<PAGE>
===============================================================================
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

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

                                  FORM 10-K
             ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                       SECURITIES EXCHANGE ACT OF 1934
                 For the fiscal year ended December 31, 1996
                         COMMISSION FILE NO. 1-11402

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

                               HFS INCORPORATED
            (Exact name of Registrant as specified in its charter)

                  DELAWARE                            22-3059335
         (State or other jurisdiction              (I.R.S. Employer
      of incorporation or organization)         Identification Number)

                6 SYLVAN WAY
            PARSIPPANY, NEW JERSEY                      07054
   (Address of principal executive office)            (Zip Code)
                                --------------

                                (201) 428-9700
             (Registrant's telephone number, including area code)

         SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

                                              NAME OF EACH EXCHANGE
           TITLE OF EACH CLASS                 ON WHICH REGISTERED
----------------------------------------  ---------------------------
       Common Stock, Par Value $.01          New York Stock Exchange
       5 7/8% Senior Notes due 1998          New York Stock Exchange
 4 1/2% Convertible Senior Notes due 1999    New York Stock Exchange
 4 3/4% Convertible Senior Notes due 2003    New York Stock Exchange

       SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE

   Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days: Yes [X] No [ ]

   Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

   The aggregate market value of the Common Stock issued and outstanding and
held by nonaffiliates of the Registrant, based upon the closing price for the
Common Stock on the New York Stock Exchange on March 21, 1997, was
$8,313,021,101.

   The number of shares outstanding of each of the Registrant's classes of
common stock was 127,628,756 shares of Common Stock outstanding as at March
21, 1997.

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

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                                    PART I

ITEM 1. BUSINESS

GENERAL

   HFS Incorporated (the "Registrant", which, together with its subsidiaries
is herein called collectively the "Company") is a global services provider.
The Company provides services to consumers through intermediaries in the
travel and real estate industries. In the travel industry, the Company,
through its subsidiaries, franchises hotels primarily in the mid-priced and
economy markets and is the world's largest hotel franchisor. Additionally,
the Company owns Avis, Inc. ("Avis"), currently the parent company of one of
the world's largest car rental systems and owns Resort Condominiums
International, Inc. ("RCI"), the world's largest timeshare exchange
organization.

   In the residential real estate industry, the Company, through its
subsidiaries, franchises real estate brokerage offices and is the world's
largest real estate brokerage franchisor. Additionally, the Company provides
relocation services, offering relocation clients a variety of services in
connection with the transfer of a client's employees.

   As a franchisor of hotels, residential real estate brokerage offices, and
car rental operations, the Company licenses the owners and operators of
independent businesses to use the Company's brand names. The Company does not
own or operate hotels or real estate brokerage offices. Instead, the Company
provides its franchisee customers with services designed to increase their
revenue and profitability. These services allow customers to retain
independence and local control while benefiting from the economies of scale
of widely promoted brand names and standards of service, national and
regional direct marketing and co-marketing arrangements and global
procurement. The most important of these services for hotel owners are access
to a national reservation system, national advertising and promotional
campaigns, co-marketing programs, and volume purchasing discounts. The most
significant services to real estate brokerages are national advertising and
promotional campaigns, referrals, and training. The most significant services
to car rental locations are national advertising and promotional campaigns,
co-marketing and public relations programs and access to an on-line real-time
data processing, reservations and information system which connects more than
2,000 Avis locations throughout the United States, Canada, Europe and a
number of other countries. The Company believes significant opportunities
exist to expand the co-marketing and volume purchasing benefits that it
currently provides to its franchisees.

THE TRAVEL INDUSTRY

   Hotel Franchising. The Company operates eight national hotel franchise
systems: Days Inn(Registered Trademark) Ramada(Registered Trademark) (in the
United States), Howard Johnson(Registered Trademark), Super 8(Registered
Trademark), Travelodge(Registered Trademark) (in North America), Villager
Lodge(Registered Trademark), Knights Inn(Registered Trademark) and Wingate
Inn(Registered Trademark). In aggregate, these franchise systems consist of
approximately 5,400 properties and 495,000 hotel rooms worldwide.

   Car Rental Operations. The Company owns Avis, Inc. ("Avis"), which it
acquired on October 17, 1996 (the "Date of Acquisition") for approximately
$800 million in cash and Company common stock. Avis, together with its
subsidiaries, licensees and affiliates, operates the "Avis System", which
consists of approximately 4,200 worldwide locations, including locations at
most major airports as well as downtown locations in major cities in the
United States and in approximately 160 countries and territories. Pursuant to
a plan developed by the Company prior to the Date of Acquisition, the Company
will cause the car rental operation subsidiary of Avis (the "Avis Operating
Company") to undertake an initial public offering within one
year of the Date of Acquisition, which will reduce the Company's equity
interest in the Avis Operating Company to 25%. The Company will continue to
own and operate the reservation system as well as the telecommunications and
computer processing systems which service the rental car operations for
reservations, rental agreement processing, accounting and vehicle control.
The Company charges a fee to the Avis Operating Company for such
services. In addition, the Company will retain the Avis trade name and charge
the rental car operations a franchise fee for the use of the Avis name.

                                1
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   Timeshare Exchange. The Company operates Resort Condominiums
International, Inc. ("RCI"), which it acquired on November 12, 1996 for
approximately $412 million in cash, $75 million in the Company's common stock
("Company Common Stock") and up to $200 million in contingent cash payments.
RCI provides timeshare exchange programs for approximately 2.2 million
timeshare owners and approximately 3,100 resorts around the world and
furnishes travel-related services, integrated software systems and resort
management and consulting services to the timeshare industry.

THE REAL ESTATE INDUSTRY

   Real Estate Brokerage Franchising. The Company operates the CENTURY
21(Registered Trademark), Coldwell Banker(Registered Trademark) and
Electronic Realty Associates(Registered Trademark) (ERA(Registered
Trademark)) real estate brokerage franchise systems, which it acquired on
August 1, 1995, May 31, 1996 and February 12, 1996, respectively. The CENTURY
21, Coldwell Banker and ERA franchise systems are the world's largest, third
largest and fourth largest residential real estate brokerage franchise
systems, with an aggregate of more than 11,300 independently owned and
operated franchised offices located worldwide.

   Relocation Services. The Company operates the Coldwell Banker
corporate employee relocation business, which the Company estimates is the
second largest provider and, following the integration of the corporate
relocation business of PHH Corporation (discussed below) will be the largest
provider, of corporate relocation services in the United States based on the
number of transferred employees assisted. The Coldwell Banker corporate
employee relocation services business offers its relocation clients a variety
of services in connection with the transfer of its clients' employees. These
services include the selling of a transferee's home, appraisals, inspections,
assistance in finding a new home, property marketing advice, rental
assistance, equity advances, purchasing a transferee's home at the appraised
value when no higher bid is obtained, educational and school placement
counseling, career counseling, spouse/partner employment assistance and group
move services.

PROPOSED ACQUISITIONS

   PHH Corporation -- General. In April 1997, the Company expects to complete
its acquisition of all of the outstanding shares of the common stock of PHH
Corporation ("PHH") for approximately $1.7 billion in Company Common Stock.
Based in Hunt Valley, Maryland, PHH provides a broad range of integrated
management services, expense management programs and mortgage services to
more than 3,000 major clients, including many of the world's largest
corporations, as well as government agencies and affinity groups. Its primary
business service segments consist of vehicle management, real estate and
mortgage services.

   PHH Corporation -- Travel Industry. PHH is the second world's largest
provider in North America of comprehensive vehicle management services (which
include the management, purchase, leasing and resale of vehicles for corporate
clients and government agencies, including fuel and expense management programs
and other fee-based services) and is the market leader in the United Kingdom
among the four major nationwide providers of fuel card services and the six
major nationwide providers of vehicle management services.

   PHH Corporation -- Real Estate Industry. PHH is the largest provider of
real estate relocation services (similar to those provided by Coldwell
Banker) to corporate and government clients and to members of affinity
groups. Through PHH Mortgage Services Corporation ("PHH Mortgage"), PHH
originates, sells and services residential mortgage loans in the United
States, marketing such services to consumers through relationships with
corporations, affinity groups, financial institutions, real estate brokerage
firms and other mortgage banks. PHH Mortgage is the twelfth largest
originator of residential first mortgage loans in the United States.

   Value Rent-A-Car. On March 3, 1997, the Company announced that it had
reached an agreement in principle to acquire Value-Rent-A-Car, Inc. ("Value")
from Mitsubishi Motor Sales of America for $175 million in cash. Consummation
of the transaction is subject to the satisfaction of customary

                                2
<PAGE>
conditions, including without limitation, negotiation and execution of
definitive documentation and approval of the respective boards of directors.
There can be no assurance that any such transaction between Mitsubishi and
the Company will be consummated.
                                    * * *

   The Company continually explores and conducts discussions with regard to
acquisitions and other strategic corporate transactions in its industries and
in other franchise, franchisable or service businesses. As part of this
regular on-going evaluation of acquisition opportunities, the Company
currently is engaged in a number of separate, unrelated preliminary
discussions concerning possible acquisitions. The purchase price for the
possible acquisitions may be paid in cash, through the issuance of Company
Common Stock (which would increase the number of shares of Company Common
Stock outstanding) or other securities of the Company, borrowings, or a
combination thereof. Prior to consummating any such possible acquisitions,
the Company, among other things, will need to initiate and complete
satisfactorily its due diligence investigations; negotiate the financial and
other terms (including price) and conditions of such acquisitions; obtain
appropriate Board of Directors, regulatory and other necessary consents and
approvals; and secure financing. No assurance can be given with respect to
the timing, likelihood or business effect of any possible transaction. In the
past, the Company has been involved in both relatively small acquisitions and
acquisitions which have been significant, including the acquisition of PHH
for approximately $1.7 billion, the acquisition of RCI for approximately $487
million and the acquisition of Avis for approximately $800 million.

   Financial information about the Company's industry segments may be found
in Notes 1A and 15 to the Company's consolidated financial statements
presented in Item 8 of this Annual Report on Form 10-K and is incorporated
herein by reference. Except where expressly noted, information herein does
not include information on or with respect to PHH, Value or their respective
businesses.

   Certain statements in this Annual Report on Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance, or achievements of the Company to be materially
different from any future results, performance, or achievements expressed or
implied by such forward-looking statements. These forward-looking statements
were based on various factors and were derived utilizing numerous important
assumptions and other important factors that could cause actual results to
differ materially from those in the forward-looking statements. Important
assumptions and other important factors that could cause actual results to
differ materially from those in the forward-looking statements, include, but
are not limited to: uncertainty as to the Company's future profitability; the
Company's ability to develop and implement operational and financial systems
to manage rapidly growing operations; competition in the Company's existing
and potential future lines of business; the Company's ability to integrate
and operate successfully acquired businesses and the risks associated with
such businesses; the Company's ability to obtain financing on acceptable
terms to finance the Company's growth strategy and for the Company to operate
within the limitations imposed by financing arrangements; uncertainty as to
the future profitability of acquired businesses; and other factors. Other
factors and assumptions not identified above were also involved in the
derivation of these forward-looking statements, and the failure of such other
assumptions to be realized as well as other factors may also cause actual
results to differ materially from those projected. The Company assumes no
obligation to update these forward-looking statements to reflect actual
results, changes in assumptions or changes in other factors affecting such
forward-looking statements.

   The Company's principal executive offices are located at 6 Sylvan Way,
Parsippany, New Jersey 07054 (telephone number: (201) 428-9700).

                                3
<PAGE>
                             THE TRAVEL INDUSTRY

THE LODGING FRANCHISE BUSINESS

GENERAL

   The lodging industry can be divided into three broad segments based on
price and services: luxury or upscale, which typically charge room rates
above $78 per night; middle market, with room rates generally between $52 and
$77 per night; and economy, where rates generally are less than $52 per
night. Of the brand names franchised by the Company, Ramada, Howard Johnson
and Wingate Inn properties compete principally in the middle market segment
and Days Inn, Knights Inn, Super 8, Travelodge and Villager Lodge properties
compete primarily in the economy segment, which is currently the fastest
growing segment of the industry.

   As franchisor of lodging facilities, the Company provides a number of
services designed to directly or indirectly increase hotel occupancy rates,
revenues and profitability, the most important of which is a centralized
brand-specific national reservations system. Similarly, brand awareness
derived from nationally recognized brand names, supported by national
advertising and marketing campaigns, can increase the desirability of a hotel
property to prospective guests. The Company believes that, in general,
national franchise brands with a greater number of hotels enjoy greater brand
awareness among potential hotel guests, and thus are perceived as more
valuable by existing and prospective franchisees than brands with a lesser
number of properties. Franchise brands can also increase franchisee property
occupancy through national direct sales programs to corporations,
associations and affinity groups.

   In determining whether to affiliate with a national franchise brand, hotel
operators compare the costs of affiliation (including the capital
expenditures and operating costs required to meet a brand's quality and
operating standards, plus the ongoing payment of franchise royalties and
assessments for the reservations system and marketing programs) with the
increase in gross room revenue anticipated to be derived from brand
membership. Other benefits to brand affiliation include group purchasing
services, training programs, design and construction advice, and other
franchisee support services, all of which provide the benefits of a national
lodging services organization to operators of independently-owned hotels. The
Company believes that, in general, franchise affiliations are viewed as
enhancing the value of a hotel property by providing economic benefits to the
property.

   Since the Company's organization in mid-1990, the Company has experienced
significant growth in revenue, net income and earnings per share. A
significant portion of these gains has been achieved through a series of
acquisitions of hotel franchise chains. The Company commenced operations in
July 1990 with the acquisition of the Howard Johnson franchise system and the
rights to operate the U.S. Ramada franchise system. The Company acquired the
Days Inn franchise system in 1992, the Super 8 franchise system and
substantially all of the assets of the Park Inn International(Registered
Trademark) franchise system in the U.S. and Canada in 1993 (and which the
Company recently sold--See "Recent Acquisitions and Divestitures"), the
Villager Lodge franchise system in 1994, the Knights Inn franchise system in
August 1995 and the Travelodge franchise system in January 1996. Each of
these acquisitions has increased the Company's earnings per share. The
Company continues actively to seek opportunities to acquire or license
additional hotel franchise systems, including established brands in the upper
end of the market, where the Company is not currently represented. See
"Lodging Franchise Growth" below.

   The fee and cost structure of the Company's business provides significant
opportunities for the Company to increase earnings by increasing the number
of franchised properties. Hotel franchisors such as the Company derive
substantially all of their revenue from franchise fees. Franchise fees are
comprised of two components, a royalty portion and a marketing and reservations
portion, both of which are normally charged by the franchisor as a percentage
of the franchisee's gross room sales. The royalty portion of the franchise fee
is intended to cover the operating expenses of the franchisor, such as expenses
incurred in quality assurance, administrative support and other franchise
services and to provide the franchisor with operating profits. The marketing
and reservations portion of the franchise fee is intended to reimburse the
franchisor for the expenses associated with providing such franchise services
as a national reservations system, national media advertising and certain
training programs.

                                4
<PAGE>
   The Company's franchisees are dispersed geographically which minimizes the
exposure to any one hotel owner or geographic region. Of the approximately
5,400 properties and 3,400 franchisees in the Company's systems, no
individual hotel owner accounts for more than 2% of the Company's lodging
revenue.

   Recent Acquisitions and Divestitures. On January 23, 1996, the Company
purchased from Forte Hotels, Inc. ("FHI"), for a price of approximately $39
million, the assets comprising the Travelodge hotel franchise system in North
America, including the Travelodge and Thriftlodge(Registered Trademark)
service marks, franchise agreements covering 311 hotels having an aggregate
of approximately 27,800 rooms and a license agreement with FHI granting to
FHI the right to use the Travelodge service mark in the operation of 96
hotels (having an aggregate of 5,170 rooms) owned by joint ventures in which
FHI owns an interest. Concurrent with the Company's acquisition of the
Travelodge franchise system, Motels of America, Inc. ("MOA") purchased from
FHI 20 motels subject to Travelodge franchises for a price of $32.3 million,
and Chartwell Leisure Inc. (formerly known as National Gaming Corp. and
National Lodging Corp.) ("Chartwell") purchased from Forte USA, Inc. all of
the capital stock of FHI for a price of approximately $98.4 million. In
connection with such acquisition by Chartwell, the Company has guaranteed $75
million of borrowings by Chartwell under a $125 million revolving credit
facility entered into by Chartwell with certain banks for which the Company
is to be paid a guarantee fee of 2% per annum of the outstanding guarantee
commitment by the Company. The guarantee was made pursuant to an existing
financing agreement between the Company and Chartwell which was modified to
accommodate the FHI transaction. It is anticipated that such guarantee will
be terminated upon Chartwell's refinancing of the underlying bank facility.
Chartwell paid the Company an advisory fee of approximately $2 million for
services in connection with the FHI transaction. The Company also loaned $10
million to a subsidiary of MOA under a $10 million revolving credit
arrangement to finance the purchase from FHI of the motels described above.
The loan bears interest at a rate of 14% per annum, is guaranteed by a parent
of MOA and is secured by approximately 80% of the outstanding common stock of
MOA.

   On October 28, 1996, the Company sold Park Inns International, Inc., which
franchises the 46-hotel, 6,053 rooms, Park Inn International franchise system
in the United States to Park Inn International Worldwide Hotel Group ("Park
Group") for $2.2 million, and recognized a pre-tax gain of approximately $0.6
million. Park Group had previously owned and operated this domestic lodging
chain prior to selling it to the Company in June 1993.

   Preliminary Understanding with Hilton Hotels Corporation. On January 27,
1997, Hilton Hotels Corporation announced, in connection with its pending
tender offer for the outstanding common stock of ITT Corporation ("ITT"),
that it had reached a preliminary understanding with the Company under which,
subject to Hilton's acquisition of ITT, the Company would license, on a
long-term basis, the Sheraton trademark, franchise system and management
agreements. Any such transaction is subject to Hilton's acquisition of ITT,
as well as to the negotiation of definitive agreements relating to such
license. There can be no assurance that Hilton's attempt to acquire ITT will
be successful or that any transaction between Hilton and the Company will be
consummated.

LODGING FRANCHISE GROWTH

   Growth of the franchise systems through the sale of long-term franchise
contracts to operators of existing and newly constructed hotels is the
leading source of revenue and earnings growth in the Company's lodging
franchise business. Franchises are terminated primarily for not paying the
required franchise fees and/or not maintaining compliance with brand quality
assurance standards required pursuant to the applicable franchise agreement.

   The following table demonstrates the growth of the Company's combined
lodging franchise systems. Data reflects hotels in operation as of the end of
the specified fiscal period and does not reflect the backlog of executed
franchise agreements which represent properties preparing to join the
specified franchise system.

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                  HOTEL PROPERTIES IN THE FRANCHISE SYSTEMS

<TABLE>
<CAPTION>
                                  PROPERTIES     ROOMS
                                ------------  ----------
<S>                             <C>           <C>
Balances at December 31, 1991       1,059       151,704
Acquired--1992 ................     1,220       133,127
Openings--1992 ................       303        27,179
Terminations--1992 ............      (116)      (15,437)
                                ------------  ----------
Balances at December 31, 1992       2,466       296,573
% change from 1991 ............     132.9%         95.5%
Acquired--1993 ................     1,010        64,215
Openings--1993 ................       495        49,569
Terminations--1993 ............      (188)      (26,426)
                                ------------  ----------
Balances at December 31, 1993       3,783       383,931
% change from 1992 ............      53.4%         29.5%
Acquired--1994 ................        10         1,173
Openings--1994 ................       584        52,109
Terminations--1994 ............      (148)      (20,928)
                                ------------  ----------
Balances at December 31, 1994       4,229       416,285
% change from 1993 ............      11.8%          8.4%
Acquired--1995 ................       113         9,780
Openings--1995 ................       575        53,500
Terminations--1995 ............      (314)      (39,603)
                                ------------  ----------
Balances at December 31, 1995       4,603       439,962
% change from 1994 ............       8.8%          5.7%
Acquired--1996 ................       364        30,274
Openings--1996 ................       753        64,232
Sold--1996 ....................       (46)       (6,053)
Terminations--1996 ............      (277)      (33,200)
                                ------------  ----------
Balances at December 31, 1996       5,397       495,215
% change from 1995 ............      17.2%         12.6%
</TABLE>

LODGING FRANCHISE SALES

   The Company markets franchises principally to independent hotel and motel
owners, as well as to owners whose properties are affiliated with other hotel
brands. The Company believes that its existing franchisees also represent a
significant potential market because many own, or may own in the future,
other hotels which can be converted to the Company's brand names.
Accordingly, a significant factor in the Company's sales strategy is
maintaining the satisfaction of its existing franchisees by providing quality
services.

   The Company employs a national franchise sales force consisting of
approximately 80 salespeople and sales management personnel, which is divided
into several brand-specific sales groups, with regional offices around the
country. The sales force is compensated primarily through commissions. In
order to provide broad marketing of the Company's brands, sales referrals are
made among the sales groups and a referring salesperson is entitled to a
commission for referrals which result in a franchise sale.

   There are three major steps in the franchising process: (i) identifying
potential franchisees, (ii) executing the franchise contract and (iii)
opening the property. Identification of opportunities is the responsibility
of the franchise sales force. Executed agreements create the backlog that
results in property openings. The Company executed 1,166 and 983 lodging
franchise agreements in 1996 and 1995, respectively. As of December 31, 1996
and December 31, 1995, there were 786 and 682 executed contracts,
representing 61,325 and 55,864 rooms, respectively, in the backlog for the
Company's lodging franchise systems. Approximately 28% of the executed
contracts outstanding during 1996 were terminated before the related lodging
facility opened as a franchised facility.

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   The Company seeks to expand its franchise systems and provide marketing
and other franchise services to franchisees on an international basis through
a series of master license agreements with internationally based developers
and franchisors. As of December 31, 1996, the Company's franchising
subsidiaries (other than Ramada) have entered into international master
licensing agreements for some or all of 46 countries on six continents. The
agreements typically include minimum development requirements and require an
initial license fee upon execution of the license agreements as well as
recurring franchise fees.

LODGING FRANCHISE SYSTEMS

   The following is a summary description of the principal lodging franchise
systems operated by the Company. Information reflects properties which are
open and operating and is presented as of December 31, 1996.

<TABLE>
<CAPTION>
                                    AVG.
                 PRIMARY MARKET   ROOMS PER       # OF        # OF        DOMESTIC/
     BRAND           SERVED       PROPERTY     PROPERTIES     ROOMS     INTERNATIONAL*
--------------  --------------  -----------  ------------  ---------  ----------------
<S>             <C>             <C>          <C>           <C>        <C>
Days Inn....... Lower Economy         92         1,736       159,976  International(1)
Howard
 Johnson....... Mid-market           109           506        55,297  International(1)
Knights Inn.... Lower Economy         88           190        16,720  International(2)
Ramada......... Mid-market           139           861       119,477  Domestic
Super 8........ Economy               61         1,500        92,174  International(2)
Travelodge..... Upper Economy         81           511        41,520  Domestic(1)(4)
Villager
 Lodge......... Lower Economy         78            53         4,136  International(3)
Wingate........ Mid-market            96             5           482  International(3)
</TABLE>

------------
*      Description of rights owned or licensed.
(1)    Includes properties in Mexico and Canada.
(2)    Includes properties in Canada.
(3)    No international properties currently open and operating.
(4)    Rights include all of North America.

OPERATIONS -- LODGING

   The Company's organization is designed to provide a high level of service
to its franchisees while maintaining a controlled level of overhead expense.
In the lodging segment, expenses related to marketing and reservations
services are budgeted to match marketing and reservation fees each year.

   National Reservations Systems. Unlike other franchise businesses (such as
restaurants), the lodging business is characterized by remote purchasing
through travel agencies and through use by consumers of toll-free telephone
numbers. Each of the Company's reservations systems is independently operated,
focusing on its specific brand and franchise system, and is comprised of one
or more nationally advertised toll-free telephone numbers, reservations
agents who accept inbound calls, a computer operation that processes
reservations, and automated links which accept reservations from travel
agents and other travel providers, such as airlines, and which report
reservations made through the system to each franchisee property. Each
reservations agent handles reservation requests and inquiries for only one of
the Company's franchise systems and there is no "cross selling" of franchise
systems. The Company maintains eight reservations centers that are located in
Knoxville and Elizabethton, Tennessee; Phoenix, Arizona; Oklahoma City,
Oklahoma; Winner and Aberdeen, South Dakota; El Cajon, California; and Saint
John, New Brunswick, Canada. Generally, reservations agents for each of the
franchise systems are located in at least two of the Company's eight
facilities, thereby ensuring continuous service in the event of a power
failure or telephone line interruption occurring at any one of the locations.

   Brand Name Marketing Programs. The Company's brand name marketing programs
seek to increase the traveling public's awareness of the Company's franchise
systems and thereby increase

                                7
<PAGE>
franchisee property occupancy rates and revenues. To achieve this objective,
each of the franchise systems' programs is managed by its own staff, who
develop the marketing strategy for the system and report to the brand
president. A central corporate marketing services department implements the
strategy.

   The marketing services department publishes hotel directories for each
franchise system, conducts market research and produces artwork for national
and regional advertising programs. In addition, the marketing services
department works with the independent advertising agencies that have been
retained for each franchise system. These advertising agencies produce
television, radio and print advertising and assist in placing advertisements
in the media.

   Quality Assurance. The Company believes that franchisees have a high level
of interest in the degree to which the quality of fellow franchise operators
is monitored, both upon admission to the system and on an ongoing basis.
Franchise quality control occurs through inspections at the time of
application, upon entry into the system and on an ongoing basis through
quality assurance programs. Quality assurance programs promote uniformity
within the franchise system, an important marketing factor with respect to
increasing consumer demand for lodging facilities. These programs consist of
generally unannounced inspections of properties (two to four times a year) by
inspectors who are rotated through franchise system properties to promote
consistent grading standards. Properties proposed to be converted to one of
the Company's franchise systems are inspected by the Company's most
experienced inspectors, who are dedicated specifically to this function and
who prepare specific renovation schedules to which the potential franchisees
are required to adhere. These specialists report to the Senior Vice President
of Operations rather than to the sales personnel proposing the property. As
of December 31, 1996, the Company employed 74 persons in the quality
assurance department.

   Various brand-specific quality assurance initiatives are designed to
encourage compliance. The Company has instituted certain financial incentive
programs to encourage franchisees to improve their properties. In general,
franchisees are given 30 days to correct the conditions that led to default
or implement a plan to correct the default. If the default is not cured in a
timely fashion, the Company has the right to terminate the defaulting
franchisee's franchise agreement.

   Training. Each of the Company's franchise systems has a training
department which conducts both mandatory and optional training programs.
These departments are staffed by experienced Company employees who conduct
regularly scheduled regional educational seminars for both property level
non-management and management personnel. Training programs are designed to
teach franchisees how best to utilize the Company's reservations system and
marketing programs, as well as the fundamentals of hotel operations such as
recruiting, housekeeping and yield management. The Company also provides
special on-site training upon request. The Company has developed and
maintains a library of training videos, cassettes and tapes, as well as
printed training material, which are available to franchisees. The Company
also employs Property Opening Specialists who help the property staff become
acclimated when their property enters a franchise system.

   Purchasing. Through its HFS Purchasing Services operation, the Company
provides its franchisees with volume purchasing discounts for products,
services, furnishings and equipment used in lodging operations. In addition
to the preferred alliance programs described hereinafter, HFS Purchasing
Services establishes relationships with lodging industry vendors and
negotiates discounts for purchases by its customers. The Company does not
maintain inventory, directly supply any of the products or, generally, extend
credit to franchisees for purchases. See "COMBINED OPERATIONS --Preferred
Alliance and Co-Marketing Arrangements" below.

   Franchise Services. In all of its operations, the Company emphasizes
service to its franchisees. This emphasis is exemplified by the franchise
services department which is comprised of 51 persons with extensive
experience in the lodging industry, who are available to respond to inquiries
by franchisees. Each franchisee is assigned a franchise service manager who
is available via a toll-free telephone number. After each communication with
a franchisee, the franchise service manager prepares a contact report which
is circulated within the Company to the departments responsible for
responding to the inquiry.

                                8
<PAGE>
LODGING FRANCHISE AGREEMENTS

   The Company's lodging franchise agreements grant the right to utilize one
of the brand names associated with the Company's lodging franchise systems to
lodging facility owners or operators under long-term franchise agreements. An
annual average of 3.3% of the Company's existing franchise agreements are
scheduled to expire from January 1, 1997 through December 31, 2006, with no
more than 4.4% (in 2002) scheduled to expire in any one of those years.

   The current standard agreements generally are for 15-year terms for
converted properties and 20-year terms for newly constructed properties and
generally require, among other obligations, franchisees to pay a minimum
initial fee of between $15,000 and $35,000 based on property size and type,
as well as annual franchise fees comprised of royalty fees and
marketing/reservation fees based on gross room revenues.

   Under the terms of the standard franchise agreements in effect at December
31, 1996, franchisees are typically required to pay recurring fees comprised
of a royalty portion and a reservation/marketing portion, calculated as a
percentage of annual gross room revenue that range from 7.0% to 8.8%. The
Company discounts fees from the standard rates from time to time and under
certain circumstances.

   The Company's typical franchise agreement is terminable by the Company
upon the respective franchisee's failure to maintain certain quality
standards or to pay franchise fees or other charges. In the event of such
termination, the Company is typically entitled to be compensated for lost
revenues in an amount equal to the franchise fees accrued during periods
specified in the respective franchise agreements which are generally between
one and five years.

LODGING SERVICE MARKS AND OTHER INTELLECTUAL PROPERTY

   General. The service marks "Days Inn," "Ramada," "Howard Johnson," "Super
8" and "Travelodge" and related logos are material to the Company's business.
The Company, through its franchisees, actively uses these marks. All of the
material marks in each franchise system are registered (or have applications
pending for registration) with the United States Patent and Trademark Office.
The marks relating to the Days Inn system, the Howard Johnson system, the
Knights Inn system, the Super 8 system, the Travelodge system (in North
America) and the Villager Lodge system are owned by the Company through its
subsidiaries.

   Ramada License Agreement. The Company franchises the service mark "Ramada"
and related marks, Ramada brands and logos (the "Ramada Marks") to lodging
facility owners in the United States pursuant to two license agreements (the
"Ramada License Agreements") between an indirect subsidiary of New World
Development Co., Ltd. ("New World") and Ramada Franchise Systems, Inc.
("RFS"), a wholly-owned subsidiary of the Company. The Ramada License
Agreements limit RFS's use of the Ramada Marks to the U.S. market.

   The Ramada License Agreements have initial terms terminating on March 31,
2024. At the end of the initial terms, RFS has the right either (i) to extend
the Ramada License Agreements, (ii) to purchase the Ramada Marks for their
fair market value at the date of purchase, subject to certain minimums after
the initial terms, or (iii) to terminate the Ramada License Agreements. The
Ramada License Agreements require that RFS pay royalties calculated on the
basis of percentages of annual gross room sales, subject to certain minimums
and maximums as specified in each Ramada License Agreement. Such royalties
approximate $18.2 million for 1996.

   The Ramada License Agreements are subject to certain termination events
relating to, among other things, (i) the failure to maintain aggregate annual
gross room sales minimum amounts stated in the Ramada License Agreements,
(ii) the maintenance by the Company of a minimum net worth of $50 million
(however, this minimum net worth requirement may be satisfied by a guaranty
of an affiliate of the Company with a net worth of at least $50 million or by
an irrevocable letter of credit (or similar form of third-party credit
support)), (iii) non-payment of royalties, (iv) failure to maintain
registrations on the Ramada Marks and to take reasonable actions to stop
infringements, (v) failure to pay certain liabilities specified by the
Restructuring Agreement, dated July 15, 1991, by and among New World, Ramada

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<PAGE>
International Hotels and Resorts, Inc., Ramada Inc., Franchise System
Holdings, Inc., the Company and RFS and (vi) failure to maintain appropriate
hotel standards of service and quality. A termination of the Ramada License
Agreements would result in the loss of the income stream from franchising the
Ramada brand names and could result in the payment by the Company of
liquidated damages equal to three years of license fees. The Company does not
believe that it will have difficulty complying with all of the material terms
of the Ramada License Agreements.

COMPETITION

   Competition among the national lodging brand franchisors to grow their
franchise systems is intense. The Company's primary national lodging brand
competitors are the Holiday Inn(Registered Trademark) and Best
Western(Registered Trademark) brands and Choice Hotels, which franchises
seven brands, including the Comfort Inn(Registered Trademark), Quality
Inn(Registered Trademark) and Econo Lodge(Registered Trademark) brands. Days
Inn, Travelodge and Super 8 properties principally compete with Comfort Inn,
Hampton Inn(Registered Trademark) and Econo Lodge in the limited service
economy sector of the market. The chief competitor of Ramada, Howard Johnson
and Wingate Inn properties, which compete in the middle market segment of the
hotel industry, is Holiday Inn. In addition, a lodging facility owner may
choose not to affiliate with a franchisor but to remain independent.

   The Company believes that competition for the sale of franchises in the
lodging industry is based principally upon the perceived value and quality of
the brand and services offered to franchisees, as well as the nature of those
services. The Company believes that prospective franchisees value a franchise
based upon their view of the relationship of conversion costs and future
charges to the potential for increased revenue and profitability. The
reputation of the franchisor among existing franchisees is also a factor
which may lead a property owner to select a particular affiliation. The
Company also believes that the perceived value of its brand names to
prospective franchisees is, to some extent, a function of the success of its
existing franchisees.

   The ability of the Company's lodging franchisees to compete in the lodging
industry is important to the Company's prospects for growth, although,
because franchise fees are based on franchisee gross room revenue, the
Company's revenue is not directly dependent on franchisee profitability.

