operations                                      764            914

      Total operating expenses                          117,851        129,342

      Operating income                                   48,125         61,869


      OTHER INCOME AND EXPENSES, NET:
      Interest expense                                      926          2,157
      Interest and other investment (income) loss        (2,961 )        2,402
      Equity in net income of affiliates                   (336 )         (436 )

      Total other income and expenses, net               (2,371 )        4,123

      Income before income taxes                         50,496         57,746
      Income taxes                                       17,688         21,831

      Net income                                      $  32,808      $  35,915

      Weighted average shares outstanding - diluted      59,818         63,390

      Diluted earnings per share                      $    0.55      $    0.57

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 $74.6 million for the three months ended September 30, 2009 compared to $89.0 million for the three months ended September 30, 2008. The decline in franchising revenues is primarily due to a 13% decrease in royalty revenues and a 58% decrease in initial franchise and relicensing fees. In addition, other income decreased by 19% for the three months ended September 30, 2009 compared to the three months ended September 30, 2008.

Domestic royalty fees for the three months ended September 30, 2009 decreased $8.8 million to $60.7 million from $69.5 million in the three months ended September 30, 2008, a decrease of 13%. The decline in royalties is attributable to a combination of factors including a 15.9% decline in RevPAR, offset by a 4.8% increase in the number of domestic franchised hotel rooms and an increase in the effective royalty rate of the domestic system from 4.19% to 4.23%. System-wide RevPAR declined due to a 720 basis point decline in occupancy and a 5.3% decline in average daily rates.

A summary of the Company's domestic franchised hotels operating information is as follows:

                                      For the Three Months Ended          For the Three Months Ended
                                          September 30, 2009*                 September 30, 2008*                          Change
                                   Average                             Average                             Average
                                    Daily                               Daily                               Daily
                                     Rate     Occupancy      RevPAR      Rate     Occupancy      RevPAR     Rate         Occupancy         RevPAR
Comfort Inn                        $  81.35        62.7 %    $ 51.04   $  85.58        69.9 %    $ 59.79      (4.9 )%         (720 )bps     (14.6 )%
Comfort Suites                        86.67        60.0 %      52.02      92.58        68.7 %      63.57      (6.4 )%         (870 )bps     (18.2 )%
Sleep                                 72.14        57.9 %      41.74      74.93        66.2 %      49.63      (3.7 )%         (830 )bps     (15.9 )%

Midscale without Food & Beverage      81.32        61.4 %      49.89      85.65        69.1 %      59.15      (5.1 )%         (770 )bps     (15.7 )%


Quality                               72.71        53.7 %      39.02      77.04        61.2 %      47.15      (5.6 )%         (750 )bps     (17.2 )%
Clarion                               81.07        47.8 %      38.75      89.85        59.1 %      53.06      (9.8 )%       (1,130 )bps     (27.0 )%

Midscale with Food & Beverage         74.33        52.4 %      38.97      79.74        60.7 %      48.43      (6.8 )%         (830 )bps     (19.5 )%


Econo Lodge                           58.54        51.2 %      29.94      60.26        55.7 %      33.59      (2.9 )%         (450 )bps     (10.9 )%
Rodeway                               57.37        51.1 %      29.30      61.31        56.0 %      34.34      (6.4 )%         (490 )bps     (14.7 )%

Economy                               58.19        51.1 %      29.75      60.54        55.8 %      33.79      (3.9 )%         (470 )bps     (12.0 )%


MainStay                              73.01        63.6 %      46.44      76.09        70.0 %      53.28      (4.0 )%         (640 )bps     (12.8 )%
Suburban                              41.68        60.1 %      25.06      43.27        65.8 %      28.45      (3.7 )%         (570 )bps     (11.9 )%

Extended Stay                         50.88        61.1 %      31.10      52.27        66.9 %      34.95      (2.7 )%         (580 )bps     (11.0 )%

Total                              $  74.77        56.9 %    $ 42.56   $  78.96        64.1 %    $ 50.62      (5.3 )%         (720 )bps     (15.9 )%

* Operating statistics represent hotel operations from June through August

The number of domestic available rooms increased to 387,630 as of September 30, 2009 from 369,739 as of September 30, 2008, an increase of 4.8%. The total number of domestic hotels available grew 4.9% to 4,890 as of September 30, 2009 from 4,661 as of September 30, 2008.

