<PAGE>



                           SCHEDULE 14A INFORMATION

          Proxy Statement Pursuant to Section 14(a) of the Securities
                    Exchange Act of 1934 (Amendment No.  )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [_]

Check the appropriate box:

[_]  Preliminary Proxy Statement         [_]  CONFIDENTIAL, FOR USE OF THE
                                              COMMISSION ONLY (AS PERMITTED BY
                                              RULE 14A-6(E)(2))

[X]  Definitive Proxy Statement

[_]  Definitive Additional Materials

[_]  Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12


                       Sunburst Hospitality Corporation
--------------------------------------------------------------------------------
               (Name of Registrant as Specified In Its Charter)

                       Sunburst Hospitality Corporation
--------------------------------------------------------------------------------
   (Name of Person(s) Filing Proxy Statement, if other than the Registrant)


Payment of Filing Fee (Check the appropriate box):

[X]  No fee required

[_]  Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.


     (1) Title of each class of securities to which transaction applies:

     -------------------------------------------------------------------------


     (2) Aggregate number of securities to which transaction applies:

     -------------------------------------------------------------------------


     (3) Per unit price or other underlying value of transaction computed
         pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
         the filing fee is calculated and state how it was determined):

     -------------------------------------------------------------------------


     (4) Proposed maximum aggregate value of transaction:

     -------------------------------------------------------------------------


     (5) Total fee paid:

     -------------------------------------------------------------------------

[_]  Fee paid previously with preliminary materials.

[_]  Check box if any part of the fee is offset as provided by Exchange
     Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
     was paid previously. Identify the previous filing by registration statement
     number, or the Form or Schedule and the date of its filing.

     (1) Amount Previously Paid:

     -------------------------------------------------------------------------


     (2) Form, Schedule or Registration Statement No.:

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     (3) Filing Party:

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     (4) Date Filed:

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Notes:

<PAGE>

                        SUNBURST HOSPITALITY CORPORATION

                              10770 COLUMBIA PIKE
                         SILVER SPRING, MARYLAND 20901

                               ----------------

                            NOTICE OF ANNUAL MEETING
                           TO BE HELD APRIL 22, 1998

                               ----------------

To the Stockholders of
SUNBURST HOSPITALITY CORPORATION

  The 1998 Annual Meeting of Stockholders (the "Annual Meeting") of Sunburst
Hospitality Corporation, a Delaware corporation ("Sunburst" or the "Company"),
will be held at the Quality Suites Shady Grove, 3 Research Court, Rockville,
Maryland at 9:00 a.m. (E.S.T.) on Wednesday, April 22, 1998 for the following
purposes:

  1. To elect two Class II directors to hold office for a three year term
  ending at the 2001 Annual Meeting of Stockholders and until their
  successors are elected and qualified;

  2. To approve an increase of 1.2 million in the number of authorized shares
  under the Sunburst Hospitality Corporation 1996 Long-Term Incentive Plan;
  and

  3. To transact such other business as may properly come before the Annual
  Meeting.

  Holders of record of Sunburst common stock at the close of business on March
12, 1998 will be entitled to notice of, and to vote at, the Annual Meeting or
any adjournment(s) or postponement(s) thereof. Stockholders are reminded that
your shares of Sunburst common stock cannot be voted unless you properly
execute and return the enclosed proxy card or make other arrangements to have
your shares represented at the meeting. A list of stockholders will be
available for inspection at the office of the Company located at the address
above, at least 10 days prior to the Annual Meeting.

                                            By Order of the Board of Directors

                                             SUNBURST HOSPITALITY CORPORATION

                                                /s/ Pamela M. Williams

                                                    Pamela M. Williams
                                                    Assistant Secretary

March 25, 1998
Silver Spring, Maryland

  TO VOTE YOUR SHARES, PLEASE SIGN, DATE AND COMPLETE THE ENCLOSED PROXY AND
MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
<PAGE>

                       SUNBURST HOSPITALITY CORPORATION

                              10770 COLUMBIA PIKE
                         SILVER SPRING, MARYLAND 20901

                               ----------------

                                PROXY STATEMENT

                        ANNUAL MEETING OF STOCKHOLDERS
                                APRIL 22, 1998

                               ----------------

                              GENERAL INFORMATION

  This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Sunburst Hospitality Corporation, a
Delaware corporation ("Sunburst" or the "Company"), for use at the 1998 Annual
Meeting of Stockholders of the Company to be held at 9:00 a.m. (E.S.T.) on
April 22, 1998, at the Quality Suites Shady Grove, 3 Research Court,
Rockville, Maryland and at any adjournment(s) or postponement(s) thereof (the
"Annual Meeting"). It is anticipated that this Proxy Statement and proxy will
first be mailed to the Company's stockholders on or about March 25, 1998.

  The Company's Annual Report on Form 10-K (including certified financial
statements) for the seven month period ended December 31, 1997 is accompanying
this Proxy Statement. The Annual Report is not part of the proxy solicitation
material.

 Background of Spinoffs; Change In Fiscal Year

  Prior to October 15, 1997, the Company was named Choice Hotels
International, Inc. On October 15, 1997, the Company distributed to its
stockholders its hotel franchising business and its European hotel ownership
pursuant to a pro rata distribution to its stockholders of all of the stock of
its wholly-owned subsidiary, Choice Hotels Franchising, Inc. (the "Spinoff").
At the time of the Spinoff, the Company changed its name to "Sunburst
Hospitality Corporation" and Choice Hotels Franchising, Inc. changed its name
to "Choice Hotels International, Inc." ("New Choice").

  Prior to November 1996, the Company was a subsidiary of Manor Care, Inc.
("Manor Care") which, directly and through its subsidiaries, engaged in the
ownership and management of hotels currently conducted by the Company as well
as the hotel franchising business currently conducted by New Choice (together,
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 the Company (the "Manor Care Spinoff").

  In September 1997, the Company changed its fiscal year from May 31 to
December 31.

 Voting of Proxies

  Your vote is important. Shares can be voted at the Annual Meeting only if
you are present in person or represented by proxy. Even if you plan to attend
the meeting, you are urged to sign, date and return the accompanying proxy
card.

  When the enclosed proxy card is properly signed, dated and returned, the
stock represented by the proxy will be voted in accordance with your
directions. You can specify your voting instructions by marking the
appropriate box on the proxy card. If your proxy card is signed and returned
without specific voting instructions, your shares of Sunburst common stock
will be voted as recommended by the directors: "FOR" the election of the two
nominees for director named on the proxy card and "FOR" the amendment to the
1996 Long-Term

                                       1
<PAGE>

Incentive Plan (the "1996 Incentive Plan"). Abstentions marked on the proxy
card have the effect of being voted "against" the directors' proposals but are
counted in the determination of a quorum.

  You may revoke your proxy at any time before it is voted at the meeting by
(i) filing with ChaseMellon Shareholder Services, L.L.C. in its capacity as
transfer agent for the Company (the "Transfer Agent"), at or before the Annual
Meeting, a written notice of revocation bearing a later date than the proxy,
(ii) executing a later-dated proxy relating to the same shares of Company
Common Stock and delivering it to the Transfer Agent at or before the Annual
Meeting, or (iii) attending the Annual Meeting and voting in person (although
attendance at the Annual Meeting will not, in and of itself, constitute a
revocation of a proxy). Any written notice revoking a proxy should be sent to
ChaseMellon Shareholder Services, L.L.C., Overpeck Centre, 85 Challenger Road,
Ridgefield Park, New Jersey 07660.

 Votes Required

  The close of business on March 12, 1998 has been fixed as the record date
for determination of holders of Company common stock entitled to notice of and
to vote at the Annual Meeting. On that date, there were outstanding and
entitled to vote 19,963,190 shares of Company common stock. The presence,
either in person or by proxy, of persons entitled to cast a majority of such
votes constitutes a quorum for the transaction of business at the Annual
Meeting. Abstentions and broker no-votes on returned proxies are counted as
shares present in the determination of whether the shares of stock represented
at the Annual Meeting constitute a quorum. A broker "non-vote" occurs when a
nominee holding shares of Sunburst common stock for a beneficial owner does
not vote on a particular item and has not received instructions from the
beneficial owner.

  Stockholders are entitled to one vote per share on all matters submitted for
consideration at the Annual Meeting. With regard to the election of directors,
votes may be cast in favor of or withheld from nominees. Votes that are
withheld will be excluded entirely from the vote and will have no effect.
Abstentions may be specified on all proposals other than the election of
directors. Each proposal is tabulated separately. Abstentions are counted in
tabulations of the votes cast on proposals presented to the stockholders,
whereas broker non-votes are not counted for purposes of determining whether a
proposal has been approved.

  The affirmative vote of a plurality of shares of Company common stock
present in person or represented by proxy at the Annual Meeting is required to
elect the directors nominated. "Plurality" means that the individuals who
receive the largest number of votes cast are elected as directors up to the
maximum number of directors to be chosen at the meeting.

  Certain members of the Bainum family (including various trusts, partnerships
and corporations established by members of the Bainum family) in the aggregate
have the right to vote approximately 34.59% of the number of outstanding
shares of Company common stock and have indicated an intention to vote in
accordance with the recommendations of the Board of Directors.

 Solicitation of Proxies

  The Company will bear the cost of the solicitation. In addition to
solicitation by mail, the Company will request banks, brokers and other
custodian nominees and fiduciaries to supply proxy material to the beneficial
owners of Company common stock of whom they have knowledge, and will reimburse
them for their expenses in so doing; and certain directors, officers and other
employees of the Company, not specially employed for the purpose, may solicit
proxies, without additional remuneration therefor, by personal interview,
mail, telephone or telegraph.

 Relationship With Independent Public Accountants

  Since 1996, Arthur Andersen LLP has served as the Company's independent
public accounting firm. It is expected that representatives of Arthur Andersen
will be present at the annual meeting. They will be given an

                                       2
<PAGE>

opportunity to make a statement if they desire to do so, and it is expected
that they will be available to respond to appropriate questions.

 Procedures for Stockholder Proposals and Nominations

  Under the Company's Bylaws, nominations for director may be made only by the
Board of Directors or a committee of the board, or by a stockholder entitled
to vote who has delivered notice to the Company not less than 60, nor more
than 90, days before the first anniversary of the preceding year's annual
meeting.

  The Bylaws also provide that no business may be brought before an annual
meeting except as specified in the notice of meeting (which includes
stockholder proposals that the Company is required to set forth in its proxy
statement under SEC Rule 14a-8) or as otherwise brought before the meeting by
or at the direction of the board or by a stockholder entitled to vote who has
delivered notice to the Company (containing certain information specified in
the Bylaws) within the time limits described above for a nomination for the
election of a director. These requirements are separate and apart from, and in
addition to, the SEC's requirements that a stockholder must comply with in
order to have a stockholder proposal included in the Company's proxy statement
under SEC Rule 14a-8.

 Stockholder Proposals for 1999 Annual Meeting

  Stockholder proposals intended to be presented at the Company's 1999 Annual
Meeting of Stockholders must be received by the Company's Corporate Secretary
no later than February 21, 1999. Such proposals must meet the requirements set
forth in the rules and regulations of the SEC in order to be eligible for
inclusion in the Company's 1999 proxy materials.

 Other Matters to Come Before the Meeting

  The Board of Directors does not know of any matters which will be brought
before the 1998 annual meeting other than those specifically set forth in the
notice of meeting. If any other matters are properly introduced at the meeting
for consideration, including, among other things, consideration of a motion to
adjourn the meeting to another time or place, the individuals named on the
enclose proxy card will have discretion to vote in accordance with their best
judgment.

            SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

  Section 16(a) of the Securities Exchange Act of 1934, as amended, (the
"Exchange Act") requires the Company's reporting officers and directors, and
persons who own more than ten percent of the Company's common stock, to file
reports of ownership and changes in ownership on Forms 3, 4 and 5 with the
Securities and Exchange Commission (the "Commission"), the New York Stock
Exchange and the Company. Because of the failure of the Commission to correct
EDGAR filing information for the Company after the Company's timely request,
the following Form 5's were timely filed electronically but rejected from the
EDGAR system: Stewart Bainum, Stewart Bainum, Jr., Federic V. Malek, Carole Y.
Prest, James A. MacCutcheon and Antonio DiRico. The Form 5's were subsequently
refiled and accepted. A Form 5 for Paul A. Gould was filed late. None of the
transactions covered in the late filings were subject to short swing liability
under Section 16(b) of the Exchange Act. Except as previously noted and based
on a review of the copies of such reports furnished to the Company and written
representations that no other reports were required, the Company believes that
all of its reporting officers, directors and greater than ten percent
beneficial owners complied with all filing requirements applicable to them
during the fiscal year ended December 31, 1997.

                        ELECTION OF CLASS II DIRECTORS

  The Board of Directors currently consists of three classes of directors, as
nearly equal in number as possible. Directors hold office for staggered terms
of three years (or less if they are filling a vacancy) and until their
successors are elected and qualified. One of the three classes, comprising
approximately one third of the

                                       3
<PAGE>

directors, is elected each year to succeed the directors whose terms are
expiring. The directors in Class II will be elected at the Annual Meeting to
serve for a term expiring at the Company's Annual Meeting in the year 2001.
The directors in Classes III and I are serving terms expiring at the Company's
Annual Meeting of Stockholders in 1999 and 2000, respectively.

  In connection with the Spinoff, Barbara Bainum, Robert C. Hazard, Jr.,
Gerald W. Petitt, Jerry E. Robertson and William R. Floyd resigned from the
Board of Directors on October 15, 1997, and Donald J. Landry and Carole Y.
Prest were appointed to the Board of Directors. On November 13, 1997, Keith B.
Pitts was appointed to the Board of Directors.

  The Company's Board of Directors has proposed the following nominees for
election as directors at the annual meeting:

                        NOMINEES FOR CLASS II DIRECTORS

          WITH TERMS EXPIRING AT THE ANNUAL MEETING IN THE YEAR 2001:

                              STEWART BAINUM, JR.
                                 PAUL A. GOULD

  THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF THE ABOVE-
NAMED NOMINEES AS DIRECTORS FOR A TERM OF THREE YEARS. Proxies solicited by
the Board of Directors will be voted "FOR" the election of the nominees,
unless otherwise instructed on the proxy card.

  Information is provided below with respect to each nominee for election and
each director continuing in office. Should one or more of these nominees
become unavailable to accept nomination or election as a director, the
individuals named as proxies on the enclosed proxy card will vote the shares
that they represent for the election of such other persons as the board may
recommend, unless the board reduces the number of directors. The Board of
Directors knows of no reason why any of the nominees will be unavailable or
unable to serve.

NOMINEES FOR ELECTION AS DIRECTORS

 Class II -- Nominees for Terms Expiring in 2001

  STEWART BAINUM, JR., 51, Chairman of the Board of the Company since November
1996; Chairman of the Board of New Choice since October 1997 and from March
1987 to November 1996; Chairman of the Board and Chief Executive Officer of
Manor Care and ManorCare Health Services, Inc. ("MCHS") since March 1987;
Chief Executive Officer of Manor Care since March 1987 and President since
June 1989; Vice Chairman of the Board of Vitalink Pharmacy Services, Inc.
("Vitalink") since December 1994; Vice Chairman of the Board of Manor Care and
subsidiaries from June 1982 to March 1987; Director of Manor Care since August
1981, of Vitalink since September 1991, of MCHS since 1976 and of the Company
since 1977; Chief Executive Officer of MCHS since June 1989 and President from
May 1990 to May 1991; Chairman of the Board and Chief Executive Officer of
Vitalink from September 1991 to February 1995 and President and Chief
Executive Officer from March 1987 to September 1991.

  PAUL A. GOULD, 53, Managing Director of Allen & Company Incorporated
(investment banking firm) for more than five years and other positions at
Allen & Company Incorporated since 1973; Director of the Company since
November 1996. Director: Tele-Communications, Inc., Tele-Communications
International, Inc. and Ascent Entertainment Group.


                                       4
<PAGE>

DIRECTORS WHOSE TERM OF OFFICE CONTINUE

 Class III -- Term Expires in 1999

  DONALD J. LANDRY, 49, Chief Executive Officer and Vice Chairman of the
Company since October 1997; President of New Choice from January 1995 to
October 1997; President of Manor Care Hotel Division ("MCHD") from March 1992
to November 1996; various executive positions with Richfield Hotel Management,
Inc. and its predecessors for more than 16 years, including President of MHM
Corporation.

  FREDERIC V MALEK, 61, Chairman of Thayer Capital Partners since March 1993;
Co-Chairman of CB Commercial Real Estate Group, Inc. from April 1989 to
October 1996; Campaign Manager for Bush-Quayle '92 from January 1992 to
November 1992; Vice Chairman of NWA, Inc. (airlines), July 1990 to December
1991; Director of the Company since November 1996. Director: Manor Care, New
Choice, American Management Systems, Inc., Automatic Data Processing Corp., CB
Commercial Real Estate Group, Inc., FPL Group, Inc. (an affiliate of Florida
Power and Light-power company), Northwest Airlines and various Paine Webber
mutual funds.

 Class I -- Terms Expire 2000

  STEWART BAINUM, 78, Vice Chairman of the Board of Manor Care and
subsidiaries since March 1987; Chairman of the Board of Manor Care from August
1981 to March 1987, Chief Executive Officer from July 1985 to March 1987,
President from May 1982 to July 1985; Chairman of the Board of MCHS from 1968
to March 1987 and a Director since 1968; Director of Vitalink from September
1991 to September 1994; Director of the Company since November 1996; Chairman
of the Board of New Choice from 1972 to March 1987 and a Director since 1963;
Chairman of the Board of Realty Investment Company, Inc. since 1965.

  CAROLE Y. PREST, 46, Senior Vice President, Strategy and Marketing of Manor
Care since September 1997; Vice President, Corporate Strategic Planning of
Manor Care from September 1995 to September 1997; Vice President and General
Manager and various other positions at Gen Rad, Inc. from May 1985 to 1994.
Director of the Company since October 1997.

  KEITH B. PITTS, 40, Chairman, President and Chief Executive Officer of
Paragon Health Network, Inc. since November, 1997; Consultant to Apollo from
August 1997 to November 1997; Consultant to Tenet Healthcare Corp. ("Tenet")
from February 1997 to August 1997; Executive Vice President and Chief
Financial Officer of orNda HealthCorp from August 1992 until its merger with
Tenet in January, 1997. Director of the Company since November 1997.

THE BOARD OF DIRECTORS

  The Board of Directors is responsible for overseeing the overall performance
of the Company. Members of the board are kept informed of the Company's
business through discussions with the Chairman, the Chief Executive Officer
and other members of the Company's management, by reviewing materials provided
to them and by participating in board and committee meetings. Prior to October
15, 1997, the Board of Directors consisted of nine member, five of whom
resigned upon the Spinoff. Donald J. Landry and Carole Y. Prest were appointed
to the Board of Directors upon the Spinoff and Keith B. Pitts was appointed on
November 13, 1997. Since November 13, 1997, the Board of Directors has
consisted of seven directors, four of who were not present or past officers of
the Company.

  For the twelve months ended December 31, 1997, the Board of Directors held
five meetings. Each director attended all of the meetings of the Board of
Directors and of the committees of the Board of Directors on which such
director served since the time that such director joined the Board of
Directors.

COMMITTEES OF THE BOARD

  The standing committees of the Board of Directors include the Audit, Ethics
and Compliance Committee, the Compensation/Key Executive Stock Option Plan
Committee and the Compensation/Key Executive Stock

                                       5
<PAGE>

Option Plan Committee No. 2. At the November 13, 1997 Board Meeting, the
Nominating Committee was abolished and the Nominating and Corporate Governance
Committee was established. The current members of the standing committees are
as follows:

    COMPENSATION/KEY EXECUTIVE STOCK OPTION         NOMINATING & CORPORATE
    PLAN COMMITTEE                                  GOVERNANCE COMMITTEE
    Frederic V. Malek, Chair                        Carole Y. Prest, Chair
    Stewart Bainum                                  Paul A. Gould
    Stewart Bainum, Jr.                             Frederic V. Malek
    Keith B. Pitts

    COMPENSATION/KEY EXECUTIVE STOCK OPTION         AUDIT, ETHICS AND
    PLAN COMMITTEE NO. 2                            COMPLIANCE
    Frederic V. Malek, Chair                        COMMITTEE
    Keith B. Pitts                                  Paul A. Gould, Chair
                                                    Keith B. Pitts

  The Compensation/Key Executive Stock Option Plan Committees administer the
Company's stock option plans and grant stock options thereunder, review
compensation of officers and key management employees, recommend development
programs for employees such as training, bonus and incentive plans, pensions
and retirement, and review other employee fringe benefit programs. The
Compensation/Key Executive Stock Option Plan Committees each met twice during
the twelve months ended December 31, 1997.

  The Nominating and Corporate Governance Committee is responsible for
administering the Sunburst Corporate Governance Guidelines, assessing the
functioning of the Board, determining size and composition of the Board,
recommending candidates to fill vacancies on the Board, determining actions to
be taken with respect to directors who are unable to perform their duties,
setting the company's policies regarding the conduct of business between the
company and any other entity affiliated with a director and determining the
compensation of non-employee directors. The Nominating and Corporate
Governance Committee was established in November, 1997 and held no meetings
during the twelve month period ended December 31, 1997.

  The Audit, Ethics and Compliance Committee reviews the scope and results of
the annual audit, reviews and approves the services and related fees of the
Company's independent public accountants, reviews the Company's internal
accounting controls and reviews the Company's Internal Audit Department and
its activities. The Audit Committee met three times during the twelve month
period ended December 31, 1997.

COMPENSATION OF DIRECTORS

  The Company has adopted the Sunburst Hospitality Corporation Non-Employee
Director Stock Option and Deferred Compensation Stock Purchase Plan. Part A of
the Plan provides that eligible non-employee directors are granted options to
purchase 5,000 shares of the Company's common stock on their first date of
election and are granted options to purchase 1,000 shares on their date of
election in subsequent calendar years. Part B of the Plan provides that
eligible non-employee directors may elect, prior to May 31 of each year, to
defer a minimum of 25% of committee fees earned during the ensuing fiscal
year. The fees which are so deferred will be used to purchase the Company's
common stock on the open market within 15 days after December 1, February 28
and May 31 of such fiscal year. Pending such purchases, the funds will be
credited to an Interest Deferred Account, which will be interest bearing.
Stock which is so purchased will be deposited in a Stock Deferred Account
pending distribution in accordance with the Plan.

  Pursuant to the Non-Employee Director Stock Compensation Plan adopted by the
Company, eligible non-employee directors will receive annually, in lieu of
cash, restricted shares of the Company's common stock, the fair market value
of which at the time of grant will be equal to $30,000, which will represent
the Board of

                                       6
<PAGE>

Directors retainer and meeting fees. In addition, all non-employee directors
receive $1,610 per diem for Committee meetings attended and are reimbursed for
travel expenses and other out-of-pocket expenses.

  Directors who are employees of the Company receive no separate remuneration
for their services as directors.

        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The following table sets forth the amount of the Company's common stock
beneficially owned by (i) each director of the Company, (ii) the Company's
chief executive officer and the other four most highly compensated executive
officers (the "Named Officers"), (iii) all officers and directors of the
Company as a group and (iv) all persons who are expected to own beneficially
more than 5% of the Company's common stock, as of March 12, 1998, the Record
Date. Unless otherwise specified, the address for each of them is 10770
Columbia Pike, Silver Spring, Maryland, 20901.