   The ability of an individual franchisee to compete may be affected by the
location and quality of its property, the number of competing properties in
the vicinity, its affiliation with a recognized brand name, community
reputation and other factors. A franchisee's success may also be affected by
general, regional and local economic conditions. The effect of these
conditions on the Company's results of operations is substantially reduced by
virtue of the diverse geographical locations of the Company's franchises. At
December 31, 1996, the Company had franchised lodging properties in North
America (including all 50 states of the United States), Europe, Asia, Africa
and South America.

SEASONALITY

   The principal source of lodging revenue for the Company is based upon the
annual gross room revenue of franchised properties. As a result, the
Company's revenue from the lodging franchise business experiences seasonal
lodging revenue patterns similar to those of the hotel industry wherein the
summer months, because of increases in leisure travel, produce higher
revenues than other periods during the year.

CAR RENTAL BUSINESS

GENERAL

   On October 17, 1996 (the "Date of Acquisition"), the Company completed the
acquisition of all of the outstanding capital stock of Avis, which together
with its subsidiaries, licensees and affiliates, operates the Avis System,
which the Company believes to be the second largest car rental system in the
world. The Avis System consists of approximately 4,200 locations, including
locations at most major airports as well as downtown locations in major
cities in the United States and in approximately 160 countries and
territories. Approximately 77% of the Avis System rental revenues in the
United States are received from locations operated by Avis directly or under
agency arrangements, with the remainder being received from locations
operated by independent licensees. No individual Avis location accounts for
more than 4% of the Company's car rental operations.

                               10
<PAGE>
   Avis's international business is conducted by a network of several wholly
owned subsidiaries and joint ventures along with a number of licensees and
sublicensees. Avis Europe Ltd. ("Avis Europe"), which currently operates the
Avis System in Europe, Africa and the Middle East, is a licensee of Avis for
such areas. Avis Europe has entered into a series of transactions with the
Company and Avis which are more fully described below under "Recent
Acquisitions and Divestitures". The Avis System in Canada, Central and South
America, the Caribbean and (prior to giving effect to the Avis Europe
transactions described below) Asia Pacific, comprising some 65 countries and
territories, is operated by Avis subsidiaries, joint ventures and licensees.
During the peak summer season, the Avis System fleet worldwide consists of
approximately 370,000 vehicles. Avis has more than 20,000 employees
worldwide, with approximately 20% represented by 65 various local unions
under contracts expiring on a variety of dates.

   Pursuant to a plan developed by the Company prior to the Date of
Acquisition, the Company will cause the car rental operating subsidiary of
Avis (the "Avis Operating Company") to undertake an initial public offering
(the "Avis IPO") within one year of the Date of Acquisition, which will
reduce the Company's equity interest in the Avis Operating Company to 25%.
The Company will continue to own and operate the reservation system as well
as the telecommunications and computer processing systems which service the
rental car operations for reservations, rental agreement processing,
accounting and vehicle control. The Company will charge a fee to Avis for
such services. In addition, the Company will retain the Avis trade name and
charge the Avis Operating Company a franchise fee for the use of the Avis
name.

   The car rental industry provides vehicle rentals to business and
individual customers worldwide. The industry has been composed of two
principal segments: general use (mainly at airport and downtown locations)
and local (mainly at downtown and suburban locations). The car rental
industry rents primarily from on-airport, near-airport, downtown and suburban
locations to business and leisure travelers and to individuals who have lost
the use of their vehicles through accident, theft or breakdown. In addition
to revenue from vehicle rentals, the industry derives significant revenue
from the sale of rental related products such as insurance, refueling
services and loss damage waivers (a waiver of Avis's right to make a renter
pay for damage to the rented car).

   Car renters generally are (i) business travelers renting under negotiated
contractual arrangements between specified rental companies and the
travelers' employers, (ii) business travelers who do not rent under
negotiated contractual arrangements (but who may receive discounts through
travel, professional or other organizations), (iii) leisure travelers and
(iv) renters who have lost the use of their own vehicles through accident,
theft or breakdown. Contractual arrangements normally are the result of
negotiations between rental companies and large corporations, based upon
rates, billing and service arrangements, and influenced by reliability and
renter convenience. Business travelers who are not parties to negotiated
contractual arrangements and leisure travelers generally are influenced by
advertising, renter convenience and access to special rates because of
membership in travel, professional and other organizations.

   Recent Acquisitions and Divestitures. In December 1996, the Company sold
the insurance replacement rental car business of Agency Rent A Car System,
Inc. ("Agency"), which it indirectly owned through Avis, to Enterprise
Rent-A-Car Company ("Enterprise"). The Company entered into an agreement with
Enterprise restricting its participation in the insurance replacement rental
car business within a fifty mile radius of an Agency location existing as of
the date of closing until June 13, 2000.

   On February 7, 1997, the Company and Avis agreed to enter into a series of
agreements with Avis Europe and related parties (the "Avis Europe
Transactions"). Upon consummation of the Avis Europe Transactions, Avis will
have divested itself of its approximately 8.7% ownership interest in Avis
Europe and Avis Europe will become the licensee of Avis for Asia. The Avis
Europe Transactions are expected to be consummated in April 1997.

   The Avis Europe licenses expire on November 30, 2036, unless earlier
termination is effected in accordance with the license terms. Avis Europe's
previously paid-up license for Europe, the Middle East and Africa is to be
modified to provide for a paid-up license only as to Europe and the Middle
East. Avis Europe will pay annual royalties to Avis for Africa and a defined
portion of Asia which covers the area between 60 (degrees) longitude and
150 (degrees) longitude, excluding Australia, New Zealand and Papua New Guinea.

                               11
<PAGE>
Avis Europe also will enter into a Preferred Alliance Agreement with the Company
under which Avis Europe will become a preferred alliance provider for car
rentals to RCI customers in Europe, Asia and Africa, and for car rentals to
PHH customers needing replacement vehicles for fleets managed by PHH in
Europe, Asia and Africa.

   On March 3, 1997, the Company announced that it had reached an agreement
in principle to acquire Value-Rent-A-Car, Inc. ("Value") from Mitsubishi
Motor Sales of America for $175 million in cash. Value predominantly serves
leisure customers from 45 corporate-owned rental car locations. Value's fleet
totals approximately 22,000 vehicles, and during 1996 Value reported revenues
of approximately $180 million. Consummation of such transaction is subject to
the satisfaction of customary conditions, including without limitation,
negotiation and execution of definitive documentation and there can be no
assurance that any such transaction between Mitsubishi and the Company will
be consummated.

OPERATIONS -- AVIS

   The Avis System. Avis provides the Avis System with: (i) national
promotion, advertising and public relations services; (ii) reservations and
information systems; (iii) data processing support; (iv) marketing programs
with hotels and airlines; (v) a sales staff for marketing to corporate
customers and the travel community; (vi) credit card services for commercial
customers; (vii) training in local marketing techniques; and (viii) operation
and training support. Avis's on-line real-time data processing and
information system, known as the Wizard System, connects more than 2,000 Avis
locations in the United States, Canada, Europe and a number of other
countries.

   The Wizard System. The Wizard System is a telecommunications and computer
processing system which is used in association with the Avis System for
reservations, rental agreement processing, accounting, fleet control and a
variety of other purposes. It is owned and operated by WizCom International,
Ltd. ("WizCom"), a wholly owned subsidiary of the Company. Avis uses the
Wizard System as a marketing tool and benefits from the operating
efficiencies obtained through the Wizard System.

   The Wizard System is linked to more than 12,000 terminals in more than
2,000 rental locations through telephone lines and satellite communications.
Among the features of the Wizard System which are not available on most
competitors' systems are (a) an advanced graphical interface reservation
system; (b) "Rapid Return," which permits customers who are returning cars to
obtain completed charge records from radio-connected "Roving Rapid Return"
agents who complete and deliver the charge record at the car as it is being
returned; (c) "Wizard on Wheels," which enables Avis locations to assign cars
and complete rental agreements while customers are being transported to the
car; (d) "Avis Link," which automatically identifies a customer using an
American Express or other major credit card who is entitled to special rental
rates and conditions, and therefore sharply reduces the number of instances
in which Avis inadvertently fails to honor the benefits of negotiated rate
arrangements to which such customers are entitled; (e) interactive interfaces
through the airline computerized reservation systems described under
"Marketing"; (f) sophisticated fleet control and revenue management programs
which, among other things, enable rental agents to ensure that a customer who
rents a particular type of vehicle will receive the available vehicle of that
type which has the lowest mileage (benefitting the customer and Avis by more
evenly dispersing utilization among cars of a particular type); and (g) a
comprehensive control and reporting system that enables Avis to adapt quickly
to changes in customer requirements. Avis also benefits from the low cost and
speed of billing available as a result of broad use of the Wizard System and
believes that the Wizard System keeps its clerical and communications costs
below those of its competitors.

   Rental Operations. Avis rents a wide variety of automobiles and minivans,
most of which consist of the current and immediately preceding model years.
Car rentals are generally made on a daily, weekly or monthly basis. Rental
charges in the United States usually are computed on the basis of the length
of the rental or on the length of the rental plus a mileage charge.
Additional charges are made for refueling service, loss damage waivers,
personal accident insurance, personal effects protection and, in some
instances, additional liability insurance. Rates vary at different locations
depending on the type of vehicle, the local market and competitive and cost
factors. Most rentals are made utilizing rate plans under which the customer
is responsible for gasoline used during the rental. The Company also
generally offers

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<PAGE>
customers the convenience of leaving a rented car at an Avis location in a
city other than the one in which it was rented under its "Rent it Here --
Leave it There" program, although, consistent with industry practices, a
drop-off charge or special intercity rate may be imposed.

   U.S. Operations. Approximately 88% of Avis's United States rental revenue
is generated at 175 of the busiest airports in the United States. Avis's
rental revenue at those airports as a percentage of total rental revenues
generated at those airports for each of the past five full calendar years
beginning with 1992 approximated 23.9%; 24.0%; 22.3%; 23.1% and 24.9%,
respectively.

   At December 31, 1996, the Company owned approximately 414 Avis car rental
facilities at airport, near-airport and downtown locations throughout the
United States. Of these facilities, approximately 175 primarily serve airport
business and approximately 239 are non-airport locations. By focusing on
travelers at the major airports, Avis has been able to operate more vehicles
from significantly fewer rental sites than its competitors, yielding
significant economies of scale. Avis's emphasis on airport traffic has
resulted in a strong competitive position at the major domestic
rental-revenue airports.

   The Company has 75 independent Avis licensees which operate locations in
the United States. The two largest licensees operate the Avis System in the
Los Angeles and Dallas areas and account for approximately half of all United
States licensees' rentals. Certain licensees in the United States pay Avis a
fee equal to 5% of their total time and mileage charges, less all customer
discounts, of which Avis is required to utilize 40% for corporate
licensee-related programs, while six licensees pay 8% of their gross revenue.
Most of Avis's United States licensees currently pay 53 cents per rental
agreement for certain functions of the Wizard System, and they are charged
separately for other aspects of the Wizard System.

   International Operations. Avis's subsidiaries, joint ventures and
licensees (other than Avis Europe, and prior to consummation of the Avis
Europe Transactions) operate the Avis System internationally in approximately
65 countries and territories, with wholly owned subsidiaries in Canada,
Argentina, Australia, New Zealand, Puerto Rico and the United States Virgin
Islands, and joint ventures in Jamaica, Singapore and Malaysia. The principal
business of Avis's foreign subsidiaries is car rentals.

   Avis's international system (not including Avis Europe, and prior to
consummation of the Avis Europe Transactions) operates a combined peak rental
and leasing fleet of approximately 44,000 vehicles, of which approximately
23,000 are operated by subsidiaries, and the balance by joint ventures and
licensees. Revenue of the foreign subsidiaries for calendar year 1996
approximated $243 million, without taking into account revenue of joint
ventures or licensees.

   Marketing. In the United States, approximately 80% of Avis's 1996 rentals
were generated by travelers who used the Avis System under contractual
arrangements negotiated by Avis with either the travelers' corporate
employers or organizations such as American Association of Retired Persons in
which the travelers have memberships. The remainder of the rental activity is
from business and leisure renters who are not affiliated with corporations or
organizations with which Avis has contractual arrangements. Avis's corporate
sales organization is the principal source of contractual arrangements with
corporate accounts. Unaffiliated business travelers are solicited by direct
mail, telemarketing and advertising campaigns.

   The Company solicits contractual arrangements with corporate accounts by
emphasizing the Wizard System's advanced technology, customer service,
pricing and a worldwide rental network. The Wizard System plays a significant
part in securing business of this type because the Wizard System enables Avis
to offer a wide variety of pricing combinations, special reports and tracking
techniques tailored to the particular needs of each account, and to assure
adherence to agreed-upon rates.

   Car renters can make Avis reservations through all four major United
States based global distribution systems and several international based
systems. Users of the United States based global distribution systems can
obtain access through these systems to the Avis reservations system
concerning among other things, rental locations, vehicle availability and
applicable rate structures. The Avis reservations system gives them the
ability to reserve and confirm Avis vehicles directly through these

                               13
<PAGE>
systems. Avis also maintains strong links to the hotel industry. Avis has
arrangements with the Hilton Corporation, the Hyatt Corporation and the
Sheraton Marketing Corporation frequent traveler programs, which provide
various incentives to all program participants.

   Rental Vehicle Purchases and Dispositions. Avis participates in a variety
of vehicle purchase programs with major domestic and foreign manufacturers,
although actual purchases are made directly through local car dealers. The
average price for automobiles purchased by Avis in 1996 for its rental fleet
was approximately $16,200. On average during model year 1996, 84% of the
purchases were comprised of GM vehicles, 12% of Chrysler vehicles and 4% of
Nissan, Subaru, Hyundai, Ford, Toyota and Land Rover vehicles. These
percentages vary among the Avis operations and will most likely change from
year to year. The vehicle purchase programs sponsored by manufacturers
sometimes provide Avis with sales incentives for the purchase of certain
models, and most of these programs allow Avis to serve as a drop-ship
location for vehicles, thus enabling Avis to receive a fee from the
manufacturers for preparing newly purchased vehicles for use. There can be no
assurance that Avis will continue to be able to benefit from sales incentives
in the future.

   Most of the Avis cars in the United States are purchased, owned and sold
by Prime Vehicles Trust, a grantor trust created by a subsidiary of Avis, or
by corporate nominees of Prime Vehicles Trust. All decisions regarding Prime
Vehicles Trust purchases and sales of cars are made by Avis, and Prime
Vehicles Trust is combined with Avis for both financial and tax accounting
purposes. The existence of Prime Vehicles Trust has no effect on Avis's
control of the cars in the Avis fleet. However, Avis believes the existence
of Prime Vehicles Trust has been useful in obtaining financing secured by its
cars.

   Avis's current operating strategy is to hold vehicles not more than twelve
months. The average age of rental cars in Avis's fleet is approximately six
months. Approximately 90% of the vehicles purchased by the Company in model
year 1996 were eligible for participation in manufacturers' repurchase
programs ("Repurchase Programs"). These programs currently require that Avis
maintain Program vehicles in its fleet for a minimum of six months and impose
numerous return conditions, including those related to mileage and overall
condition. Approximately 2% of the Program vehicles purchased by Avis and
scheduled to be returned in 1996 were ineligible for return. At the time of
return to the manufacturer, Avis receives the price guaranteed at the time of
purchase, subject to adjustment for excess mileage and damage, and is thus
protected from fluctuations in the prices of previously-owned vehicles in the
wholesale market at the time of disposition. The future percentage of Program
vehicles in Avis' fleet will be dependent on the availability and
attractiveness of the manufacturers' Repurchase Programs, over which Avis has
no control.

   In addition, Avis sells cars previously rented by Avis on a wholesale
basis to dealers in the United States through informal arrangements or at
auctions through standard consignment agreements.

   Insurance. Avis generally assumes the risk of liability to third parties
in the United States for up to $1 million per occurrence. Avis has purchased
significant excess insurance coverage against risks which exceed $1 million
per occurrence. One of the benefits of Avis's retaining the risk up to $1
million per occurrence is that Avis maintains its own claims department,
which controls the disposition of most claims.

   Under the standard Avis rental contract, persons renting vehicles receive
liability coverage up to the minimum financial responsibility limits required
by applicable law. Higher limits are provided by separate agreement to some
United States national corporate accounts, and Avis customers have the
option, for an additional daily charge, to participate in a group policy
underwritten by a major national insurer which increases the renter's
coverage to one million dollars. Avis renters also have the option to elect,
for additional daily charges, "Personal Accident Insurance," which pays
medical expenses and accidental death benefits for accidents during the
rental period, and "Personal Effects Protection," which ensures against loss
or damage to the renters' personal belongings during the rental period. Both
these coverages are underwritten by major national insurers.

   Purchasing. Through its HFS Purchasing Services operations, the Company
provides its Avis licensees with volume purchasing discounts for products,
services, furnishings and equipment used in their

                               14
<PAGE>
car rental operations. In addition to the preferred alliance programs
described hereinafter, HFS Purchasing Services establishes relationships with
vendors and negotiates discounts for purchases by its customers. The Company
does not maintain inventory, directly supply any of the products or generally
extend credit to franchisees for purchases. See "OTHER BUSINESSES"
--Preferred Alliance and Co-Marketing Arrangements" below.

AVIS LICENSED MARKS AND INTELLECTUAL PROPERTY

   The service mark "Avis", related marks incorporating the word "Avis", and
related logos are material to the Company's business. Avis, through its
subsidiaries, joint ventures and licensees, actively uses these marks. All of
the material marks used in Avis's business are registered (or have
applications pending for registration) with the United States Patent and
Trademark Office. The marks used in Avis's business are owned by the Company
through its subsidiaries. Avis is authorized to use the marks in the car
rental and related businesses as well as in several other businesses,
including equipment rental and leasing, hotels, insurance and information
services.

COMPETITION

   The domestic car rental industry includes eight major brands: Alamo
Rent-A-Car, Inc., Avis, Budget Rent-A-Car Corporation ("Budget"), Dollar Rent
A Car ("Dollar"), Enterprise, The Hertz Corporation ("Hertz"), National Car
Rental System Inc., and Thrifty Rent-A-Car System Inc. ("Thrifty"), and a large
number of smaller and regional or local firms, serving on-airport, near-airport
and other locations. Most of Avis's major competitors operate through a
combination of owned and franchised operations. Other smaller car rental
companies operate primarily through franchises.

   Certain of Avis's major car rental competitors are owned by, or are
affiliated with, the major automobile manufacturers, and each of the major
domestic car rental companies maintains a close relationship with one or more
United States automobile manufacturers. At December 31, 1996, Ford owned
Hertz and had a long-term supply contract with Team Rental Group Inc., the
party which recently has agreed to purchase Budget from Ford; Chrysler had
equity interests in Dollar and Thrifty. Automobile manufacturers often
provide financing for the purchase of vehicles and provide payments to car
rental companies in consideration of advertising and promotional programs
that benefit the manufacturers. In addition, manufacturers provide fleet
assistance programs, including Repurchase Programs and similar arrangements,
which protect rental companies against loss on disposition of vehicles and
enable rental companies to adjust their fleet size to take account of
seasonal variations in demand. Avis could be at a competitive disadvantage if
manufacturers selectively restrict eligibility to participate in their
Repurchase Programs.

   There have been occasions during the history of the car rental industry in
which the major car rental companies have been adversely affected by
industry-wide price pressures, and Avis has, on such occasions, priced its
product in response to such pressures. Moreover, at times when the car rental
industry has experienced vehicle oversupply, there has been intensified
competitive pressure. This oversupply has had a negative impact on the
industry's ability to raise rental rates. Avis has taken steps to address its
fixed cost structure to improve its overall competitive position; however,
future oversupply or other factors affecting competition could still
adversely affect Avis's financial condition and results of operations.

SEASONALITY

   Avis's business is subject to seasonal variations in customer demand, with
the third quarter of the year, which covers the summer vacation period,
representing the peak season for vehicle rentals. Therefore, any occurrence
that disrupts travel patterns during the summer period could have a material
adverse effect on Avis's annual performance and adversely affect the
Company's overall annual financial performance. The fourth quarter is
generally the weakest financial quarter for Avis because there is limited
leisure travel and a greater potential for adverse weather conditions at such
time. Many of Avis's operating expenses, such as rent, general insurance and
administrative personnel, are fixed and cannot be reduced during periods of
decreased rental demand.

                               15
<PAGE>
ENVIRONMENTAL MATTERS

   The principal environmental regulatory requirements applicable to Avis's
operations relate to the ownership or use of tanks for the storage of
petroleum products, such as gasoline, diesel fuel and waste oils; the
treatment or discharge of waste waters; and the generation, storage,
transportation and off-site treatment or disposal of solid or liquid wastes.
Avis operates 229 domestic and international locations at which petroleum
products are stored in underground or aboveground tanks. Avis has instituted
an environmental compliance program designed to ensure that these tanks are
in compliance with applicable technical and operational requirements,
including the replacement of underground steel tanks and periodic integrity
testing of underground storage tanks. The Company believes that the locations
where Avis currently operates are in compliance, in all material respects,
with such regulatory requirements.

   Avis may also be subject to requirements related to the remediation of, or
the liability for remediation of, substances that have been released to the
environment at properties owned or operated by Avis or at properties to which
Avis sends substances for treatment or disposal. Such remediation
requirements may be imposed without regard to fault and liability for
environmental remediation can be substantial.

   Avis may be eligible for reimbursement or payment of remediation costs
associated with future releases from its regulated underground storage tanks.
Certain of the states in which Avis maintains underground storage tanks have
established funds to assist in the payment of remediation costs for releases
from certain registered underground tanks. Subject to certain deductibles,
the availability of funds, compliance status of the tanks and the nature of
the release, these tank funds may be available to Avis for use in remediating
future releases from its tank systems.

THE TIMESHARE EXCHANGE BUSINESS

GENERAL

   On November 12, 1996, the Company completed the acquisition of all the
outstanding capital stock of RCI and its affiliates for $412 million in cash
and $75 million in Company Common Stock, plus future contingency payments of
up to $200 million over the next five years. In contemplation of the
acquisition of RCI by HFS, the former sole shareholder received $149 million
of securities in the form of a dividend prior to consummation of the
transaction. RCI, based in Indianapolis, Indiana, is the world's largest
provider of timeshare vacation exchange opportunities for more than 2.2
million timeshare owners from more than 150 nations and more than 3,100
resorts in 80 countries around the world. RCI's business consists primarily
of the operation of an exchange program for owners of condominium timeshares
or whole units at affiliated resorts, the publication of magazines and other
periodicals related to the vacation and timeshare industry, travel related
services, resort management, integrated software systems and service and
consulting services. RCI has significant operations in North America, Europe,
Middle East, Latin America, Australia, and the Pacific Rim. RCI has more than
4,100 employees worldwide.

   The "RCI Network" provides RCI members who own timeshares at
RCI-affiliated resorts the capability to exchange their timeshare vacation
accommodations in any given year for comparable value accommodations at other
RCI-affiliated resorts. Approximately 1.1 million members of the RCI Network
reside outside of the United States, which accounts for 51% of the total
members of the RCI Network. RCI's membership volume has grown at a compound
annual rate for the last five years of approximately 10%, while exchange
volumes have grown at a compound annual rate of approximately 12% for the
same time period.

   RCI provides members of the RCI Network with access to both domestic and
international timeshare resorts, publications regarding timeshare exchange
opportunities and other travel-related services, including discounted
purchasing programs. In 1996, members in the United States paid an average
annual membership fee of $67 as well as an average exchange fee of $100 for
every exchange arranged by RCI. In 1996, membership and exchange fees totaled
approximately $260 million and RCI arranged nearly 1.7 million exchanges.

                               16
<PAGE>
   The resort component of the leisure industry is primarily serviced by two
alternatives for overnight accommodations: commercial lodging establishments
and timeshare resorts. Commercial lodging consists principally of: a) hotels
and motels in which a room is rented on a nightly, weekly or monthly basis
for the duration of the visit and b) rentals of privately-owned condominium
units or homes. Oftentimes, this segment is designed to serve both the
leisure and business traveler. Timeshare resorts present an economical and
reliable alternative to commercial lodging for many vacationers who want to
experience the added benefits associated with ownership. Timeshare resorts
are purposely designed and operated for the needs and enjoyment of the
leisure traveler.

   Developers of resorts affiliated with the RCI Network typically pay the
first year membership fee for new members upon the sale of the timeshare
interest. In the United States, more than 75% of such owners renew their
memberships in their second year and more than 90% of these owners renew each
year thereafter.

   Resort timesharing -also referred to as vacation ownership -is the
shared ownership and/or periodic use of property by a number of users or
owners for a defined period of years or in perpetuity. An example of a simple
form of timeshare is a condominium unit that is owned by fifty-two persons,
with each person having the right to use the unit for one week of every year.
In the United States, industry sources estimate that the average price of
such a timeshare is about $7,500 to $10,000, plus a yearly maintenance fee of
approximately $350. Based upon information published about the industry, the
Company believes that 1996 sales of timeshares exceeded $6 billion worldwide.
Two principal segments make up the timeshare exchange industry: owners of
timeshare interests (consumers) and resort properties (developers/
operators). Industry sources have estimated that the total number of owners
of timeshare interests is more than 3.5 million, while the total number of
timeshare resorts worldwide has been estimated to be more than 4,500. The
timeshare exchange industry derives revenue from annual membership fees paid
by owners of timeshare interests, fees paid by such owners for each exchange
and fees paid by members and resort affiliates for various other products and
services.

TIMESHARE EXCHANGE BUSINESS GROWTH

   The timeshare exchange industry has experienced significant growth over
the past decade. The Company believes that the factors driving this growth
include the demographic trend toward older, more affluent Americans who
travel more frequently; the entrance of major hospitality and entertainment
companies into timeshare development; a worldwide acceptance of the timeshare
concept; and an increasing focus on leisure activities, family travel and a
desire for value, variety and flexibility in a vacation experience. The
Company believes that future growth of the timeshare exchange industry will
be determined by general economic conditions both in the U.S. and worldwide,
the public image of the industry, improved approaches to marketing and sales,
a greater variety of products and price points, the broadening of the
timeshare market and a variety of other factors. Accordingly, the Company
cannot predict if future growth trends will continue at rates comparable to
those of the recent past.

OPERATIONS -- TIMESHARE EXCHANGE BUSINESS

   The Company's timeshare exchange business is designed to provide
high-quality, leisure travel services to its members and cost-effective,
single-source support services to its affiliated timeshare resorts. Most
members are acquired from timeshare developers who purchase an initial RCI
membership for each buyer at the time the timeshare interval is sold. A small
percentage of members are acquired through direct solicitation activities of
RCI.

MEMBER SERVICES

   International Exchange System.  Members are served though a network of
call centers located in 26 countries throughout the world. These call centers
are staffed by approximately 2,200 people. Major regional call and
information support centers are located in Indianapolis, Kettering (England),
Mexico City and Singapore. All members receive a directory that lists resorts
available through the exchange system, a periodic magazine and other
information related to the exchange system and available travel services.
These materials are published in various languages.

                               17
<PAGE>
   Travel Services.  In addition to exchange services, RCI's call centers
also engage in telemarketing and cross-selling of other ancillary travel and
hospitality services. These services are offered to a majority of members
depending on their location. RCI provides travel services to U.S. members of
the RCI Network through its affiliate, RCI Travel, Inc. ("RCIT"). On a global
basis, RCI provides travel services through entities operating in local
jurisdictions (hereinafter, RCIT and its local entities are referred to as
"Travel Agencies"). Travel Agencies provide airline reservations and airline
ticket sales to members in conjunction with the arrangement of their
timeshare exchanges, as well as providing other types of travel services,
including hotel accommodations, car rentals, cruises and tours. Travel
Agencies also from time to time offer travel packages utilizing resort
developers' unsold inventory to generate both revenue and prospective
timeshare purchasers to affiliated resorts.

   Quality Assurance.  Members have a high level of interest in the quality
of their home resorts and other resorts within the exchange system. Quality
control of affiliated resorts occurs through inspections at the time of
application, unannounced inspections and visits by Company personnel, and
comment card feedback from members exchanging into each resort. Resorts
meeting certain quality measures are given special recognition through RCI's
Gold Crown Resort and Resorts of International Distinction award programs.

RESORT SERVICES

   Resort Affiliations. Growth of the timeshare business is dependent on the
sale of timeshare units through affiliated resorts. RCI affiliates
international brand names and independent developers, owners' associations
and vacation clubs. The Company believes that national lodging and
hospitality companies are attracted to the vacation ownership concept because
of the industry's relatively low product cost and high profit margins, and
the recognition that vacation ownership resorts provide an attractive
alternative to the traditional hotel-based vacation and allow the hotel
companies to leverage their brands into additional resort markets where
demand exists for accommodations beyond traditional rental-based lodging
operations. Today, 7 of every 10 timeshare resorts worldwide are affiliated
with RCI. The Company also believes that RCI's existing affiliates represent
a significant potential market because many developers and resort managers
may become involved in additional resorts in the future which can be
affiliated with RCI. Accordingly, a significant factor in RCI's growth
strategy is maintaining the satisfaction of its existing affiliates by
providing quality support services.

   Sales Support Services.  Exchange services are considered to be an
essential component of timeshare ownership. In fact, exchange is one of the
primary reasons given for purchasing timeshare. RCI provides a wide variety
of sales and marketing materials to assist its affiliated resorts in selling
more efficiently and effectively. These include videos explaining the concept
of vacation ownership and exchange, interactive multi-media sales tools, wall
displays customized for the resort, a wide variety of promotional brochures,
travel services, purchasing discounts and the Endless Vacation Special Resort
Edition Directory which includes photos and/or summary information for all
RCI-affiliated resorts. In addition, RCI uses state-of-the-art database
marketing techniques to identify highly qualified sales prospects for its
resort affiliates.

   Advertising. RCI provides many advertising opportunities in its member and
developer focused publications, as well as through its site on the Internet
World Wide Web at http://www.rci.com.

   Timeshare Consulting. RCI provides worldwide timeshare consulting services
through its affiliate, RCI Consulting, Inc. ("RCIC"). These services include
comprehensive market research, site selection, strategic planning, community
economic impact studies, resort concept evaluation, financial feasibility
assessments, on-site studies of existing resort developments, and tailored
sales and marketing plans.

   Resort Management Software. RCI provides computer software systems to
timeshare resorts and developers through its affiliate, Resort Computer
Corporation ("RCC"). RCC provides software that integrates resort functions
such as sales, accounting, inventory, maintenance, dues and reservations.

   Property Management. RCI provides resort property management services
through its affiliate, RCI Management, Inc. ("RCIM"). RCIM is a single source
for any and all resort management services, and offers a menu including
hospitality services, a centralized reservations service center, advanced
reservations technology, human resources expertise and owners' association
administration.

                               18
<PAGE>
TIMESHARE PROPERTY AFFILIATION AGREEMENTS

   More than 3,100 timeshare resorts are affiliated with the RCI Network, of
which approximately 1,300 resorts are located in the United States and
Canada, approximately 1,150 in Europe and Africa, approximately 400 in Mexico
and Latin America, and approximately 250 in the Asia-Pacific region. The
terms of RCI's affiliation agreements with its affiliates generally require
that the developer enroll each new timeshare purchaser at the resort as a
member of RCI, license the affiliated resort to use the RCI name and marks
for certain purposes, set forth the materials and services RCI will provide
to the affiliate, and generally describe RCI's expectations of the resort's
management. The affiliation agreement also includes stipulations for
representation of the exchange program, minimum enrollment requirements and
treatment of exchange guests. Affiliation agreements are typically for a term
of five or six years, and automatically renew thereafter for terms of one to
six years unless either party takes affirmative action to terminate the
relationship. RCI makes available a wide variety of goods and services to its
affiliated developers, including publications, advertising, sales and
marketing materials, timeshare consulting services, resort management
software, travel packaging and property management services.

RCI LICENSED MARKS AND INTELLECTUAL PROPERTY

   The service marks "RCI", "Resort Condominiums International" and related
logos are material to RCI's business. RCI and its subsidiaries actively use
the marks. All of the material marks used in RCI's business are registered
(or have applications pending for registration) with the United States Patent
and Trademark Office as well as major countries worldwide where RCI or its
subsidiaries have significant operations. The marks used in RCI's business
are owned by the Company.

SEASONALITY

   A principal source of timeshare revenue relates to exchange services to
members. Since members have historically shown a tendency to plan their
vacations in the first quarter of the year, revenues are generally slightly
higher in the first quarter in comparison to other quarters of the year. The
Company cannot predict whether this trend will continue in the future as the
timeshare business expands outside of the United States and Europe, and as
global travel patterns shift with the aging of the world population.

COMPETITION

   The global timeshare exchange industry is comprised of a number of
entities, including resort developers and owners. RCI's largest competitor is
Interval International ("Interval"), a wholly-owned subsidiary of CUC
International Inc. Based upon industry sources, the Company believes that 95%
of the more than 4,500 timeshare resorts in the world are affiliated with
either RCI or Interval. Based upon 1995 published statistics and Company
information, RCI has more than 2 million timeshare owners who are members,
while Interval has approximately 660,000 timeshare owners who are members.
Also in 1995, RCI confirmed more than 1.5 million exchange transactions while
Interval confirmed approximately 327,000 transactions. As a result, based on
1995 business volume, RCI services approximately 76% of members and
approximately 83% of exchange transactions.

                           THE REAL ESTATE INDUSTRY

REAL ESTATE BROKERAGE FRANCHISE BUSINESS

GENERAL

   In August 1995, the Company acquired Century 21 Real Estate Corporation
("Century 21"), the world's largest franchisor of residential real estate
brokerage offices with approximately 6,200 independently owned and operated
franchised offices with approximately 101,000 sales agents worldwide. In
February 1996, the Company acquired the ERA franchise system. The ERA system
is the fourth largest residential real estate brokerage franchise system with
over 2,500 independently owned and operated franchised offices and more than
27,000 sales agents worldwide. In May 1996, the Company acquired

                               19
<PAGE>
Coldwell Banker Corporation ("Coldwell Banker"), the owner of the world's
second largest residential real estate brokerage franchise system with
approximately 2,600 independently owned and operated franchised offices and
approximately 56,000 sales agents worldwide. Coldwell Banker also operates a
corporate relocation services business, which the Company estimates is the
second largest provider of such services in the United States based on the
number of transferred employees assisted.