A summary of domestic hotels and available rooms at September 30, 2009 and 2008 by brand is as follows:

                                       September 30, 2009      September 30, 2008                     Variance
                                       Hotels       Rooms      Hotels       Rooms     Hotels      Rooms         %           %
Comfort Inn                              1,457      114,377      1,455      113,782        2         595        0.1 %       0.5 %
Comfort Suites                             601       46,853        526       40,890       75       5,963       14.3 %      14.6 %
Sleep                                      389       28,459        359       26,478       30       1,981        8.4 %       7.5 %

Midscale without Food & Beverage         2,447      189,689      2,340      181,150      107       8,539        4.6 %       4.7 %

Quality                                    963       88,129        888       83,648       75       4,481        8.4 %       5.4 %
Clarion                                    167       24,063        173       23,031       (6 )     1,032       (3.5 )%      4.5 %

Midscale with Food & Beverage            1,130      112,192      1,061      106,679       69       5,513        6.5 %       5.2 %

Econo Lodge                                795       49,504        824       51,490      (29 )    (1,986 )     (3.5 )%     (3.9 )%
Rodeway                                    374       21,834        336       19,904       38       1,930       11.3 %       9.7 %

Economy                                  1,169       71,338      1,160       71,394        9         (56 )      0.8 %      (0.1 )%

MainStay                                    37        2,866         34        2,605        3         261        8.8 %      10.0 %
Suburban                                    63        7,531         58        7,054        5         477        8.6 %       6.8 %

Extended Stay                              100       10,397         92        9,659        8         738        8.7 %       7.6 %

Ascend Collection                           26        1,941         -            -        26       1,941         NM          NM
Cambria Suites                              18        2,073          8          857       10       1,216      125.0 %     141.9 %

Total Domestic Franchises                4,890      387,630      4,661      369,739      229      17,891        4.9 %       4.8 %

International available rooms increased slightly to 99,582 as of September 30, 2009 from 98,628 as of September 30, 2008. The total number of international hotels increased from 1,110 as of September 30, 2008 to 1,116 as of September 30, 2009.

As of September 30, 2009, the Company had 744 franchised hotels with 59,121 rooms under construction, awaiting conversion or approved for development in its domestic system as compared to 955 hotels and 76,269 rooms at September 30, 2008. The number of new construction franchised hotels in the Company's domestic pipeline decreased 23% to 558 at September 30, 2009 from 724 at September 30, 2008. The number of conversion franchised hotels in the Company's domestic pipeline declined by 45 or 19% from September 30, 2008 to 186 hotels at September 30, 2009. The Company had an additional 116 franchised hotels with 9,420 rooms under construction, awaiting conversion or approved for development in its international system as of September 30, 2009 compared to 119 hotels and 9,647 rooms at September 30, 2008. 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 September 30, 2009 and 2008 by brand is as follows:

                                                              September 30, 2009                  September 30, 2008                                      Variance
                                                                     Units                               Units                   Conversion           New Construction             Total
                                                                        New                                 New
                                                       Conversion   Construction   Total   Conversion   Construction   Total   Units       %          Units           %        Units       %
Comfort Inn                                                    37             97     134           44            123     167      (7 )     (16 )%         (26 )      (21 )%      (33 )    (20 )%
Comfort Suites                                                 -             194     194            2            281     283      (2 )    (100 )%         (87 )      (31 )%      (89 )    (31 )%
Sleep Inn                                                       1            129     130            1            148     149      -          0 %          (19 )      (13 )%      (19 )    (13 )%


Midscale without Food & Beverage                               38            420     458           47            552     599      (9 )     (19 )%        (132 )      (24 )%     (141 )    (24 )%


Quality                                                        49             16      65           77             16      93     (28 )     (36 )%          -           0 %       (28 )    (30 )%
Clarion                                                        23              6      29           30             10      40      (7 )     (23 )%          (4 )      (40 )%      (11 )    (28 )%
. . .