<TABLE>
<CAPTION>
                                                                 SHARES OF
                                                                COMMON STOCK    PERCENT OF SHARES
        NAME OF BENEFICIAL OWNER                             BENEFICIALLY OWNED  OUTSTANDING(1)
        ------------------------                             ------------------ -----------------
<S>                                                          <C>                <C>
Stewart Bainum, Jr..........................................     5,333,203(2)         26.72%
Stewart Bainum..............................................     3,397,955(3)         17.02%
Antonio DiRico..............................................        16,059(4)             *
William R. Floyd............................................        37,707(6)             *
Paul A. Gould...............................................           980(7)             *
Kevin P. Hanley.............................................           822(8)             *
Edward A. Kubis(9)..........................................         7,973(10)            *
Donald J. Landry............................................       112,205(11)            *
James A. MacCutcheon........................................        73,998(12)            *
Frederic V. Malek...........................................         2,464(13)            *
Keith B. Pitts..............................................         1,611(14)            *
Carole Y. Prest.............................................         4,778(15)            *
All Directors and Officers as a Group (12 persons)..........     7,126,943(16)        35.70%
Barbara Bainum..............................................     1,840,585(17)         9.22%
Bruce Bainum................................................     1,837,434(18)         9.20%
Ronald Baron................................................     5,870,140(19)        29.40%
</TABLE>
--------
  * Less than 1% of class.

(1) Percentages are based on 19,963,190 shares outstanding on March 12, 1998
    (the "Record Date") plus, for each person, the shares which would be
    issued assuming that such person exercises all options it holds which are
    exercisable on such date or become exercisable within 60 days thereafter.

(2) Includes 183,051 shares owned directly by the Stewart Bainum, Jr.
    Declaration of Trust dated March 13, 1996, the sole trustee and
    beneficiary of which is the reporting person. Also includes 1,805,920
    shares owned by Bainum Associates Limited Partnership ("Bainum
    Associates") and 1,471,750 shares owned by MC Investments Limited
    Partnership ("MC Investments"), in both of which Mr. Bainum, Jr. is
    managing general partner with the sole right to dispose of the shares;
    1,189,290 shares held directly by Realty Investment Company, Inc.
    ("Realty"), a real estate management and investment company in which Mr.
    Bainum, Jr. has shared voting authority; 593,209 shares owned by Mid Pines
    Associates Limited Partnership ("Mid Pines"), in which Mr. Bainum, Jr. is
    managing general partner and has shared voting authority and 3,533 shares
    owned by the Foundation for Maryland's Future, in which Mr. Bainum, Jr. is
    the sole director. Also includes 86,401 shares which Mr. Bainum, Jr. has
    the right to acquire pursuant to stock options which are presently
    exercisable or which become exercisable within 60 days after the Record
    Date, and 49 shares which Mr. Bainum, Jr. has the right to receive upon
    termination of his employment with Sunburst pursuant to the terms of the
    Non-Qualified Retirement Savings and Investment Plan ("Non- Qualified
    Savings Plan").

                                       7
<PAGE>

(3) Includes 1,302,595 shares held directly by the Stewart Bainum Declaration
    of Trust, of which Mr. Bainum is the sole trustee and beneficiary, his
    joint interest in 259,848 shares owned by Bainum Associates and 345,284
    shares owned by MC Investments, each of which is a limited partnership in
    which Mr. Bainum has joint ownership with his wife as a limited partner
    and as such has the right to acquire at any time a number of shares equal
    in value to the liquidation preference of their limited partnership
    interests; 1,189,290 shares held directly by Realty, in which Mr. Bainum
    and his wife have shared voting authority; and 23,435 shares held by the
    Commonweal Foundation of which Mr. Bainum is Chairman of the Board of
    Directors and has shared voting authority. Also includes 266,237 shares
    held by the Jane L. Bainum Declaration of Trust, the sole trustee and
    beneficiary of which is Mr. Bainum's wife, and 1,221 shares which Mr.
    Bainum has the right to acquire pursuant to stock options which are
    presently exercisable or which become exercisable within 60 days after the
    Record Date. Also includes 829 shares of restricted stock granted under
    the Company's Non-Employee Director Stock Compensation Plan ("Non-Employee
    Director Stock Compensation Plan") to Mr. Bainum which are not vested but
    which Mr. Bainum has the right to vote.

(4) Includes 214 shares held directly by Mr. DiRico and 421 shares and 937
    shares, respectively, which Mr. DiRico has the right to receive upon
    termination of his employment pursuant to the terms of the Retirement
    Savings and Investment Plan ("401(k) Plan") and Non-Qualified Savings and
    Investment Plan ("Non-Qualified Plan"). Also includes 14,487 share which
    Mr. DiRico has the right to acquire pursuant to stock options which are
    currently exercisable or become exercisable upon 60 days of the Record
    Date.

(5) In connection with the Spinoff, Mr. Floyd resigned from the Company on
    October 15, 1997.

(6) Includes 9,597 shares held directly by Mr. Floyd and 18,993 shares of
    restricted stock granted pursuant to Mr. Floyd's employment agreement
    which are not yet vested, but which Mr. Floyd has the right to vote. Also
    includes 9,117 shares Mr. Floyd has the right to acquire pursuant to stock
    options which are presently exercisable or become exercisable within 60
    days after the Record Date.

(7) Includes 228 shares held directly by Mr. Gould and 752 shares of
    restricted stock granted under the Non-Employee Director Stock
    Compensation Plan to Mr. Gould which are not vested but which Mr. Gould
    has the right to vote.

(8) Includes 66 shares held directly by Mr. Hanley and 756 shares Mr. Hanley
    has the right to acquire pursuant to stock options which are presently
    exercisable or which become exercisable within 60 days after the Record
    Date.

(9) Mr. Kubis resigned from the Company on December 31, 1997.

(10) Consists of 7,973 shares Mr. Kubis has the right to acquire pursuant to
     stock options which are presently exercisable or which become exercisable
     within 60 days after the Record Date.

(11) Includes 2,000 shares owned directly by Mr. Landry; and 88 shares and 336
     shares, respectively, which Mr. Landry has the right to receive upon
     termination of his employment pursuant to the terms of the 401(k) Plan
     and Non-Qualified Savings Plan. Also includes 109,781 shares Mr. Landry
     has the right to acquire pursuant to stock options which are presently
     exercisable or which become exercisable within 60 days after the Record
     Date.

(12) Includes 1,000 shares owned directly by Mr. MacCutcheon. Also includes 75
     shares held by minor children. Beneficial ownership of such shares is
     disclaimed. Also includes 72,923 shares Mr. MacCutcheon has the right to
     acquire pursuant to stock options which are presently exercisable or
     which become exercisable within 60 days after the Record Date.

(13) Includes 747 shares held directly by Mr. Malek; 1,221 shares which Mr.
     Malek has the right to acquire pursuant to stock options which are
     presently exercisable or become exercisable within 60 days of the Record
     Date and 829 restricted shares granted under the Non-Employer Director
     Stock Compensation Plan which are not vested, but which Mr. Malek has the
     right to vote.

(14) Consists of 1,611 restricted shares granted under the Non-Employer
     Director Stock Compensation Plan which are not vested, but which Mr.
     Pitts has the right to vote.


                                       8
<PAGE>

(15) Includes 1,750 restricted shares granted under the Non-Employer Director
     Stock Compensation Plan which are not vested, but which Ms. Prest has the
     right to vote. Also includes 3,028 shares Ms. Prest has the right to
     acquire pursuant to stock options which are presently exercisable or
     which become exercisable within 60 days after the Record Date.

(16) Includes a total of 296,185 shares which the officers and directors
     included in the group have the right to acquire pursuant to stock options
     which are presently exercisable, or exercisable within 60 days of the
     Record Date, and a total of 509 shares and 1,322 shares, respectively,
     which such directors and officers have the right to receive upon
     termination of their employment with Sunburst pursuant to the terms of
     the 401(k) Plan and the Non-Qualified Savings Plan.

(17) Includes 33,899 shares held directly by Ms. Bainum and 752 restricted
     shares granted under the Non-Employer Director Stock Compensation Plan
     which are not vested, but which Ms. Bainum has the right to vote. Also
     includes 593,209 shares owned by Mid Pines, in which Ms. Bainum is a
     general partner and has shared voting authority, 1,189,290 shares owned
     by Realty in which Ms. Bainum's trust has voting stock and shared voting
     authority and 23,435 shares owned by Commonweal Foundation, in which Ms.
     Bainum is a Director and has shared voting authority. Ms. Bainum's
     address is 8738 Colesville Road, Suite 800, Silver Spring, Maryland,
     20910.

(18) Includes 31,500 shares held directly by Mr. Bainum. Also includes 593,209
     shares owned by Mid Pines, in which Ms. Bainum is a general partner and
     has shared voting authority, 1,189,290 shares owned by Realty in which
     Ms. Bainum's trust has voting stock and shared voting authority and
     23,435 shares owned by Commonweal Foundation, in which Ms. Bainum is a
     Director and has shared voting authority. Mr. Bainum's address is 8738
     Colesville Road, Suite 800, Silver Spring, Maryland, 20910.

(19) As of October 16, 1997 based on a Schedule 13-D, as amended, filed by Mr.
     Baron with the Securities and Exchange Commission (the "Commission"). Mr.
     Baron's address is 450 Park Avenue, Suite 2800, New York, New York 10022.

THE FOLLOWING COMPENSATION COMMITTEE REPORT AND THE PERFORMANCE GRAPH THAT
APPEARS IMMEDIATELY AFTER SUCH REPORT SHALL NOT BE DEEMED TO BE SOLICITING
MATERIAL OR TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 OR INCORPORATED
BY REFERENCE IN ANY DOCUMENT SO FILED.

               BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE
                                 COMPENSATION

  There are currently two compensation committees for the Company, the
Compensation/Key Executive Stock Option Plan Committee and the
Compensation/Key Executive Stock Option Plan Committee No. 2 ("Committee No.
2") (collectively, the "Committee"). The role of Committee No. 2, which is
comprised of "outside directors" as defined in Section 162(m)(3) of the Code,
is to approve awards under the 1996 Long-Term Incentive Plan to the Chief
Executive Officer and the executive officers, including the Named Officers
defined below. Of the current members of the Committee, Messrs. Malek
(Chairman) and Bainum (not a member of Committee No. 2), were appointed on
November 4, 1996. Mr. Bainum, Jr. (not a member of Committee No. 2) was
appointed upon the Spinoff and Mr. Pitts was appointed on November 13, 1997.
Prior to the Spinoff, the committees were comprised of Messrs. Malek and
Bainum (not a member of Committee No. 2) and Barbara Bainum and Jerry E.
Robertson. In connection with the Spinoff, Ms. Bainum and Mr. Robertson
resigned from the Board of Directors.

  The following philosophy and principles have been set forth as a framework
within which the Committee will operate.

 COMPENSATION COMMITTEE PHILOSOPHY AND GUIDING PRINCIPLES

  .Attract and retain talented management;

                                       9
<PAGE>

  . Closely align management's interests and actions with those of
    shareholders through the establishment of appropriate award vehicles;

  . Reward employees for enhancing shareholder value through sustained
    improvement in operating cash flow and earnings per share;

  . Position base pay at market so that the Company can vary total
    compensation costs with financial results by means of variable pay; and

  . Recognize the concept that executive officers individually, and as a
    group, should have a significant ownership stake in the Company.

EXECUTIVE COMPENSATION POLICIES

 Compensation Levels

  The Committee relates total compensation levels for the Company's executive
officers to the total compensation paid to similarly situated executives based
on various independently published compensation surveys, primarily conducted
and evaluated by independent consultants. Summary data on companies of similar
size in the service sector are used as the primary comparison and companies in
the hotel industry are used as a secondary comparison. Compensation for the
executive officers was set in June 1997, prior to the Spinoff, and from
January 1, 1997 until the Spinoff, the current Vice Chairman and Chief
Executive Officer ("CEO") was serving and President and Chief Operating
Officer. Because of this, one set of secondary comparison companies was used
for the executive officers as a group and a second set was used for
compensation to be paid to the Vice Chairman and CEO upon the Spinoff.

  Total compensation is targeted to approximate the median of the competitive
market data and comparison companies. However, because of the performance-
oriented nature of the incentive programs, total compensation may exceed
market norms when the Company's targeted performance goals are exceeded.
Similarly, total compensation may lag the market when performance goals are
not achieved. For the twelves months ended December 31, 1997, compensation for
the Vice Chairman and CEO and for the Executive Vice President and Chief
Financial Officer was slightly above the primary survey data but was
consistent with the secondary comparison companies. The compensation for all
of the other executive officers, as a group, was approximately at the median.