   The Company believes that application of its franchisee focused management
strategies and techniques can significantly increase the revenues produced by
its real estate brokerage franchise systems while also increasing the quality
and quantity of services provided to franchisees. The Company believes that
independent real estate brokerage offices currently affiliate with national
real estate franchisors principally in order to gain the consumer recognition
and credibility of a nationally known and promoted brand name. Brand
recognition is especially important to real estate brokers since home buyers
are generally infrequent users of brokerage services and have often recently
arrived in an area, resulting in little ability to benefit from word-of-mouth
recommendations.

   During 1996, the Company implemented a preferred alliance program which
seeks to capitalize on the dollar volume of home sales brokered by CENTURY
21, Coldwell Banker and ERA agents and the valuable access point these
brokerage offices provide for service providers who wish to reach these home
buyers. Preferred alliance marketers include providers of property and
casualty insurance, moving and storage services, mortgage and title
insurance, environmental testing services, home improvement suppliers, and
sellers of furniture, fixtures and other household goods.

   The Company's real estate brokerage franchisees are dispersed
geographically, which minimizes the exposure to any one broker or geographic
region. National Realty Trust (the "Trust"), an independent trust governed by
independent trustees, established to own and operate the Coldwell Banker
offices which were previously owned by a subsidiary of Coldwell Banker
Corporation, is the largest franchisee of the Coldwell Banker franchise
system, representing 12.6% of the franchised offices in the Coldwell Banker
franchise system. Of the more than 11,300 franchised offices in the Company's
real estate brokerage franchise systems, no individual broker, other than the
Trust, accounts for more than 1% of the Company's real estate brokerage
services.

   As with the lodging franchise systems, the sale of long-term franchise
contracts is the leading source of revenue and earnings growth in the real
estate franchise business. The following table demonstrates the growth of the
Company's combined real estate systems:

                   REAL ESTATE OFFICES IN FRANCHISE SYSTEMS

<TABLE>
<CAPTION>
                                          TOTAL OFFICES
                                        ---------------
<S>                                     <C>
Balance at December 31, 1994 ..........           0

Acquired--1995 ........................       5,965
Openings--1995 ........................         147
Terminations--1995 ....................        (122)
                                             ------
Balance at December 31, 1995 ..........       5,990

Acquired--1996 ........................       5,118
Openings--1996 ........................         683
Terminations--1996 ....................        (442)
                                             ------
Balance at December 31, 1996 ..........      11,349

Percent Change from December 31, 1995          89.3%
</TABLE>

   Recent Acquisitions. During 1996, the Company completed the purchase of
the six United States CENTURY 21 regions which were not owned by Century 21.
These six regions represent more than 1,000

                               20
<PAGE>
CENTURY 21 franchised real estate brokerage offices located in the Pacific
Northwest, the Southwest, Central California, Southern Florida, the
Mid-Atlantic States and Eastern Pennsylvania. The aggregate purchase price was
approximately $147 million, paid in a combination of cash, a note and Company
Common Stock.

   On May 31, 1996 the Company completed its acquisition of Coldwell Banker
for approximately $740 million in cash and repayment of debt. Promptly
following this transaction, the Company conveyed 318 real estate brokerage
offices which prior to the acquisition had been owned by Coldwell Banker to
the Trust. Since May 31, 1996, the Trust has acquired additional real estate
brokerage offices, which are currently operating under Coldwell Banker,
CENTURY 21 or ERA franchise agreements. The Trust is the largest Coldwell
Banker franchisee and the largest privately owned residential real estate
brokerage company in the United States. The free cash flow of the Trust is
expended at the discretion of the trustees for advertising and promotion for
the benefit of the real estate offices represented by the franchises included
in the Trust. Each of the brokerage offices owned by the Trust is subject to
a standard Coldwell Banker, CENTURY 21 or ERA franchise agreement, as the
case may be, having a term of ten years.

   In February 1997, the Company entered into an agreement to acquire the 50%
interest of its partner, PNC Mortgage ("PNC"), a subsidiary of PNC Bank
Corp., in The Home Mortgage Network ("HMN"), a neutral multi-lender mortgage
origination service operating out of approximately 200 Coldwell Banker
offices in nine states. The Company owned the other 50% interest in HMN
through its ownership of Coldwell Banker, an original founder with PNC
Mortgage of HMN in mid-1995. HMN ended 1996 with over $1.1 billion in
mortgage loan application volume. The transaction is expected to close in
April 1997.

THE COMPANY'S REAL ESTATE BROKERAGE FRANCHISE SYSTEMS

   CENTURY 21. Century 21 is the world's largest residential real estate
brokerage franchisor, with approximately 6,200 independently owned and
operated franchise offices with more than 101,000 sales agents located in 19
countries and territories. In 1996, the Company signed master franchise
agreements providing for the development of Century 21 affiliated real estate
brokerage offices in the Caribbean, the United Kingdom, the Philippines,
Indonesia, Israel and Korea.

   The primary component of Century 21's revenue is service fees on
commissions from real estate transactions. Service fees are 6% of gross
commission income, subject to annual rebates to franchisees who pay a certain
threshold level of service fees annually. CENTURY 21 franchisees who meet
certain levels of annual gross revenue (as defined in the franchise
agreements) are eligible for the Century 21 Incentive Bonus ("CIB") Program,
which results in a rebate payment to qualifying franchisees determined in
accordance with the applicable franchise agreement (up to 2% in current
agreements) of such annual gross revenue. For 1996, approximately 13% of
CENTURY 21 franchisees qualified for CIB payments and such payments
aggregated less than 1% of gross commissions.

   CENTURY 21 franchisees generally contribute 2% (subject to specified
minimums and maximums) of their brokerage commissions each year to the
Century 21 National Advertising Fund (the "NAF") which in turn disburses them
for local, regional and national marketing campaigns. In 1996, the NAF spent
approximately $39 million on marketing campaigns.

   Coldwell Banker. Coldwell Banker is the world's third largest residential
real estate brokerage franchise system, with approximately 2,600
independently owned and operated franchise offices in the United States,
Canada and Puerto Rico, with approximately 56,000 sales agents. The primary
revenue from the Coldwell Banker system is derived from various fees paid by
franchisees, including initial franchise fees and ongoing services. Coldwell
Banker franchisees pay annual fees to the Company consisting of ongoing
services and advertising fees, which are generally 6.0% and 2.5%,
respectively, of a franchisee's annual gross revenues (subject to annual
rebates to franchisees who pay a certain threshold level of service fees
annually, and to minimums and maximums on advertising fees).

   Coldwell Banker franchisees who meet certain levels of annual gross
revenue (as defined in the franchise agreements) are eligible for the
Performance Premium Award ("PPA") Program, which results in a rebate payment
to qualifying franchisees determined in accordance with the applicable
franchise agreement (up to 4% in current agreements) of such annual gross
revenue. For 1996, approximately 24% of Coldwell Banker franchisees qualified
for PPA payments and such payments aggregated approximately 1% of gross
commissions.

                               21
<PAGE>
   Advertising fees collected from Coldwell Banker franchisees are generally
expended on local, regional and national marketing activities, including
media purchases and production, direct mail and promotional activities and
other marketing efforts. In 1996, Coldwell Banker expended approximately
$18.3 million for such purposes.

   ERA. The ERA franchise system is the fourth largest residential real
estate brokerage franchise system in the world, with more than 2,500
independently owned and operated franchise offices, with more than 27,000
sales agents located in 15 countries. The primary revenue from the ERA
franchise system results from franchisees' payments of fixed membership fees
ranging from $202 to $799 per month, based on volume, plus per transaction
fees of approximately $113.

   In addition to membership fees and transaction fees, franchisees of the
ERA system pay a fixed amount per month, which ranges from $218 to $874,
based on volume, plus an additional $218 per month for each branch office,
into the ERA National Marketing Fund (the "ERA NMF"). The Company utilizes
the funds in the ERA NMF for local, regional and national marketing
activities, including media purchases and production, direct mail and
promotional activities and other marketing efforts. In 1996, the ERA NMF
spent approximately $8.7 million on marketing campaigns.

REAL ESTATE BROKERAGE FRANCHISE SALES

   The Company markets real estate brokerage franchises primarily to
independent, unaffiliated owners of real estate brokerage companies as well
as individuals who are interested in establishing real estate brokerage
businesses. The Company believes that its existing franchisee base represents
another source of potential growth, as franchisees seek to expand their
existing business to additional markets. Therefore, the Company's sales
strategy focuses on maintaining satisfaction and enhancing the value of the
relationship between the franchisor and the franchisee.

   The Company's real estate brokerage franchise systems employ a national
franchise sales force consisting of approximately 123 salespersons and sales
management personnel, which is divided into separate sales organizations for
the CENTURY 21, Coldwell Banker and ERA systems. These sales organizations
are compensated primarily through commissions on sales concluded. Members of
the sales forces are also encouraged to provide referrals to the other sales
forces when appropriate.

OPERATIONS -- REAL ESTATE BROKERAGE

   Brand Name Marketing Programs. The Company's brand name marketing programs
for the real estate brokerage business focus on increasing brand awareness
generally, in order to increase the likelihood of potential home buyers and
home sellers engaging franchise brokers' services. Each brand has a dedicated
marketing staff in order to develop the brand's marketing strategy while
maintaining brand integrity. The corporate marketing services department
provides services related to production and implementation of the marketing
strategy developed by the broad marketing staff.

   Training and Consulting. Each brand provides its franchisees and their
sales associates with training programs which have been developed by such
brand. The training programs include mandatory programs instructing the
franchisee and/or the sales associate on how to best utilize the methods of
the particular system and additional optional training programs which expand
upon such instruction. Each brand's training department is staffed with
instructors experienced in both real estate practice and instruction. In
addition, the Company has established regional support personnel who provide
consulting services to the franchisees in their respective regions.

   Awards. Each system provides a series of awards to brokers and their sales
associates who are outstanding performers in each year. These awards signify
the highest levels of achievement within each system and provide a
significant incentive for franchisees to attract and retain the best sales
associates.

   Referrals. Each system provides its franchisees with referrals of
potential customers, which referrals are developed from sources both within
and outside of the system.

   Purchasing. Through its HFS Purchasing Services operations, the Company
provides its franchisees with volume purchasing discounts for products,
services, furnishings and equipment used in real estate

                               22
<PAGE>
brokerage operations. In addition to the preferred alliance programs
described hereinafter, HFS Purchasing Services establishes relationships with
vendors and negotiates discounts for purchases by its customers. The Company
does not maintain inventory, directly supply any of the products or,
generally, extend credit to franchisees for purchases. See "COMBINED
OPERATIONS --Preferred Alliance and Co-Marketing Arrangements" below.

REAL ESTATE BROKERAGE FRANCHISE AGREEMENTS

   The Company's real estate brokerage franchise agreements grant the right
to utilize one of the brand names associated with the Company's real estate
brokerage franchise systems to real estate brokers under franchise
agreements.

   CENTURY 21. The current standard franchise agreement for the CENTURY 21
system provides for a 10-year term (prior to October 1995, agreements
provided for five-year terms). Franchise agreements generally require, among
other obligations, that franchisees pay fees comprised of royalty fees
and marketing fees which are generally 6% and 2%, respectively, of gross
commissions on closed transactions. See "The Company's Real Estate Brokerage
Franchise Systems -- CENTURY 21" above. The marketing portion of the annual
franchise fee is intended to reimburse the Company for the expenses
associated with providing such franchise services as brand-specific national
media advertising and training. In addition, the CENTURY 21 agreements
provide for the payment of the CIB to qualified franchisees who meet certain
levels of annual gross revenue (as defined in the franchise agreements).

   Coldwell Banker. Coldwell Banker franchise agreements generally have a
term of seven to ten years for which franchisees pay annual fees consisting
of ongoing service and advertising fees, which are generally 6.0% and 2.5%,
respectively, of a franchisee's annual gross revenues (subject to annual
rebates to franchisees who pay a certain threshold level of service fees
annually). See "The Company's Real Estate Brokerage Franchise Systems --
Coldwell Banker" above. In return for payment of the franchise fees, the
Company provides Coldwell Banker franchisees access to the Coldwell Banker
name and systems, referrals from the Company's corporate relocation business
and the combined market presence of all its franchised offices.

   ERA. The current form of the franchise agreement for the ERA system
provides for a term expiring March 31, 2002. ERA franchisees pay membership
fees and marketing fees at fixed rates determined by gross annual volume of
real estate sales, and a per transaction charge of approximately $113. See
"The Company's Real Estate Brokerage Franchise Systems -- ERA" above.

   The Company's typical franchise agreement for all real estate brokerage
brands is terminable by the Company for the franchisee's failure to pay
franchise fees or other charges or for other material default under the
franchise agreement. In the event of such termination, the agreement
generally provides that the Company is entitled to be compensated for lost
revenues in an amount equal to the average monthly franchise fees calculated
for the remaining term of the agreement.

REAL ESTATE BROKERAGE SERVICE MARKS AND OTHER INTELLECTUAL PROPERTY

   General. The service marks "CENTURY 21," "Coldwell Banker," "Electronic
Realty Associates" and "ERA" and related logos are material to the Company's
business. The Company, through its franchisees, actively uses these marks.
All of the material marks in each franchise system are registered (or have
applications pending for registration) with the United States Patent and
Trademark Office. The marks used in the real estate brokerage systems are
owned by the Company through its subsidiaries.

   Other Licensing. In addition to licensing the CENTURY 21 marks under the
franchise agreements, the Company has entered into certain licensing
arrangements for the CENTURY 21 marks. In particular, in December 1995 the
Company entered into a 20-year license agreement with AMRE, Inc. ("AMRE")
(subject to termination by AMRE in 2005), pursuant to which AMRE's affiliate,
American Remodeling, Inc., was permitted to market specific home improvement
products and services to residential consumers under the name "CENTURY 21
Home Improvements." Due to AMRE's poor business performance, in the fourth
quarter of 1996, the Company wrote off an $11 million accrued license fee
representing fees

                               23
<PAGE>
recognized as earned through the third quarter of 1996, a $3 million
investment in preferred stock and related accrued professional fees. On
January 21, 1997, AMRE sought protection under Chapter 11 of the United
States Bankruptcy Code, and on February 28, 1997, the Company terminated the
license agreement with AMRE. The Company is pursuing relicensing the CENTURY
21 Home Improvements name to other independent entities in the home
improvement industry.

COMPETITION

   Competition among the national real estate brokerage brand franchisors to
grow their franchise systems is intense. The chief competitors of the
Company's real estate brokerage franchise systems are the RE/MAX, Better
Homes & Gardens and Prudential real estate brokerage brands. In addition, a
real estate broker may choose to affiliate with a regional chain or not to
affiliate with a franchisor but to remain independent.

   The Company believes that competition for the sale of franchises in the
real estate brokerage industry is based principally upon the perceived value
and quality of the brand and services offered to franchisees, as well as the
nature of those services. The Company also believes that the perceived value
of its brand names to prospective franchisees is, to some extent, a function
of the success of its existing franchisees.

   The ability of the Company's real estate brokerage franchisees to compete
in the industry is important to the Company's prospects for growth, although,
because franchise fees are based on franchisee gross commissions or volume,
the Company's revenue is not directly dependent on franchisee profitability.

   The ability of an individual franchisee to compete may be affected by the
location and quality of its office, the number of competing offices in the
vicinity, its affiliation with a recognized brand name, community reputation
and other factors. A franchisee's success may also be affected by general,
regional and local economic conditions. The effect of these conditions on the
Company's results of operations is substantially reduced by virtue of the
diverse geographical locations of the Company's franchises. At December 31,
1996, the combined real estate franchise systems had 8,541 franchised
brokerage offices in the United States and 11,349 offices worldwide. The real
estate franchise systems have offices in 23 countries and territories in
North America, Europe, Asia, Africa and Australia.

SEASONALITY

   The principal sources of real estate segment revenue for the Company are
based upon the timing of residential real estate sales, which are lower in
the first calendar quarter each year, and relatively level the other three
quarters of the year. As a result, the Company's revenue from the real estate
brokerage segment of its business is less in the first calendar quarter of
each year.

THE RELOCATION BUSINESS

   The Company operates two subsidiaries engaged in the business of
providing employee relocation services to corporate clients. The Company
estimates that through Worldwide Relocation Management Company, Inc. ("WRMC",
acquired in connection with the Century 21 acquisition) and Coldwell Banker
Relocation Services, Inc., the Company is the second largest provider of
employee relocation services in the United States. These corporate employee
relocation businesses offer their relocation clients a variety of services
in connection with the transfer of its clients' employees. At December 31,
1996, Coldwell Banker employed 960 people in its relocation business at its
corporate office and three regional offices and WRMC employed 118 people.
Following its acquisition of PHH (with its employee relocation subsidiary),
the Company will be the largest provider of employee relocation services in
the United States.

   The relocation services provided to customers of one or more of the
relocation subsidiaries include primarily appraisal, inspection and selling
of transferees' homes, equity advances (guaranteed by the corporate
customer), purchase of a home which is not sold for at least a price
determined on the appraised value within a specified time period, certain
home management services, assistance in locating a new home at the
transferee's destination, consulting services and other related services.

                               24
<PAGE>
   All costs associated with such services are reimbursed by the corporate
client, including, if necessary, repayment of equity advances and
reimbursement of losses on the sale of homes purchased by one of the
Company's relocation subsidiaries. Corporate clients also pay a fee for the
services performed. Another source of revenue for the Company is interest on
the equity advances. As a result of the obligations of corporate clients to
pay the losses and guarantee repayment of equity advances, the exposure of
the Company on such items is limited to the credit risk of the corporate
clients of its relocation businesses and not on the potential changes in
value of residential real estate. The Company believes such risk is minimal,
due to the credit quality of the corporate clients of its relocation
subsidiaries.

OTHER BUSINESSES

PREFERRED ALLIANCE AND CO-MARKETING ARRANGEMENTS

   The Company believes a significant portion of its revenue growth
opportunities will arise from its ability to capitalize on the significant
and increasing amount of aggregate purchasing power and marketing outlets
represented by the businesses in the Company's franchise systems. The Company
initially tapped the potential of these synergies within the Company in 1993
when it launched its Preferred Alliance Program, under which hotel industry
vendors provide significant discounts, commissions and co-marketing revenue
to hotel franchisees plus preferred alliance fees to the Company in exchange
for being designated as the preferred provider of goods or services to the
owners of the Company's franchised hotels or the preferred marketer of goods
and services to the millions of hotel guests who stay in the hotels and
customers of the real estate brokerage offices each year.

   The Company currently participates in preferred alliance relationships
with more than 70 companies, including AT&T, ADT Security Systems, Pizza Hut,
Kodak, VISA U.S.A., Office Depot and Coca-Cola. Fees to the Company from
these contracts have increased from $6.5 million in 1993 to $20.8 million in
1995 and $46.1 million in 1996. The operating profit generated by most new
preferred alliance arrangements closely approximates the incremental revenue
produced by such arrangements since the costs of the existing infrastructure
required to negotiate and operate these programs are largely fixed. Revenue
received by the Company pursuant to the preferred alliance arrangements are
classified in Service Fees and are included in the business segment to which
they relate. Such fees have been a significant source of increases in
revenue and operating income in the Company's statement of operations for
1996 compared to 1995.

INFORMATION TECHNOLOGY SERVICES.

   WizCom International, Ltd ("WizCom"), a wholly owned indirect subsidiary
of the Company, was formerly an indirect subsidiary of Avis, owns and
operates the Wizard System more fully described under "CAR RENTAL BUSINESS --
Operations -- Avis -- The Wizard System" above. In 1995, Budget Rent
A Car Corporation ("Budget") entered into a computer services agreement with
WizCom that provides Budget with certain reservation system computer services
that are substantially similar to computer services provided to the Avis
System. WizCom has also entered into agreements with hotel and other rental
car companies to provide travel related reservation and distribution system
services.

CREDIT INFORMATION BUSINESS.

   In May 1995 the Company acquired Central Credit Inc. ("CCI"), a gambling
patron credit information business. CCI maintains a database of information
provided by casinos regarding the credit records of casino gaming patrons,
and provides, for a fee, such information and related services to its
customers, which primarily consist of casinos.

VEHICLE MANAGEMENT SERVICES.

   Upon consummation of its acquisition of PHH, the Company will acquire
indirectly PHH Vehicle Management Services Corporation ("VMS"), which provide
fully integrated vehicle management services to corporate clients and
government agencies. These services include providing advisory services for

                               25
<PAGE>
automobile fleet management programs and managerial services. In addition,
VMS provides managerial services which include purchasing automobiles,
arranging for their delivery through new car dealers located throughout the
United States, Canada, the United Kingdom and the Republic of Ireland, as
well as capabilities in Mexico and throughout Europe, complying with various
local registration, title, tax and insurance requirements, pursuing warranty
claims with automobile manufacturers and selling used cars at replacement
time. VMS offers various leasing plans for its vehicle leasing programs,
financed primarily through the issuance of commercial paper and medium-term
notes and through unsecured borrowings under revolving credit agreements and
bank lines of credit. Also, VMS offers fuel and expense management programs
to corporations and government agencies for the control of automotive
business travel expenses in each of the United States, Canada, United
Kingdom, Republic of Ireland and Germany, with capabilities in Mexico and
throughout Europe. Through a service card and billing service, a client's
traveling representatives are able to purchase various products and services
such as gasoline, tires, batteries, glass and maintenance services at
numerous outlets.

MORTGAGE SERVICES.

   Also through its proposed acquisition of PHH, the Company will acquire the
twelfth largest originator of residential first mortgage loans in the United
States, PHH Mortgage. PHH Mortgage offers services consisting of the
origination, sale and servicing of residential first mortgage loans. A
variety of first mortgage products are marketed to consumers through
relationships with corporations, affinity groups, financial institutions,
real estate brokerage firms and other mortgage banks. PHH Mortgage is a
centralized mortgage lender conducting its business primarily from its
location in Mount Laurel, New Jersey, servicing customers in all fifty
states. PHH Mortgage customarily sells all mortgages it originates to
investors (which include a variety of institutional investors) either as
individual loans, as mortgage-backed securities or as participation
certificates issued or guaranteed by Fannie Mae Corp., the Federal Home Loan
Mortgage Corporation ("FHLMC") or the Government National Mortgage
Association ("GNMA") while generally retaining mortgage servicing rights.

REGULATION

   Franchise Regulation. The sale of franchises is regulated by various state
laws as well as by the Federal Trade Commission (the "FTC"). The FTC requires
that franchisors make extensive disclosure to prospective franchisees but
does not require registration. A number of states require registration or
disclosure in connection with franchise offers and sales. In addition,
several states have "franchise relationship laws" or "business opportunity
laws" that limit the ability of the franchisor to terminate franchise
agreements or to withhold consent to the renewal or transfer of these
agreements. While the Company's franchising operations have not been
materially adversely affected by such existing regulation, the Company cannot
predict the effect of any future legislation or regulation.

   Real Estate Brokerage Regulation. The federal Real Estate Settlement
Procedures Act and state real estate brokerage laws restrict payments which
real estate brokers may receive in connection with the sales of residences
and referral of settlement services (e.g., mortgages, homeowners insurance,
title insurance). Such laws may to some extent restrict preferred alliance
arrangements involving the Company's real estate brokerage franchisees.

   Timeshare Exchange Regulation. The Company's timeshare exchange business
is subject to foreign, federal, state and local laws and regulations
including those relating to taxes, consumer credit, environmental protection
and labor matters. In addition, the Company is subject to state statutes in
those states regulating timeshare exchange services, and must prepare and
file annually, with regulators in states which require it, the "RCI
Disclosure Guide to Vacation Exchange". The Company is not subject to those
state statutes governing the development of timeshare condominium units and
the sale of timeshare interests, but such statutes directly affect the
members and resorts that participate in the RCI Network. Therefore, the
statutes indirectly impact the Company.

                               26
<PAGE>
   Car Rental Regulation. The Company's car rental business is subject to
federal, state and local laws and regulations pertaining to, among other
things, taxing and licensing of vehicles, currency controls, consumer credit,
labor matters and retail vehicle sales. For the principal environmental
regulatory requirements applicable to such operations, see "CAR RENTAL
BUSINESS --Environmental Matters."

   Gaming Credit Regulation. Under the Delaware General Corporation Law,
because the Company may be required to have licenses from state agencies or
other authorities to conduct its gaming credit information business and
because the licenses may be conditioned upon some or all of the stockholders
possessing certain prescribed qualifications, the Company's capital stock may
be made subject to redemption by the Company to the extent necessary to
prevent the loss of such licenses. As a result, the Company's Certificate of
Incorporation and By-Laws contain provisions which (i) make the right of
stockholders required to be qualified by relevant gaming authorities to vote
capital stock held by them depend upon their prompt qualification by the
relevant gaming authorities (or the prompt receipt of a waiver of such
qualification) and prevent stockholders found to be disqualified under
applicable gaming laws and regulations from voting any shares of stock
beneficially owned by them on any matter, (ii) provide for the disposition,
at the Company's option, of any publicly-traded securities held by any person
required to be qualified who has not been qualified (or obtained a waiver of
such qualification) or any person found to be disqualified and (iii) provide
for the redemption, at the Company's option, of any shares of capital stock
of the Company held by any person required to be qualified who has not been
qualified (or obtained a waiver of such qualification) or any person found to
be so disqualified. The purpose of these provisions is to provide a procedure
permitting the Company either (a) to require any person required to be
qualified who has not been qualified (or obtained a waiver of such
qualification) or any person found unsuitable or disqualified to hold capital
stock in the Company to dispose of his securities or (b) to redeem capital
stock held by any such person.

EMPLOYEES

   As of December 31, 1996, the Company employed approximately 30,900 persons
full time. Approximately 14,000 employees work in the Avis car rental
operations, 4,000 of whom are represented by 65 various local unions under
contracts expiring on a variety of dates. No local union represents more than
2.5% of the Company's employees. Management considers its employee relations
to be satisfactory.

ITEM 2. PROPERTIES

   The principal executive offices of the Company are in a building owned by
the Company located at 6 Sylvan Way, Parsippany, New Jersey 07054. The
Company leases all other office facilities and seven lodging reservation
system offices in the United States, and one reservation center in Saint
John, New Brunswick, Canada. The Company leases space in Tulsa, Oklahoma for
its Avis car rental reservations system pursuant to a lease expiring in 2001,
and leases office space for Avis and WizCom in Garden City, New York pursuant
to a lease expiring in 2015. The Company also leases or has concessions
relating to space for its Avis business at 707 locations in the United States
and 97 locations outside the United States for all of its operations and owns
a 166,000 square foot building in Virginia Beach, Virginia which serves as a
satellite administrative and reservations facility for Avis. The Company owns
two office locations used in connection with RCI's business and leases 19
locations in the United States and 38 locations internationally. The Company
also leases sales offices and other ancillary office space in locations
around the country. Management believes that such properties are sufficient
to meet its present needs and does not anticipate any difficulty in securing
additional space, as needed, on terms acceptable to the Company.

ITEM 3. LEGAL PROCEEDINGS

   The Company is not a party to any litigation, other than litigation
incidental to the business of the Company. None of such litigation, either
individually or in the aggregate, is material to the business of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   No matters were submitted to a vote of security holders during the fourth
quarter of 1996.

                               27
<PAGE>
                                   PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS

MARKET PRICE ON COMMON STOCK

   Since the initial public offering of the Company's Common Stock at $4 per
share, effective December 9, 1992, the Company's Common Stock has been listed
on the New York Stock Exchange ("NYSE") under the symbol "HFS". At March 21,
1997 the number of stockholders of record was approximately 514. The
following table sets forth the quarterly high and low sales prices per share
as reported by the NYSE for 1996 and 1995.

<TABLE>
<CAPTION>
 1996               HIGH        LOW
---------------  ---------  ---------
<S>              <C>        <C>
First Quarter  .   $51.500    $36.500
Second Quarter      75.500     45.500
Third Quarter  .    72.000     49.125
Fourth Quarter      79.875     55.750
</TABLE>

<TABLE>
<CAPTION>
 1995               HIGH        LOW
---------------  ---------  ---------
<S>              <C>        <C>
First Quarter  .   $16.750    $12.500
Second Quarter      17.625     13.875
Third Quarter  .    27.000     17.000
Fourth Quarter      40.875     25.375
</TABLE>

   On March 21, 1997 the last sale price of the Company's Common Stock on the
NYSE was $65.75 per share.

   All stock price information has been restated to reflect a two-for-one
stock split effected in the form of a dividend to stockholders of record on
January 30, 1996, payable on February 14, 1996.

DIVIDEND POLICY

   The Company expects to retain its earnings for the development and
expansion of its business and the repayment of indebtedness and does not
anticipate paying dividends on Common Stock in the foreseeable future.

                               28
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

                      HFS INCORPORATED AND SUBSIDIARIES
                     SELECTED CONSOLIDATED FINANCIAL DATA
                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER 31,
                                   ---------------------------------------------------------------
                                       1996         1995         1994         1993         1992
                                   -----------  -----------  -----------  -----------  -----------
<S>                                <C>          <C>          <C>          <C>          <C>
OPERATING DATA
Total revenue ....................  $  799,040   $  412,983    $312,547     $257,070     $202,954
Total expenses ...................     515,393      278,078     221,904      196,402      174,251
Income before extraordinary loss       169,584       79,730      53,489       34,323       19,857
Extraordinary loss ...............          --           --          --       12,845        1,622
                                   -----------  -----------  -----------  -----------  -----------
Net income .......................  $  169,584   $   79,730    $ 53,489     $ 21,478     $ 18,235
                                   -----------  -----------  -----------  -----------  -----------
PER SHARE INFORMATION
(PRIMARY)
Income before extraordinary loss    $     1.29   $       .74   $     .53    $     .35    $     .23
Extraordinary loss (net of tax)  .          --           --          --           .13          .02
                                   -----------  -----------  -----------  -----------  -----------
Net income .......................  $     1.29   $       .74   $     .53    $     .22    $     .21
                                   -----------  -----------  -----------  -----------  -----------
(FULLY DILUTED)
Income before extraordinary loss    $     1.29   $       .73   $     .53    $     .34    $     .23
Extraordinary loss (net of tax)  .          --           --          --           .13          .02
                                   -----------  -----------  -----------  -----------  -----------
Net income .......................  $     1.29   $       .73   $     .53    $     .21    $     .21
                                   -----------  -----------  -----------  -----------  -----------
BALANCE SHEET DATA
Franchise agreements, net ........  $  995,947   $  517,218    $495,026     $504,572     $395,785
Total assets .....................   4,288,921    1,165,808     774,097      735,821      545,330
Long-term debt ...................     748,421      300,778     347,416      347,712      236,088
Stockholders' equity .............   2,476,501      560,191     280,569      267,409      226,559
</TABLE>

   There were no dividends declared during the periods presented above.

   All per share information presented has been retroactively adjusted to
reflect the stock splits discussed in Note 1 in the Notes to the Consolidated
Financial Statements.

   On April 29, 1993, the Company purchased the outstanding stock of the
company which owns the Super 8 Motel franchise system ("Super 8"). On May 11,
1995, the Company acquired by merger Central Credit Inc. ("CCI"), a gambling
patron credit information business. On August 1, 1995, a majority owned
subsidiary of the Company acquired the Century 21 real estate brokerage
franchise system ("Century 21"). On January 23, 1996, the Company acquired the
assets comprising the Travelodge hotel franchise system in North America.
On February 12, 1996, the Company purchased substantially all the assets
comprising the Electronic Realty Associates residential real estate brokerage
franchise system. During the second quarter of 1996, the Company purchased
the six previously non-aimed regions of the CENTURY 21 franchise system.
On May 31, 1996, the Company acquired the Coldwell Banker real estate brokerage
franchise system and relocation business ("CB"). On October 17, 1996, the
Company acquired the common stock of Avis, Inc. ("Avis") which owns the world's
second largest car rental system. On November 12, 1996, the Company acquired
the common stock of Resorts Condominium International, Inc. ("RCI"), provider
of timeshare exchange programs. Consolidated results of the Company include
the operating results of Days Inn, Super 8, CCI, Century 21, CB and RCI since
the respective dates of acquisition (see Note 2 in the Notes to the
Consolidated Financial Statements).

   On November 22, 1994, the Company distributed its business of financing,
developing and operating casino gaming facilities to shareholders in
accordance with a formal plan adopted by the Board of Directors on September
9, 1994.

                               29
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS

GENERAL OVERVIEW

   In 1996, HFS Incorporated (together with its subsidiaries, the "Company")
evolved from the world's largest franchisor of lodging properties and real
estate brokerage offices to a global service provider. Although the Company
provides fee-based services that primarily fall within the Travel and Real
Estate industries, the Company generally neither owns the assets nor shares
the risks associated with the underlying businesses of its customers. Within
the travel industry, the Company is the world's largest franchisor of lodging
facilities ("Lodging") and provider of vacation timeshare exchange services
("Timeshare"). The Company also owns Avis, Inc., the second largest car
rental system worldwide ("Car Rental"). The Company will undertake an initial
public offering of the Avis car rental operation in September 1997 that is
expected to dilute the Company's interest in such car rental operation to 25%
and replace car rental ownership earnings with revenue from franchise,
reservation and information technology agreements. Within the real estate
industry, the Company is the world's largest franchisor of real estate
brokerage offices ("Real Estate Franchise") and the second largest provider
of corporate relocation services ("Relocation").

   In November 1996, the Company announced an agreement to acquire PHH
Corporation ("PHH") in a $1.7 billion transaction which will be accounted for
as a pooling of interests. PHH's business lines, which complement the
Company's travel and real estate industry segments, include the world's
largest corporate relocation business and the twelfth largest mortgage
service business in the United States. PHH also provides international fleet
management services.

   All comparisons within the following discussion are to the previous year,
unless otherwise stated.

RESULTS OF OPERATIONS

1996 COMPARED TO 1995

   Consolidated net income increased 113% to $169.6 million in 1996 while
earnings per share ("EPS") increased 77% to $1.29. Operating income (revenue
less expenses excluding interest and income taxes) increased in the Company's
all of Lodging business, which was established in 1990, as well as in the
Company's other business segments which grew substantially by acquisitions
in 1996.

   Consolidated revenue increased 93% to $799.0 million including a 15%
($48.9 million) increase in Lodging revenue and a 441% ($337.1 million)
revenue increase for the aggregate of the other segments, which include
significant 1996 acquisitions. Prior to 1996, historical Company operating
margins have exceeded 58% for all years presented based on the strength of
the Company's franchise businesses, especially Lodging, which continues to
yield operating margins in excess of 60%. Operating margins for recently
acquired business segments are substantial; however, they do not match the
franchise business results, as those businesses generate revenue from the
value of their intellectual property and because consolidated depreciation
and amortization of acquired assets has increased $38.4 million (124%) due to
the high level of 1996 acquisition activity.

   Interest expense increased 50% ($11.0 million) primarily resulting from
the issuance of $240 million, 4 3/4% Convertible Senior Notes ("4 3/4%
Notes") in February 1996 while the weighted average effective interest rate
decreased from 5.94% to 5.67%.

   The Company collects certain service fees from lodging and real estate
franchisees, which it disburses completely for marketing and reservation
activities on behalf of franchisees. Since the Company administers such funds
on a pass through basis, management analyzes business results for the Lodging
and Real Estate franchise segments in terms of revenue, net of marketing and
reservation expenses ("Net revenue") and operating expenses. Net revenue
consists of gross revenue of $799.0 million, $413.0 million and $312.5
million for 1996, 1995 and 1994, respectively, less $169.3 million, $144.0
million and $130.3 million of marketing and reservation expenses, for the
same respective periods.

                               30
<PAGE>
in gross and net revenue is approximately the same for all years presented.
Operating expenses include depreciation and amortization but exclude interest
expense and income taxes. Results for the combined segments are as follows
($000's):

<TABLE>
<CAPTION>
                                                     VARIANCE                VARIANCE
OPERATING INCOME               1996        1995      96 V 95       1994      95 V 94
-------------------------  ----------  ----------  ----------  ----------  ----------
<S>                        <C>         <C>         <C>         <C>         <C>
Net revenue ..............   $629,725    $269,019      134%      $182,279       48%
Operating expenses .......   $313,324    $112,325      179%      $ 72,951       54%
Operating income .........   $316,401    $156,694      102%      $109,328       43%
Operating margin .........       50.2%       58.2%     (14)%         60.0%      (3)%
Depreciation/amortization
 included in above .......   $ 69,234    $ 30,857      124%      $ 23,723       30%
</TABLE>

TRAVEL INDUSTRY

LODGING

   The Company operates eight nationally recognized brands with approximately
5,400 lodging properties under franchise contracts of up to 20 years in
duration. The Company provides central reservation system services and
national marketing programs, which are completely funded by its franchisees
based on a designated portion of its franchise fee. The Company charges
royalty fees based on a percentage of franchisee gross room sales to fund all
expenses not covered by marketing and reservation fees, such as quality
assurance inspections and franchise sales and service functions. Accordingly,
the significant revenue drivers of the Company are the number of
royalty-paying franchise units and the average royalty rate at which they
pay. Relevant but less significant are the average daily rate and occupancy
percentage of the underlying lodging properties.

<TABLE>
<CAPTION>
 OPERATING INCOME ($000'S)     1996         1995       VARIANCE
-------------------------  -----------  -----------  ----------
<S>                        <C>          <C>          <C>
Net revenue ..............   $227,840     $196,704       16%
Operating expenses........   $ 87,667     $ 75,025       17%
Operating income..........   $140,173     $121,679       15%
Operating margin .........       61.5%        61.9%      (1%)
Depreciation/amortization
 (included in above)......   $ 30,852     $ 26,058       18%
</TABLE>

   Operating income increased 15% and net revenue increased 16% as a result
of a 13% increase in royalty and a 41% increase in revenue from preferred
alliance partners seeking access to the Company's franchisees and their
underlying consumer base. Results for 1996 demonstrated that room growth is
the most significant outcome driver for franchisee royalty, as the Company
added 55,253 net rooms in 1996, representing a 133% increase from 1995
results. The Company added 94,506 rooms in 1996 (including 30,274 rooms added
by the acquisition of Travelodge franchise contracts) and terminated 39,253
rooms in 1996 (including 6,053 Park Inn International rooms, comprising the
franchise system sold in September 1996 for $2.2 million). In 1995, the
Company added 63,280 rooms (including 9,780 rooms added by the acquisition of
Knights Inn franchise contracts) and terminated 39,603 rooms (including
22,151 related to a special year-end removal of properties as a result of the
repositioning and tightening of quality standards of the Company's brands).
Total U.S. system revenue per available room ("REVPAR") increased 1.3%
primarily due to a 1.9% increase in the average daily rates charged at
franchised lodging facilities ("ADR"), however, REVPAR for comparable
properties increased 3.3% as a result of increases in ADR.

   The 17% ($12.6 million) increase in operating expenses included an 18%
increase ($4.8 million) in depreciation and amortization, primarily related
to the excess of cost over net assets acquired ("goodwill") associated with
the acquisitions of the Travelodge and Knights Inn franchise systems in
January 1996 and August 1995, respectively. Selling, general and
administrative expenses ("SG&A") increased 16% ($7.8 million), primarily as a
result of a $2.0 million of increase in franchise sales and $1.9 million of
scheduled Ramada license fee increases.

CAR RENTAL

   The Company acquired Avis, Inc. on October 17, 1996 for approximately $800
million in cash and Company common stock. Prior to the acquisition date, the
Company announced its plan to undertake an initial public offering (the
"IPO") of Avis' car rental operating subsidiary ("ARAC") within one year of

                               31
<PAGE>
the acquisition date and dilute its interest in ARAC to approximately 25%.
The Company will retain assets that are consistent with the Company's service
provider business profile, including the trademarks, franchise agreements,
reservation system and information technology system assets. ARAC will pay
fees to the Company based on franchise agreements commencing in 1997 (as well
as fees associated with reservation and information technology agreements)
that are typical to a traditional franchise relationship. The Car Rental
segment generated $6.1 million of operating income which was comprised of
$9.5 million of revenue and $3.4 million of operating expenses for the period
October 17, 1996 to December 31, 1996. Net revenue consists primarily of
third party franchise fees and $2.3 million of equity in earnings of ARAC
from the October 17, 1996 acquisition date during the weakest calendar
quarter in the car rental business. Operating expenses primarily consisted of
depreciation and amortization expenses associated with the Avis trademark and
goodwill.

TIMESHARE

   The Company acquired RCI on November 12, 1996 for $487 million plus up to
$200 million of contingent consideration. RCI sells subscription memberships
to owners of vacation timeshare resorts which allows the members to exchange
their timeshare accommodations for time share accomodations owned by other
members at participating affiliated resorts worldwide. In addition to
membership fees, RCI earns fees for exchanges processed by its call center.
The key timeshare revenue drivers include the number of fee paying members
and exchanges as well as each corresponding average fee. The operating income
summary for the period November 12, 1996 to December 31, 1996 is as follows
($000's):

<TABLE>
<CAPTION>
 OPERATING INCOME
-------------------------
<S>                          <C>
Net revenue ..............   $30,723
Operating expenses........   $25,013
Operating income..........   $ 5,710
Operating margin .........      18.6%
Depreciation/amortization
 included in above........   $ 2,559
</TABLE>

   Net revenue primarily consists of $11.3 million of membership fees and
$12.1 million of exchange fees. Assuming Company ownership of timeshare
operations since January 1, 1995, pro forma annual membership and exchange
fee revenue increased 12% to $102.0 million and 11% to $157.6 million,
respectively. Total members and exchanges for full year 1996 increased 8% to
2.2 million and 9% to 1.7 million compared to 1995, respectively. Operating
expenses consist primarily of $15.4 million and $2.5 million of staff and
communication costs associated with member services (call centers) and other
timeshare functions for the period November 12, 1996 to December 31, 1996.

REAL ESTATE INDUSTRY

REAL ESTATE FRANCHISE

   The Company licenses brand names to independently owned brokerage offices
associated with three of the four largest franchise systems in the world. The
Company acquired the world's largest franchise system, the CENTURY 21
franchise system in August 1995, the ERA franchise system in February 1996
and the Coldwell Banker franchise system in May 1996. Similar to Lodging, the
most significant revenue driver for real estate franchise is unit growth and
the number of sales associates affiliated with the underlying franchise
brokerage offices. Royalties generally based on a percentage of franchisee
commission revenue fund the franchise sales, service and training efforts.
Marketing fee collections fund national advertising expenditures and other
marketing activities.

<TABLE>
<CAPTION>
 OPERATING INCOME ($000'S)     1996         1995      VARIANCE
-------------------------  -----------  ----------  ----------
<S>                        <C>          <C>         <C>
Net revenue ..............   $231,132     $43,771       428%
Operating expenses........   $127,421     $24,494       420%
Operating income..........   $103,711     $19,277       438%
Operating margin .........       44.9%       44.0%        2%
Depreciation/amortization
 included in above........   $ 27,317     $ 2,997       811%
</TABLE>

                               32
<PAGE>
   Operating income and net revenue increased 438% and 428% respectively, as
a result of the CENTURY 21 franchise system's first full year contribution to
operating results and partial year contributions from the acquired Coldwell
Banker and ERA franchise systems. The three franchise systems license their
trademarks to approximately 11,300 brokerage offices with approximately
184,000 sales associates at December 31, 1996. The royalty portion of revenue
increased $162.8 million (361%) and revenue from preferred alliances grew from
$208,000 to $13.4 million, net of the Company's $11.0 million fourth quarter
write-off of revenue associated with the licensing of the CENTURY 21 trademark
to Amre, Inc., which filed for bankruptcy protection in February 1997. The
Company is currently negotiating with home improvement companies to license the
CENTURY 21 trademark.

   Operating expenses increased 420% ($102.9 million) as a result of
incremental expenses associated with acquired franchise systems. Operating
expenses also included a $5.0 million restructuring charge associated with
the second quarter 1996 contribution of Coldwell Banker's former owned
brokerage business to National Realty Trust (the "Trust"), an independent
entity governed by independent trustees. The Company's operating income and
operating margin excluding the contribution to the Trust would have increased
from $103.7 million to $108.7 million and from 44.9% to 47.0%.

RELOCATION

   Relocation segment services primarily consists of the purchase, management
and resale of homes for transferring employees of corporate clients and
members of affinity group clients. Although the Company acquires the home of
client employees, the client corporation reimburses the Company for carrying
costs until the home is sold and for home sale losses. Accordingly, the
Company earns a fee for services with no real estate risk. Operating expenses
primarily consist of sales and service staffing and related costs. Operating
results include contributions from Coldwell Banker Relocation Services, Inc.
("CBRS") from the May 31, 1996 acquisition date and from Worldwide Relocation
Management, Inc. ("WRM") since the August 1, 1995 acquisition date, as
summarized below ($000's):

<TABLE>
<CAPTION>

OPERATING INCOME ($000'S)      1996       1995      VARIANCE
-------------------------   ----------  ---------  ----------
<S>                        <C>         <C>        <C>
Net revenue ............     $77,983     $8,204        851%
Operating expenses......     $49,521     $3,783      1,209%
Operating income........     $28,462     $4,421        544%
Operating margin .......        36.5%      53.9%       (32%)
</TABLE>

   Net revenue in 1996 includes $59.2 million of revenue from CBRS since the
Company's May 31, 1996 acquisition date and $16.0 million of net revenue from
WRM. Net revenue in 1995 represents five months of results from WRM only.
Operating expenses increased 544% due to the acquisition of CBRS and a full
year's contribution from WRM. The operating margin decrease reflects service
costs associated with CBRS, a full service relocation company and the second
largest relocation services company worldwide.

1995 COMPARED TO 1994

   Consolidated net income increased 49% to $79.7 million in 1995 while EPS
increased 38% to $.73. Company operations primarily consisted of Lodging
through August 1, 1995, the date the Company commenced Real Estate Franchise
segment operations by acquiring the CENTURY 21 franchise system for $275
million. Real Estate Franchise revenue and operating profits comprised 16%
and 12%, respectively, of corresponding consolidated 1995 totals compared to
none in 1994.

   Interest expense increased $1.4 million representing incremental financing
costs associated with the CENTURY 21 transaction and a general rise in
interest rates in 1995 compared to 1994. Despite average LIBOR rate increases
approximating 84 basis points, the Company's average borrowing rate increased
only 40 basis points to 6.0%, principally as a result of favorable fixed rate
debt securities issued in 1994 and 1993.

                               33
<PAGE>
   Results for the combined segments are as follows ($000's):

<TABLE>
<CAPTION>
 OPERATING INCOME ($000'S)     1995         1994       VARIANCE
-------------------------  -----------  -----------  ----------
<S>                        <C>          <C>          <C>
Net revenue ..............   $269,019     $182,279        48%
Operating expenses........   $112,325     $ 72,951        54%
Operating income..........   $156,694     $109,328        43%
Operating margin .........       58.2%        60.0%       (3%)
Depreciation/amortization
 included in above........   $ 30,857     $ 23,723        30%
</TABLE>

   Consolidated net revenue increased 48% to $269.0 million while operating
profits increased 43% to $156.7 million. Indicative of the Company's
operating leverage, the Company's operating margins including Real Estate
Franchise approximated 58.2% in 1995. The Company maintained significant
operating margins despite the development and integration of a Real Estate
Franchise infrastructure during the period following its August 1995
acquisition of the CENTURY 21 franchise system.

LODGING

<TABLE>
<CAPTION>
 OPERATING INCOME ($000'S)     1995         1994       VARIANCE
-------------------------  -----------  -----------  ----------
<S>                        <C>          <C>          <C>
Net revenue ..............   $196,704     $170,426        15%
Operating expenses........   $ 75,025     $ 67,939        10%
Operating income..........   $121,679     $102,487        19%
Operating margin .........       61.9%        60.1%        3%
Depreciation/amortization
 included in above........   $ 26,058     $ 21,921        19%
</TABLE>

   Lodging net revenue increased 15% as a result of a $20.7 million (16%)
increase in royalty and a $6.8 million (49%) increase in revenue from
preferred alliances seeking access to franchisees and their customers. Room
growth represented the most significant revenue outcome driver contributing
to the revenue increase. The Company added 63,280 rooms during 1995,
representing an 18.8% increase, but also terminated 39,603 rooms including
22,151 rooms in a special year-end removal of properties as a result of the
repositioning and tightening of quality standards of the Company's brands.
Total REVPAR increased 3.0% primarily due to a 2.6% increase in the average
daily rates charged at franchisee hotels and the average royalty rate for
1995 increased 1.8% when compared to 1994.

   Demonstrating the Company's ability to translate revenue into earnings,
operating income increased $19.2 million (19%) while operating expenses
increased only $7.1 million (10%). The increase in operating expenses
included $4.6 million of franchise sales and bad debt expenses associated
with system growth as well as $1.5 million of scheduled Ramada license fee
increases. Depreciation and amortization expense also increased $4.1 million
in part from a full year's expense in 1995 related to the newly developed
reservation system for the Days Inn franchise system which was implemented in
October 1994. The increase was also attributable to goodwill amortization
associated with the issuance of Company common stock in December 1994 and
September 1995, pursuant to an earnout agreement entered into with Bryanston
Group, Inc., an affiliate of the sellers of the Days Inn franchise system.

REAL ESTATE FRANCHISE

   The CENTURY 21 franchise system contributed $43.8 million of net revenue
and $19.3 million of operating profit for the five months following the
Company's August 1, 1995 acquisition. Franchise fees paid by the approximately
6,000 CENTURY 21 franchised brokerage offices approximated $42.1 million and
comprised the significant portion of Real Estate Franchise net revenue.
Operating expenses included $21.5 million of SG&A, including franchise sales,
service and training expenses and $3.0 million of depreciation and amortization
associated with goodwill and franchise agreements acquired in the CENTURY 21
acquisition.

LIQUIDITY AND CAPITAL RESOURCES

ACQUISITIONS OVERVIEW

   In 1996, the Company expanded and strengthened its leadership position in
its lodging and real estate brokerage franchise businesses with additional
franchise system acquisitions. The Company also extended

                               34
<PAGE>
the scope of its operations by acquiring other businesses that are leading
providers of services to the consumer travel and real estate markets. The
acquired businesses share similar characteristics, foremost of which is that
each was immediately accretive to Company earnings. Revenue is substantially
generated from service fees and not dependent on hard assets or the need for
capital expenditures other than technology investments which support and
historically have been substantially funded by the Company's customers. These
service businesses each generate significant cash flows which is enhanced by
the Company's operating leverage that provides acquired revenue streams
without corresponding increases in operating infrastructure expenses.
The Company is currently positioned to cross market within its existing
business segments and continues to pursue acquisitions and/or investments in
service businesses that fit the profile described above. A review of pending
and completed acquisitions in 1996 follows.

PENDING ACQUISITIONS

   PHH -- On November 10, 1996, the Company entered into a definitive merger
agreement (the "Merger Agreement") pursuant to which the Company is expected to
issue $1.7 billion of Company common stock in exchange for all of the
outstanding common stock of PHH. PHH is the world's largest provider of
corporate relocation services and also provides mortgage services and fleet
management services. This transaction will be accounted for as a pooling of
interests. Pursuant to the terms of the Merger Agreement, the number of
Company shares to be issued may range from 21.3 million to 28.8 million (plus
approximately 1.9 million shares in connection with outstanding PHH stock
options), based upon the average share price of the Company's common stock
over a period of 20 trading days ending five trading days prior to the date
of the vote by PHH shareholders on approval of the transactions.  Consummation
of the transaction is subject to the approval of PHH and Company shareholders
at special meetings to be held on April 30, 1997.

   The Company anticipates that it will incur a one-time restructuring charge
in connection with the merger. The charge includes severance, facility
consolidation and other transaction related costs associated with the
integration of the Company and PHH businesses. The charge is estimated to
approximate $267 million before related income tax benefits and will be paid
with cash flow from operations and borrowings under the Company's revolving
credit facility. The Company estimates the charge to result in annual pre-tax
savings of approximately $100 million with the full benefit of cost
reductions beginning in 1998.

   PHH reported $1.4 billion of revenue and $75.3 million of net income for
the nine month period ended January 31, 1997 and $1.8 billion of revenue and
$81.6 million of net income, for the year ended April 30, 1996. PHH reported
total assets of $6.1 billion at January 31, 1997 and debt, primarily under
fleet management and mortgage programs, of $4.7 billion. Although PHH's debt
to equity ratio approximates 7 to 1, such debt corresponds directly with
related net investments in leased vehicles and equity advances on homes.
Accordingly, Standard & Poor's Corporation ("S&P") and Moody's Investors
Service, Inc. ("Moody's") assigned investment grade ratings of A+ and A2,
respectively to PHH debt and A1 and P1, respectively to PHH commercial paper.
On a pro forma basis for the PHH transaction, total assets and stockholders'
equity of the Company as of September 30, 1996 approximated $10.3 billion and
$2.8 billion, respectively.

   Value -- On March 3, 1997, the Company announced that it reached an
agreement in principle to acquire Value Rent-A-Car ("Value") for $175 million
in cash which will be financed with borrowings under the Revolving Credit
Facility. The Company anticipates that Value would be added to the Car Rental
Segment in the second quarter 1997, subject to execution of definitive
documentation and approval of the respective boards of directors. The Company
intends to expand Value, which predominately serves the leisure market in 45
corporate-owned locations, through franchising additional locations.

   Sheraton -- On January 27, 1997, Hilton Hotels Corporation ("Hilton")
announced that it had reached a preliminary understanding to license certain
assets to the Company in connection with its pending tender offer for the
outstanding common stock of ITT Corporation ("ITT"). Pursuant to the
preliminary understanding, subject to Hilton's successful acquisition of ITT,
the Company would license the Sheraton trademark, franchise system and
management agreements worldwide under a long-term contract. The transaction
is subject to Hilton's acquisition of ITT as well as negotiation of
definitive

                               35
<PAGE>
agreements relating to the proposed license agreement. There can be no
assurance that Hilton's attempt to acquire ITT will be successful or that the
Company and Hilton will consummate the proposed transaction.

COMPLETED ACQUISITIONS

   RCI -- On November 12, 1996, the Company completed the acquisition of all
the outstanding common stock of RCI for approximately $487 million comprised
of $412 million in cash and $75 million of Company common stock plus future
contingent payments of up to $200 million over the next five years. The cash
portion of the purchase price was funded with borrowings under a revolving
credit facility and excess proceeds from a second quarter public offering of
approximately 19.4 million shares which generated $1.2 billion of proceeds
(the "Offering").

   RCI, based in Indianapolis, Indiana, is the world's largest provider of
timeshare exchange programs, providing services for approximately 2.2 million
timeshare owners and approximately 3,100 resorts around the world. RCI is
also engaged in publishing related to the timeshare industry and provides
other travel-related services, integrated software systems, resort management
and consulting services.

   Avis -- On October 17, 1996, the Company completed the acquisition of all
of the outstanding capital stock of Avis, including payments under certain
employee stock plans of Avis and the redemption of certain series of
preferred stock of Avis for $806.5 million. The purchase price was comprised
of approximately $367.2 million in cash, $100.9 million in indebtedness and
$338.4 million (approximately 4.6 million shares) of Company common stock.
The cash portion of the purchase price was funded with excess proceeds from
the Offering.

   Prior to the consummation of the acquisition, the Company announced its
plan to undertake an IPO of ARAC within one year of the acquisition date and
dilute its interest in ARAC to approximately 25%. ARAC will license the Avis
trademark from the Company in return for a license fee based on a percentage
of ARAC revenue. The Company also provides reservation and information
technology services to ARAC.

   Coldwell Banker -- On May 31, 1996, the Company acquired by merger
Coldwell Banker (the "Merger") for $640 million of cash plus repayment of
approximately $105 million of indebtedness. At the effective date of the
Merger, Coldwell Banker had 2,164 franchised brokerage offices and owned 318
residential real estate brokerage offices ("Owned Brokerage Business") in the
United States, Canada and Puerto Rico, representing the third largest real
estate brokerage system in the United States.

   The Company financed the Coldwell Banker transaction with a portion of the
approximately $1.2 billion of proceeds from the Offering. Immediately following
the closing of the Merger, the Company conveyed the Owned Brokerage Business to
the Trust and recorded a $5 million pre-tax restructuring charge.

   CENTURY 21 Non-owned Regions -- During the second quarter of 1996, the
Company completed the acquisition of six U.S. CENTURY 21 regions which were
licensed to four independent master licensees. The aggregate purchase price
consisted of approximately $96 million of cash, $5 million of notes and $46
million (approximately 0.9 million shares) of the Company's common stock.
These acquisitions resulted in the Company receiving royalty fees of up to 6%
of the franchisee gross commissions generated by such offices compared to
less than 1% previously received under the master licensing agreements. The
cash portion of the aggregate purchase price was financed with proceeds from
the issuance of the 4 3/4% Notes.

   ERA -- On February 12, 1996, the Company purchased substantially all of
the assets comprising the ERA residential real estate brokerage system for
approximately $40.5 million was financed by borrowings under the Company's
revolving credit facility.

   CENTURY 21 -- On August 1, 1995, a majority-owned Company subsidiary, C21
Holding Corp. ("Holding"), acquired Century 21 from Metropolitan Life
Insurance Company ("MetLife") for an aggregate purchase price of $245 million
plus expenses. In February 1996, the Company paid the $30 million contingent
portion of the purchase price of Century 21 and redeemed $80 million of
Century 21 redeemable preferred stock issued by MetLife prior to the
acquisition. The Company financed these payments with proceeds from the
4 3/4% Notes.

                               36
<PAGE>
   Effective October 29, 1996 (the "Effective Date"), the Company amended the
Subscription and Stockholders' Agreement dated as of August 1, 1995 among C21
Holding Corp., the Company and a group of former executives of Century 21
Real Estate Corporation (the "Former Management") pursuant to which the
Company owns 87.5% of C21 Holding Corp. and the Former Management owns 12.5%
of C21 Holding Corp. Such amendment provides for the acceleration of the
Company's option to purchase the 12.5% ownership from the Former Management
at fair market value, determined as of the Effective Date. The Company is in
the process of determining the fair market value of C21 Holding Corp. and
expects to complete such purchase in early 1997.

   Travelodge -- On January 23, 1996, the Company purchased the assets
comprising the Travelodge hotel franchise system in North America, including
the Travelodge and Thriftlodge service marks and franchise agreements from
Forte Hotels, Inc. ("FHI") for $39.3 million. The Company financed the
acquisition with borrowings under its revolving credit facility and repaid
the borrowings with proceeds from the 4 3/4% Notes.

   Concurrent with the Company's acquisition of the Travelodge franchise
system, Motels of America, Inc., through a wholly owned subsidiary,
(collectively, "MOA"), purchased 20 Travelodge motels from FHI for $32.3
million. Chartwell Leisure, Inc. ("CHRT") (formerly National Lodging Corp.),
a former wholly owned Company subsidiary which was distributed to the Company
shareholders in November 1994, purchased all of the capital stock of FHI for
$98.4 million. FHI owned or had an interest in 112 hotel and motel properties
at the acquisition date. MOA, a significant Company franchisee, entered into
twenty year Travelodge franchise agreements for the lodging properties it
acquired from FHI. The Company financed $10 million of MOA's purchase price
under a $10 million revolving credit facility, bearing interest at 14% per
annum. The loan is guaranteed by the parent company of MOA and secured by
approximately 80% of MOA's outstanding common stock.

   In connection with CHRT's acquisition of FHI, the Company guaranteed $75
million of CHRT borrowings under a $125 million revolving credit facility
entered into by CHRT with certain banks. The Company is paid a guarantee fee of
2% per annum of the outstanding guarantee commitment by the Company pursuant to
a Financing Agreement. Such guarantee is expected to terminate upon CHRT's
refinancing of its revolving credit facility planned for the second quarter
of 1997.

   Concurrent with the acquisition of the Travelodge franchise system and
CHRT's acquisition of FHI, the marketing and advisory agreements between the
Company and CHRT were terminated. The corporate services agreement was
modified to provide that the Company was to provide financial and other
corporate administrative support and advisory services through September 1996
and thereafter advisory services through January 2019 for a fee of $1.5
million per year. This agreement was terminated in November 1996 by mutual
agreement, with the Company receiving $9.5 million in consideration for
consenting to the early termination of such agreement. Additionally, CHRT
paid a $2.0 million advisory fee to the Company in connection with CHRT's
acquisition of FHI.

EQUITY TRANSACTIONS

   Treasury Purchases -- On January 7, 1997, the Board of Directors
authorized the purchase of 2.6 million shares of Company common stock to
satisfy stock option exercises and conversions of convertible debt securities
and to fund future acquisitions. The Company acquired approximately 2.6
million treasury shares in January and February 1997 for $179.4 million with
revolving credit borrowings.

   The Company completed the offering of 19.4 million shares of common stock
in the second quarter of 1996 which yielded net proceeds to the Company after
expenses of approximately $1.2 billion. Approximately $755 million of the
proceeds were used to finance the acquisition of Coldwell Banker and $75
million was used to repay outstanding borrowings under the Company's existing
credit facility. The remaining $331 million of proceeds were used as partial
consideration for the October 17, 1996 and November 12, 1996 acquisitions of
Avis and RCI, respectively.

   The Company issued 0.9 million shares of common stock in May 1996 in
connection with the acquisition of the CENTURY 21 non-owned regions. Also,
the Company issued 4.6 million and 1.0 million shares in connection with the
October 17, 1996 and November 12, 1996 acquisitions of Avis and RCI,
respectively.

                               37
<PAGE>
FINANCING

   The Company continues to believe that it has excellent liquidity and access
to liquidity through various sources. The Company has generated significant
positive cash flow from operations in every quarter since its initial public
offering in December 1992. The Company has also demonstrated its ability to
access equity and public debt markets and financial institutions to generate
capital for strategic acquisitions. Indicative of the Company's
creditworthiness, following the announcement of the PHH merger, S&P and Duff
& Phelps affirmed their A credit rating of the Company's $540 million of
publicly issued debt and Moody's affirmed their Baa1 rating and scheduled a
review of the Company for possible upgrade. The Company generated $184.4
million of cash flow from operations during the year ended December 31, 1996,
representing a $63.3 million (35%) increase from the year ended December 31,
1995. The Company reported a $110.7 million working capital deficiency at
December 31, 1996 primarily as a result of $150 million of third party
borrowings on behalf of ARAC which were acquired in the Avis acquisition. The
Company will repay such debt in September 1997 upon receipt of proceeds from a
corresponding intercompany loan due from ARAC.

   Cash and cash equivalents increased $39.7 million from December 31, 1995
to December 31, 1996. Approximately $182.3 million and $1.51 billion of the
increase was attributable to net cash provided by operating activities and
financing activities, respectively. This increase was offset by $1.66 billion
of net cash used in investing activities. The increase from operating
activities was primarily attributable to $169.6 million of net income and
$71.3 million of depreciation and amortization net of $78.3 million increase
in trade payables. Investing activities required the use of $1.60 billion of
cash used to purchase the net assets of acquired businesss exclusive of
acquired cash, and $42.5 million of property and equipment additions including
company headquarters improvements (first occupied in September 1996), a new
reservation system for the Super 8 franchise system and computer equipment
following the Company's termination of a contract with an information
technology services provider. Approximately $1.2 billion and $447.1 million
of proceeds were received (and reported as net cash provided by financing
activities) in connection with the Offering, and borrowings under the
Revolving Credit Facilities.

   On October 2, 1996, the Company replaced an existing $300 million
revolving credit facility with $1 billion of revolving credit facilities
consisting of (i) a $500 million, five year revolving credit facility and a
$500 million, 364 day credit facility (the "364 Day Revolving Credit facility")
(collectively the "Revolving Credit Facilities"). The Company may renew the
364 Day Revolving Credit Facility on an annual basis for an additional 364
days up to a maximum aggregate term of five years upon receiving lender
approval. The Revolving Credit Facilities, at the option of the Company, bear
interest at rates based on competitive bids of lenders participating in the
facilities, at the prime rate or at LIBOR plus a margin approximating 25
basis points. The Company may request $500 million of additional credit
availability under the Revolving Credit Agreement. Outstanding borrowings
under the Revolving Credit Facilities approximated $205 million at December
31, 1996.

   The Company filed a shelf registration statement with the Securities and
Exchange Commission effective August 29, 1996, for the aggregate issuance of
up to $1 billion of debt and equity securities. These securities may be
offered from time to time, together or separately, based on terms to be
determined at the time of sale. The proceeds may be used for general
corporate purposes, which may include future acquisitions.

   Long-term debt primarily consists of $540 million of publicly issued debt,
$205 million of borrowings under the Revolving Credit Facilities and $150
million of acquired Avis fleet financing, borrowed on behalf of the car
rental operating company subsidiary, ARAC, which will be repaid upon
settlement of the corresponding intercompany loan due from ARAC prior to the
IPO. Publicly issued debt includes the $240 million of 4 3/4% Notes
(convertible) due 2003, $150 million of 4 1/2% convertible senior notes due
1999 and $150 million of 4 7/8% senior notes due December 1998. Interest on the
publicly issued debt is paid semi-annually. Long-term debt increased from
$303.0 million at December 31, 1995 to $901.4 million at December 31, 1996,
due to the issuance of the 4 3/4% Notes, $205 million of borrowings under the
Revolving Credit Facilities which financed the November acquisition of RCI
and $150 million of acquired

                               38
<PAGE>
Avis debt which is expected to be repaid by ARAC in September 1997. The weighted
average stated interest rate on long-term debt at December 31, 1996 was 5.7%
compared to the weighted average stated interest rate of 5.2% at December 31,
1995 as the result of revolving credit borrowings in 1996.

   The Company has investments in Europe and Asia in its timeshare business.
Therefore, changes in the value of foreign currencies, principally sterling,
affect the Company's balance sheet and cash flow statements when translated
into U.S. dollars. The Company will enter into forward exchange contracts to
reduce the impact of changes in foreign currency exchange rates with respect
to its investment in foreign operating companies prior to such exposure
becoming material.

IMPACT OF INFLATION

   The primary source of revenue of the Company through December 31, 1996 is
based on a percentage of the franchised lodging facilities' gross room
revenue and franchised real estate brokerage offices' gross commission
revenue. As a result, the Company's revenue (excluding those changes
attributable to a change in the number of franchises) is expected to change
consistent with the trend of the consumer price index. The Company does not
believe that inflation would have an unfavorable impact on its operations.

IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

   In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which is
effective for the Company in financial statements issued after January 1,
1997. The Company does not expect the adoption of SFAS 125 to have a material
impact on the financial condition or results of operations.