  One of the companies in the general secondary comparison, Marriott
International, Inc., and one of the companies in the CEO specific secondary
comparison, Starwood Hotels and Resorts Worldwide, Inc. were not included in
as part of the Peer Group Index (defined below) for the performance graph.
Marriott was included in the comparison because it is located in the
Washington, D.C. metropolitan area and, at the time, the Company was also
engaged in the franchising business. However, since the Spinoff, the Company
is no longer engaged in the franchising business. The Starwood comparison
compensation information was from 1996 and at that time, Starwood had a
profile similar to the expected profile of the Company after the Spinoff.
However, Starwood's growth in hotel portfolio and market capitalization since
that time no longer make it an appropriate comparison for performance
purposes.

 Policy with Respect to Qualifying Compensation for Deductibility

  The Company's policy with respect to the deductibility limit of Section
162(m) of the Internal Revenue Code generally is to preserve the federal
income tax deductibility of compensation paid when it is appropriate and is in
the best interests of the Company and its stockholders. However, the Company
reserves the right to authorize the payment of nondeductible compensation if
it deems that is appropriate. The Committee intends to monitor the Company's
compensation programs with respect to such laws.


                                      10
<PAGE>

 Annual Compensation

  The base salary pay practice is to target at the 55th percentile of the
market range among the comparison groups for a particular position and to
adjust as appropriate for experience and performance.

  Awards under the annual cash bonus program for the twelve months ended
December 31, 1997 were based on certain performance measurements, which were
based 60% on achieving targeted gross operating profits, 20% on customer
satisfaction goals and 20% on RevPAR. For the twelve months ended December 31,
1997, actual performance exceeded the measurement goals for each component.
For fiscal year 1998, the Committee has proposed revising the performance
measurements to focus heavily on management's responsibility to deliver
increased operating cash flow and earnings per share based on earnings per
share from continuing operations at established annual targets. For executive
officers other than the Chief Executive Officer, the proposal also includes
specific performance measurements directly accountable to the executive
officer. These performance measurements, where applicable, would include
customer satisfaction and RevPAR and would incorporate each executive
officer's accountability for the successful execution of key initiatives tied
to achievement of the Company's strategic plan.

LONG-TERM INCENTIVES

  The Company will award long-term incentives under the 1996 Incentive Plan.
The plan gives the Compensation Committee the latitude of awarding Incentive
Stock Options, non-qualified stock options, restricted stock, and other types
of long-term incentive awards. The recommended awards were developed by
analyzing peer group average market data and the Company's past practice. In
June 1997, the Compensation Committee approved a Stock Option Guide Chart for
the Company's executives. The Stock Option Guide Chart was reviewed and
revised in February 1998. It utilizes a market based salary multiple to
establish a competitive range of stock options from which executive awards can
be determined.

  In accordance with common competitive practice, some of the stock option
grants to Company executive officers in the twelve months ended December 31,
1997 by the Compensation Committee prior to the Spinoff were larger than
competitive annual grants in contemplation of the Spinoff.

COMPENSATION OF THE CHIEF EXECUTIVE OFFICER

  Donald J. Landry was appointed CEO upon consummation of the Spinoff on
October 15, 1997. Prior to that time, William R. Floyd was the Chief Executive
Officer of the Company and Mr. Landry served as the President and Chief
Operating Officer. The Compensation Committee approved an employment agreement
with Mr. Landry which became effective upon the Spinoff. The terms of the
agreement are described below under "Executive Compensation--Employment
Agreements." In setting the base compensation for Mr. Landry under the
Employment Agreement, the Board of Directors deliberations included
consideration of Mr. Floyd's base compensation as well as Mr. Landry's
compensation in his prior role of President and Chief Operating Officer.

                          THE COMPENSATION COMMITTEE

                          Frederic V. Malek, Chairman

                                Stewart Bainum
                       (not a member of Committee No. 2)

                              Stewart Bainum, Jr.
                       (not a member of Committee No. 2)

                                Keith B. Pitts

                                      11
<PAGE>

                               PERFORMANCE GRAPH

  The following graph compares the performance of Sunburst common stock with
the performance of the New York Stock Exchange Composite Index ("NYSE
Composite Index") and a peer group index (the "Peer Group Index") by measuring
the changes in common stock prices from November 4, 1996, (the first day of
regular way trading) plus assumed reinvested dividends. The Commission's rules
require that the Company select a peer group in good faith with which to
compare its stock performance by selecting a group of companies in lines of
business similar to its own. Accordingly, the Company has selected a peer
group that includes companies which are actively traded on the New York Stock
Exchange and the NASDAQ Stock Market and which are in the hospitality
industry. The common stock of the following companies have been included in
the Peer Group Index: Bristol Hotel Company, LaQuinta Hotel Corporation, Prime
Hospitality Corp., Red Roof Inns, Inc., CapStar Hotel Company and Servico Inc.

  The graph assumes that $100 was invested on November 4, 1996, in each of
Sunburst common stock, the NYSE Composite Index and the Peer Group Index, and
that all dividends were reinvested. In addition, the graph weighs the
constituent companies on the basis of their respective capitalization,
measured at the beginning of each relevant time period.

                        Comparison of Cumulative Return
              Among Sunburst, NYSE Composite Index and Peer Group

                           [LINE GRAPH APPEARS HERE]

                     November 4,     December 31,      June 30,     December 31,
                       1996              1996            1997            1997
                     -----------     ------------      --------     ------------

Sunburst                100             108.5           104.2           122.6
NYSE Composite Index    100             105.3           124.9           139.9
Peer Group              100             100.0           121.2           119.4


                                      12
<PAGE>

                            EXECUTIVE COMPENSATION

  Compensation received by the Named Officers prior to consummation of the
Manor Care Spinoff was paid by Manor Care. Compensation received by the Named
Officers after the Manor Care Spinoff was paid by the Company.

                          SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                   ANNUAL COMPENSATION(1)           LONG-TERM COMPENSATION
                             ----------------------------------     --------------------------
                                                                    RESTRICTED
                             FISCAL                                   STOCK       STOCK OPTION      ALL OTHER
NAME AND PRINCIPAL POSITION  YEAR(1)  SALARY   BONUS    OTHER       AWARDS($)     SHARES(#)(2)   COMPENSATION(3)
---------------------------  ------- -------- -------- --------     ----------    ------------   ---------------
<S>                          <C>     <C>      <C>      <C>          <C>           <C>            <C>
Stewart Bainum, Jr.
 (4)....................     1997A   $148,310 $ 47,683    (5)             --            --               --
 Chairman                    1997B    656,357  388,520    (5)             --         60,000(6)           --
                             1996     625,102  337,555    (5)             --         60,000(7)      $ 33,543
Donald J. Landry (8)....     1997A    421,975  200,508                              106,000(9)         6,035
 Vice Chairman and           1997B    404,250  200,508    (5)             --        100,000(10)        6,035
 Chief Executive Officer     1996     366,702  201,686    (5)             --            --             5,000
James A. MacCutcheon
 (11)...................     1997A    312,900   52,263                               46,500(12)       18,682
 Executive Vice
  President,                 1997B    313,578  158,953    (5)             --         67,500(13)       18,682
 Chief Financial Officer     1996     301,517  135,682    (5)             --         25,000(14)       13,176
  & Treasurer
Antonio DiRico..........     1997A    259,499   86,524                               80,600(15)        3,043
 President                   1997B    196,200   86,584    (5)             --         25,000(16)        3,043
                             1996     179,904   71,961    (5)             --         80,000(17)        2,225
Kevin P. Hanley.........     1997A    174,999   84,452    (5)             --         51,200(18)          --
                             1997B    144,890   51,776    (5)             --          2,727(19)          --
                             1996     130,208    1,500    (5)             --            --               --
William R. Floyd (20)...     1997A    371,875  267,233 $139,403(21)       --         65,000(22)          --
                             1997 B   270,373  146,001  107,833(23)  $250,000(24)   307,693(25)          --
                             1996         --       --       --            --            --               --
Edward A. Kubis (26)....     1997A    139,539   55,890    (5)             --         18,000(27)        6,300
                             1997B    138,000   24,830    (5)             --         15,000(28)        6,300
                             1996     110,584      --     (5)             --          5,000(29)          --
</TABLE>

 (1) On September 16, 1997, the Company changed its fiscal year end from May
     31 to December 31. Accordingly, the summary compensation information
     presented is for the twelve months ended December 31, 1997 ("1997A"), the
     fiscal year ended May 31, 1997 ("1997B") and the fiscal year ended May
     31, 1996 ("1996"). Summary compensation data paid to the Named Officers
     during the period between January 1, 1997 and May 31, 1997 are reflected
     in each of the 1997A and 1997B periods.
 (2) For all of the Named Officers, except for Messrs. MacCutcheon and Floyd,
     the grants in 1997B and 1996 represent options to purchase shares of
     Manor Care common stock. In connection with the Manor Care Spinoff, the
     options to purchase Manor Care common stock were converted, in some cases
     100%, to options to purchase Company common stock. For Messrs.
     MacCutcheon and Floyd with respect to grants in 1997B and or all of the
     Named Officers with respect to grants in 1997A, represents options to
     acquire shares of Company common stock. In connection with the Spinoff,
     the options to purchase Company common stock were converted to successor
     options to purchase Company common stock and New Choice common stock. In
     all cases, however, the exercise prices were adjusted to maintain the
     same financial value to the option holder before and after the Manor Care
     Spinoff and the Spinoff.
 (3) Represents amounts contributed by Manor Care for 1996 and the Company
     1997A and 1997B under their respective 401(k) Plan and Non-Qualified
     Savings Plan, which provide retirement and other benefits to eligible
     employees, including the Named Officers. The value of the amounts
     contributed in stock by the Company for 1997A and 1997B under the 401(k)
     Plan and Non-qualified Savings Plan, respectively, for

                                      13
<PAGE>

    the Named Offices were as follows: Mr. Landry, $2,375 and $3,660; Mr.
    MacCutcheon, $6,240 and $12,443; Mr. DiRico, $966 and $2,077; and Mr.
    Kubis, $2,520 and $3,780.
 (4) For part of 1997B and all of 1996, Mr. Bainum, Jr. was the Chairman and
     Chief Executive Officer of Manor Care and the Company. In November, 1996,
     he resigned as Chief Executive Officer of the Company. The compensation
     reflected here for 1997B and 1996 is the total compensation received for
     services rendered to both Manor Care and Company. For 1997A, represents
     the amount of compensation paid solely by the Company.
 (5) The value of perquisites and other compensation does not exceed the
     lesser of $50,000 or 10% of the amount of annual salary and bonus paid as
     to any of the Named Officers.
 (6) In connection with the Spinoff, these options were converted on a pro
     rata basis into options to acquire 20,000 shares of Company common stock
     at an exercise price of $7.1894 and 60,000 shares of New Choice at an
     exercise price of $12.1130.
 (7) In connection with the Spinoff, these options were converted on a pro
     rata basis into options to acquire 20,000 shares of Company common stock
     at an exercise price of $5.5083 and 60,000 shares of New Choice at an
     exercise price of $9.2807.
 (8) Mr. Landry was appointed Vice Chairman and Chief Executive Officer upon
     the Spinoff. Prior to the Spinoff, he was President of the Company.
 (9) In connection with the Spinoff, these options were converted into options
     to purchase 124,631 shares of Company common stock at an exercise price
     of $7.8815 and 53,000 shares of New Choice common stock at an exercise
     price of $13.2791.
(10) In connection with the Spinoff, these options were converted into options
     to purchase 291,795 shares of Company common stock at an exercise price
     of $7.1894 and 153,497 shares of New Choice common stock at an exercise
     price of $12.113.
(11) For 1996 and part of 1997B, Mr. MacCutcheon was Senior Vice President,
     Chief Financial Officer and Treasurer of Manor Care and the Company. On
     November 1, 1996, Mr. MacCutcheon resigned from Manor Care and assumed
     the position of Executive Vice President, Chief Financial Officer and
     Treasurer of the Company. The compensation reflected for 1996 and 1997B
     is total compensation received for services rendered to both Manor Care
     and the Company. For the period of 1997B after the Manor Care Spinoff,
     the amount of compensation paid solely by the Company was $209,052 for
     salary and $103,690 for bonus. In connection with the Spinoff, the
     Company and New Choice entered into a Consulting Agreement whereby New
     Choice would reimburse the Company for 30% of Mr. MacCutcheon's base
     salary and bonus from October 15, 1997 through November 1, 2001. See
     "Certain Relationships and Related Transactions."
(12) In connection with the Spinoff, these options were converted into options
     to purchase 54,673 shares of Company common stock at an exercise price of
     $7.835 and 23,250 shares of New Choice common stock at an exercise price
     of $13.2008.
(13) In connection with the Spinoff, these options were converted into options
     to purchase 138,806 shares of Company common stock at an exercise price
     of $6.884, 47,082 shares of Company common stock at an exercise price of
     $7.1894, 30,308 shares of New Choice at an exercise price of $11.5986 and
     15,642 shares of New Choice common stock at an exercise price of $12.113.
(14) In connection with the Spinoff, these options were converted into options
     to purchase 59,035 shares of Company common stock at an exercise price of
     $5.083 and 24,976 shares of New Choice common stock at an exercise price
     of $9.2807.
(15) In connection with the Spinoff, these options were converted into options
     to purchase 111,739 shares of Company common stock at an exercise price
     of $7.835 and 30,225 shares of New Choice common stock at an exercise
     price of $13.2008.
(16) In connection with the Spinoff, these options were converted into options
     to purchase 82,498 shares of Company common stock at an exercise price of
     $7.1894 and 32,706 shares of New Choice common stock at an exercise price
     of $12.113.
(17) In connection with the Spinoff, these options were converted into options
     to purchase 22,543 shares of Company common stock at an exercise price of
     $5.5083 and 12,747 shares of New Choice common stock at an exercise price
     of $9.2807.