   In March 1997, FASB issued SFAS No. 128, "Earnings per Share" which is
effective for the Company in financial statements issued after December 15,
1997. SFAS 128 supercedes APB 15 and replaces the presentations of primary
EPS with a presentation of Basic EPS. It also requires presentation of Basic
and Diluted EPS on the income statement for all entities with complex capital
structures. Assuming SFAS 128 was applicable for 1996, the Company would have
reported the following:

<TABLE>
<CAPTION>
<S>                   <C>
 Pro forma:
 Basic EPS.........   $1.46
 Diluted EPS.......   $1.29
As reported:
 Primary EPS.......   $1.29
 Fully diluted
 EPS...............   $1.29
</TABLE>

SEASONALITY

   The principal sources of revenue for the Company are fees for services
provided. Lodging and Car Rental franchise royalty fees share the same
pattern of revenue experienced by their respective underlying industries,
wherein summer months produce higher revenue due to increased leisure travel.
Although the Timeshare business services the leisure traveler, exchanges are
made and earned consistently throughout the year. Real Estate franchise fees
and Relocation service fees are earned when residential home sale closings
peak, which is generally in the summer months. On a weighted average basis,
pro forma for acquired companies, the aggregate principal sources of revenue
generate 22%, 26%, 28% and 24% of total annual revenue in the first, second,
third and fourth calendar quarters, respectively.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   See Financial Statement and Financial Statement Schedule Index commencing
on page F-1 hereof.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
        AND FINANCIAL DISCLOSURE

None

                               39
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

   The following individuals serve as directors of the Company as of March
21, 1997:

<TABLE>
<CAPTION>
<S>                               <C>
Henry R. Silverman, Chairman      Martin L. Edelman
John D. Snodgrass                 Robert E. Nederlander
Stephen P. Holmes                 Robert W. Pittman
Michael P. Monaco                 E. John Rosenwald, Jr.
James E. Buckman                  Leonard Schutzman
Christel DeHaan                   Robert F. Smith
</TABLE>

   MR. SILVERMAN, age 56, has been a Director, Chairman of the Board,
Chairman of the Executive Committee and Chief Executive Officer of the
Company since May 1990. From November 1994 until February 1996, Mr. Silverman
also served as Chairman of the Board and Chief Executive Officer of Chartwell
Leisure Inc. ("Chartwell") formerly known as National Gaming Corp. and
National Lodging Corp., an independent publicly traded company and former
wholly owned subsidiary of the Company. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS" for a description of the Company's relationships with
Chartwell. Mr. Silverman currently continues to serve as a member of the
Board of Directors of Chartwell.

   MR. SNODGRASS, age 40, has been a Director, President and Chief Operating
Officer of the Company since February 1992 and was appointed Vice Chairman in
September 1996. Mr. Snodgrass also serves as a Director, Chairman of the
Board and Chief Executive Officer of several subsidiaries of the Company.
From November 1994 through January 1996, Mr. Snodgrass served as Vice
Chairman of the Board of Chartwell.

   MR. HOLMES, age 40, was appointed Vice Chairman of the Company in
September 1996 and has served as a Director of the Company since June 1994.
From July 1990 through September 1996 Mr. Holmes served as Executive Vice
President, Treasurer and Chief Financial Officer of the Company. Mr. Holmes
also serves as a director and officer of several subsidiaries of the Company.
Mr. Holmes also serves as a Director and, from November 1994 to February 1996
was the Executive Vice President and Chief Financial Officer, of Chartwell.
Mr. Holmes also serves as a director of Avis Europe Ltd.

   MR. MONACO, age 49, was appointed Vice Chairman and Chief Financial
Officer of the Company in October 1996 and was elected to the Board of
Directors effective January 27, 1997. Mr. Monaco also serves as a director
and officer of several subsidiaries of the Company. Mr. Monaco served as
Executive Vice President and Chief Financial Officer of the American Express
Company from September 1990 to June 1996.

   MR. BUCKMAN, age 52, has been Executive Vice President, General Counsel
and Assistant Secretary of the Company since February 1992 and a Director of
the Company since June 1994. Mr. Buckman also serves as a director and
officer of several subsidiaries of the Company. From November 1994 to
February 1996, Mr. Buckman served as the Executive Vice President, General
Counsel and Secretary of Chartwell and until August 1996 he served as a
Director of Chartwell. He was a partner with Troutman, Sanders, Lockersman &
Ashmore, an Atlanta, Georgia law firm from January 1990 to February 1992.

   MS. DEHAAN, age 54, was elected a Director of the Company effective in
November 1996. Ms. DeHaan founded RCI in 1974, until November 1996 served as
its Chairman and Chief Executive Officer and currently serves as the Chairman
of the Board of Directors of RCI. Ms. DeHaan also currently serves as
President and Chief Executive Officer of CD Enterprises, Inc.

   MR. EDELMAN, age 55, was elected a Director of the Company in November
1993. Mr. Edelman also serves as President and a Director of Chartwell. He
has been a partner with Battle Fowler, a New York City law firm, from 1972
through 1993 and as of January 1, 1994 is Of Counsel to that firm. Battle
Fowler has represented the Company in a number of transactions during the
past fiscal year. Mr. Edelman is also a partner of Chartwell Hotels
Associates, Chartwell Leisure Associates L.P., Chartwell Leisure Associates

                               40
<PAGE>
L.P. II, and of certain of their respective affiliates. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" for a discussion of the Company's
transactions with Battle Fowler, transactions with the Chartwell entities.
Mr. Edelman also serves as a Director of Presidio Capital Corp., California
Real Estate Investment Trust and Networks, Inc.

   MR. NEDERLANDER, age 63, has been a Director of the Company since July
1995. Mr. Nederlander has been President and Director since November 1981 of
the Nederlander Organization, Inc., owner and operator of one of the world's
largest chains of legitimate theaters. Mr. Nederlander has been Chairman of
the Board of Riddell Sports Inc. since April 1988 and was the Chief Executive
Officer of such corporation from 1988 through April 1, 1993. From February
until June 1992, Mr. Nederlander was also the Company's interim President and
Chief Operating Officer. He served as the Managing General Partner of the New
York Yankees from August 1990 until December 1991, and has been a limited
partner since 1973. Mr. Nederlander has been President since October 1985 of
Nederlander Television and Film Productions, Inc.; Chairman of the Board
since January 1988 of Mego Financial Corp. ("Mego") and Vice Chairman of the
Board since February 1988 to early 1993 of Vacation Spa Resorts, Inc., an
affiliate of Mego. Mr. Nederlander also served as Chairman of the Board of
Allis-Chalmers Corp. from May 1989 to 1993 and as Vice Chairman from 1993
through October 1996. In October 1996, Mr. Nederlander became a director of
News Communications, Inc., a publisher of community oriented free circulation
newspapers. See "EXECUTIVE COMPENSATION -- Compensation Committee Interlocks
and Insider Participation" for a discussion of certain transactions and
relationships between the Company and Mego.

   MR. PITTMAN, age 43, has been a Director of the Company since July 1994.
Since October 1996 Mr. Pittman has been President and Chief Executive Officer
of AOL Networks, a unit of America Online, Inc. From September 1995 through
October 1996, Mr. Pittman served as the Chief Executive Officer and Managing
Partner of the Company's wholly owned subsidiary, Century 21 Real Estate
Corporation. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" for a
discussion of certain transactions and relationships between the Company and
Mr. Pittman. From 1990 until September 1995, Mr. Pittman served as President
and Chief Executive Officer of Time Warner Enterprises, a business
development unit of Time Warner Inc. and, from 1991 to September 1995,
additionally, as Chairman and Chief Executive Officer of Six Flags
Entertainment Corporation, the parent of Six Flags Theme Parks Inc. Mr.
Pittman serves as a director of America Online, Inc.

   MR. ROSENWALD, age 66, was elected a Director of the Company effective in
September 1996. Mr. Rosenwald has been, since 1988, Vice Chairman of The Bear
Stearns Companies, Inc. Mr. Rosenwald also serves as a Director of The Bear
Stearns Companies, Inc., Hasbro, Inc. and Frequency Electronics, Inc.

   MR. SCHUTZMAN, age 50, has been a Director of the Company since August
1993. Mr. Schutzman is currently Chairman of the Board and Chief Executive
Officer of Triad Capital Corporation of New York, a small business investment
company, and is a professor at the William E. Simon Graduate School of
Business at the University of Rochester in Rochester, New York. Mr. Schutzman
was Senior Vice President of PepsiCo Inc. from February 1987 to April 1995.
Mr. Schutzman also serves as a Director of RCSB Finance, Inc., the bank
holding company for Rochester Community Savings Bank.

   MR. SMITH, age 64, has been a Director of the Company since February 1993.
From November 1994 until August 1996, Mr. Smith also served as a Director of
Chartwell. Mr. Smith is the retired Chairman and Chief Executive Officer of
American Express Bank, Ltd. ("AEBL"). He joined AEBL's parent company, the
American Express Company in 1981 as Corporate Treasurer before moving to AEBL
and serving as Vice Chairman and Co-Chief Operating Officer and then
President prior to becoming CEO. Mr. Smith is currently a Partner in Car
Component Technologies, Inc., an automobile parts remanufacturer, located in
Bedford, New Hampshire.

   Messrs. Holmes and Pittman were Directors and Mr. Snodgrass was Chairman
of the Board of AMRE, Inc. ("AMRE") within two years prior to January 20,
1997, the date on which AMRE filed for reorganization under Chapter 11 of the
U.S. Bankruptcy Code. Although the Company had a minor investment in AMRE,
AMRE is not an affiliate of or otherwise related to the Company.

                               41
<PAGE>
EXECUTIVE OFFICERS

   The following table sets forth certain information regarding the executive
officers of the Company:

<TABLE>
<CAPTION>
           NAME                                   OFFICE OR POSITIONS HELD
-------------------------  --------------------------------------------------------------------
<S>                        <C>
Henry R. Silverman ....... Chairman of the Board and Chief Executive Officer
John D. Snodgrass ........ Vice Chairman, President, Chief Operating Officer and Director
Stephen P. Holmes ........ Vice Chairman
Michael P. Monaco ........ Vice Chairman and Chief Financial Officer
James E. Buckman ......... Executive Vice President, General Counsel and Assistant Secretary
Scott W. Anderson ........ Executive Vice President of Marketing
David P. McNicholas  ..... Executive Vice President and Chief Information Officer
John M. Osborne .......... Executive Vice President of Franchise Sales
John J. Russell, Jr.  .... President, Hospitality Division
Richard A. Smith ......... President, Real Estate Division
</TABLE>

   For biographical information concerning Messrs. Silverman, Snodgrass,
Holmes, Monaco and Buckman see "Directors" above.

   MR. ANDERSON, age 46, has been Executive Vice President of Marketing for
the Company since September 1996. Mr. Anderson served as Managing Director --
Games Services for the Atlanta Committee for the 1996 Olympic Games from
January 1994 to September 1996. From September 1990 to January 1994 Mr.
Anderson was President and Chief Executive Officer of Callaway Gardens and
Resort in Georgia.

   MR. MCNICHOLAS, age 56, was appointed Executive Vice President and Chief
Information Officer of the Company in November 1996. Mr. McNicholas also has
been, since May 1994, President and, since May 1987, a Director of WizCom
International, Ltd., a subsidiary of the Company. Prior to November 1996, Mr.
McNicholas served as Corporate Vice President of Information Systems of Avis,
Inc. Mr. McNicholas currently serves as a Director of Avis Europe Ltd.

   MR. OSBORNE, age 46, has been Executive Vice President of Franchise Sales
for the Company's Hospitality Division since July 1993. In August 1996, Mr.
Osborne also assumed responsibility for the Company's Franchise Sales for the
Real Estate Division. Mr. Osborne was General Manager for the Central Region
of Wang Laboratories Inc. from July 1991 to June 1993. Prior to such time he
spent approximately 12 years at Unisys Corporation in various senior
management positions.

   MR. RUSSELL, age 49, has been President of the Hospitality Division of the
Company since April 1996. Prior to such time, Mr. Russell served as Executive
Vice President of Franchise Sales for the Real Estate Division of the Company
from October 1995 through March 1996 and President of Days Inns of America,
Inc. from August 1992 to October 1995. Prior to joining Days Inns of America,
Inc., Mr. Russell was Vice President of Benchmark Hospitality Management
Company and general manager of its Resort at Squaw Creek in Olympic Valley,
California.

   MR. SMITH, age 43, has been President of the Company's Real Estate
Division since October 1996. Prior to such time, Mr. Smith served as
Executive Vice President of Operations of the Company since February 1992.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

   Section 16(a) of the Exchange Act requires HFS's officers and directors,
and persons who own more than ten percent of a registered class of HFS's
equity securities, to file reports of ownership and changes in ownership on
Forms 3, 4 and 5 with the Securities and Exchange Commission and the New York
Stock Exchange. Officers, directors and greater than ten percent owners are
required to furnish HFS with copies of all Forms 3, 4 and 5 they file.

   Based solely on HFS's review of the copies of such forms it has received
and written representations from certain reporting persons that they were not
required to file Forms 5 for a specified fiscal year, except as set forth
below, HFS believes that all its officers, directors, and greater than ten
percent beneficial owners complied with all filing requirements applicable to
them with respect to transactions during 1996.

                               42
<PAGE>


   In February 1997, Mr. Silverman filed a Form 5, amending a Form 4 filed by
Mr. Silverman for the month of October 1996 which reported, inter alia, the
transactions related to the exercise of options to purchase 57,900 shares of
Company Common Stock. The Form 4 as filed in November 1996 reported such
transactions incorrectly as relating to 57,200 shares of Company Common Stock
as a result of a typographical error.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

   The following table sets forth the 1994, 1995 and 1996 cash and noncash
compensation awarded to or earned by the Chief Executive Officer of the
Company, the four other most highly compensated executive officers of the
Company and one former officer of a subsidiary of the Company, for whom such
reporting is required:

                          SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>

                                  ANNUAL COMPENSATION
                        -----------------------------------
        NAME AND                                     BONUS
   PRINCIPAL POSITION      YEAR     SALARY($)         ($)
-----------------------  ------  --------------  -----------
<S>                      <C>     <C>             <C>
Henry R. Silverman
 Chairman of the Board,    1996     1,501,930      2,250,000
 Chief Executive           1995     1,000,000        434,000
 Officer                   1994     1,370,837(4)       0
John D. Snodgrass
 Vice Chairman,            1996       571,539        557,728
 President & Chief         1995       558,043        543,043
 Operating Officer (5)     1994       543,509        529,584

Stephen P. Holmes          1996       417,305        215,621
 Vice Chairman (5)         1995       356,406        150,000
                           1994       323,911        150,000
James E. Buckman           1996       417,305        215,621
 Exec. Vice President,     1995       356,406        150,000
 General Counsel, Asst.    1994       321,116        150,000
 Secretary (5)
John J. Russell, Jr.,      1996       363,222        132,423
 President, Hospitality    1995       213,769        106,885
 Division                  1994       208,381        104,191
Robert W. Pittman          1996       834,615          0
 (Former) Chairman and     1995       165,385          0
 Managing Partner,
 Century 21 Real Estate
 Corporation(1)
</TABLE>

                    (RESTUBBED TABLE CONTINUED FROM ABOVE)

<TABLE>
<CAPTION>

                                          LONG TERM
                                         COMPENSATION
                         ------------------------------------------
                                             AWARDS
                                        --------------
                                            SECURITIES     ALL OTHER
                           OTHER ANNUAL     UNDERLYING      COMPEN-
        NAME AND           COMPENSATION    OPTIONS/SARS     SATION
   PRINCIPAL POSITION         ($)(3)           (#)          ($)(2)
-----------------------  --------------  --------------  -----------
<S>                      <C>             <C>             <C>
Henry R. Silverman
 Chairman of the Board,     19,986,936      2,000,000       39,804
 Chief Executive                0           1,835,082        6,666
 Officer                        0           1,447,802       10,330
John D. Snodgrass
 Vice Chairman,                 0             320,000        1,455
 President & Chief              0             558,142        2,397
 Operating Officer (5)          0             454,840       32,873

Stephen P. Holmes          5,354,088          100,000        4,103
 Vice Chairman (5)              0             231,720        3,173
                                0             160,156        4,280

James E. Buckman                0             100,000        3,940
 Exec. Vice President,         816,513        220,076        3,173
 General Counsel, Asst.         0             160,156        4,460
 Secretary (5)

John J. Russell, Jr.,          297,625        140,000       61,833
 President, Hospitality      1,520,933         20,000        2,460
 Division                       86,706         21,354        2,294
Robert W. Pittman            1,102,708        200,000       10,038
 (Former) Chairman and          41,833        244,662            0
 Managing Partner,
 Century 21 Real Estate
 Corporation(1)
</TABLE>

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

(1)    Mr. Pittman served as Chairman and Managing Partner of Century 21 Real
       Estate Corporation from September 1995 through October 1996. Mr.
       Pittman also has served since 1994 and continues to serve as a Director
       of the Company.
(2)    Payments included in these amounts for the fiscal year ended December
       31, 1996 consist of (1) Company contributions to the Employee Savings
       Plan (the "401k Plan"), which is a defined contribution salary
       reduction 401(k) plan qualified under Section 401(a) of the Internal
       Revenue



                               43
<PAGE>
       Code of 1986, as amended (the "Code") and under a non-qualified
       deferred compensation plan established by the Company in 1996 ("Defined
       Contribution Match"); and (2) insurance premiums paid by the Company
       for supplemental life insurance coverage. In addition, in 1996 only,
       payments of $150 for each of Messrs. Silverman, Snodgrass, Holmes,
       Buckman and Russell were made under the medical examination
       reimbursement program, and in 1994, Mr. Snodgrass received $29,677 in
       reimbursement of relocation expenses. The payments with respect to the
       Defined Contribution Match and life insurance premiums were as follows:

<TABLE>
<CAPTION>
                            DEFINED         LIFE
                          CONTRIBUTION    INSURANCE
                  YEAR       MATCH         PREMIUM
                ------  --------------  -----------
<S>             <C>     <C>             <C>
Mr. Silverman     1996      $35,094        $4,410
                  1995        2,310         4,356
                  1994        2,310         8,020
Mr. Snodgrass     1996            0         1,305
                  1995            0         2,397
                  1994            0         3,206
Mr. Holmes ....   1996        2,648         1,305
                  1995        2,310           863
                  1994        2,310         1,970
Mr. Buckman  ..   1996        2,375         1,415
                  1995        2,310           863
                  1994        2,310         2,150
Mr. Russell  ..   1996       61,683             0
                  1995        2,640             0
                  1994        2,294             0
Mr. Pittman  ..   1996       10,038             0
                  1995            0             0
</TABLE>

(3)    Other Annual Compensation consists of income received as a result of
       the exercise of stock options. In addition, as Mr. Pittman was a
       non-employee director from 1994 through September 1995 and has again
       become a non-employee director as of October 29, 1996, Other Annual
       Income for Mr. Pittman includes the amount of $41,833 in 1995 and
       $6,000 in 1996 representing compensation to Mr. Pittman in the capacity
       of a non-employee director.
(4)    Prior to the effective date of the distribution of Chartwell's stock to
       the shareholders of the Company in November 1994 (the "Chartwell
       Distribution"), Mr. Silverman's annual rate of compensation from the
       Company was $1,400,000. As of such effective date, Mr. Silverman's
       annual rate of compensation from the Company was reduced by $400,000,
       and his annual rate of compensation from Chartwell was established at
       $500,000. Effective February 1, 1996, Mr. Silverman resigned as
       Chairman and Chief Executive Officer of Chartwell and, in accordance
       with his employment contract with the Company, his annual base rate of
       compensation was increased to $1,500,000.
(5)    Although Messrs. Snodgrass, Holmes and Buckman served as executive
       officers of Chartwell in 1995 and a short period in 1996, they received
       their entire compensation (other than certain options to purchase
       shares of Chartwell common stock which were cancelled) for serving in
       such capacities from the Company. A portion of the Corporate Services
       Fee paid to the Company by Chartwell pursuant to the Corporate Services
       Agreement entered into between the Company and Chartwell in connection
       with the Chartwell Distribution represents the payment to the Company
       by Chartwell for the executive services performed by such persons on
       behalf of Chartwell. No set allocations were established with respect
       to the portion of time that such persons devoted to the affairs of the
       Company and Chartwell, respectively, nor were allocations established
       with respect to the portion of such persons' overall compensation from
       the Company that was paid in respect of services performed on behalf of
       Chartwell pursuant to the Corporate Services Agreement. Messrs.
       Snodgrass, Holmes and Buckman are no longer officers of Chartwell. See
       "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Relationship with
       Chartwell."

                               44
<PAGE>
OPTION GRANTS TABLE

   The following tables summarize option grants during the last fiscal year
for the named executive officers. The Company's option plans do not provide
for stock appreciation rights.

                   OPTION/SAR GRANTS IN LAST FISCAL YEAR(1)

<TABLE>
<CAPTION>
                                                                                  POTENTIAL REALIZABLE VALUE
                                                                                    AT ASSUMED ANNUAL RATES
                                                                                        OF STOCK PRICE
                                                                                         APPRECIATION
                                           INDIVIDUAL GRANTS                            FOR OPTION TERM
---------------------  --------------------------------------------------------  ---------------------------
                          NUMBER OF       % OF TOTAL
                          SECURITIES     OPTIONS/SARS    EXERCISE
                          UNDERLYING      GRANTED TO     OR BASE
                         OPTIONS/SARS    EMPLOYEES IN     PRICE      EXPIRATION
         NAME            GRANTED (#)     FISCAL YEAR      ($/SH)        DATE       5% ($)(2)     10% ($)(2)
---------------------  --------------  --------------  ----------  ------------  ------------  -------------
<S>                    <C>             <C>             <C>         <C>           <C>           <C>
Henry R. Silverman  ..    2,000,000         18.27        40.3125       1/22/06     52,944,062    132,061,680
John D. Snodgrass  ...      320,000          2.92        62.1250       5/31/06     12,632,664     31,891,050
Stephen P. Holmes  ...      100,000          0.91        62.1250       5/31/06      3,947,707      9,965,953
James E. Buckman  ....      100,000          0.91        62.1250       5/31/06      3,947,707      9,965,953
John J. Russell, Jr.        140,000          1.28        46.1250        3/1/06      4,061,063     10,291,575
Robert W. Pittman  ...      200,000          1.83        73.0000      10/29/06      8,937,474     22,879,543
</TABLE>

------------
(1)    In accordance with the terms of the 1993 Plan, an equitable adjustment
       was made to the numbers of options granted and the exercise prices of
       options granted under the 1993 Plan as a result of the Company's
       two-for-one stock split, effected as a stock dividend as of February
       14, 1996. The 1993 Plan option numbers and exercise prices included in
       the Table above and elsewhere in this Proxy Statement reflect such
       equitable adjustment.
(2)    Based upon the exercise prices, the amounts shown in these columns are
       the potential realizable value of options granted at assumed rates of
       stock price appreciation (5% and 10%) set by the executive compensation
       disclosure provisions of the proxy rules, and have not been discounted
       to reflect the present value of such amounts. The assumed rates of
       stock price appreciation are not intended to forecast the future
       appreciation of the Common Stock.

   Pursuant to the 1993 Plan, options for up to 24,541,600 shares of Common
Stock may be granted to directors, officers, employees and independent
contractors of the Company. In 1996, a total of 10,945,900 options were
granted under the 1993 Plan to a broad group of directors, officers,
employees and independent contractors of the Company. Except for the grants
made to Mr. Silverman and Mr. Snodgrass, which are, in accordance with each
of their employment agreements, fully vested, all such options were granted
as non-qualified options on the terms described below as generally applicable
to the 1993 Plan. In accordance with the formula grant provisions for
non-employee directors in the 1993 Plan, 50,000 options were granted to Mr.
Rosenwald as of September 24, 1996, on the standard terms of the 1993 Plan.

   Options granted under the 1993 Plan may be "incentive stock options"
("ISOs") (within the meaning of Section 422 of the Code) or options not
subject to Section 422 of the Code ("NQSOs"). Each such option (ISO or NQSO),
when it becomes exercisable, entitles the holder thereof to purchase a share
of Common Stock for an amount equal to the exercise price of the option,
payable in cash, in shares of Common Stock with an aggregate value equal to
the exercise price of the option, or in a combination thereof. The exercise
price of each option under the 1993 Stock Option Plan may not be less than
the fair market value of a share of Common Stock on the date the option is
granted. Generally, options held by an optionee will become exercisable as to
20% of the shares covered by such options on the first anniversary of the
date of grant if the optionee continues to be employed by the Company on that
date, and with respect to an additional 20% of the shares covered by such
options on each of the four succeeding anniversaries of the date of grant if
the optionee continues to be employed by the Company on each such date. All
options held by an optionee will become fully exercisable (to the extent not
already exercisable)

                               45
<PAGE>
if a "change-of-control transaction" (as defined in the 1993 Plan) occurs.
Generally, options granted under the 1993 Plan, to the extent not exercised,
expire on the earliest of (i) the tenth anniversary of the date of grant,
(ii) two years following the optionee's termination of employment on account
of death, retirement or disability or (iii) one year following the optionee's
termination of employment for any other reason (other than Cause, as defined
in the 1993 Plan). Options granted to directors who are not employees of the
Company or a subsidiary are subject to pre-determined rules and procedures
such that neither the Board of Directors nor the Compensation Committee has
any discretion in connection with the granting of such options. The 1993 Plan
was amended in 1996 to (i) increase the number of shares of Common Stock
authorized for issuance under the 1993 Plan, (ii) to modify the annual
limitation on the number of options that may be granted to any individual,
(iii) to permit transferability of options under certain limited
circumstances, (iv) to provide for the delegation by the Compensation
Committee to the Stock Option Committee of the Board of Directors the
authority to grant options to optionees other than executive officers and
directors of the Company and (v) to permit the Board or the Compensation
Committee to approve the acceleration of the exercisability of options
granted to Non-Employee Directors.

OPTION EXERCISES AND YEAR-END OPTION VALUE TABLE

   The following table summarizes the exercise of options by the named
executive officers during the last fiscal year and the value of unexercised
options held by such named executives as of the end of such fiscal year. The
Company's option plans do not provide for stock appreciation rights.

                   AGGREGATED OPTION/SAR EXERCISES IN LAST
                   FISCAL YEAR AND FY-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
                                                            NUMBER OF SECURITIES
                                                           UNDERLYING UNEXERCISED      VALUE OF UNEXERCISED
                                                           OPTIONS/SARS AT FY-END    IN-THE-MONEY OPTIONS/SARS
                                                                     (#)                 AT FY-END ($)(1)
                       SHARES ACQUIRED   VALUE REALIZED
         NAME          ON EXERCISE (#)        ($)         EXERCISABLE/UNEXERCISABLE  EXERCISABLE/UNEXERCISABLE
--------------------  ---------------  ----------------  -------------------------  -------------------------
<S>                   <C>              <C>               <C>                        <C>
Henry R. Silverman         300,000        $19,989,936           11,700,000/0          $544,283,955/$0
John D. Snodgrass                0                  0            3,155,200/0          $146,717,200/$0
Stephen P. Holmes           96,000          5,354,088          494,406/509,594        $ 26,935,232/$18,956,167
James E. Buckman                 0                  0          373,063/635,337        $ 19,494,211/$25,822,005
John J. Russell, Jr.             0                  0          49,490/229,252         $  2,617,160/$6,446,248
Robert W. Pittman           30,000          1,054,875          81,067/338,933         $  2,998,004/$5,305,083
</TABLE>

------------
(1)    Based upon the closing price of the Common Stock on the New York Stock
       Exchange on December 31, 1996 ($59.75), and applicable option exercise
       prices.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

   As of January 1, 1996, the members of the Compensation Committee were Mr.
Robert Smith (Chair), Mr. Nederlander, Mr. Schutzman and Roger J. Stone, Jr.
As of July 24, 1996, the Board of Directors reappointed Mr. Smith as Chair of
the Compensation Committee and Messrs. Schutzman, Stone and Nederlander to
serve as members of the Compensation Committee. In September 1996 Mr. Stone
resigned from the Compensation Committee and the Board. None of the foregoing
individuals are or were, at the time so serving, officers or employees of the
Company.

   In April 1995, the Company and Ramada Franchise Systems, Inc. ("RFS"), a
wholly-owned subsidiary of the Company ("RFS"), entered into a license
agreement with Preferred Equities Corporation ("PEC"), the owner, developer
and operator of interval ownership resort facilities, pursuant to which PEC
was licensed to use certain Ramada servicemarks in connection with its
facilities in the United States. PEC has paid RFS $1 million in initial fees
and will pay a percentage of Gross Sales (as defined) of interval ownership
interests during the term of the agreement. Mr. Nederlander is the Chairman
and a significant shareholder of MEGO Financial Corp., of which PEC is a
wholly-owned subsidiary.

                               47
<PAGE>
COMPENSATION OF DIRECTORS

   Non-Employee Directors receive an annual retainer of $30,000, plus $4,000
for chairing a committee and $2,000 for serving as a member of a committee
other than Chair. Non-Employee Directors also are paid $1,000 for each Board
meeting attended and $500 ($1,000 for committee chair) for each Board
committee meeting if held on the same day as a Board meeting and $1,000
($2,000 for committee chair) for each Board committee meeting attended on a
day on which there is no Board meeting. Non-Employee Directors are reimbursed
for expenses incurred in attending meetings of the Board of Directors and
committees.

   The Company provides $100,000 of term life insurance coverage for each
Non-Employee Director to the beneficiary designated by such Non-Employee
Director. In addition, the Company has purchased joint life insurance
contracts in the amount of $1 million for each Director. Upon the death of
such Director, the Company will donate an aggregate of $1 million to one or
more charitable organizations designated by such Director from the proceeds
of such insurance policy. With the exception of such joint life insurance
contracts, members of the Board of Directors who are officers or employees of
the Company or any of its subsidiaries do not receive compensation or
reimbursement of expenses for serving in such capacity.

   Under the 1993 Plan, as of June 14, 1994, each Non-Employee Director was
granted options to purchase 5,338 shares of Common Stock on the date of his
or her appointment or election to the Board of Directors (or the date of the
1994 Annual Meeting of Stockholders for Non-Employee Directors elected or
serving as of such date). Such options have an exercise price of the fair
market value on the date of grant and vest over a five year period from the
date of grant at the rate of 20% per year, and otherwise have the same terms
as all other options granted under the 1993 Plan. As a result of the
amendments to the 1993 Plan which were approved by the stockholders of the
Company at the 1995 Annual Meeting of Stockholders, a single grant will be
made to each new Non-Employee Director, on the terms described above, of
options to purchase 50,000 shares of Common Stock on the date of such
director's initial appointment or election, and those Non-Employee Directors
who received grants of options to purchase shares of Common Stock pursuant to
the 1993 Plan prior to such amendment and who continued to serve as
Non-Employee Directors received an additional grant effective on the date of
the 1995 Annual Meeting of Stockholders of options to purchase 44,662 shares
of Common Stock, on the terms described above. In September 1996, the 1993
Plan was amended to permit the Board or the Compensation Committee to
accelerate the vesting of options granted to Non-Employee Directors.

EMPLOYMENT CONTRACTS AND TERMINATION, SEVERANCE AND CHANGE OF CONTROL
ARRANGEMENTS

   With the exception of Mr. Russell, who does not currently have an
employment contract with the Company, each named executive officer is or was
employed by the Company pursuant to a written employment agreement. Mr.
Pittman was employed by the Company pursuant to an employment agreement as
described below prior to his resignation in October 1996.

   Mr. Silverman serves as Chairman of the Board and Chief Executive Officer
of the Company pursuant to an employment agreement that was amended and
restated as of June 30, 1996 and further amended as of January 27, 1997 (such
agreement, as amended and restated, is referred to herein as the "Silverman
Agreement"). The following description of the Silverman Agreement is
qualified in its entirety by reference to the copy of such agreement filed
with the Securities and Exchange Commission as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996
and the amendment filed as Exhibit 10 The Silverman Agreement expires on
December 31, 2000. In connection with the Chartwell Distribution, as of the
effective date thereof (the "Effective Date") Mr. Silverman entered into an
employment agreement with Chartwell. Concurrently therewith, Mr. Silverman
and the Company entered into an amendment to the Silverman Agreement,
pursuant to which Mr. Silverman's annual rate of compensation was reduced to
$1,000,000 effective as of the Effective Date (subject to annual increases
after 1995 in accordance with the increases in the consumer price index), in
recognition of the fact that, from the Effective Date, Mr. Silverman served
as an executive officer of Chartwell on a concurrent basis with his
employment by the Company. Such amendment also provided that in the event Mr.
Silverman resigned or his employment by Chartwell was terminated during the

                               47
<PAGE>
period of his employment under the Silverman Agreement, his annual base
salary would be increased by the amount of his annual base salary payable by
Chartwell in effect at the time of such termination. Mr. Silverman resigned
as an employee of Chartwell as of January 24, 1996 at which time his base
salary was increased to $1,500,000. The Silverman Agreement provides for Mr.
Silverman to receive a bonus with respect to each of the Company's fiscal
years in the amount of 0.75% of the Company's "EBITDA" (as defined in the
Silverman Agreement) for such fiscal year, provided that such bonus does not
exceed 150% of Mr. Silverman's annual base salary in effect on the first day
of such fiscal year, and further provided that such bonus shall be pro-rated
for any partial year based upon the number of days in such year occurring
prior to the termination of the Silverman Agreement. The Silverman Agreement
also provides that the Committee may award additional compensation to Mr.
Silverman if the Committee, in its sole discretion, determines that such a
payment is warranted based upon Mr. Silverman's performance.

   The Silverman Agreement also provides for the Company to grant to Mr.
Silverman, on or before July 1 of each calendar year commencing in 1996, a
stock option to purchase two million (2,000,000) shares of Common Stock under
the 1993 Plan. Each such stock option will be exercisable at an exercise
price per share equal to the Fair Market Value (as defined in the 1993 Plan)
of the Common Stock on the date of grant and will vest immediately upon
grant. Further, the options previously granted to Mr. Silverman under the
1993 Plan were immediately vested in connection with the execution of the
amended and restated Silverman Agreement. The Silverman Agreement further
provides that Mr. Silverman may not sell more than two million (2,000,000)
shares of Common Stock in any calendar year, provided, however, that the
foregoing limitation only applies with respect to shares of Common Stock
acquired by Mr. Silverman pursuant to the exercise of options granted under
any stock option or other plan of the Company. The number of shares of Common
Stock granted under each option referred to above and the number of shares of
Common Stock which the Executive may sell in a calendar year will be adjusted
to reflect any "Change in Capitalization" (as defined in the 1993 Plan).
Prior to the execution of the amended and restated Silverman Agreement, the
Silverman Agreement provided that, notwithstanding the foregoing restriction
on sale of stock, Mr. Silverman could sell more than two million (2,000,000)
shares of Common Stock in a calendar year provided that the total number of
shares sold in that calendar year and the prior calendar year did not exceed
four million (4,000,000) shares of Common Stock.

   In addition, the Silverman Agreement provides that the Company will
guarantee certain loans that Mr. Silverman receives from a financial
institution reasonably acceptable to the Company with an aggregate principal
amount equal to not more than the lesser of (i) $100,000,000 or (ii) 25% of
the excess of the aggregate "Fair Market Value" (as defined in the 1993 Plan)
of the Common Stock (determined as of the date of such loan or loans) subject
to Mr. Silverman's then outstanding stock options (vested or unvested)
granted under any stock option or other plan of the Company over the
aggregate exercise price of all such stock options (such excess being
hereinafter referred to as the "Value"). The terms of any such loans shall
provide that if at any time the outstanding principal amount of such loans
exceeds 50% of the Value, Mr. Silverman will immediately repay an amount of
such loans so that the outstanding principal amount of such loans does not
exceed 50% of the Value.

   The Silverman Agreement provides that in the event Mr. Silverman's
employment is terminated by the Company for any reason other than death,
disability or "cause" (as defined in the Silverman Agreement), Mr. Silverman
would receive, on the date of such termination, a severance payment in an
amount equal to (i) the aggregate annual base salary (as adjusted for
increases in the consumer price index through the date of termination)
through December 31, 2000, and (ii) 0.75% of the Company's "EBITDA" for the
twelve (12) calendar months preceding the termination date multiplied by the
number of years (including partial years) remaining through December 31,
2000, provided, that such payment shall not exceed 150% of the annual base
salary in effect on the termination date multiplied by the number of years
(including partial years) remaining through December 31, 2000. In addition,
the Company would continue to make available to Mr. Silverman the other
welfare benefits contained in the Silverman Agreement until December 31, 2000
provided Mr. Silverman did not receive substantially the same benefits from
another employer.

                               48
<PAGE>
   If any Change-of-Control Transaction (as such term is defined in the 1993
Plan) occurs, Mr. Silverman will be entitled to receive a lump sum payment
equal to his aggregate annual salary as in effect on such date multiplied by
three (3), irrespective of whether he offers to continue his employment with
the Company, provided that such lump sum shall not be paid to Mr. Silverman
if after completion of the Change-of-Control Transaction he shall be employed
directly or indirectly by the Company or its successor pursuant to an
employment agreement in form and substance substantially identical to the
Silverman Agreement, but having a term of not less than three (3) years. This
provision survives the termination of the Silverman Agreement for any reason
other than for Cause or the voluntary resignation of Mr. Silverman. Further,
in the event a Change-of-Control Transaction occurs the Silverman Agreement
provides that the Company will pay Mr. Silverman a lump sum amount, in cash
or Common Stock at the Company's option, equal to the value of the options
remaining to be granted in accordance with the Silverman Agreement as
determined by an independent compensation consultant or investment banker,
selected by Mr. Silverman and reasonably acceptable to the Company.

   Mr. Snodgrass serves as President, Chief Operating Officer and a director
of the Company pursuant to an employment agreement (the "Snodgrass
Agreement") that, as amended, expires on December 31, 1998. The Snodgrass
Agreement provides for a base salary of at least $515,000 per year and in the
event certain established levels of earnings before interest, taxes,
depreciation and amortization are achieved for the applicable year, an annual
bonus equal to $15,000 less than his then-current base salary. The Snodgrass
Agreement also provides for severance equal to a lump sum payment equal to
the greater of his aggregate base salary for one year or his base salary from
the date of his termination through January 31, 1998 in the event that
employment is terminated by the Company for any reason other than disability
or "just cause" or is terminated by Mr. Snodgrass for "good reason" (as
defined in the agreement). In the event employment is terminated in
connection with a change-of-control transaction prior to December 31, 1998,
Mr. Snodgrass would be entitled to a lump sum payment equal to his base
salary; provided, however, that any such lump sum payment would be reduced by
the amount of any other severance payment made to Mr. Snodgrass in connection
with termination of his employment. Mr. Snodgrass is also entitled to be
indemnified against federal excise tax in the event that any "excess
parachute payments" are deemed to result from the severance payment and the
acceleration of the vesting under any stock options granted to Mr. Snodgrass
due to a change-of-control transaction. The Compensation Committee has
approved offering loan guarantees to Mr. Snodgrass on the same terms as
described in the preceding paragraph for Mr. Silverman.

   Under the Snodgrass Agreement a change-of-control transaction is generally
defined to mean any sale or other transfer of 50% of the Common Stock other
than as a result of a public offering of capital stock by the Company, to a
third party, other than to The Blackstone Group or its affiliates, whether by
sale or issuance of Common Stock, or the sale of more than 50% of the assets
or earning power of the Company and its subsidiaries (taken as a whole) other
than to The Blackstone Group or its affiliates or a merger or consolidation
in which designees of The Blackstone Group or its affiliates no longer
constitute a majority of the directors of the surviving corporation and each
committee thereof or control of 50% or more of the business of the Company is
sold, assigned or otherwise transferred to any third party, other than The
Blackstone Group or its affiliate. The Snodgrass Agreement also provides that
the payments related to a change-of-control transaction are not required if
Mr. Snodgrass is subsequently employed pursuant to an employment agreement in
form and substance substantially identical to his employment agreement in
effect immediately prior to such change-of-control transaction.

   The Snodgrass Agreement also provides for the Company to grant to Mr.
Snodgrass, in May 1997 and May 1998, a stock option to purchase 250,000
shares of Common Stock under the 1993 Plan. Each such stock option will be
exercisable at an exercise price per share equal to the Fair Market Value (as
defined in the 1993 Plan) of the Common Stock on the date of grant and will
vest immediately upon grant. Further, the options previously granted to Mr.
Snodgrass under the 1993 Plan were immediately vested in connection with the
execution of the third amendment to the Snodgrass Agreement, executed in
October 1996. Also pursuant to such amendment, the Company agreed to arrange
to provide to Mr. Snodgrass transportation by charter aircraft for personal
and business use, the cost of which will be borne by Mr. Snodgrass or the
Company in accordance with currently existing Company policy.

                               49
<PAGE>
   Mr. Holmes serves as Vice Chairman of the Company pursuant to an
employment agreement, amended as of October 1, 1994, that expires on October
1, 1997. Mr. Buckman is Executive Vice President and General Counsel of the
Company pursuant to an employment agreement, amended as of October 1, 1994,
that expires on January 15, 1998. Messrs. Holmes and Buckman each currently
receive base salary at the rate of $500,000 per annum. Each of Messrs. Holmes
and Buckman is to be paid an annual bonus in accordance with the then
effective cash incentive or cash bonus plan of the Company. Their base
salaries are subject to annual increases in accordance with increases in the
consumer price index. In the event that employment is terminated by the
Company during the term of the agreement, other than for death, disability or
"cause" (as defined in such agreements), Mr. Holmes or Mr. Buckman, as the
case may be, would receive a severance payment in an amount equal to the base
salary then payable under the agreement through the earlier of (i) the first
anniversary of such termination or (ii) the expiration of the term of such
employment agreement. The employment agreements also provide that if Mr.
Holmes or Mr. Buckman, as the case may be, is terminated prior to the
expiration of his employment agreement in connection with a change-of-control
transaction, Mr. Holmes or Mr. Buckman, as the case may be, would receive a
lump sum payment equal to the base salary which would have been payable from
the date of such termination to the expiration of his employment agreement,
but not less than one year's base salary. The Compensation Committee has
approved offering loan guarantees to Messrs. Holmes and Buckman on the same
terms as described above for Mr. Silverman.

   Under the employment agreements for Messrs. Buckman and Holmes, a
change-of-control transaction is generally defined to mean any transaction or
series of transactions pursuant to or as a result of which (i) during any
period of not more than 24 months, individuals who at the beginning of such
period constitute the Board, and any new director (other than a director
designated by a third party who has entered into an agreement to effect a
transaction described in clause (ii), (iii) or (iv) below) whose election by
the Board or nomination for election by the Company's stockholders was
approved by a vote of at least a majority of the directors then still in
office who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved (other than
approval given in connection with an actual or threatened proxy or election
contest), cease for any reason to constitute at least a majority of the
members of the Board, (ii) beneficial ownership of 50% or more of the common
stock (or other securities having generally the right to vote for election of
the Board) of the Company (the "Shares") shall be sold, assigned or otherwise
transferred, directly or indirectly, other than pursuant to a public
offering, to a third party, whether by sale or issuance of Shares or other
securities or otherwise, (iii) the Company or any Subsidiary shall sell,
assign or otherwise transfer, directly or indirectly, assets (including stock
or other securities of Subsidiaries) having a fair market or book value or
earning power of 50% or more of the assets or earning power of the Company
and its Subsidiaries (taken as a whole) to any third party, other than the
Company or a wholly-owned Subsidiary thereof, or (iv) control of 50% or more
of the business of the Company shall be sold, assigned or otherwise
transferred directly or indirectly to any third party. For purposes of this
paragraph, the term "Subsidiary" shall mean any corporation in an unbroken
chain of corporations, beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain. Messrs. Buckman's and
Holmes' employment agreements also provide that the payments related to a
change-of-control transaction are not required if they are subsequently
employed pursuant to an employment agreement in form and substance
substantially identical to their existing employment agreement.

   Mr. Russell was employed by the Company in August 1992 as President of
Days Inns of America, Inc., a wholly owned subsidiary of the Company,
pursuant to an employment agreement which expired by its terms in 1995. From
September 1995 through April 1996 Mr. Russell was Executive Vice President of
Franchise Sales of the Company's Real Estate Division, and from and after
April 1996, Mr. Russell has held his current position as President of the
Hospitality Division of the Company, with compensation at the annual rate of
$300,000.

                               50
<PAGE>
   On August 1, 1995, the Company, Century 21 and Mr. Pittman entered into an
employment agreement (the "Pittman Agreement") whereby Mr. Pittman agreed to
serve as the Chief Executive Officer of Century 21, effective as of November
1, 1995. The following description of the Pittman Agreement is qualified in
its entirety by reference to the copy of such agreement filed with the
Securities and Exchange Commission as Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1995. The Pittman
Agreement provided that Century 21 would pay Mr. Pittman an annual base
salary of $1,000,000 and an annual bonus of the lesser of 2.7% of Century
21's EBITDA (as defined in such agreement) and $1,050,000, which bonus was
approved by the Company's stockholders on January 22, 1996; provided,
however, that such bonus for the period commencing on November 1, 1995
through December 31, 1995 was $178,356 and was not subject to the prior
approval of the Company's stockholders. Pursuant to the Pittman Agreement on
each of September 12, 1995 and October 29, 1996, the Company granted Mr.
Pittman stock options to purchase 200,000 shares of Common Stock. All such
options have an exercise price equal to the fair market value of the Common
Stock on the date of grant, vest, in the case of the 1995 grant 50% on each
of the first two anniversaries of the date of grant, and in the case of the
1996 grant, 100% on the first anniversary of the date of grant, and otherwise
have substantially the same terms as all other options granted under the 1993
Plan. Mr. Pittman resigned as Chief Executive Officer and Managing Partner of
Century 21 effective October 29, 1996, at which time the Pittman Agreement
was terminated.

   The following table sets forth the payments to which each of the officers
indicated would have been entitled under their respective employment
agreements in the event his employment had been terminated by the Company
without cause or as a result of a change-of-control transaction as of
December 31, 1996.

<TABLE>
<CAPTION>
                                  AMOUNT PAYABLE
                 AMOUNT PAYABLE   FOR TERMINATION
                 FOR TERMINATION   DUE TO CHANGE
                  WITHOUT CAUSE     OF CONTROL
                ---------------  ---------------
<S>             <C>              <C>
Mr. Silverman      $15,000,000      $4,500,000
Mr. Snodgrass          619,167         571,539
Mr. Holmes ....        375,000         500,000
Mr. Buckman  ..        500,000         520,833
Mr. Russell  ..        300,000             -0-

</TABLE>

                               51
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
         AND MANAGEMENT

   The information set forth on the following table is furnished as of March
21, 1997 with respect to any person (including any "group" as that term is
used in Section 13(d) (3) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) who is known to the Company to be the beneficial owner
of more than 5% of any class of the Company's voting securities, and as to
those shares of the Company's equity securities beneficially owned by each of
its directors, certain of its executive officers, and all of its executive
officers and directors as a group. The number of shares of Common Stock
outstanding as of March 21, 1997 was 127,628,756.

<TABLE>
<CAPTION>
                                              AMOUNT AND NATURE OF
                    NAME                      BENEFICIAL OWNERSHIP  PERCENT OF CLASS
-------------------------------------------  --------------------  ----------------
<S>                                          <C>                   <C>
PRINCIPAL STOCKHOLDERS
FMR Corp.(1) ...............................       16,839,695            13.19%
 82 Devonshire Street
 Boston, MA 02109
Massachusetts Financial Services
 Company(2).................................       11,240,403             8.81%
 500 Boylston Street
 Boston, MA 02116-3741
Putnam Investments, Inc.(3).................       10,033,558             7.86%
 One Post Office Square
 Boston, MA 02109
Provident Investment Counsel(4).............        8,936,584             7.00%
 300 North Lake Avenue
 Pasadena, CA 91101-4022
Morgan Stanley Group, Inc.(5)...............        7,228,877             5.66%
 1585 Broadway
 New York, NY 10036
DIRECTORS AND EXECUTIVE OFFICERS
Henry R. Silverman (6) .....................       11,673,440             8.39%
John D. Snodgrass (7) ......................        3,050,675             2.34%
James E. Buckman (8) .......................          420,863              *
Christel DeHaan ............................          999,500              *
Martin L. Edelman (8) ......................           11,067              *
Stephen P. Holmes (8) ......................          497,806              *
Michael P. Monaco ..........................                0              *
Robert E. Nederlander (8) ..................           10,000              *
Robert W. Pittman (8) ......................           81,067              *
E. John Rosenwald, Jr ......................           10,000              *
Leonard Schutzman (8) ......................           13,067              *
Robert F. Smith (9) ........................           21,067              *
John J. Russell, Jr. (8) ...................                0              *
EXECUTIVE OFFICERS AND DIRECTORS
 AS A GROUP (17 persons)(10)................       17,220,716            11.99%
</TABLE>

------------
*        Less than 1%
(1)      Based upon information contained in a Schedule 13G/A dated February
         14, 1997 by FMR Corp., a registered investment advisor, and the
         other reporting persons named therein, FMR Corp. and such other
         reporting persons beneficially own 16,839,695 shares of Common
         Stock. According to the Schedule 13G/A, FMR Corp. and the other
         reporting persons named in such filing have the sole power to vote
         835,146 shares and have the sole power to dispose of all of such
         shares.
(2)      Based upon the information contained in a Schedule 13G/A dated
         February 12, 1997 by Massachusetts Financial Services Company, a
         registered investment adviser on behalf of itself and the other
         reporting person

                               52
<PAGE>
         named therein, such reporting persons beneficially own 11,240,403
         shares of Common Stock. According to the Schedule 13G/A,
         Massachusetts Financial Services Company and the other reporting
         person named in such filing have sole power to vote 11,170,003 of
         such shares, and have sole power to dispose of all of such shares.
(3)      Based upon the information contained in a Schedule 13G dated January
         27, 1997 by Putnam Investments, Inc., an affiliate of Marsh &
         McLennan Companies, Inc., on behalf of itself and the other
         reporting persons named therein, Putnam Investments, Inc.
         beneficially owns 10,033,558 shares of Common Stock. According to
         the Schedule 13G, neither Putnam Investments, Inc. nor the other
         reporting persons named in such filing have sole voting or
         investment power with respect to such shares of Common Stock. Putnam
         Investments, Inc. and/or such reporting persons have shared power to
         vote 689,760 shares of such stock and shared power to dispose of all
         of such stock.
(4)      Based upon the information contained in a Schedule 13G/A dated
         February 10, 1997 by Provident Investment Counsel, a registered
         investment adviser, on behalf of itself and the other reporting
         persons named therein, Provident Investment Counsel and such
         reporting persons beneficially own 8,936,584 shares of Common Stock.
         According to the Schedule 13G/A, Provident Investment Counsel and
         such reporting persons have the sole power to vote 6,659,320 shares
         and have the sole power to dispose of all of such shares.
(5)      Based upon the information contained in a Schedule 13G dated
         February 11, 1997 by Morgan Stanley Group, Inc., a registered
         investment adviser, Morgan Stanley Group, Inc. beneficially owns
         7,228,877 shares of Common Stock. According to the Schedule 13G,
         Morgan Stanley Group, Inc. has shared power to vote 5,218,382 shares
         and has the shared power to dispose of all of such shares.
(6)      Includes 11,550,000 shares of Common Stock purchasable pursuant to
         options currently exercisable or exercisable within 60 days, 103,440
         shares of Common Stock in two retirement plans whose sole
         beneficiary is Mr. Silverman and 20,000 shares owned by Mr.
         Silverman's wife. Mr. Silverman disclaims beneficial ownership of
         the shares owned by his wife. For purposes of calculating percent of
         class for Mr. Silverman, the number of shares subject to options
         currently exercisable or exercisable by Mr. Silverman within 60 days
         are deemed outstanding.
(7)      Includes 3,005,200 shares of Common Stock purchasable pursuant to
         options currently exercisable or exercisable within 60 days and
         5,475 shares of Common Stock which are held by an irrevocable trust
         for the benefit of Mr. Snodgrass' minor children. Mr. Snodgrass and
         his wife have no interest in the trust and are not trustees of the
         trust. Mr. Snodgrass disclaims beneficial ownership of such shares.
         For purposes of calculating percent of class for Mr. Snodgrass, the
         number of shares subject to options currently exercisable or
         exercisable by Mr. Snodgrass within 60 days are deemed outstanding.
(8)      Share number for the person named, includes shares subject to
         options currently exercisable or exercisable within 60 days as
         follows: with respect to (a) Mr. Buckman, 419,663 shares, (b) Mr.
         Edelman, 11,067 shares (c) Mr. Holmes, 494,406 shares, (d) Mr.
         Nederlander, 10,000 shares, (e) Mr. Pittman, 81,067 shares, (f) Mr.
         Schutzman, 11,067 shares and (g) Mr. Osborne, 4,640 shares. For
         purposes of calculating percent of class for the person named, the
         number of shares subject to options currently exercisable or
         exercisable by such person within 60 days are deemed outstanding. In
         each case, share ownership is less than 1% of the Common Stock.
(9)      Includes 11,067 shares subject to options currently exercisable or
         exercisable within 60 days, 8,000 shares held in the name of Smith
         Family Foundation of which Mr. Smith is President and 2,000 shares
         owned by a Keough plan of which Mr. Smith is the sole beneficiary.
         Mr. Smith disclaims beneficial ownership of the shares held by the
         Smith Family Foundation. For purposes of calculating percent of
         class for Mr. Smith, the number of shares subject to options
         currently exercisable or exercisable by Mr. Smith within 60 days are
         deemed outstanding. Share ownership is less than 1% of the Common
         Stock.
(10)     In addition to shares beneficially owned by executive officers and
         directors, share number includes 16,023,088 shares of Common Stock
         purchasable by executive officers or directors pursuant to options
         currently exercisable or exercisable within 60 days. Shares subject
         to options currently exercisable or exercisable within 60 days are
         deemed outstanding for the purpose of computing percent of class.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   See "EXECUTIVE COMPENSATION -- Compensation Committee Interlocks and
Insider Participation" for a discussion of Mr. Nederlander's relationships
with the Company and various entities engaged in transactions with the
Company.

RELATIONSHIP WITH CHARTWELL

   On November 22, 1994 (the "Effective Date"), the Company distributed to
its stockholders one (1) share of the common stock of Chartwell, then a
wholly owned subsidiary of the Company, for every ten

                               53
<PAGE>
(10) shares of Common Stock held of record as of November 14, 1994 (the
"Distribution"). On the Effective Date, the Company also transferred the
assets and liabilities of its business of financing and developing casino
gaming and entertainment facilities (the "Casino Development Business") to
Chartwell and made (and agreed to make) cash capital contributions to
Chartwell aggregating $50 million. As a result of the Distribution, Chartwell
became an independent publicly traded corporation and ceased to be a
subsidiary of the Company.

   In connection with the Distribution and for purposes of (i) governing
certain of the ongoing relationships between the Company and Chartwell after
the Distribution, (ii) providing mechanisms for an orderly transition and
(iii) providing the Company with a means of participating in the economic
benefits of future gaming projects, the Company and Chartwell entered into
certain agreements, including the Distribution Agreement, the Financing
Agreement, the Marketing Services Agreement, the Advisory Agreement, the
Corporate Services Agreement, the Facility Lease and the Tax Sharing
Agreement on the Effective Date. Copies of such agreements were filed with
the Securities and Exchange Commission as exhibits to Chartwell's Current
Report on Form 8-K dated December 2, 1994. As indicated herein under the
captions "ELECTION OF DIRECTORS -- Information Regarding Nominees" and
"EXECUTIVE OFFICERS," certain of the Company's directors and executive
officers also currently serve, or served during 1995, as directors and
executive officers of Chartwell. Each of these directors and executive
officers also owned certain options to purchase shares of common stock of
Chartwell, which, except for the options which were granted to Mr. Edelman
and Mr. Robert Smith, have been cancelled on or before February 1, 1996.

   On December 20, 1995, Chartwell Leisure Associates L.P. II, a general
partnership affiliated with the Fisher Brothers and Gordon Getty ("Chartwell
Leisure II") acquired approximately 17% of the outstanding common stock of
Chartwell. Mr. Edelman is a partner in Chartwell Leisure II, owning in the
aggregate a 4.8% beneficial interest in that partnership. On January 23,
1996, the Company acquired the Travelodge(Registered Trademark) and
Thriftlodge(Registered Trademark) lodging franchise system (the "Travelodge
System") and the related trademarks and trade names in North America from
Forte Hotels, Inc. and Forte Plc and immediately subsequent to such
acquisition, Chartwell acquired Forte Hotels, Inc., including in such
purchase approximately 16 hotels and joint venture interests in 96 hotels,
which are now licensed as part of the Travelodge System. As a result,
Chartwell is the largest franchisee of the Travelodge System. Under the
applicable franchise agreements, Chartwell is required to pay to Travelodge
Hotels, Inc. ("THI"), a wholly owned subsidiary of HFS, annual franchise fees
equal to four percent of gross room revenues for the owned hotel properties
plus four percent of gross room revenues of such properties as marketing and
reservation fees. In addition, the Company is required to pay to THI a
license fee equal to four percent of gross room revenues multiplied by
Chartwell's percentage interest in each of the hotel properties owned by
joint ventures in which Chartwell acquired an interest. In connection with
such acquisition, in accordance with the Financing Agreement, the Company
guaranteed $75 million of borrowings by Chartwell under a $125 million
revolving credit facility with certain banks. The Company receives an annual
guaranty fee of 2% of the $75 million credit extension. It is anticipated
that such guarantee will be terminated upon Chartwell's refinancing of the
underlying bank facility. In connection with the Travelodge acquisition, the
Advisory Agreement and the Marketing Services Agreement were terminated, and
the Corporate Services Agreement was modified to provide for a fixed fee of
$1.5 million per year, the provision of certain corporate services only
through September 1996 and the requirement of the Company to provide
corporate transaction advisory services. The Company and Chartwell agreed to
terminate the Advisory Agreement effective in December 1996, in consideration
of which Chartwell agreed to pay the Company $9.5 million, of which
approximately $2.5 million was paid in cash. The balance was paid by delivery
of a promissory note in the principal amount of $7 million, payable over seven
years commencing on January 1, 1999, bearing interest at the per annum rate of
6%, and payable in semi-annual installments commencing July 1, 1997. The
Company also received an advisory fee of approximately $2 million from
Chartwell for advisory services in connection with the acquisition by Chartwell
of Forte Hotels, Inc.

                               54
<PAGE>
   In 1996, The Company and affiliates of Chartwell entered into master
licensing relationships with respect to the Travelodge brands in Canada and
Mexico under which such affiliates assumed responsibility for providing
services to the Canadian and Mexican franchisees other than reservation
services, which will continue to be provided by the Company. The Company will
receive royalties and fees for providing certain marketing and reservation
services under the master license agreements. Chartwell has guaranteed the
obligations of the affiliates under the master license agreements. The master
license in Canada replaced an agreement with Royco Hotels & Resorts Ltd.
acquired from FHI.

OTHER RELATIONSHIPS

   Mr. Edelman is of counsel to Battle Fowler, a New York City law firm.
Battle Fowler represented the Company in certain transactions in 1995. It is
expected that Battle Fowler will continue to represent the Company in
connection with certain matters from time to time in the future.

   Mr. Edelman is also a partner in Chartwell Hotels Associates ("Chartwell
Hotels"), a general partnership affiliated with the Fisher Brothers and
Gordon Getty, and its affiliate Chequers Investment Associates, which have
acquired certain hotels and mortgages secured by hotels from the Resolution
Trust Corporation. In two transactions with Chartwell Hotels, entered into in
November 1992 and May 1993, and each amended in December 1994, which have
resulted in and will result in the addition of properties to the Company's
franchise systems, the Company has advanced approximately $10 million, and
has agreed to advance up to an additional $4 million if certain additional
property conversions and other requirements are met, in return for Chartwell
Hotels agreeing to franchise the properties with one of the Company's brands.
All Chartwell Hotels properties will pay royalties once they become part of
the Company's franchise systems and these royalties will be credited toward
the recovery of the advance. Certain properties which cannot be converted to
Company brands will also pay a percentage of gross room sales in lieu of
royalties as specified in the agreements. Each advance is required to be
fully recovered over a maximum five year period following the advance. In
addition, as individual properties convert to Company brands, the Company
will make additional advances to the franchisee of such properties to fund
costs incurred in connection with such conversion. Such advances are required
to be repaid with interest by the franchisee over a three year period and
such repayment has been guaranteed by Chartwell Hotels.

   Mr. Edelman is also a partner in Chartwell Leisure Associates L.P.
("Chartwell Leisure"). Chartwell Leisure has contracted with Funtricity
Vicksburg Family Entertainment Park, Inc., a wholly-owned subsidiary of Six
Flags Theme Parks, Inc., to develop a high quality family entertainment
center (the "Project") on land which is ground leased by Chartwell Leisure
from affiliates of Rainbow Casino Corporation (collectively, "Rainbow"). As
an inducement to Chartwell Leisure to provide the financing for the Project,
commencing May 1, 1995, the opening of the project, Chartwell shares
principal and interest payments on a loan to Rainbow with Chartwell Leisure
ranging from 14% to 27% of such payments adjusted annually in accordance with
a schedule to the agreement. The Company shares marketing fees from Rainbow
with Chartwell Leisure based on the same scheduled percentages. Chartwell
Leisure has agreed to share with the Company 50% of the net cash flow payable
to Chartwell Leisure in respect of the Project and the Company has agreed to
share such amounts pro-rata with Chartwell based on the relative amounts paid
by the Company and Chartwell, respectively, to Chartwell Leisure each year.
Mr. Pittman was the Chairman and Chief Executive Officer of Six Flags
Entertainment Corporation, the parent of Six Flags Theme Parks, Inc. until
September 12, 1995. During 1996, the Company paid Chartwell Leisure
approximately $887,000 and received from Chartwell Leisure (net of payments
to Chartwell) approximately $39,000 under this agreement.

   In July 1995, the Company entered into agreements (the "Stock Purchase
Agreements") to acquire Century 21 and certain of its subsidiaries from
Metropolitan Life Insurance Company (together with certain of its
subsidiaries, "MetLife") for consideration of $245 million. On August 1,
1995, HFS assigned the Stock Purchase Agreements, other than certain rights
and obligations thereunder, to its subsidiary, C21 Holding Corp. ("Holding").
The acquisition of Century 21 by Holding was completed on August 1, 1995. In
connection with Holding's acquisition of Century 21, Holding purchased 2
million shares of Common Stock from the Company in exchange for $20,000 and a
Demand Note of Holding in the

                               55
<PAGE>
principal amount of $87,980,000 that bears interest at the rate of 13.0% per
annum. In addition, the Company purchased a second Demand Note of Holding in
the principal amount of $61,750,000 that bears interest at the rate of 13.0%
per annum, for $61,750,000 in cash. Holding used the 2 million shares of HFS
common stock and the proceeds from the sale of the second Demand Note to
satisfy, in part, its obligations to MetLife pursuant to the Stock Purchase
Agreements. In addition to the foregoing, in April 1996 the Company acquired
Century 21 Region V, Inc. and transferred the assets of such corporation to
Century 21 in May 1996.

   The Company entered into a Subscription Agreement, dated August 1, 1995
(the "Subscription Agreement"), among the Company, Holding, Mr. Pittman and
the other Century 21 management stockholders named therein (the "Management
Stockholders", and together with Mr. Pittman, the "Managers") pursuant to
which the Company subscribed for 87.5% of the common stock of Holding (the
"Holding Common Stock") for consideration of $8.75 million, Mr. Pittman
subscribed for approximately 8.33% of the Holding Common Stock for
consideration of approximately $0.8 million and the Management Stockholders
subscribed for approximately 4.17% of the Holding Common Stock for
consideration of approximately $0.4 million. Pursuant to the Subscription
Agreement none of the Managers may transfer his Holding Common Stock without
the consent of the Company, other than pursuant to a Permitted Transfer (as
defined in the Subscription Agreement). In December 1995, with the consent of
the Company, Mr. Pittman transferred a portion of his ownership interest in
Holding equal to 0.5% of the outstanding Holding Common Stock to another
officer of Century 21 and the Management Stockholders transferred a portion
of their respective ownership interests in Holding equal to an aggregate of
0.25% of the outstanding Holding Common Stock to such other officer of
Century 21. Under the Subscription Agreement, the Company has a call option
to purchase all of the Holding Common Stock owned by the Managers from
January 1, 1998, or earlier in the event of certain terminations of the
Pittman Agreement, for the fair market value of such stock when the option is
exercised (the "Exercise Price"). The Managers each have a put option to
require the Company to purchase all of their Holding Common Stock from
January 1, 1998 or earlier in the event of certain terminations of the
applicable Manager's Employment Agreement at the Exercise Price. The Company
may use cash or, if agreed to by the Company and the Managers, Common Stock,
or, if so agreed, a combination of both, to pay for either option. The
Managers have also been granted tag-along rights in respect of a sale by the
Company of Holding Common Stock if, after giving effect to such sale, the
Company would own less than a majority of the Holding Common Stock. In a
tag-along situation the Managers would be permitted to sell their Holding
Common Stock to the purchaser for the same consideration as that received by
the Company. In addition, if the Company proposes to sell its Holding Common
Stock, and after giving effect to such sale the Company would own less than a
majority of the Holding Common Stock, then the Company has the right to
require the Managers to sell their Holding Common Stock, pro-rata with the
Company; provided, that the Managers receive their share of the consideration
for such Holding Common Stock in cash. Concurrently with Mr. Pittman's
resignation from Century 21, the Company, Mr. Pittman and the Management
Stockholders entered into a letter agreement providing, inter alia, that Mr.
Pittman's resignation constituted a "voluntary resignation" under his
employment agreement providing for the exercise by the Company of the call
option on the Holding Common Stock, which transaction is expected to be
settled in the second quarter of 1997.

   On March 31, 1995 the Company acquired a 1% general partnership interest
in a limited partnership (the "Partnership") which develops, promotes and
franchises the recently established Wingate Inn franchise system, a new
construction hotel brand. Through December 31, 1995, an additional $15
million of capital was invested in the partnership through a private
placement of limited partnership unit interests, which units were sold for
$50,000 each. The Company has an option to acquire the limited partner
investment at a 30% compounded annual rate of return plus additional
outstanding capital loans and an additional call premium equal to
approximately 1.5 times annual royalty revenue, as defined. The limited
partners may require the Company to acquire the limited partner interest on
August 29, 2001. The Company also agreed to finance additional limited
partner capital contributions up to $60 million at the prime lending rate,
upon the occurrence of certain events, including the addition of open and
operating Wingate Inn properties. Certain executives of the Company purchased
limited partnership units in the partnership, as follows: Messrs. Silverman
and Snodgrass, 10 units each; Messrs. Buckman, Holmes and Osborne, 2 units
each; and Mr. Richard Smith, 1 unit.

                               56
<PAGE>
   In addition, the Company has agreed to guarantee up to $36 million of
borrowings by a subsidiary of the Partnership, which borrowings will be used
to provide financing for franchisees to develop Wingate Inn facilities.

   In November 1996, the Company acquired all of the stock of Resort
Condominiums International, Inc. from ms. DeHaan. Consideration for such
acquisition consisted of $412 million in cash and $75 million in Common
Stock, plus future contingent payments of up to $200 million over five years
commencing in November 1996.

   In accordance with the terms of the Snodgrass Agreement, the Company has
arranged to make available to Mr. Snodgrass a one-quarter interest in a
Hawker 1000 aircraft. Further, as of December 31, 1998, the Company will have
the right to require Mr. Snodgrass to purchase such interest, and Mr.
Snodgrass shall have the right to require the Company to sell such interest
to him, in each case for the amount paid by the Company for such interest of
$2.8 million.

   Mr. Rosenwald serves as Vice Chairman of The Bear Stearns Companies, Inc.,
an investment banking firm. During 1996, The Bear Stearns Companies, Inc.
provided underwriting and advisory services to the Company.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

ITEM 14(a)(1) FINANCIAL STATEMENTS

   See Financial Statement and Financial Statement Schedule Index commencing
on page F-1 hereof.

ITEM 14(a)(2) FINANCIAL STATEMENT SCHEDULES

   See Financial Statement and Financial Statement Schedule Index commencing
on page F-1 hereof.