                                      14
<PAGE>

(18) In connection with the Spinoff, these options were converted into options
     to purchase 70,981 shares of Company common stock at an exercise price of
     $7.835 and 19,200 shares of New Choice common stock at an exercise price
     of $13.2008.
(19) In connection with the Spinoff, these options were converted into options
     to purchase 3,779 shares of Company common stock at an exercise price of
     $7.1894 and 1,024 shares of New Choice common stock at an exercise price
     of $12.113.
(20) Mr. Floyd was employed as Vice Chairman and Chief Executive Officer of
     the Company from October 16, 1996 until the Spinoff. In connection with
     the Spinoff, Mr. Floyd resigned from the Company and was appointed Chief
     Executive Officer of New Choice.
(21) Consists of relocation expenses and $11,700 in automobile allowance.
     Includes $107,831 in relocation expenses reported for 1997B.
(22) In connection with the Spinoff, these options were converted into options
     to purchase 10,883 shares of Company common stock at an exercise price of
     $9.786 and 71,631 shares of New Choice common stock at an exercise price
     of $16.488.
(23) Consists of relocation expenses.
(24) Represents a grant of 85,470 shares of restricted shares of the Company
     granted on November 4, 1996. The shares vest in three equal annual
     installments beginning on November 4, 1997. The restricted shares are
     entitled to dividends and in connection with the Spinoff, Mr. Floyd
     received 85,470 shares of New Choice common stock as a dividend on such
     shares of Company common stock, of which 56,980 shares remain unvested.
     In connection with the one-for-three reverse stock split, the Company
     shares were converted into 28,490 shares of Company common stock.
(25) In connection with the Spinoff, these options were converted into options
     to purchase 45,584 shares of Company common stock at an exercise price of
     $7.2466 and 341,515 shares of New Choice common stock at an exercise
     price of $12.2095.
(26) Mr. Kubis resigned from the Company on December 31, 1997.
(27) In connection with the Spinoff, these options were converted into options
     to purchase 24,954 shares of Company common stock at an exercise price of
     $7.835 and 6,750 shares of New Choice common stock at an exercise price
     of $13.2008.
(28) In connection with the Spinoff, these options were converted into options
     to purchase 40,356 shares of Company common stock at an exercise price of
     $7.1894 and 13,407 shares of New Choice common stock at an exercise price
     of $12.113.
(29) In connection with the Spinoff, these options were converted into options
     to purchase 11,806 shares of Company common stock at an exercise price of
     $5.5083 and 4,669 shares of New Choice common stock at an exercise price
     of $9.2887.

  Stock Options. The following tables set forth certain information at
December 31, 1997 and for the twelve months then ended concerning options to
purchase Company common stock granted to Named Officers. All common stock
figures and exercise prices have been adjusted to reflect stock dividends and
stock splits effective in prior fiscal years. With the Spinoff, existing
Company stock options were subject to certain adjustments or conversions into
options to purchase shares of Company common stock and New Choice common
stock. The table below represents the options grants on a post-conversion
basis.

                                      15
<PAGE>

                          STOCK OPTION GRANTS IN 1997

<TABLE>
<CAPTION>
                                                                                   POTENTIAL REALIZABLE
                                                                                     VALUE OF ASSUMED
                                                                                    RATE OF STOCK PRICE
                                                                                     APPRECIATION FOR
                                                INDIVIDUAL GRANTS                     OPTION TERM(2)
                                  ------------------------------------------------ ---------------------
                                              PERCENTAGE OF
                                              TOTAL OPTIONS
                                  NUMBER OF   GRANTED TO ALL  EXERCISE
                                   OPTIONS     EMPLOYEES IN  BASE PRICE EXPIRATION
          NAME           COMPANY*  GRANTED         1997      PER SHARE     DATE      5%(3)     10%(4)
          ----           -------- ---------   -------------- ---------- ---------- --------- -----------
<S>                      <C>      <C>         <C>            <C>        <C>        <C>       <C>
Stewart Bainum, Jr......  SNB            0           --            --        --          --          --
                          CHH            0           --            --        --          --          --
                                   -------
                          Total          0
Donald J. Landry(5).....  SNB      124,631        21.92%(6)   $ 7.8815   6/25/07   $ 617,746 $ 1,565,502
                          CHH       53,000              (7)   $13.2791   6/25/07     442,613   1,121,665
                                   -------
                          Total    177,631
James A.
 MacCutcheon(5).........  SNB       54,673         9.62%(6)   $ 7.8350   6/24/07     269,395     682,701
                          CHH       23,250              (7)   $13.2008   6/24/07     193,019     489,149
                                   -------
                          Total     77,923
Antonio DiRico(5).......  SNB      111,739        19.65%(6)   $  7.835   6/24/07     551,253   1,395,284
                          CHH       30,225              (7)   $13.2008   6/24/07     250,924     635,894
                                   -------
                          Total    141,964
Kevin P. Hanley.........  SNB       70,981        12.49%(6)   $  7.835   6/24/07     349,751     886,339
                          CHH       19,200              (7)   $13.2008   6/24/07     159,396     403,943
                                   -------
                          Total     90,181
William R. Floyd(5).....  SNB       10,833         1.91%(6)   $  9.786   9/16/07     168,955      66,670
                          CHH       71,431              (7)   $ 16.488   9/16/07     740,682   1,114,066
                                   -------
                          Total     82,264
Edward A. Kubis(5)......  SNB       24,954(8)      4.39%(6)   $  7.835   6/24/07     123,108     311,600
                          CHH        6,750(8)           (7)   $13.2008   6/24/07      56,037     142,011
                                   -------
                          Total     31,704
</TABLE>
--------
*  References to SNB are to the Company and CHH are to New Choice.

(1) Options granted to the named officers were granted prior to the Spinoff.
    In connection with the Spinoff, these options were converted to successor
    options to purchase Company common stock and New Choice common stock. In
    all cases, however, the number of options and the exercise prices were
    adjusted to maintain the same financial value to the option holder before
    and after the Spinoff. The number of options set forth in the table
    represent the number Company and New Choice options and the adjusted
    exercise prices after the conversion.
(2) The dollar amounts under these columns are the result of calculations at
    the 5% and 10% rates set by the Securities and Exchange Commission and
    therefore are not intended to forecast future possible appreciation, if
    any, of the stock price. Since options are granted at market price, a zero
    percent gain in the stock price will result in no realizable value to the
    optionees.
(3) A 5% per year appreciation in stock price from $9.786 per share yields
    $15.9404, from $16.488 per share yields $26.8572, from $7.8815 per share
    yields $12.8381, from $13.2791 per share yields $21.6303, from $7.835 per
    share yields $12.7684, and from $13.2008 per share yields $21.5027.
(4) A 10% per year appreciation in stock price from $9.786 per share yields
    $25.3824, from $16.488 per share yields $42,7656, from $7.8815 per share
    yields $20.4426, from $13.2791 per share yields $34.4426, from $7.835 per
    share yields $20.322, and from $13.2008 per share yields $34.2395.
(5) The options granted to the officers vest at the rate of 20% per year on
    the first through the fifth anniversaries of the date of the stock option
    grant.
(6) The options presented in this table are presented post-Spinoff and,
    therefore, the percentages relate to the total number of Company options
    granted in 1997 on a post-Spinoff conversion basis. Since the actual

                                      16
<PAGE>

   option grants occurred prior to the Spinoff and related conversion, the
   percentage presented is not equivalent to the percentage if calculated on a
   pre-Spinoff basis.
(7) In the twelve months ended December 31, 1997, New Choice only granted
    options to two individuals for a total of 120,000 options granted. All
    other outstanding New Choice options (including those listed in this
    table) were issued in connection with the conversion of Company options in
    the Spinoff.
(8) These grants lapsed upon Mr. Kubis' resignation from the Company.

                      AGGREGATED OPTION EXERCISES IN 1997
                          AND YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                            NUMBER OF UNEXERCISED
                                                                 OPTIONS AT
                                    SHARES                    DECEMBER 31, 1997       VALUE OF UNEXERCISED
                                   ACQUIRED      VALUE    -------------------------   IN-THE-MONEY OPTIONS
NAME                     COMPANY* ON EXERCISE   REALIZED  EXERCISABLE UNEXERCISABLE  AT DECEMBER 31, 1997(1)
----                     -------- -----------  ---------- ----------- ------------- -------------------------
                                       #           $           #            #       EXERCISABLE UNEXERCISABLE
                                  -----------  ---------- ----------- ------------- ----------- -------------
<S>                      <C>      <C>          <C>        <C>         <C>           <C>         <C>
Stewart Bainum, Jr. ....   SNB      46,500(3)  $3,705,452   101,000       52,334    $  750,906   $  254,990
                           CHH         --             --    303,000      157,000     3,602,207    1,188,693
Donald J. Landry........   SNB         --             --     42,462      789,105       192,559    3,348,905
                           CHH         --             --    251,197      313,105     2,221,843    2,098,091
James A. MacCutcheon....   SNB         --             --     72,923      369,076       470,259    1,445,011
                           CHH         --             --    256,699      133,252     2,861,047      814,798
Antonio DiRico..........   SNB         --             --     14,487      226,338       246,129      912,798
                           CHH         --             --     29,617       64,454       189,482      279,579
Kevin P. Hanley.........   SNB         --             --        756       74,004         2,030      152,920
                           CHH         --             --        205       20,019           797       56,929
William R. Floyd........   SNB         --             --      9,117       47,300        23,963       96,815
                           CHH         --             --     68,303      334,643       258,902    1,000,752
Edward A. Kubis.........   SNB         --             --      7,973       52,952        29,418      181,122
                           CHH         --             --      9,775       13,744        56,633       76,341
</TABLE>
--------
*  References to "SNB" are to the Company and "CHH" are to New Choice.

(1) Options granted to the named employees were granted prior to the Spinoff.
    In connection with the Spinoff, these options were converted to options to
    purchase Company common stock and New Choice common stock. In all cases,
    however, the exercise prices were adjusted to maintain the same financial
    value to the option holder before and after the Spinoff. The number of
    options set forth in the table represent the number Company and New Choice
    options and the adjusted exercise prices after the conversion.
(2) The closing prices of Company common stock and New Choice's common stock
    as reported by the New York Stock Exchange on December 31, 1997 were
    $9.875 and $16.00, respectively. The value is calculated on the basis of
    the difference between the option exercise price and such closing price
    multiplied by the number of shares of Company common stock or New Choice's
    common stock underlying the option.
(3) These exercises occurred prior to the Spinoff and therefore involved the
    exercise of Company common stock before the distribution and the one-for-
    three reverse stock split.