ITEM 14(a)(3) EXHIBITS

<TABLE>
<CAPTION>
  EXHIBIT NO.    DESCRIPTION
---------------  ----------------------------------------------------------------------------------------------
<S>              <C>
       2.1       Agreement Among Purchasers dated as of January 22, 1996 among National Lodging Corp., Motels of
                 America, Inc. and Bear Acquisition Corp. (Incorporated by reference to the Registrant's Annual Report
                 on Form 10-K for the fiscal year ended December 31, 1995, Exhibit 2.10)
       2.2       Purchase and Sale Agreement dated February 9, 1996 among Electronic Realty Associates, L.P., the
                 Registrant and ERA Acquisition Co. (Incorporated by reference to the Registrant's Annual Report
                 on Form 10-K for the fiscal year ended December 31, 1995, Exhibit 2.11)
       2.3       Agreement dated February 9, 1996 among Heller Financial, Inc. the Registrant and ERA Acquisition
                 Co. (Incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year
                 ended December 31, 1995, Exhibit 2.12).
       2.4       Agreement and Plan of Merger and Reorganization, dated as of April 15, 1996, by and between HFS
                 Incorporated, Century 21 Region V, Inc. and Yeager Real Estate and Financial Services, Inc. (Incorporated
                 by reference to Registrant's Registration Statement on Form S-3 (Registration No. 333-03646), Exhibit
                 No. 2.1)
       2.5       Stock Purchase Agreement dated as of July 12, 1995 between the Registrant and Metropolitan Life
                 Insurance Company (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for
                 the quarterly period ended June 30, 1995, Exhibit 2.1)
       2.6       Stock Purchase Agreement dated as of July 12, 1995 between the Registrant and C21 Acquisition Corp.
                 (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period
                 ended June 30, 1995, Exhibit 2.2)
       2.7       Stock Purchase Agreement dated as of July 12, 1995 between the Registrant and Metropolitan Tower
                 Corp. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly
                 period ended June 30, 1995, Exhibit 2.3)

                               57
<PAGE>
  EXHIBIT NO.    DESCRIPTION
---------------  ----------------------------------------------------------------------------------------------
      2.8        Stock Purchase Agreement dated as of October 17, 1995 between the Registrant and AMRE, Inc. (Incorporated
                 by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September
                 30, 1995).
      2.9        Purchase Agreement dated as of December 19, 1995 among the Registrant, Forte Hotels, Inc. and Forte
                 USA, Inc. (Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year
                 ended December 31, 1995, Exhibit 2.9)
      2.10       Agreement and Plan of Merger dated as of April 3, 1996 among the Registrant, C-21 Holding Corp.,
                 Century 21 Real Estate of the Mid-Atlantic States, Inc. and George F. Kettle. (Incorporated by reference
                 to Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996, Exhibit
                 2.1)
      2.11       Agreement and Plan of Merger dated as of April 3, 1996 among the Registrant, C21 Holding Corp.,
                 Century 21 of Eastern Pennsylvania, Inc., George F. Kettle and James O. Nelson. (Incorporated by
                 reference to Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31,
                 1996, Exhibit 2.2)
      2.12       Agreement and Plan of Merger dated as of May 1, 1996 among the Registrant, CBC Acquisition Corp.,
                 Fremont Investors, Inc. and Coldwell Banker Corporation. (Incorporated by reference to Registrant's
                 Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996, Exhibit 2.4)
      2.13       Agreement and Plan of Merger, dated as of August 23, 1996, by and among HFS Incorporated, Avis Acquisition
                 Corp., U.S. Trust Company of California, N.A. as Trustee of the Trust forming a part of the Avis,
                 Inc. Employee Stock Ownership Plan and Avis, Inc. (Incorporated by reference to Registrant's Registration
                 Statement on Form S-3 (Registration No. 333-11029, Exhibit 2.1)
      2.14       Stock Purchase Agreement, dated as of August 28, 1996, by and between HFS Incorporated and General
                 Motors Corporation. (Incorporated by reference to Registrant's Registration Statement on Form S-3
                 (Registration No. 333-11029, Exhibit 2.2)
      2.15       Stock Purchase Agreement dated as of October 6, 1996 by and among the Company, Christel DeHaan and
                 Resort Condominiums International, Inc. (Incorporated by reference to Registrant's Quarterly Report
                 on Form 10-Q for the quarterly period ended September 30, 1996, Exhibit 2.1)
      2.16       Registration Rights Agreement, dated as of November 12, 1996, by and between HFS Incorporated and
                 Ms. Christel DeHaan (Incorporated by reference to Registrant's Registration Statement on Form S-3
                 (Registration No. 333-17371), Exhibit 2.2)
      2.17       Agreement and Plan of Merger dated as of November 10, 1996, by and among HFS Incorporated, PHH Corporation
                 and Mercury Acquisition Corp. (Incorporated by reference to the Company's Current Report on Form
                 8-K dated November 14, 1996, Exhibit 2.1)
      2.18       Asset Purchase Agreement dated as of April 2, 1996 among Century 21 Real Estate of Southern Florida,
                 Inc., the Registrant and Richard C. Ritchey (Incorporated by reference to Registrant's Quarterly
                 Report on Form 10-Q for the quarterly period ended March 31, 1996, Exhibit 10.1)
      2.19       Asset Purchase Agreement dated as of April 3, 1996 among Century 21 Real Estate Corporation, the
                 Registrant, Century 21 of the Southwest, Inc. and Larry E. Bryson. (Incorporated by reference to
                 Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996, Exhibit
                 10.2)
      3.1        Restated Certificate of Incorporation of the Registrant (Incorporated by reference to Exhibit 4
                 to the Registrant's Registration Statement on Form 8-A filed on February 21, 1996)
      3.2        Amended and Restated By-laws of the Registrant (Incorporated by reference to the Registrant's Quarterly
                 Report on Form 10-Q for the quarterly period ended September 30, 1996, Exhibit 3.1)

                               58
<PAGE>
  EXHIBIT NO.    DESCRIPTION
---------------  ----------------------------------------------------------------------------------------------
       4.1       Form of certificate for the Registrant's Common Stock, par value $0.1 per share (Incorporated by
                 reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-51422), Exhibit
                 No. 4.1)
       4.2       Form of Indenture between the Registrant and Continental Bank, National Association, as trustee
                 (Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration
                 No. 33-71736), Exhibit No. 4.1)
       4.3       Form of Indenture between the Registrant and Bank of America Illinois as trustee (the "Senior
                 Trustee")(Incorporated by reference to the Registrant's Current Report on Form 8-K dated September
                 28, 1994, Exhibit 2)
       4.4       Form of Supplemental Indenture between the Registrant and the Senior Trustee (Incorporated by reference
                 to the Registrant's Current Report on Form 8-K dated September 28, 1994, Exhibit 3).
       4.5       Indenture dated as of February 28, 1996 between the Registrant and First Trust of Illinois, National
                 Association, as trustee (Incorporated by reference to the Registrant's Current Report on Form 8-K
                 dated March 8, 1996, Exhibit 4.01)
       4.6       Supplemental Indenture No. 1 dated as of February 28, 1996 between the Registrant and First Trust
                 of Illinois, National Association, as trustee (Incorporated by reference to the Registrant's Current
                 Report on Form 8-K dated March 8, 1996, Exhibit 4.02)
       4.7       Form of Senior Indenture entered into by the Registrant and The Bank of Nova Scotia Trust Company
                 of New York, as Trustee. (Incorporated by reference to Registrant's Registration Statement on Form
                 S-3 (Registration No. 333-03276), Exhibit 4.2)
       4.8       Form of Subordinated Indenture entered into by the Registrant and the Bank of Nova Scotia Trust
                 Company of New York, as Trustee (Incorporated by reference to Registrant's Registration Statement
                 on Form S-3 (Registration No. 333-03276), Exhibit 4.3)
      10.1       364-Day Competitive Advance and Revolving Credit Agreement dated as of October 2, 1996 among HFS
                 Incorporated and The Lenders Referred to Therein and The Chase Manhattan Bank as Administrative
                 Agent (Incorporated by reference to Registrant's Current Report on Form 8-K dated October 15, 1996,
                 Exhibit 10.1)
      10.2       Five Year Competitive Advance and Revolving Credit Agreement dated as of October 2, 1996 among HFS
                 Incorporated and The Lenders Referred to Therein and The Chase Manhattan Bank as Administrative
                 Agent (Incorporated by reference to Registrant's Current Report on Form 8-K dated October 15, 1996,
                 Exhibit 10.2)
      10.3       License Agreement dated as of September 18, 1989 amended and restated as of July 15, 1991 between
                 Franchise System Holdings, Inc. and Ramada Franchise Systems, Inc. (Incorporated by reference to
                 the Registrant's Registration Statement on Form S-1 (Registration No. 33-51422), Exhibit No. 10.2)
      10.4       Restructuring Agreement dated as of July 15, 1991 by and among New World Development Co., Ltd.,
                 Ramada International Hotels & Resorts, Inc. Ramada Inc., Franchise System Holdings, Inc., the Registrant
                 and Ramada Franchise Systems, Inc. (Incorporated by reference to the Registrant's Registration Statement
                 on Form S-1 (Registration No. 33-51422), Exhibit No. 10.3)
      10.5       License Agreement dated as of November 1, 1991 between Franchise Systems Holdings, Inc. and Ramada
                 Franchise Systems, Inc. (Incorporated by reference to the Registrant's Registration Statement on
                 Form S-1 (Registration No. 33-51422), Exhibit No. 10.4)
      10.6       Amendment to License Agreement, Restructuring Agreement and Certain Other Restructuring Documents
                 dated as of November 1, 1991 by and among New World Development Co., Ltd., Ramada International
                 Hotels & Resorts, Inc., Ramada Inc., Franchise System Holdings, Inc., the Registrant and Ramada
                 Franchise Systems, Inc. (Incorporated by reference to the Registrant's Registration Statement on
                 Form S-1 (Registration No. 33-51422), Exhibit No. 10.5)

                               59
<PAGE>
  EXHIBIT NO.    DESCRIPTION
---------------  ----------------------------------------------------------------------------------------------
     10.7        The Registrant's 1992 Incentive Stock Option Plan and Form of Stock Option Agreement. (Incorporated
                 by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-51422),
                 Exhibit No. 10.6)
     10.8        Form of Amended and Restated Employment Agreement dated as of June 30, 1996 between the Registrant
                 and Henry R. Silverman. (Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
                 for the quarterly period ended June 30, 1996, Exhibit 10.1)
     10.8(a )*   Amendment dated January 27, 1997 to Amended and Restated Employment Agreement dated as of June 30,
                 1996 between the Registrant and Henry R. Silverman.
     10.9        Employment Agreement dated as of January 31, 1992 between the Registrant and John D. Snodgrass,
                 as amended as of January 31, 1992. (Incorporated by reference to the Registrant's Registration Statement
                 on Form S-1 (Registration No. 33-51422), Exhibit 10.23)
     10.9(a )    Amendment to Employment Agreement dated as of October 30, 1996 between the Registrant and John D.
                 Snodgrass. (Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for the quarterly
                 period ended September 30, 1996, Exhibit 10.1)
     10.10       Employment Agreement dated October 14, 1996 between the Registrant and Michael P. Monaco. (Incorporated
                 by reference to Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September
                 30, 1996, Exhibit 10.2)
     10.11       Employment Agreement dated as of January 15, 1992 between the Registrant and James E. Buckman. (Incorporated
                 by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-51422),
                 Exhibit 10.24)
     10.11(a)    Amendment to Employment Agreement between Registrant and James E. Buckman dated as of October 1,
                 1994. (Incorporated by reference to the Registrant's Annual Report on Form 10-K filed March 31,
                 1994, Exhibit No. 10.12(a))
     10.12       Employment Agreement dated as of October 1, 1991 between the Registrant and Stephen P. Holmes. (Incorporated
                 by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-51422 Exhibit
                 10.25)
     10.12(a)    Amendment to Employment Agreement between Registrant and Stephen P. Holmes dated as of October 1,
                 1994. (Incorporated by reference to the Registrant's Annual Report on Form 10-K filed March 31,
                 1994, Exhibit NO. 10.13(a))
     10.13       Employment Agreement dated as of January 31, 1992 between the Registrant and Richard A. Smith. (Incorporated
                 by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-51422),
                 Exhibit 10.27)
     10.13(a)    Amendment to employment Agreement between Registrant and Richard A. Smith dated as of October 1,
                 1994. (Incorporated by reference to the Registrant's Annual Report on Form 10-K filed March 31,
                 1994, Exhibit No. 10.14(a))
     10.14       Letter Agreement between the Registrant and John Osborne regarding employment. (Incorporated by
                 reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-70706), Exhibit
                 No. 10.28)
     10.15       U.S. Bankruptcy Court for the District of Delaware Order Incorporating Additional Terms Relating
                 to the Relationship of Purchaser to Franchisees, dated December 20, 1991. (Incorporated by reference
                 to the Registrant's Registration Statement on Form S-1 (Registration No. 33-51422), Exhibit 10.31)
     10.16       Conversion Agreement between Chartwell Hotels Associates and HFS Brands, Inc., dated as of November
                 17, 1992. (Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration
                 NO. 33-51422 Exhibit 10.33)
     10.17       Conversion Agreement, dated as of may 9, 1993, between Chartwell Hotels II Associated and HFS Brands,
                 Inc. (Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration
                 No. 33-63398) Exhibit No. 10.35)
</TABLE>

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                               60
<PAGE>
<TABLE>
<CAPTION>
  EXHIBIT NO.    DESCRIPTION
---------------  -------------------------------------------------------------------------------------------
<S>              <C>
     10.18       Letter Agreement among the Registrant, Bryanston Group, Inc. and National Gaming Corp. dated
                 August 18, 1995. (Incorporated by reference to the Registrant's Registration Statement on Form
                 S-3 (Registration No. 33-96034), Exhibit 10.1)
     10.19       Second Amendment of Casino Financing Agreement dated as of August 11, 1994 between the Registrant
                 and Rainbow Casino Corporation. (Incorporated by reference tot he Registrant's Annual Report
                 of Form 10-K filed March 31, 1994, Exhibit No. 10.30(b))
     10.20       Marketing Services Agreement dated as of march 15, 1994 between Rainbow Casino Corporation and
                 HFS Gaming Corp. (Incorporated by reference to the Registrant's Form 10-K filed March 31, 1994,
                 Exhibit No. 10.32)
     10.21       The Registrant's Amended and Restated 1993 Stock Option Plan (Incorporated by reference to the
                 Registrant's Registration Statement on Form S-8 (Registration No. 33-83956), Exhibit 4.1)
     10.21(a)    First Amendment to the Amended and Restated 1993 Stock Option Plan dated May 5, 1995. (Incorporated
                 by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 33094756),
                 Exhibit 4.1)
     10.21(b)    Second Amendment to the Amended and Restated 1993 Stock Option Plan dated January 22, 1996. (Incorporated
                 by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December
                 31, 1995, Exhibit 10.21(b))
     10.21(c)    Third Amendment to the Amended and Restated 1993 Stock Option Plan dated January 22, 1996. (Incorporated
                 by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December
                 31, 1995, Exhibit 10.21(c))
     10.21(d)    Fourth Amendment to the Amended and Restated 1993 Stock Option Plan dated May 20, 1996. (Incorporated
                 by reference to Registrant's Registration Statement on Form S-8 (Registration No. 333-06733),
                 Exhibit 4.5)
     10.21(e)*   Fifth Amendment to the Amended and Restated 1993 Stock Option Plan dated July 24, 1996.
     10.21(f)*   Sixth Amendment to the Amended and Restated 1993 Stock Option Plan dated September 24, 1996.
     10.22       Marketing Services Agreement dated as of April 27, 1994 by and between HFS Gaming Corp. and Boomtown,
                 Inc. (Incorporated by reference to the Registrant's Form 10-Q filed May 16, 1994, Exhibit 10.2)
     10.23       Guarantee Letter, dated January 17, 1995, by and among Hospitality Franchise Systems, Inc., National
                 Gaming Corp. and Boomtown, Inc. (Incorporated by reference to the Registrant's Form 8-K filed
                 February 1, 1995, Exhibit 10.1)
     10.24       Interim Financing Agreement dated as of November 22, 1994 between the Registrant and National
                 Gaming Corp. (Incorporated by reference to Exhibit Number 10.1 to the National Gaming Corp. Current
                 Report on Form 8-K dated December 2, 1994)
     10.25       Form of Amended and Restated Corporate Services Agreement dated as of January 24, 1996 between
                 the Registrant and National Lodging Corp. (Incorporated by reference to Registrant's Quarterly
                 Report on Form 10-Q for the quarterly period ended June 30, 1996, Exhibit 10.3)reference to the
                 Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, Exhibit
                 10.30)
     10.26       Form of Second Amended and Restated Financing Agreement dated as of July 24, 1996 between the
                 Registrant and National Lodging Corp. (Incorporated by reference to Registrant's Quarterly Report
                 on Form 10-Q for the quarterly period ended June 30, 1996, Exhibit 10.2)
     10.27*      HFS Guaranty dated as of August 28, 1996 by the Registrant to The Chase Manhattan Bank, as Administrative
                 Agent (as defined in such agreement) for the benefit of National Lodging Corp.
</TABLE>

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                                   61

<PAGE>
<TABLE>
<CAPTION>
  EXHIBIT NO.    DESCRIPTION
---------------  ------------------------------------------------------------------------------------------
<S>              <C>
      10.28      Tax Sharing and Indemnification Agreement dated as of November 22, 1994 between the Registrant
                 and National Gaming Corp. (Incorporated by reference to Exhibit Number 10.6 to the National
                 Gaming Corp. Current Report on Form 8-K dated December 2, 1994)
      10.29*     Second Amended and Restated Agreement of Limited Partnership of Hotel Franchising Limited Partnership
                 dated as of November 20, 1996.
      10.30      Support Agreement between the Registrant, General Franchise Systems, Inc. and Hotel Franchising
                 Limited Partnership dated as of March 31, 1995 (Incorporated by reference to the Registrant's
                 Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995, Exhibit 10.2)
      10.31      Loan and Security Agreement dated as of March 31, 1995 between the Registrant and Franchise
                 Investors L.L.C. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
                 for the quarterly period ended March 31, 1995, Exhibit 10.3)
      10.32      Guaranty Agreement dated as of March 31, 1995 between the Registrant and Franchise Investors
                 L.L.C. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the
                 quarterly period ended March 31, 1995, Exhibit 10.4)
      10.33      Asset Purchase Agreement dated April 21, 1995 among Knights Lodging, Inc. and Economy Lodging
                 Systems, Inc., as Sellers, and KI Acquisition Corp., as Buyer (Incorporated by reference to
                 the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995,
                 Exhibit 10.5)
      10.34      Agreement dated as of March 31, 1995 between the Registrant and Motels of America, Inc. (Incorporated
                 by reference to the Registrant's Current Report on Form 8-K dated April 4, 1995, Exhibit 10.1)
      10.35      Amended and Restated Warrant Agreement dated as of August 11, 1993, as amended and restated
                 as of May 15, 1995 between the Registrant and Chemical Mellon Shareholder Services (Incorporated
                 by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
                 June 30, 1995, Exhibit 10.1)
      10.36      Indemnification Agreement dated as of July 12, 1995 among the Registrant, Metropolitan Life
                 Insurance Company and Metropolitan Tower Corp. (Incorporated by reference to the Registrant's
                 Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1995, Exhibit 10.2)
      10.37      Subscription and Stockholders Agreement dated as of August 1, 1995 among C21 Holding Corp.,
                 the Registrant, Robert W. Pittman, Mark S. Mitzner and Mayo S. Stuntz, Jr. (Incorporated by
                 reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June
                 30, 1995, Exhibit 10.3)
      10.38      Employment Agreement dated as of August 1, 1995 among Century 21 Real Estate Corporation, the
                 Registrant and Robert W. Pittman (Incorporated by reference to the Registrant's Quarterly Report
                 on Form 10-Q for the quarterly period ended June 30, 1995, Exhibit 10.4)
      10.39      Employment Agreement dated as of August 1, 1995 among Century 21 Real Estate Corporation, the
                 Registrant and Mark S. Mitzner (Incorporated by reference to the Registrant's Quarterly Report
                 on Form 10-Q for the quarterly period ended June 30, 1995, Exhibit 10.5)
      10.40      Employment Agreement dated as of August 1, 1995 among Century 21 Real Estate Corporation, the
                 Registrant and Mayo S. Stuntz, Jr. (Incorporated by reference to the Registrant's Quarterly
                 Report on Form 10-Q for the quarterly period ended June 30, 1995, Exhibit 10.6)
      10.41      Services Agreement dated as of July 12, 1995 between the Registrant and Metropolitan Life Insurance
                 Company (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the
                 quarterly period ended June 30, 1995, Exhibit 10.7)
</TABLE>

------------
* Filed herewith

                                   62
<PAGE>
<TABLE>
<CAPTION>
  EXHIBIT NO.    DESCRIPTION
---------------  --------------------------------------------------------------------------------------------
<S>              <C>
      10.42      Assignment Agreement dated as of August 1, 1995 between the Registrant and C21 Holding Corp. (Incorporated
                 by reference to the Registrant's Current Report on Form 8-K dated August 16, 1995, Exhibit 10.1)
      10.43      Credit Agreement dated as of October 17, 1995 between AMRE, Inc., as borrower, and the Registrant,
                 as lender (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the
                 quarterly period ended September 30, 1995, Exhibit 10.1)
      10.44      License Agreement among TM Acquisition Corp., Century 21 Real Estate Corporation and American
                 Remodelling, Inc. dated October 17, 1995 (Incorporated by reference to the Registrant's Quarterly
                 Report on Form 10-Q for the quarterly period ended September 30, 1995, Exhibit 10.2)
      10.45      Master License Agreement dated October 17, 1995 between Century 21 Real Estate Corporation and
                 TM Acquisition Corp. (Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
                 for the quarterly period ended September 30, 1995, Exhibit 10.3)
      10.46      Purchasing Services Agreement dated as of November 30, 1995 between the Registrant and Compleat
                 Resources Group, Inc. (Incorporated by reference to the Registrant's Current Report on Form 8-K
                 dated December 11, 1995, Exhibit 10.1)
      10.46(a)   First Amendment to Purchasing Services Agreement dated January 31, 1997 between the Registrant
                 and Compleat Resources Group, Inc.
      10.47      Stock Purchase Agreement dated as of November 30, 1995 between the Registrant and Insignia Financial
                 Group, Inc. (Incorporated by reference to the Registrant's Current Report on Form 8-K dated December
                 11, 1995, Exhibit 10.2)
      10.48      Registration Rights Agreement dated as of November 30, 1995 between the Registrant and Insignia
                 Financial Group, Inc. (Incorporated by reference to the Registrant's Current Report on Form 8-K
                 dated December 11, 1995, Exhibit 10.3)
      10.49*     Credit Agreement dated as of November 20, 1996 among Wingate Financial LLC, the Lenders named
                 therein and The Chase Manhattan Bank, as administrative agent and collateral agent, Westdeutsche
                 Landesbank Girozentrale, as collateral agent, The Bank of Nova Scotia, as documentation agent
                 and Bankers Trust Company, as syndication agent.
      10.50*     Guaranty dated as of November 20, 1996 from the Registrant to The Chase Manhattan Bank, as agent
                 for the Lenders named in the Credit Agreement dated as of November 20, 1996.
      11   *     Statement re: Historical Computation of Per Share Earnings
      11.1 *     Statement re: Pro Forma Computation of Per Share Earnings
      12   *     Statement re: Computation of Ratio of Earnings to Fixed Charges
      21   *     Subsidiaries of the Registrant
      23.1 *     Consent of Deloitte & Touche LLP relating to the financial statements of HFS Incorporated.
      23.2 *     Consent of Deloitte & Touch LLP relating to the financial statements of Rental Car Operations
                 of Avis, Inc.
      23.3 *     Consent of Price Waterhouse LLP relating to the financial statements of Avis, Inc.
</TABLE>

------------
* Filed herewith

ITEM 14(b) REPORTS ON FORM 8-K

   On October 15, 1996, the Company filed a Current Report on Form 8-K, which
report was amended on March 27, 1997, to report the execution on October 6,
1996 of a definitive agreement to acquire Resort Condominiums International,
Inc. ("RCI") and the execution on October 2, 1996 of credit agreements relating
to $1 billion in revolving credit financing. Such report included pro forma
financial information reflecting the RCI acquisition and other acquisitions
and transactions.


                                    63

<PAGE>
   On November 15, 1996, the Company filed a Current Report on Form 8-K to
report the execution on November 10, 1996 of an agreement and plan of merger
pursuant to which Mercury Acquisition Corp., a wholly owned subsidiary of the
Company, is expected to be merged with PHH Corporation (the "PHH Merger").
Such Current Report on Form 8-K was amended on December 4, 1996 by the filing
of an amendment on Form 8-K/A to include the following financial information:

   1. Audited consolidated balance sheets of PHH Corporation and subsidiaries
      as of April 30, 1996 and 1995 and the related consolidated statements
      of income, stockholders' equity and cash flows for each of the years in
      the three year period ended April 30, 1996.

   2. Unaudited consolidated balance sheet of PHH Corporation and
      subsidiaries as of October 31, 1996 and the related unaudited
      consolidated statements of income for the three and six months ended
      October 31, 1996 and 1995 and cash flows for the six months ended
      October 31, 1996 and 1995.

   3. Pro Forma financial information of the Company reflecting the PHH
      Merger.

   Such report was further amended on March 27, 1997.

   On December 5, 1996, the Company filed an amendment on Form 8-K/A to the
Company's Current Report on Form 8-K which was filed on August 29, 1996. Such
amendment included the following financial information:

   1. Audited consolidated balance sheets of Avis, Inc. and subsidiaries as
      of February 29, 1996 and February 28, 1995 and the related consolidated
      statements of income, changes in stockholders' equity, changes in
      redeemable preferred stock and cash flows for each of the years in the
      three year period ended February 29, 1996.

   2. Unaudited consolidated financial statements of Avis, Inc. and
      subsidiaries at May 31, 1996 and for the three months ended May 31,
      1996 and 1995.

   3. Unaudited consolidated financial statements of Avis, Inc. and
      subsidiaries at August 31, 1996 and for the six months ended August 31,
      1996 and 1995.

   Such report was further amended on March 27, 1997.

   On December 24, 1996, the Company filed a Current Report on Form 8-K to
report the consummation of the acquisition by the Company on October 17, 1996
of Avis, Inc. and on November 12, 1996 of RCI.

ITEM 14(d) ADDITIONAL FINANCIAL STATEMENTS

   The audited consolidated balance sheets of Avis, Inc. and subsidiaries as
of February 29, 1996 and February 28, 1995 and the related consolidated
statements of income changes in stockholders' equity, changes in redeemable
preferred stock and cash flows for each of the years in the three year period
ended February 29, 1996 included in the Company's Current Report on Form 8-K
dated August 29, 1996, as amended December 5, 1996, as further amended March
27, 1997 are incorporated herein by reference.


                                  64

<PAGE>
                                  SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                                          HFS INCORPORATED
                                          By: /s/ Henry R. Silverman
                                              -------------------------
                                              Henry R. Silverman
                                              Chairman of the Board and
                                              Chief Executive Officer
                                              Date: March 31, 1997

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.

<TABLE>
<CAPTION>
 SIGNATURE                     TITLE                                          DATE
-----------------------------  ---------------------------------------------  ------------------
<S>                            <C>                                            <C>
/s/ Henry R. Silverman         Chairman of the Board, Chief Executive         March 31, 1997
-----------------------------  Officer and Director (Principal Executive
    Henry R. Silverman         Officer)

/s/ Michael P. Monaco          Vice Chairman and Chief Financial              March 31, 1997
-----------------------------  Officer (Principal Financial Officer and
    Michael P. Monaco          Principal Accounting Officer)

/s/ Stephen P. Holmes          Vice Chairman and Director                     March 31, 1997
-----------------------------
    Stephen P. Holmes

/s/ John D. Snodgrass          Vice Chairman, President, Chief                March 31, 1997
-----------------------------  Operating Officer and Director
    John D. Snodgrass

/s/ James E. Buckman           Executive Vice President and General           March 31, 1997
-----------------------------  Counsel and Director
    James E. Buckman

/s/ Martin L. Edelman          Director                                       March 31, 1997
-----------------------------
    Martin L. Edelman

/s/ Robert E. Nederlander      Director                                       March 31, 1997
-----------------------------
    Robert E. Nederlander

/s/ E. John Rosenwald, Jr.     Director                                       March 31, 1997
-----------------------------
    E. John Rosenwald, Jr.

/s/ Robert W. Pittman          Director                                       March 31, 1997
-----------------------------
    Robert W. Pittman

/s/ Leonard Schutzman          Director                                       March 31, 1997
-----------------------------
    Leonard Schutzman

/s/ Robert F. Smith            Director                                       March 31, 1997
-----------------------------
    Robert F. Smith

/s/Christel DeHaan             Director                                       March 31, 1997
-----------------------------
    Christel DeHaam
</TABLE>



                                   65


<PAGE>
                         INDEX TO FINANCIAL STATEMENTS
                                     AND
                        FINANCIAL STATEMENT SCHEDULES

Consolidated Financial Statements of the Company:

<TABLE>
<CAPTION>
<S>                                                                           <C>
 Independent Auditors' Report.............................................    F-2
 Consolidated Balance Sheets at
   December 31, 1996 and 1995............................................     F-3
 Consolidated Statements of Income
   for the years ended December 31,
   1996, 1995 and 1994...................................................     F-4
 Consolidated Statements of Stockholders' Equity.........................     F-5
 Consolidated Statements of Cash Flows
   for the years ended December 31,
   1996, 1995 and 1994...................................................     F-6
 Notes to Consolidated Financial Statements..............................     F-7 to F-30

Financial Statement Schedule:
 Schedule II--Valuation and Qualifying Accounts of the Company ..........     F-31

Combined Financial Statements of Rental Car Operations of Avis, Inc.:
 Independent Auditors' Report ...........................................     F-32
 Combined Statement of Financial Position
   for the year ended December 31, 1996 .................................     F-33
 Combined Statement of Operations
   for the Period October 17, 1996
   (Date of Acquisition) to December 31, 1996 ...........................     F-34
 Combined Statement of Stockholder's Equity
   for the Period October 17, 1996
   (Date of Acquisition) to December 31, 1996 ...........................     F-35
 Combined Statement of Cash Flows
   for the Period October 17, 1996
   (Date of Acquisition) to December 31, 1996 ...........................     F-36
 Notes to the Combined Financial Statements
   for the Period October 17, 1996
   (Date of Acquisition) to December 31, 1996 ...........................     F-37 to F-50

Financial Statement Schedule:
 Schedule II--Valuation and Qualifying Accounts
   of Rental Car Operations of Avis, Inc. ...............................     F-51

</TABLE>

                               F-1
<PAGE>
                         INDEPENDENT AUDITORS' REPORT

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
HFS INCORPORATED:

   We have audited the accompanying consolidated balance sheets of HFS
Incorporated and its subsidiaries (the "Company") as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. Our audit also includes the financial statement schedule of the Company
listed in the index at F-1. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedule
based on our audits.

   We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

   In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company at
December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with generally accepted accounting principles. Also, in our
opinion such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.

Deloitte & Touche LLP

Parsippany, New Jersey
March 31, 1997

                               F-2
<PAGE>
                       HFS INCORPORATED AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,
                                                                           --------------------------
ASSETS                                                                          1996          1995
                                                                           ------------  ------------
<S>                                                                        <C>           <C>
CURRENT ASSETS
Cash and cash equivalents.................................................   $   55,762    $   16,109
Investment in equity securities...........................................       22,500            --
Accounts and notes receivable, net of allowance for doubtful accounts of
 $13,248 and $12,354, respectively .......................................      119,942        37,326
Marketing and reservation receivables, net of allowance for doubtful
 accounts of $7,698 and $6,858, respectively..............................       27,396        22,297
Equity advances...........................................................      125,662        51,180
Other current assets......................................................       45,820        21,304
Deferred income taxes ....................................................       72,200        20,200
                                                                           ------------  ------------
TOTAL CURRENT ASSETS......................................................      469,282       168,416
Property and equipment--net of accumulated depreciation and amortization
 of $35,135 and $19,567, respectively.....................................      236,383        67,892
Franchise agreements--net of accumulated amortization of $87,876
 and $65,905, respectively................................................      995,947       517,218
Excess of cost over fair value of net assets acquired-net of accumulated
 amortization of $44,949 and $13,352, respectively .......................    1,736,130       356,754
Other intangibles-net of accumulated amortization of $4,441...............      604,535            --
Investment in car rental operations of Avis Inc...........................       76,540            --
Other assets .............................................................      170,104        55,528
                                                                           ------------  ------------
TOTAL ASSETS..............................................................   $4,288,921    $1,165,808
                                                                           ============  ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and other................................................   $  322,577    $   64,894
Deferred income...........................................................      160,619        19,106
Income taxes payable......................................................       17,460        38,640
Short-term debt...........................................................      150,000            --
Due to car rental operations of Avis, Inc., net...........................       61,807            --
Current portion of long-term debt ........................................        2,995         2,249
                                                                           ------------  ------------
TOTAL CURRENT LIABILITIES.................................................      715,458       124,889
Long-term debt............................................................      748,421       300,778
Deferred income...........................................................      194,370         7,595
Other liabilities.........................................................       72,071         9,555
Deferred income taxes.....................................................       82,100        82,800
Commitments and contingencies (Note 9) ...................................
Series A adjustable rate Preferred Stock..................................           --        80,000

STOCKHOLDERS' EQUITY
Preferred stock, $1.00 par value--authorized 10,000,000 shares; none
 issued and outstanding...................................................           --            --
Common stock, $.01 par value--authorized 300,000,000 shares; issued and
 outstanding, 129,888,682 and 102,538,756 shares respectively  ...........        1,299         1,025
Additional paid-in capital................................................    2,236,444       475,562
Retained earnings ........................................................      253,188        83,604
                                                                           ------------  ------------
Net unrealized gain on investment.........................................        4,366            --
Currency translation adjustment...........................................          356            --
Treasury stock, at cost (322,500 shares)..................................      (19,152)           --
TOTAL STOCKHOLDERS' EQUITY ...............................................    2,476,501       560,191
                                                                           ------------  ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................   $4,288,921    $1,165,808
                                                                           ============  ============
</TABLE>

         See accompanying notes to consolidated financial statements.