                                      17
<PAGE>

EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS

  On October 15, 1997, the Company amended and restated an employment
agreement with Stewart Bainum, Jr., providing for Mr. Bainum, Jr.'s employment
as Chairman of the Company's Board of Directors. The agreement has a term of
three years. Either the Company or Mr. Bainum may terminate the agreement upon
30 days' prior written notice on the first and second anniversary dates of the
agreement. The agreement provides that Mr. Bainum, Jr. devote 12.5% of his
professional time to the Company's affairs, 12.5% of his professional time to
the affairs of the Company, 12.5% to New Choice and the remaining 75% of his
professional time to the affairs of Manor Care. The agreement provides for a
base salary of $82,044 per annum for services to the Company and a maximum
bonus of 60% of Mr. Bainum, Jr.'s base compensation based upon the performance
of the Company.

  The Company entered into an Employment Agreement with Donald J. Landry on
June 25, 1997, effective upon the Spinoff on October 15, 1997. The agreement
has a term of three years from October 15, 1997 and provides for a base salary
of $424,462 per annum, subject to annual adjustments, and an annual bonus of
up to 60% of his base compensation, based upon the Company's performance. The
agreement also provides for an award of options to acquire 106,000 shares of
the Company's common stock, granted on June 25, 1997. The stock options vest
in five equal annual installments beginning on June 25, 1998. In connection
with the Spinoff, these options were converted into 124,631 options to acquire
Sunburst common stock and 53,000 options to acquire New Choice common stock.

  The Company entered into an Employment Agreement with James A. MacCutcheon
on October 31, 1996, effective November 1, 1996. The agreement has a term of
five years and provides for a base salary of $313,578 per annum, subject to
annual adjustments, and an annual bonus of up to 55% of his base compensation,
based upon the Company's performance.

  In February 1998, the Board of Directors approved an amendment to the 1996
Incentive Plan which provides for accelerated vesting of all outstanding
options and restricted stock grants if a participant is terminated as a result
of involuntary termination other than for Cause, or voluntary termination for
Good Reason (as such terms are defined in the 1996 Incentive Plan) within
twelve months of certain events defined in the 1996 Incentive Plan as a Change
in Control of the Company.

RETIREMENT PLANS

  The Company has adopted the Sunburst Hospitality Corporation Supplemental
Executive Retirement Plan (the "SERP"). Participants are Senior Vice
Presidents and other officers who selected by the Board of Directors to
participate.

  Participants in the SERP receive a monthly benefit for life based upon final
average salary and years of service. Final average salary is the average of
the monthly base salary, excluding bonuses or commissions, earned in a 60
month period which produces the highest average out of the 120 months of
employment, prior to the first occurring of the early retirement date or the
normal retirement date. The nominal retirement age is 65, and participants
must have a minimum of 15 years of service. Participants may retire at age 60
and may elect to receive reduced benefits commencing prior to age 65, subject
to Board approval. All of the Named Officers who are participants are age 55
or younger, so that none of their compensation reported above would be
included in the final average salary calculation.

  Assuming that the following officers continue to be employed by the Company
until they reach age 65, their credited years of service are as follows:

<TABLE>
<CAPTION>
                                               CURRENT YEARS YEARS OF SERVICE AT
               NAME OF INDIVIDUAL               OF SERVICE         AGE 65
               ------------------              ------------- -------------------
   <S>                                         <C>           <C>
   Donald J. Landry...........................        6               22
   James A. MacCutcheon.......................       10               30
</TABLE>


                                      18
<PAGE>

  The table below sets forth estimated annual benefits payable upon retirement
to persons in specified compensation and years of service classifications.
These benefits are straight life annuity amounts, although participants have
the option of selecting a joint and 50% survivor annuity or ten-year certain
payments. The benefits are not subject to offset for social security and other
amounts.

                          YEARS OF SERVICE/BENEFIT AS
                      PERCENTAGE OF FINAL AVERAGE SALARY

<TABLE>
<CAPTION>
REMUNERATION                                                                                25 OR
  MORE/30%                                                 15/15%                          20/22.5%
------------                                              --------                         --------
<S>                       <C>                             <C>                              <C>
$300,000                  $45,000                         $ 67,500                         $ 90,000
 350,000                   52,500                           78,750                          105,000
 400,000                   60,000                           90,000                          120,000
 450,000                   67,500                          101,250                          135,000
 500,000                   75,000                          112,500                          150,000
 600,000                   90,000                          135,000                          180,000
</TABLE>

  In November 1996, the Company established the Sunburst Hospitality
Corporation Retirement Savings and Investment Plan (the "401(k) Plan"). The
401(k) Plan is a defined contribution retirement, savings and investment plan
qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), and includes a cash or deferred arrangement under
Section 401(k) of the Code. All employees age 21 or over and who have worked
for the Company for a twelve month period during which such employee completed
at least 1,000 hours will be eligible to participate. Subject to certain non-
discrimination requirements, each employee will be able to contribute an
amount to the 401(k) Plan on a pre-tax basis up to 15% of the employee's
salary, but not more than the current Federal limit of $10,000. The Company
will match contributions made by its employees subject to certain limitations.
The amount of the match will be equal to a percentage of the amount of salary
reduction contribution made on behalf of a participant during the plan year
based upon a formula that involves the profits of the Company for the year and
the number of years of service of the participant. Amounts contributed by the
Company pursuant to its 401(k) Plan for Named Officers are included in the
Summary Compensation Table under the column headed "All Other Compensation."

  The Company also adopted the Sunburst Hospitality Corporation Non-Qualified
Retirement Savings and Investment Plan ("Non-Qualified Savings Plan"). Certain
select highly compensated members of management of the Company will be
eligible to participate in the Non-Qualified Savings Plan. The Non-Qualified
Savings Plan is structured so as to provide the participants with a pre-tax
savings vehicle to the extent that pre-tax savings are limited under the
401(k) Plan as a result of various governmental regulations, such as non-
discrimination testing. Amounts contributed by the Company under its Non-
Qualified Savings Plan for fiscal year 1997 for the Named Officers are
included in the Summary Compensation Table under the column headed "All Other
Compensation."

  The Company match under the 401(k) Plan and the Non-Qualified Savings Plan
is limited to a maximum aggregate of 6% of the annual salary of a participant.
Likewise, participant contributions under the two plans will not exceed the
aggregate of 15% of the annual salary of a participant.

              PROPOSAL TO AMEND THE 1996 LONG-TERM INCENTIVE PLAN
                            (ITEM 2 ON PROXY CARD)

 General

  On October 11, 1996, the Board of Directors adopted the 1996 Long-Term
Incentive Plan (the "1996 Incentive Plan") for key employees (including
officers) of the Company and its subsidiaries subject to approval of the 1996
Incentive Plan by the affirmative vote of the holders of a majority of the
number of shares of Company common stock. Such shareholder approval was
received at the 1997 Annual Meeting of Shareholders. The types of awards that
may be granted under the 1996 Incentive Plan are restricted shares, incentive
stock options, nonqualified stock options, stock appreciation rights and
performance shares.


                                      19
<PAGE>

  The 1996 Incentive Plan originally authorized the awarding of a maximum of
7.1 million shares of Company common stock to eligible employees. Because of
the Company's one-for-three reverse stock split on October 15, 1997, the 7.1
million shares was converted to 2.36 million shares.

 Effects of Spinoffs and Reverse Stock Split

  The initial authorization of 7.1 million shares eligible under the 1996
Incentive Plan was intended to be a sufficient number of shares to cover
grants under the 1996 Incentive Plan for the next five to ten years. The grant
by the Company of 1,038,454 awards from November 1996 to the Spinoff in
October 1997 was consistent with this belief. However, this calculation did
not fully anticipate the impact of the Manor Care Spinoff and the Spinoff.

  In the Manor Care Spinoff, existing Manor Care options held by employees of
the Company, as well as by a small number of Manor Care employees, were
converted into successor Manor Care and Company options. These successor
Company options were deemed to be issued out of the 7.1 million authorized
shares under the 1996 Incentive Plan. Likewise, in the Spinoff, Company
options were converted into successor New Choice options and Company options.
In many instances, the conversion required an increase in the number of an
optionee's grant of Company options in order to maintain the same financial
value of the options before and after the Spinoff. To the extent that the
number of successor Company options outstanding after the Spinoff was greater
than the number of Company options outstanding before the Spinoff, this
difference was also deemed to have been issued out of the original number of
authorized shares (which is now 2.36 million because of the one-for-three
reverse stock split).

  These conversions of Company options in each of the spinoffs has resulted in
a depletion of the authorized shares under the 1996 Incentive Plan.

 Proposed Amendment

  On February 4, 1998, the Board of Directors approved an amendment to Section
5 of the 1996 Incentive Plan to increase the number of authorized share by 1.2
million shares. Pursuant to the requirements of the New York Stock Exchange,
the amendment is subject to shareholder approval.

  THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL TO APPROVE THE
AMENDMENT TO SECTION 5 OF THE 1996 INCENTIVE PLAN TO INCREASE THE AUTHORIZED
NUMBER OF SHARES AVAILABLE UNDER THE 1996 INCENTIVE PLAN BY 1.2 MILLION
SHARES. Proxies solicited by the Board of Directors will be voted "FOR" this
proposal, unless otherwise instructed on the proxy card.

                CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

RELATIONSHIP WITH MANOR CARE

  Stewart Bainum, Jr. is the Chairman of the Company's Board of Directors and
is also the Chairman of the Board of Directors and Chief Executive Officer of
Manor Care. Additionally, Stewart Bainum is a Director of the Company and of
Manor Care. Additionally, Messrs. Bainum and Bainum Jr., as well as certain
other officers and directors of the Company and of Manor Care own shares
and/or options or other rights to acquire shares of each of the Company and
Manor Care.

 Manor Care Lease Agreements

  In connection with the Manor Care Spinoff, the Company and Manor Care
entered into a lease agreement with respect to the complex at 10750 and 10770
Columbia Pike, Silver Spring, Maryland (the "Silver Spring Complex") at which
the Company's principal executive offices were located (the "Silver Spring
Lease"). After the Spinoff, the Company remained obligated under the Silver
Spring Lease and has subleased the space at 10750 Columbia Pike to New Choice
pursuant to a sublease. The Company leases from Manor Care for a period of 30

                                      20
<PAGE>

months certain office space (approximately 30% of the Silver Spring Complex
initially, including the space subleased to New Choice), with provisions to
allow the Company to use additional square footage as needed at a monthly
rental rate equal to one-twelfth of the operating expenses (as defined
therein) of the Silver Spring Complex net of third party rental income paid to
Manor Care by other tenants of the complex, less a pro rata portion of the
operating expenses attributable to the space occupied by Manor Care (initially
approximately 29% of the Silver Spring Complex). At the beginning of each
fiscal year following November 1, 1996 (the date of the Manor Care Spinoff),
Manor Care's occupancy percentage is redetermined. Currently, Manor Care is
not occupying any space at the Silver Spring Complex. Operating expenses
include all of the costs associated with operating and maintaining the complex
including, without limitation, supplies and materials used to maintain the
complex, wages and salaries of employees who operate the complex, insurance
for the complex, costs of repairs and capital improvements to the complex, the
fees of the property manager (which may be Manor Care), costs and expenses
associated with leasing space at the complex and renovating space rented to
tenants, costs of environmental inspection, testing or cleanup, principal and
interest payable on indebtedness secured by mortgages against the complex, or
any portion thereof, and charges for utilities, taxes and facilities services.

  The Company and Manor Care also entered into (i) a sublease agreement with
respect to certain office space in Gaithersburg, Maryland (the "Gaithersburg
Lease") pursuant to which the Company is obligated to rent from Manor Care, on
terms similar to the Silver Spring Lease, certain additional space as such
space becomes available during the 30 month period following the date of the
Manor Care Spinoff and (ii) a sublease agreement with respect to the Comfort
Inn N.W., Pikesville, Maryland, pursuant to which the Company subleases the
property from Manor Care on the same terms and conditions that govern Manor
Care's rights and interests under the lease relating to such property.

  During the twelve month period ended December 31, 1997, the Company paid to
Manor Care under the Gaithersburg Lease and the Silver Spring Lease
approximately $4.7 million.

 The Manor Care Loan Agreement

  On November 1, 1996, the Company and a subsidiary of Manor Care entered into
a loan agreement (the "Loan Agreement"), governing the repayment by the
Company of an aggregate of $225.7 million previously advanced to the Company
by Manor Care. Prepayments made on or before November 1, 1997 resulted in a
prepayment penalty equal to the difference between the stated interest rate
and the annualized interest rate on a U.S. Treasury Note for a relevant period
until November 1, 1997. Prepayments made after November 1, 1997 do not result
in a penalty.

  On April 23, 1997, the Company, through its wholly owned subsidiary First
Choice Properties, completed an offering of mortgage securities. The net
proceeds of $110 million from the offering were used to prepay a portion of
the loan. A total yield maintenance payment of $1.9 million was made to Manor
Care as a result of the prepayment. The Company repaid the remaining portion
of the loan at the time of the Spinoff with the proceeds from a Term Note with
New Choice (described below) and advances from the Company's credit facility.

 Corporate Services Agreement

  The Company and Manor Care entered into the Corporate Services Agreement
(the "Corporate Services Agreement") which provides for the provision, by
Manor Care, of certain corporate services, including administrative,
accounting, systems and, for a fixed annual fee of $1.0 million, certain
consulting services. The term of the Consulting Services Agreement is 30
months from November 1, 1996.

 Time Sharing Agreement

  On October 10, 1996, the Company entered into a Time Sharing Agreement with
Manor Care under which the Company has the right to use from time to time a
Cessna Citation III and a Cessna Conquest I owned by Manor Care. The agreement
has term of one year with automatic renewals unless otherwise terminated. In

                                      21
<PAGE>

January 1998, Manor Care gave notice that it was terminating the Time Share
Agreement. During the twelve month period ended December 31, 1997 the Company
incurred a total of $176,948 for aircraft usage pursuant to the agreement.

RELATIONSHIP WITH NEW CHOICE

  In connection with the Spinoff, the Company and New Choice entered into
certain agreements intended to govern the relationship between the parties
after the Spinoff. In addition, the Company is New Choice's largest
franchisee. The material terms of certain of these agreements and other
arrangements, entered into between the Company and New Choice, including the
franchise agreements with respect to the Company's hotels, are described
below.

 Distribution Agreement

  In connection with the Spinoff, the Company and New Choice entered into a
Distribution Agreement which provided for, among other things, the principal
corporate transactions required to effect the Spinoff, the assumption by New
Choice of all liabilities relating to its business and the allocation between
the Company and New Choice of certain other liabilities, certain
indemnification obligations of the Company and New Choice and certain other
agreements governing the relationship between the Company and New Choice with
respect to or in consequence of the Spinoff.

  Subject to certain exceptions, New Choice has agreed to indemnify the
Company and its subsidiaries against any loss, liability or expense incurred
or suffered by the Company or its subsidiaries arising out of or related to
the failure by New Choice to perform or otherwise discharge liabilities
allocated to and assumed by New Choice under the Distribution Agreement, and
the Company has agreed to indemnify New Choice against any loss, liability or
expense incurred or suffered by New Choice arising out of or related to the
failure by the Company to perform or otherwise discharge the liabilities
retained by the Company under the Distribution Agreement. The foregoing cross-
indemnities do not apply to indemnification for tax claims and liabilities,
which are addressed in the Tax Sharing Agreement described below.

  To avoid adversely affecting the intended tax consequences of the Spinoff,
each of New Choice and the Company will agree to comply in all material
respects with each representation and statement made to any taxing authority
in connection with the IRS tax ruling or any other tax ruling obtained by New
Choice and the Company in connection with the Spinoff.

  Under the Distribution Agreement, each of New Choice and the Company will be
granted access to certain records and information in the possession of the
other, and requires the retention of such information in its possession for
specified periods and thereafter requires that each party give the other prior
notice of its intention to dispose of such information. In addition, the
Distribution Agreement provides for the allocation of shared privileges with
respect to certain information and requires each of New Choice and the Company
to obtain the consent of the other prior to waiving any shared privilege.

  As of December 31, 1997, the Company owed New Choice approximately $25
million, of which approximately $15 million represents a net equity adjustment
payment required under the terms of the Distribution Agreement. The Company
and New Choice have agreed that the Company will pay this amount on or before
December 31, 1998. The remainder of the amount owed to New Choice represents
the reimbursement of various expenses incurred subsequent to the Spinoff. The
Company paid $7.5 million of this indebtedness in March 1998.

 Strategic Alliance Agreement

  At the time of the Spinoff, New Choice and the Company entered into a
Strategic Alliance Agreement pursuant to which: (i) the Company granted a
right of first refusal to New Choice to franchise any lodging property that
the Company develops or acquires and intends to operate under franchise; (ii)
the Company has

                                      22
<PAGE>

also agreed, barring a material change in market conditions, to continue to
develop Sleep Inns and MainStay Suites hotels so that it will have opened a
total of 14 Sleep Inns and 15 MainStay Suites hotels by October 15, 2001 (48
months of the Distribution Date); (iii) New Choice has granted to the Company
an option, exercisable under certain circumstances, to purchase the brand
names, marks, franchise agreements and other assets of the MainStay Suites
hotel system; (iv) New Choice and the Company have agreed to continue to
cooperate with respect to matters of mutual interest, including new product
and concept testing for New Choice in hotels owned by the Company; and (v) the
Company has authorized New Choice to negotiate with third party vendors on the
Company's behalf for the purchase of certain items. The Strategic Alliance
Agreement extends for a term of 20 years with rights of mutual termination on
the fifth, tenth and fifteenth anniversaries.

 Amendment and Guaranty

  In connection with the Spinoff, New Choice entered into the Amendment and
Guaranty for the purpose of adding New Choice as a party to certain agreements
entered into between Former Choice and Manor Care in connection with the Manor
Care Spinoff and adding New Choice as a guarantor of certain payment
obligations of the Company to Manor Care pursuant to agreements between Former
Choice and Manor Care. For a discussion of the Amendment and Guaranty, see
"Certain Relationships and Related Transactions--Relationship with Manor Care"
and "--Lease Agreements."

 Term Note

  In connection with the Spinoff, New Choice loaned to the Company
approximately $115 million which, together with borrowings under a new bank
credit agreement, was used by the Company to repay approximately $96 million
outstanding under Former Choice's credit facility and to repay that portion of
the Former Choice indebtedness under the MNR Note allocated to the Company in
connection with the Spinoff (approximately $37 million).

  This loan is represented by a Term Note in an aggregate principal amount of
$115 million (the "Term Note"). The Term Note has a maturity of five years and
accrues interest at a rate equal to 500 basis points above the interest rate
on a 5-year U.S. Treasury Note. The Term Note is subordinated to all senior
debt of the Company and contains certain restrictive covenants comparable to
those contained in the Company's senior credit facility (including
restrictions on the Company's ability to make certain investments, incur debt,
pay dividends, dispose of assets and create liens on its assets).

 Consulting Agreement

  The Company and New Choice entered into a Consulting Agreement in which the
Company will provide consulting and advisory services to New Choice related to
financial issues affecting New Choice. The term of the agreement commences
October 15, 1997 and terminated on November 1, 2001. The Company is entitled
to an annual retainer fee equal to 30% of the annual compensation (including
base salary, incentive bonus and fringe benefits) paid to James A. MacCutcheon
by the Company during such period. If Mr. MacCutcheon ceases to be employed by
the Company, the agreement can be terminated by either party, but if
terminated by New Choice, then New Choice shall pay the Company a termination
fee equal to 30% of any amount due by the Company to Mr. MacCutcheon under his
employment agreement as a result of his separation.

 Tax Sharing Agreement

  New Choice and the Company have entered into a Tax Sharing Agreement for
purposes of allocating tax liabilities of Former Choice from before the
Spinoff among New Choice and the Company and their respective subsidiaries. In
general, the Company will be responsible for (i) filing consolidated federal
income tax returns for the Company affiliated group and combined or
consolidated state tax returns for any group that includes a member of the
Company affiliated group, including in each case New Choice and its
subsidiaries for the periods of time that such companies were members of the
applicable group and (ii) paying the taxes relating to such tax

                                      23
<PAGE>

returns to the applicable taxing authorities (including any subsequent
adjustments resulting from the redetermination of such tax liabilities by the
applicable taxing authorities). New Choice will reimburse the Company for the
portion of such taxes that relates to New Choice and its subsidiaries, as
determined based on their hypothetical separate company income tax
liabilities. New Choice and the Company have agreed to cooperate with each
other, and to share information, in preparing such tax returns and in dealing
with other tax matters.

 Employee Benefits Allocation Agreement

  In connection with the Spinoff, New Choice and the Company entered into an
Employee Benefits and Other Employment Matters Allocation Agreement (the
"Employee Benefits Allocation Agreement"). The Employee Benefits Allocation
Agreement provides for the allocation subsequent to New Choice Spinoff of
employee benefits, as they relate to employees who remained employed by the
Company or its subsidiaries ("Sunburst Employees") after the Spinoff and
employees who are employed by New Choice or its subsidiaries after the Spinoff
("Choice Employees"). Pursuant to the Employee Benefits Allocation Agreement,
the Company will continue sponsorship of the various Sunburst profit sharing
plans, stock plans and health and welfare plans with respect to Sunburst
Employees. New Choice has established a number of plans which allow it to
provide to its employees substantially the same benefits currently provided to
them as employees of the Company. The Employee Benefits Allocation Agreement
provides for cross-guarantees between New Choice and the Company with respect
to the payment of benefits under certain plans and for cross-indemnification
with respect to employment-related claim relating to prior to the Spinoff.

  The Employee Benefits Allocation Agreement also provided for the adjustment
of outstanding options to purchase shares of Sunburst common stock held by
Sunburst Employees, Choice Employees and employees of Manor Care who hold such
options as a result of the Manor Care Spinoff.

 Lease Agreements

  Pursuant to the Amendment and Guaranty, New Choice, the Company and Manor
Care have added New Choice as a guarantor of the Company's obligations under
the Gaithersburg Lease and the Silver Spring Lease. Additionally, the Company
and Choice have entered into a sublease agreement (the "Silver Spring
Sublease") with respect to the Silver Spring Lease for New Choice's principal
executive offices at 10750 Columbia Pike, Silver Spring, Maryland, 20901. New
Choice subleases approximately 54.3% of the office space available under the
Silver Spring Lease with financial terms approximately equal (on a square foot
basis) to the terms of the Silver Spring Lease. From the date of the
consummation of the Spinoff through December 31, 1997, New Choice has paid to
the Company approximately $375,000 under the Silver Spring Sublease.

 Transitional Service Agreements

  New Choice and the Company have entered into a number of agreements pursuant
to which New Choice provides, or will provide, certain continuing services to
the Company for a transitional period. Such services will be provided on
market terms and conditions. Subject to the termination provisions of the
specific agreements, the Company will be free to procure such services from
outside vendors or may develop an in-house capability in order to provide such
services internally. The primary transitional services agreements are
summarized below.

  Pursuant to the Employee Benefits Administration Agreement, New Choice
provides certain benefits, compensation and other services. Such other
services may include benefit plan administration and accounting, COBRA
administration, regulatory compliance and certain fiduciary services. Pursuant
to the Tax Administration Agreement, New Choice provides certain sales, use,
occupancy, real and personal property tax return administration, audit and
appeals services for the Company.

                                      24
<PAGE>

 Franchise Agreements

  The Clarion, Comfort, Econo Lodge, Sleep Inn, Quality, MainStay Suites and
Rodeway marks are each owned by Choice. Each hotel property owned by the
Company is subject to a franchise agreement between New Choice and the
Company, as franchisee (the "Franchise Agreements"). (The material terms of
such agreements are described below.)

 Term.

  Each Franchise Agreement has an initial term of 20 years, except the
agreement for Tempe, Arizona which is a year to year agreement. The Franchise
Agreements have varying original dates, from 1982 through 1996. Certain
Franchise Agreements allow for unilateral termination by either party on the
5th, 10th, or 15th anniversary of the Franchise Agreement.

 Termination by Sunburst.

  The Company (except with respect to one property as described below) may
terminate a Franchise Agreement if New Choice defaults on its material
obligations under such Franchise Agreement and fails to cure such defaults
within 30 days following written notice. The Franchise Agreement with respect
to the Quality Hotel--Arlington (the "Non-Standard Franchise Agreement") does
not allow the Company to terminate such Franchise Agreement.

 Termination by New Choice.

  New Choice (except with respect to the Non-Standard Franchise Agreement) may
suspend or terminate a Franchise Agreement at any time, if, among other
things, the Company (a) fails to submit reports when due; (b) fails to pay
amounts due under such Franchise Agreement; (c) fails to pay its debts
generally as they become due; or (d) receives two or more notices of default
for similar reasons for any 12 month period. New Choice (except with respect
to the Non-Standard Franchise Agreement) may terminate a Franchise Agreement
immediately upon notice to the Company if, among other things, (a) certain
bankruptcy events occur with respect to the Company; (b) the Company loses
possession or the right to possession of the Property; (c) the Company
breaches transfer restrictions in the related Franchise Agreement; (d) any
action is taken to dissolve or liquidate the Company; or (e) there is a threat
or danger to the public health and safety in the continued operation of the
Property. If a Franchise Agreement is terminated by New Choice for any of the
reasons discussed in the immediately preceding two sentences, the Company is
required to pay Special Interest equal to the product of (i) the average
monthly gross room revenue for the preceding 12 months, multiplied by (ii) the
royalty fee percentage (more fully described below), multiplied by (iii) the
number of months unexpired under the term of the related Franchise Agreement
(in no event less than between $21-$50 depending on the hotel brand multiplied
by the specified room count).

  The Non-Standard Franchise Agreement has termination provisions similar to
those in the other Franchise Agreements. New Choice may terminate the Non-
Standard Franchise Agreement immediately upon notice to the Company if, among
other things, (a) certain bankruptcy events occur with respect to the Company;
(b) certain breaches of the related agreements are not remedied; (c) any
action is taken to dissolve or liquidate the Company; or (d) legal proceedings
against the Company are not dismissed within a certain period of time. Upon
termination, the Franchise Agreement for the Rodeway Inn-Phoenix (Tempe) calls
for Special Interest of the greater of (i) $50,000 and (ii) the sum of the
previous two years of fees paid by the licensee.

 Fees.

  The Franchise Agreements require the payment of certain fees and charges,
including the following: (a) a royalty fee of between 1.93% to 5.0% of monthly
gross room revenues; (b) a marketing fee of between 0.7% and 2.5% plus $0.28
per day multiplied by the specified room count; and (c) a reservation fee of
0.88% to 1.75% of monthly gross room revenues (or 1% of monthly gross room
revenues plus $1.00 per room confirmed through New Choice's reservation
system). The marketing fee and the reservation fee are subject to reasonable
increases

                                      25
<PAGE>

during the term of the franchise if New Choice raises such fees uniformly
among all its franchisees, generally. Late payments (i) will be a breach of
the Franchise Agreement and (ii) will accrue interest from the date of
delinquency at a rate of 1.5% per month or portion thereof.

 Certain Covenants.

  The Franchise Agreements impose certain affirmative obligations upon New
Choice including: (a) to lend the Franchisee an operations manual; (b) to
utilize money collected from marketing and reservation fees to promote those
aspects of the franchise business; and (c) to periodically inspect the
Property. The Franchise Agreements also impose affirmative obligations upon
the Company including: (a) to participate in a specified reservation system;
(b) to keep and comply with the up-to-date version of New Choice's rules and
regulations for properly running the specified franchise; (c) to prepare
monthly financial and other records; (d) to not interfere with the franchised
mark(s) and New Choice's rights thereto; and (e) to maintain certain specified
insurance policies.

 Assignments.

  The Company is prohibited from directly or indirectly selling, assigning,
transferring, conveying, pledging or mortgaging its interest in the Franchise
Agreement, or any equity interest in such franchise interests without the
consent of New Choice except that, among other things, certain percentages of
ownership interests in the Company may be transferred without New Choice's
consent. New Choice's consent to such transfers, will not be given unless,
among other things: (a) all monetary obligations due under the Franchise
Agreement are paid to New Choice; (b) no defaults under the Franchise
Agreement remain uncured; (c) the transferee agrees in writing to upgrade the
related Property to the then-current standards; and (d) the transferee agrees
to remain liable for all obligations under the Franchise Agreement so
transferred.

  New Choice is permitted to assign all or any part of its rights or
obligations under the Franchise Agreements. However, the Franchise Agreements
(with the exception of the Non-Standard Franchise Agreement) do not permit New
Choice to absolve itself from the obligations that it transfers under the
Franchise Agreement. Upon the assignment of New Choice's obligations under the
Non-Standard Franchise Agreement, New Choice will no longer be liable with
respect to the obligations it so transfers.

 Noncompetition Agreement

  New Choice and the Company have entered into a noncompetition agreement that
defines the rights and obligations with respect to certain businesses to be
operated by New Choice and the Company. Under the noncompetition agreement,
for a period of five years from the date of the Spinoff, subject to the
exceptions set forth below, the Company will be prohibited from conducting any
business that competes with the business operated by Former Choice transferred
to New Choice as part of the Spinoff ("the Choice Business"). The Company will
also be prohibited from acquiring any entity conducting a business that
competes with the Choice Business, with certain exceptions outlined below,
unless, prior to such acquisition, the Company offers to sell such competing
business to New Choice on substantially the same terms and conditions;
provided, however, that the Company will not be required to make such an offer
to New Choice where the competing business is not readily divisible from other
businesses permitted to be held or acquired by the Company and the gross sales
from such competing business for the 12 months prior to such acquisition do
not exceed the greater of $1,000,000 (as adjusted for increases to the
Consumer Price Index during the term) or 5% of gross sales of the businesses
to be acquired. Subject to the foregoing, however, the noncompetition
agreement does not prohibit the Company from engaging in the following
activities: (i) the continued operation and development of any business
operated as of the date of the Spinoff by the Company and retained by the
Company; (ii) any activities otherwise permitted under the Strategic Alliance
Agreement; (iii) the ownership of up to 5% of the equity interests of a
publicly-traded entity that competes with New Choice's business; and (iv) the
ownership of equity interests of any entity that competes with New Choice's
business, if (A) the competing business does not comprise such entity's
primary business, (B) the gross sales of such entity for the prior 12 months
attributable to such competing

                                      26
<PAGE>

business does not exceed 20% of such entity's consolidated gross sales, and
(C) neither the fair market value of, nor the value, if any, attributed by the
acquisition agreement to, the competing business is in excess of $5,000,000
(as adjusted for increases to the Consumer Price Index during the term).

  During the term of the noncompetition agreement, subject to the exceptions
set forth below, New Choice will be prohibited from conducting any business
that competes with the business operated by the Company and retained by
Company in the Spinoff (the "Hotel Business"). New Choice is also prohibited
from acquiring any entity conducting a business that competes with the Hotel
Business, with certain exceptions outlined below, unless, prior to such
acquisition, New Choice offers to sell such competing business to the Company
on substantially the same terms and conditions; provided, however, that New
Choice will not be required to make such an offer to the Company where the
competing business is not readily divisible from other business permitted to
be held or acquired by New Choice and the gross revenues from such competing
business for the 12 months prior to such acquisition do not exceed the greater
of $1,000,000 (as adjusted for increases to the Consumer Price Index during
the term) or 5% of gross sales of the businesses to be acquired. Subject to
the foregoing, however, the noncompetition agreement will not prohibit New
Choice from the following activities: (i) continued operation and development
of any business operated as of the date of the Spinoff by New Choice, (ii) any
activities otherwise permitted under the Strategic Alliance Agreement, (iii)
the ownership of up to 5% of the equity interests of a publicly-traded entity
that competes with the Hotel Business, (iv) the ownership of equity interests
of any entity that competes with the Hotel Business, if (A) the competing
business does not comprise such entity's primary business, (B) the gross
revenue of such entity for the prior 12 months attributable to such competing
business does not exceed 20% of such entity's consolidated gross sales, and
(C) neither the fair market value of, nor the value, if any, attributed by the
acquisition agreement to, the competing business is in excess of $5,000,000
(as adjusted for increases to the Consumer Price Index during the term).

 Potential Conflict

  The ongoing relationship between New Choice and the Company resulting from
the agreements and arrangements described above may potentially give rise to
conflict of interest between New Choice and the Company. With respect to the
agreements between the parties, the potential exists for disagreements as to
the quality of the services provided by the parties and as to contract
compliance. Nevertheless, the Company believes that there will be sufficient
mutuality of interest between the two companies to result in a mutually
productive relationship.

  Appropriate policies and procedures are followed by the Board of Directors
of New Choice and the Company to limit the involvement of the overlapping
directors (and, if appropriate, relevant officers of such companies) in
conflict situations, including requiring them to abstain from voting as
directors of either New Choice or the Company on certain matters which present
a conflict between the two companies.

OTHER RELATIONSHIPS

  During the twelve months ended December 31, 1997, the Company paid to Allen
& Company Incorporated a total of $110,523 in brokerage commissions in
connection with the repurchase of Company common stock by the Company. Paul A.
Gould, a director of the Company, is a Managing Director of Allen & Company.

                                      27
<PAGE>

                       SUNBURST HOSPITALITY CORPORATION
              107750 Columbia Pike, Silver Spring, Maryland 20901

                   PROXY SOLICITED BY THE BOARD OF DIRECTORS
                      FOR ANNUAL MEETING OF SHAREHOLDERS

                           TO BE HELD APRIL 22, 1998

The undersigned hereby appoints PAUL A. GOULD and FREDERIC V. MALEK, and each of
them, the true and lawful attorneys and proxies, with full power of
substitution, to attend the Annual Meeting of Stockholders of Sunburst
Hospitality Corporation (the "Company") to be held on April 22, 1998 at 9:00
a.m. in the Ballroom located at the Quality Suites Shady Grove, 3 Research
Court, Rockville, Maryland and at any adjournment thereof, and to vote all
shares of common stock held of record which the undersigned could vote, with all
the powers the undersigned would possess if personally present at such meeting,
as designated below.

All shares of Company common stock that are represented at the Annual Meeting by
properly executed proxies received prior to or at the Annual Meeting and not
revoked will be voted at the Annual Meeting in accordance with the instructions
indicated herein.  If no instructions are indicated for Items 1 or 2, such
proxies will be voted in accordance with the Board of Directors' recommendations
as set forth herein with respect to such proposal(s).

--------------------------------------------------------------------------------

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR ITEM 1
AND ITEM 2.

     (1) Election of two Directors:   / /  FOR all nominees listed below:
                                      / /  WITHHOLD AUTHORITY to vote FOR all
                                           nominees listed below:

                     STEWART BAINUM, JR. and PAUL A. GOULD

(Instructions:  to withhold authority to vote for any individual nominee, write
                that nominee's name in the space provided below.)

       _________________________________________________________________

     (2) Amendment of 1996 Long-Term Incentive Plan    FOR    AGAINST  ABSTAIN
         to increase the number of authorized shares:  / /      / /      / /

     If you plan to attend the Annual Meeting of Stockholders, please mark the
following box and promptly return this Proxy Card.  / /

                        Dated                                             , 1998
                              --------------------------------------------


                              --------------------------------------------------
                                                                       Signature

                              --------------------------------------------------
                                                                       Signature

                              (Signatures should correspond exactly with the
                              name or names appearing above. Attorneys,
                              trustees, executors, administrators, guardians
                              and others signing in a representative capacity
                              should designate their full titles. If the signer
                              is a corporation, please sign the full corporate
                              name by a duly authorized officer.)