                               F-3
<PAGE>
                       HFS INCORPORATED AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF INCOME
                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                            YEARS ENDED DECEMBER 31,
                                                      ----------------------------------
                                                          1996        1995        1994
                                                      ----------  ----------  ----------
<S>                                                   <C>         <C>         <C>
REVENUES ............................................   $799,040    $412,983    $312,547
                                                      ----------  ----------  ----------
EXPENSES
Marketing and reservation............................    169,315     143,965     130,268
Selling, general and administrative..................    244,089      81,467      49,228
Depreciation and amortization........................     69,234      30,857      23,723
Interest.............................................     32,755      21,789      18,685
                                                      ----------  ----------  ----------
TOTAL EXPENSES ......................................    515,393     278,078     221,904
                                                      ----------  ----------  ----------
Income before income taxes...........................    283,647     134,905      90,643
Provision for income taxes ..........................    114,063      55,175      37,154
                                                      ----------  ----------  ----------
NET INCOME...........................................   $169,584    $ 79,730    $ 53,489
                                                      ==========  ==========  ==========
PER SHARE INFORMATION (PRIMARY)
 Net income .........................................   $   1.29    $    .74    $    .53
                                                      ==========  ==========  ==========
 Weighted average common and common equivalent
  shares outstanding ................................    135,173     113,817     100,874
                                                      ==========  ==========  ==========
PER SHARE INFORMATION (FULLY DILUTED)
  Net income.........................................   $   1.29    $    .73    $    .53
                                                      ==========  ==========  ==========
  Weighted average common and common equivalent
    shares outstanding ..............................    135,310     115,654     100,874
                                                      ==========  ==========  ==========
</TABLE>

         See accompanying notes to consolidated financial statements.

                               F-4
<PAGE>
                       HFS INCORPORATED AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                (IN THOUSANDS)
<TABLE>
<CAPTION>
                                   COMMON STOCK        ADDITIONAL
                              --------------------     PAID-IN      RETAINED
                                SHARES     AMOUNTS     CAPITAL      EARNINGS
                              ---------  ---------     ---------    --------
<S>                           <C>        <C>        <C>           <C>
Balance, January 1, 1994 ....    88,220    $  882     $  236,367    $ 30,160
Issuance of common stock  ...     4,140        42         55,900          --
Exercise of stock options ...       240         2            945          --
Tax benefit from exercise of
 stock options...............        --        --          1,002          --
Distribution of Chartwell
 Leisure Inc. ...............        --        --        (18,445)    (79,775)
Net income ..................        --        --             --      53,489
                              ---------  ---------  ------------  ----------
Balance, December 31, 1994 ..    92,600       926        275,769       3,874

Issuance of common stock  ...     8,341        83        178,240          --
Exercise of stock options ...       605         6          3,415          --
Tax benefit from exercise of
 stock options...............        --        --          3,237          --
Exercise of stock warrants ..       991        10         14,872          --
Conversion of 4 1/2% Senior
 Notes.......................         2        --             29          --
Net income ..................        --        --             --      79,730
                              ---------  ---------  ------------  ----------
Balance, December 31, 1995 ..   102,539     1,025        475,562      83,604

Issuance of common stock ....    25,706       257      1,712,015          --
Exercise of stock options ...     1,463        15         17,179          --
Tax benefit from exercise of
 stock options...............        --        --         28,397          --
Conversion of 4 1/2% Senior
 Notes.......................       181         2          3,291          --
Purchase of common stock ....        --        --             --          --
Currency translation
 adjustment..................        --        --             --          --
Net unrealized gain on
 investment..................        --        --             --          --
Net income ..................        --        --             --     169,584
                              ---------  ---------  ------------  ----------
BALANCE, DECEMBER 31, 1996  .   129,889    $1,299     $2,236,444    $253,188
                              =========  =========  ============  ==========
</TABLE>
                    (RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
                                   NET
                                UNREALIZED     CURRENCY
                                 GAIN ON      TRANSLATION    TREASURY
                                INVESTMENT    ADJUSTMENT       STOCK        TOTAL
                                ----------    -----------    --------       -----
<S>                           <C>           <C>            <C>          <C>
Balance, January 1, 1994 ....     $   --         $ --        $     --    $  267,409
Issuance of common stock  ...                                                55,942
Exercise of stock options ...         --           --              --           947
Tax benefit from exercise of
 stock options...............         --           --              --         1,002
Distribution of Chartwell
 Leisure Inc. ...............         --           --              --       (98,220)
Net income ..................         --           --              --        53,489
                              ------------  -------------  -----------  -----------
Balance, December 31, 1994 ..         --           --              --       280,569

Issuance of common stock  ...         --           --              --       178,323
Exercise of stock options ...         --           --              --         3,421
Tax benefit from exercise of
 stock options...............         --           --              --         3,237
Exercise of stock warrants ..         --           --              --        14,882
Conversion of 4 1/2% Senior
 Notes.......................         --           --              --            29
Net income ..................                                                79,730
                              ------------  -------------  -----------  -----------
Balance, December 31, 1995 ..         --           --              --       560,191

Issuance of common stock ....         --           --              --     1,712,272
Exercise of stock options ...         --           --              --        17,194
Tax benefit from exercise of
 stock options...............         --           --              --        28,397
Conversion of 4 1/2% Senior
 Notes.......................         --           --              --         3,293
Purchase of common stock ....         --           --         (19,152)      (19,152)
Currency translation
 adjustment..................         --          356              --           356
Net unrealized gain on
 investment..................      4,366           --              --         4,366
Net income ..................         --           --              --       169,584
                              ------------  -------------  -----------  -----------
BALANCE, DECEMBER 31, 1996  .     $4,366         $356        $(19,152)   $2,476,501
                              ============  =============  ===========  ===========
</TABLE>
See accompanying notes to consolidated financial statements.
                               F-5
<PAGE>
                       HFS INCORPORATED AND SUBSIDIARIES
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                              YEARS ENDED DECEMBER 31,
                                                                      ---------------------------------------
                                                                           1996          1995         1994
                                                                      -------------  -----------  -----------
<S>                                                                   <C>            <C>          <C>
OPERATING ACTIVITIES
Net income ..........................................................   $   169,584    $  79,730    $  53,489
Adjustments to reconcile net income to net cash provided by
 operating activities:
  Depreciation and amortization, including amortization of deferred
   financing costs...................................................        71,387       32,097       24,506
  Provision for bad debt expense.....................................         8,103       12,013        6,262
  Deferred income taxes..............................................        43,351        9,100        8,300
  Deferred rent .....................................................          (350)        (348)        (285)
  Deferred financing costs ..........................................        (6,569)        (192)      (3,322)
  Proceeds from repayment of relocation receivables and equity
   advances..........................................................     1,240,909       24,869           --
  Relocation receivables and equity advances generated...............    (1,244,512)     (30,853)          --
  Gain on sale of assets ............................................        (1,144)          --       (1,044)
  Equity in earnings of car rental operations of Avis Inc. ..........        (1,221)          --           --
  Increase (decrease) from changes in:
   Accounts and notes receivable ....................................       (25,122)      (5,373)      (8,633)
   Marketing and reservation receivables.............................        (5,564)      (7,970)      (5,195)
   Other assets......................................................          (504)      (4,679)      (5,301)
   Accounts payable and other........................................       (78,304)     (12,341)        (521)
   Deferred income...................................................         4,088        7,248       (1,721)
   Income taxes payable..............................................         3,943       17,471       23,541
   Other liabilities.................................................         4,254       (1,397)      (1,000)
                                                                      -------------  -----------  -----------
Net cash provided by operating activities ...........................       182,329      119,375       89,076
                                                                      -------------  -----------  -----------
INVESTING ACTIVITITES
Purchase of land and building........................................            --      (14,311)          --
Other property and equipment additions...............................       (41,211)     (10,212)     (11,377)
Proceeds from sale of assets.........................................         3,889           --        4,697
Due to car rental operations of Avis Inc.............................       (11,228)          --           --
Loans and investments................................................       (12,721)     (33,783)     (42,524)
Principal payments received on loans.................................         1,600           --          341
Net assets acquired, exclusive of cash acquired .....................    (1,597,231)     (70,647)          --
                                                                      -------------  -----------  -----------
Net cash used in investing activities ...............................    (1,656,902)    (128,953)     (48,863)
                                                                      -------------  -----------  -----------
FINANCING ACTIVITIES ................................................
Principal payments--long-term debt...................................        (3,161)     (46,954)    (152,131)
Issuance of common stock.............................................     1,169,117       51,808          933
Redemption of warrants...............................................            --       14,877           --
Cash distribution....................................................            --           --      (50,000)
Purchases of treasury stock..........................................       (19,152)          --           --
Redemption of Series A Preferred Stock ..............................       (80,000)          --           --
Proceeds from borrowings ............................................       447,066           --      150,000
                                                                      -------------  -----------  -----------
Net cash provided by (used in) financing activities .................     1,513,870       19,731      (51,198)
                                                                      -------------  -----------  -----------
Effect of changes in exchange rates on cash and cash equivalents ....           356           --           --
                                                                      -------------  -----------  -----------
Net increase (decrease) in cash and cash equivalents.................        39,653       10,153      (10,985)
Cash and cash equivalents, beginning of period ......................        16,109        5,956       16,941
                                                                      -------------  -----------  -----------
Cash and cash equivalents, end of period.............................   $    55,762    $  16,109    $   5,956
                                                                      =============  ===========  ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
  Interest...........................................................   $    25,377    $  19,161    $  16,788
                                                                      =============  ===========  ===========
  Taxes..............................................................   $    56,151    $  28,139    $   5,313
                                                                      =============  ===========  ===========
</TABLE>

         See accompanying notes to consolidated financial statements.

                               F-6
<PAGE>
                      HFS INCORPORATED AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   A. DESCRIPTION OF BUSINESS -- HFS Incorporated (together with its
subsidiaries, the "Company"), is a leading global provider of services to
various businesses in consumer industries. The Company engages in the
following businesses and related industry segments:

   o      Franchising (lodging and real estate franchise segments). The
          Company franchises guest lodging facilities and residential real
          estate brokerage offices and provides operational and
          administrative services to its franchisees under the names CENTURY
          21(Registered Trademark), Coldwell Banker(Registered Trademark),
          Days Inn(Registered Trademark), Electronic Realty
          Associates(Registered Trademark) ("ERA"), Howard Johnson(Registered
          Trademark), Knights Inn(Registered Trademark), Ramada(Registered
          Trademark), Super 8(Registered Trademark), Travelodge(Registered
          Trademark) and Villager Lodge(Registered Trademark) ("Villager").

          As a franchisor, the Company licenses the owners and operators of
          independent businesses, principally hotels and real estate
          brokerage offices, to use the Company's brand names. The Company
          provides its customers with services designed to increase their
          revenue and profitability. These services permit franchisees to
          retain independence and local control while benefiting from the
          economies of scale of widely promoted brand names and standards of
          service, national and regional direct marketing and co-marketing
          arrangements and global procurement. Services provided to the
          lodging segment include access to a national reservation system,
          national advertising and promotional campaigns, co-marketing
          programs and volume purchasing discounts. Services provided to the
          real estate segment include national and local advertising and
          promotion, referrals and training and volume purchasing discounts.

   o      Relocation (relocation segment). The Company provides relocation
          services to client corporations through its Coldwell Banker
          Relocation Services, Inc. and Worldwide Relocation Management, Inc.
          subsidiaries. These services include responsibility for the sale of
          a transferee's residence, providing equity advances on transferee
          residences for the purchase of a new home and home management
          services.

   o      Timeshare (timeshare segment). The Company operates Resort
          Condominiums International ("RCI"), a provider of timeshare
          exchange programs, publications and other travel related services
          to the timeshare industry. The "RCI Network" enables a member who
          owns a timeshare interest in a resort property that is affiliated
          with the RCI Network to exchange such timeshare interest for one of
          equivalent value in another affiliated resort.

   o      Car Rental (car rental segment). The Company currently owns Avis,
          Inc. ("Avis"), including the car rental operations of Avis, Inc.
          ("ARAC") which provides vehicle rentals to businesses and
          individual customers worldwide as well as other rental related
          products such as insurance, refueling services and loss damage
          waivers. The Company intends to undertake an initial public
          offering of ARAC the "IPO" which will dilute its interest to 25%.
          The Company will retain the Avis trademark which is licensed to ARAC
          under an agreement effective January 1, 1997 as well as the
          reservation and information technology systems. (see Note 1B).

   o      Other (other segment). The Company operates a telecommunications
          and computer processing system which is licensed to ARAC and other
          independent car rental companies for reservations, rental agreement
          processing, accounting, fleet control and other purposes and also
          services businesses in other industries. The Company also provides
          marketing and other services to casino gaming facilities.

   B. PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts and transactions of the Company together with its wholly
owned and majority owned subsidiaries except for the Company's ownership of
ARAC which is accounted for under the equity method (See Note 3). ARAC is not
consolidated because of the Company's plan to undertake an IPO which will
dilute the Company's interest to 25%. If the IPO is not consummated within one
year of the Company's acquisition of Avis, the Company will consolidate
ARAC. All

                               F-7
<PAGE>
material intercompany balances and transactions have been eliminated in
consolidation. The consolidated financial statements of the Company include
the assets and liabilities of Ramada Franchise Systems, Inc., an entity
controlled by the Company by virtue of its ownership of 100% of the common
stock of such entity. The assets of Ramada Franchise Systems, Inc. are not
available to satisfy the claims of any creditors of the Company or any of its
other affiliates, except as otherwise specifically agreed by Ramada Franchise
Systems, Inc.

   C. CASH AND CASH EQUIVALENTS -- The Company considers highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.

   D. INVESTMENT SECURITIES -- The Company determines the appropriate
classifications of its investment securities at the time of purchase and
periodically reevaluates such determinations. Unrestricted investment
securities for which the Company does not have the intent or ability to hold
to maturity are classified as "available for sale". Available for sale
securities are carried at fair value, with unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity.

   E. PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation is computed by the
straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is computed by the straight-line
method over the estimated useful life of the related asset or the lease term,
if shorter. Interest costs of $564,000, $82,000 and $246,000 in 1996, 1995 and
1994, respectively, for the construction of property and equipment were
capitalized and are being amortized over the estimated useful life of the
related asset. The Company periodically evaluates the recoverability of
property and equipment by comparing the carrying value to current and
expected cash flows separately for each business segment in which the
property and equipment is employed.

   F. FRANCHISE AGREEMENTS -- Franchise agreements are recorded at their
estimated fair values at the date acquired and amortized over the estimated
period to be benefited ranging from 12 to 40 years using the straight-line
method. The Company periodically evaluates the recoverability of franchise
agreements by comparing the carrying value to current and expected future
cash flows on a separate basis for each franchise brand.

   G. EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED -- The excess of
cost over fair value of net assets acquired is being amortized on a
straight-line basis over the estimated useful lives, ranging from 20 to 40
years. The Company periodically evaluates the recoverability of excess of
cost over fair value of net assets acquired by comparing the carrying value
to current and expected future cash flows on a separate basis for each
acquisition.

   H. OTHER INTANGIBLES -- Other intangibles, consisting of trademarks,
customer lists and a reservation system are recorded at their estimated fair
values at the dates acquired and are amortized over the estimated periods to
be benefited ranging from 6.5 to 40 years on a straight-line basis. The
Company periodically evaluates the recoverability of other intangibles on an
individual basis by comparing the carrying values to current and expected
future cash flows.

   I. FRANCHISE ACQUISITION COSTS -- The Company expenses direct costs
relating to franchise sales on the date the property opens.

   J. DEFERRED FINANCING COSTS -- Deferred financing costs are amortized over
the life of the related debt using the interest method.

   K. REVENUE RECOGNITION -- Revenue primarily consists of fees for providing
services to businesses in consumer industries.

   Franchise Fees: Franchise revenue consists of royalty, marketing and
reservation fees which are based on a percentage of franchised lodging
properties' gross room sales ("Gross Room Sales") and franchised real
estate brokerage offices' gross commissions earned on sales of residential
real estate properties ("Gross Closed Commissions"). Royalty, marketing and
reservation fees are accrued as the underlying franchisee revenue is earned.
Initial fees included in franchise fees are recorded as revenue when the
lodging property or real estate brokerage office opens as a franchised unit.

                               F-8
<PAGE>
    Relocation services revenue: The relocation services provided by the
Company include facilitating the purchase and resale of the
employee-transferee's residence, providing equity advances on the
employee-transferee's residence (for purchase of a new home), and home
management services.

   The homes are purchased under a contract of sale at an appraised fair
market value. Although the Company purchases these homes under a contract of
sale and obtains deeds to the properties, it does not record the deed or
transfer of title. Under the terms of their agreements with various client
corporations, the final approval to accept an offer for the sale of the homes
must be obtained from a representative of the client corporation if the offer
deviates outside of a price range specified in the contract. If there is a
difference between the appraised purchase price and the price realized upon sale
of the property, this gain or loss is recognized by the client corporation.
In the opinion of management, the only event under which the Company would be
exposed to the risk of ownership, and any resultant losses, for a purchased
home would be if a client corporation were to become insolvent and the
purchased home were to be ultimately sold for a loss.

   When called for in the client contract, the Company provides an equity
advance to the employee-transferee. The equity payment carries an interest
charge computed at a floating rate which is linked to a bank's prime rate.
These equity payments are repaid to the Company upon close of escrow or
transfer of title when the employee/transferee's home is resold. All equity
advances are guaranteed by the client corporation. The Company's management
believes that the fair value of these equity advances approximates carrying
value.

   Funds are advanced by the client corporation to the Company for payment of
the home management costs for the employee-transferee's home. The resulting
liability is the net excess of billings over costs incurred on unsold homes.
After the home is resold, a settlement of actual costs and the advance
billings is made with the client corporation.

   Revenues associated with the resale of a residence are recognized when the
residence is sold to a third party. Other service revenues are recognized
when the service is provided.

   Timeshare revenue--Revenue generated from services provided to the
timeshare industry include subscription and exchange revenue. Subscription
income is received from subscribers on either an annual basis or for periods
covering more than one year. Such subscription income is deferred upon
receipt and recorded as income as the contractual services (delivery of
publications) are provided to subscribers. Exchange fees are recognized as
revenue when the exchange request has been confirmed to the subscriber.

   Other revenue--Other principal sources of revenue primarily consist of
revenue from agreements that provide preferred alliance partners access to
the Company's customers and those customers' customers; telecommunications
and computer processing services provided to the car rental industry; and
marketing and other services provided to casino gaming facilities which are
recognized as services are provided.

Revenues consist of ($000's):

<TABLE>
<CAPTION>
                              FOR THE YEARS ENDED DECEMBER 31,
                            ----------------------------------
                                1996        1995        1994
                            ----------  ----------  ----------
<S>                         <C>         <C>         <C>
Service fees...............   $754,754    $403,003    $305,654
Equity in earnings of
 ARAC......................      2,261          --          --
Interest income............     21,055       2,116         466
Other......................     20,970       7,864       6,427
                            ----------  ----------  ----------
Total revenues.............   $799,040    $412,983    $312,547
                            ==========  ==========  ==========
</TABLE>

   L. INCOME TAXES -- The Company uses the liability method of recording
deferred income taxes. Differences in financial and tax reporting result from
differences in the recognition of income and expenses for financial and
income tax purposes as well as differences between the fair value of assets
acquired in business combinations accounted for as purchases and their tax
bases. The Company and its subsidiaries file a consolidated federal income
tax return.

                               F-9
<PAGE>
    M. SHARE INFORMATION -- Earnings per share are based upon the weighted
average number of common and common equivalent shares outstanding during the
respective periods. The $240 million 4 3/4% Convertible Senior Notes issued
in February 1996 are antidulitive, and accordingly are not included in the
computation of earnings per share. In addition, the $150 million 4 1/2%
Convertible Senior Notes issued in October 1994 are anti-dilutive for the
year ended December 31, 1994, and accordingly are not included in the
computation of earnings per share for 1994.

   In both November 1995 and February 1994, the Company's Board of Directors
authorized a two-for-one stock split of the Company's common stock which was
effected in the form of a 100% stock dividend in February 1996 and April
1994, respectively. All share, per share, stock price and stock award plan
information presented herein has been retroactively adjusted to reflect the
stock splits.

   N. USE OF ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect reported amounts and related
disclosures. Actual results could differ from those estimates.

   O. STOCK BASED COMPENSATION -- The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123
"Accounting for Stock-Based Compensation" but applies Accounting Principle
Board Opinion ("APB") No. 25 and related interpretations in accounting for
its Option plans. Under APB No. 25, because the exercise prices of the
Company's employee stock options are equal to the market prices of the
underlying Company stock on the date of grant, no compensation expense is
recognized.

   P. RECLASSIFICATIONS -- Certain reclassifications have been made to the
1995 and 1994 consolidated financial statements to conform with
classifications used in 1996.

2. ACQUISITIONS

   PENDING MERGER WITH PHH CORPORATION ("PHH") -- On November 10, 1996, the
Company entered into a definitive merger agreement (the "Merger Agreement")
pursuant to which the Company will issue approximately $1.7 billion of
Company common stock in exchange for all of the outstanding common stock of
PHH. Pursuant to the terms of the Merger Agreement, the number of Company
shares to be issued may range from 21.3 to 28.8 million, based upon the
average share price of the Company's common stock over a period of 20 trading
days ending five days prior to the date of the vote by PHH shareholders on
approval of the transaction. PHH is the world's largest provider of corporate
relocation services and also provides mortgage services and vehicle
management services. Consummation of the transaction is subject to approval
of the shareholders of each company at special meetings of such shareholders
to be held on April 30, 1997. The merger will be accounted for as a
pooling-of-interests.

   PENDING ACQUISITION OF VALUE RENT-A-CAR ("Value") -- On March 3, 1997, the
Company reached an agreement in principle to acquire value from Mitsubishi
Motor Sales of America for $175 million in cash. Value predominantly serves
leisure customers from corporate-owned rental car sites, primarily in Florida.
Closing is anticipated in the second quarter of 1997 and is subject to
customary conditions, including negotiation and execution of definitive
documentation and approval of the respective boards of directors.

COMPLETED ACQUISITIONS

   The following acquisitions were accounted for using the purchase method of
accounting; accordingly, assets acquired and liabilities assumed were
recorded at their estimated fair values. The operating results of the
following acquired companies are reflected in the Company's consolidated
statements of income since the respective dates of acquisition.

   A. RESORT CONDOMINIUMS INTERNATIONAL, INC. -- On November 12, 1996, the
Company completed the acquisition of all the outstanding capital stock of
Resort Condominiums International, Inc. and its affiliates ("RCI") for
approximately $487 million. The purchase price was comprised of $412 million
in cash and $75 million (approximately 1.0 million shares) of Company common
stock. The purchase agreement provides for contingent payments of up to $200
million over the next five

                              F-10
<PAGE>
years which are based on components which measure RCI's future performance,
including EBITDA, net revenue and number of members, as defined. Any
contingent payments made will be accounted for as additional excess of cost
over fair value of net assets acquired. RCI, based in Indianapolis, Indiana,
is the world's largest provider of timeshare exchange programs, providing
services for approximately 2.2 million timeshare owners and approximately
3,100 resorts around the world. RCI is also engaged in publishing related to
the timeshare industry and provides other travel-related services, integrated
software and resort management and consulting services.

   B. AVIS, INC. -- On October 17, 1996, the Company completed the
acquisition of all of the outstanding capital stock of Avis, Inc. ("Avis"),
including payments under certain employee stock ownership plans of Avis and
the redemption of certain series of preferred stock of Avis for an aggregate
$806.5 million. The purchase price was comprised of approximately $367.2
million in cash, $100.9 million in indebtedness and $338.4 million
(approximately 4.6 million shares) in Company common stock. Avis, together
with its subsidiaries, licensees and affiliates, operates the Avis rental car
business, which the Company believes is the second largest car rental system
in the world. See Note 3 for a discussion of the Company's business plan and
related accounting treatment regarding Avis.

   C. COLDWELL BANKER -- On May 31, 1996, the Company acquired by merger
Coldwell Banker Corporation ("Coldwell Banker"), the largest gross revenue
producing residential real estate company in North America and a leading
provider of corporate relocation services. The Company paid $640 million in
cash for all of the outstanding capital stock of Coldwell Banker and repaid
approximately $105 million of Coldwell Banker indebtedness. The aggregate
purchase price for the transaction was financed through the May 9, 1996 sale
of Company common stock in which the Company sold an aggregate 19.4 million
shares of Company common stock pursuant to a public offering. Subsequent to
the acquisition of Coldwell Banker, the Company acquired for $2.6 million a
relocation consulting firm which was merged into the Coldwell Banker
relocation business.

   Immediately following the closing of the Coldwell Banker acquisition, the
Company conveyed Coldwell Banker's 318 owned real estate brokerage offices
("Owned Brokerage Business") to National Realty Trust (the "Trust"), an
independent trust in which the Company has no beneficial interest. The
Company recorded a $5.0 million charge (approximately $3.1 million or $.02
per share) in the second quarter of 1996 representing the fair value of
operations contributed to the Trust. The charge represents the fair value of
the Owned Brokerage Business based upon a valuation which considered
earnings, cash flow, assets and business prospects of the contributed
business.

   D. CENTURY 21 NON-OWNED REGIONS -- During the second quarter of 1996, the
Company purchased from four independent master licensees, the six U.S.
previously non-owned Century 21 regions ("CENTURY 21 NORS") licensing of
more than 1,000 franchised real estate offices. The $147.4 million aggregate
purchase price for the CENTURY 21 NORS consisted of approximately $96.4
million in cash, $5 million in notes and $46.0 million (approximately 0.9
million shares) in Company common stock.

   E. ERA -- On February 12, 1996, the Company purchased substantially all
the assets comprising the Electronic Realty Associates ("ERA") residential real
estate brokerage franchise system, the fourth largest franchise system in
terms of franchised brokerage offices, for approximately $39.4 million in
cash plus expenses.

   F. TRAVELODGE -- On January 23, 1996, the Company purchased the assets
comprising the Travelodge hotel franchise system in North America, including
the Travelodge and Thriftlodge(Registered Trademark) service marks and
franchise agreements from Forte Hotels, Inc. ("FHI") for $39.3 million in
cash.

   Concurrent with the Company's acquisition of the Travelodge franchise
system, Motels of America, Inc., through a wholly owned subsidiary,
(collectively "MOA"), purchased 20 Travelodge motels from FHI for $32.3
million. MOA, a significant Company franchisee, entered into twenty year
Travelodge and Ramada franchise agreements for nineteen acquired Travelodge
motels and one acquired Ramada motel.

   In addition, Chartwell Leisure Inc. ("CHRT"), formerly National Lodging
Corp., a former wholly owned Company subsidiary which was distributed to the
Company shareholders in November 1994 (the

                              F-11
<PAGE>
"Distribution Date"), purchased all of the capital stock of FHI for $98.4
million. FHI owns or has an interest in 112 hotel and motel properties. In
connection with CHRT's acquisition, the Company guaranteed $75 million of
CHRT borrowings under a $125 million revolving credit facility entered into
by CHRT with certain banks. The Company is paid a guarantee fee of 2% per
annum of the outstanding guarantee commitment by the Company pursuant to a
financing agreement entered into between CHRT and the Company at the
Distribution Date (the "Financing Agreement"). The Financing Agreement was
modified to allow the Company to provide credit enhancements for hotel
industry investments. Such guarantee is expected to terminate upon CHRT's
refinancing of its revolving credit facilities in the second quarter of 1997.
In connection with the acquisition of the Travelodge franchise system and
CHRT's acquisition of FHI, the marketing and advisory agreements previously
entered into by the Company and CHRT at the Distribution Date were terminated.
The corporate services agreement entered into by the Company and CHRT at the
Distribution Date was modified to provide that the Company is to provide
financial and other corporate administrative support and advisory services
through September 1996 and thereafter advisory services through January 2019
for a fee of $1.5 million per year. This agreement was terminated in November
1996 by mutual agreement, and the Company received $9.5 million in
consideration for consenting to the early termination of such agreement which
was recorded as other revenue. Additionally, CHRT paid a $2.0 million advisory
fee to the Company in connection with CHRT's acquisition of FHI.

   G. KNIGHTS INN -- In August 1995, the Company acquired the assets
comprising the Knights Inn hotel franchise system, an economy hotel franchise
system, for approximately $15 million plus expenses.

   H. CENTURY 21 -- On August 1, 1995, a majority owned Company subsidiary,
C21 Holding Corp. ("Holding"), acquired Century 21 Real Estate Corporation
("Century 21"), the world's largest residential real estate brokerage
franchisor, from Metropolitan Life Insurance Company ("MetLife"). Aggregate
consideration for the acquisition consisted of $245 million plus expenses,
including an initial cash payment of $70.2 million, 4 million shares of the
Company's common stock valued at $65 million, the assumption of $80 million
of Century 21 redeemable preferred stock issued to MetLife prior to the
acquisition and subsequently redeemed in February 1996 and a $30 million
contingent payment made in February 1996. The excess of cost over fair value
of net assets acquired recorded in connection with the acquisition, includes
the contingent payment and purchase price adjustments subsequent to the
acquisition. In connection with the acquisition, the Company executed an
agreement, the Subscription and Stockholders' Agreement, with a management
group pursuant to which the ownership of Century 21 Holding Corp. common
stock was divided 87.5% to the Company and 12.5% to the management
group. In addition, the management group executives entered into renewable
employment agreements with the Company with initial terms that commenced on
November 1, 1995 and would expire on December 31, 1997. The Company has a
call option to purchase Holding common stock owned by the management group
after January 1, 1998 for the fair market value of such stock when and if the
option is exercised and the management group has a put option to require the
Company to purchase all their Holding common stock after January 1, 1998 at
fair market value. Effective October 29, 1996 (the "Effective Date"), the
Company amended the Subscription and Stockholders' Agreement to provide that
the Company's call option to purchase Holding common stock at fair
value from the management group was accelerated to the Effective Date with
the fair value determined as of the Effective Date. Pursuant to such
amendment, the employment agreements were terminated in October 1996 and the
put and call options have been exercised. The acquisition of the 12.5%
interest by the Company is expected to be completed in the second quarter of
1997.

   The Company and certain stockholders sold approximately 6.4 million common
shares pursuant to a public offering on September 19, 1995 (the "Offering").
Included in the Offering were 4 million shares issued to MetLife (the
"MetLife Shares") as partial consideration for the acquisition of Century 21.
In accordance with Century 21 acquisition agreements, the Company received
$28.9 million representing proceeds from the sale of the MetLife Shares in
excess of $17.50 per share, net of certain expenses of the Offering. In
connection with the Offering, the Company also received $20.1 million of
proceeds, net of certain expenses of the Offering from the sale of 835,800
shares issued upon the exercise of an underwriter over-allotment option. Net
proceeds from the Offering received by the Company resulted in corresponding
increases in stockholders' equity.

                              F-12
<PAGE>
    I. CENTRAL CREDIT, INC. -- On May 11, 1995, the Company acquired by
merger (the "CCI Merger") Casino & Credit Services, Inc.'s ("CACS") gambling
patron credit information business, Central Credit, Inc. ("CCI"). The Company
acquired all of the common stock of CACS for approximately $36.8 million by
issuing approximately 2.4 million shares of the Company's common stock and
warrants to acquire up to approximately 1.0 million additional shares of the
Company's common stock. The exercise prices for the warrants ranged from
$28.56 to $39.27 per share. The range of exercise prices is a result of the
various exercise prices of the underlying warrants which were issued at
various dates and prices. Prior to the acquisition, CACS distributed to its
shareholders all net assets not related to the gambling patron credit
information business.

   The following tables reflect the fair values of assets acquired and
liabilities assumed in connection with the completed acquisitions described
above. The excess of cost over fair value of net assets acquired for each of
the acquisitions is being amortized on a straight-line basis over 40 years.

<TABLE>
<CAPTION>
                                                                     ACQUIRED IN 1996
                                       --------------------------------------------------------------------------
                                                                                CENTURY 21
                                                                    COLDWELL    NON-OWNED
                                         RCI, INC.    AVIS, INC.     BANKER      REGIONS       ERA     TRAVELODGE
                                       -----------  ------------  ----------  ------------  -------  ------------
<S>                                    <C>          <C>           <C>         <C>           <C>      <C>
Cash paid.............................    $412.1        $367.2       $747.8       $ 96.4      $39.4      $ 39.3
Common stock issued...................      75.0         338.4           --         46.0         --          --
Note issued ..........................        --         100.9           --          5.0         --          --
                                       -----------  ------------  ----------  ------------  -------  ------------
Total consideration...................    $487.1        $806.5       $747.8       $147.4      $39.4      $ 39.3
                                       -----------  ------------  ----------  ------------  -------  ------------
Cash and cash equivalents.............    $144.9        $  2.4       $(16.2)      $   --      $ 3.9      $   --
Royalty and notes receivable..........      37.9          12.0         88.4           --        3.0         5.7
Investment in ARAC....................        --          75.0           --           --         --          --
Property and equipment................      55.7          61.8         21.7           .2        1.1          --
Intangibles...........................     100.0         509.0        437.2         11.0       20.0        30.0
Other assets..........................     100.6         123.7         10.6          5.6        4.1         1.5
Accounts payable and other............     221.3         223.5        113.3          9.4       25.3         6.9
Due to ARAC...........................        --          73.0           --           --         --          --
Other non-current liabilities  .......     208.4          14.9         30.2          3.5        2.2          --
                                       -----------  ------------  ----------  ------------  -------  ------------
Fair value of net assets acquired  ...       9.4         472.5        393.2          3.9        4.6        30.3
                                       -----------  ------------  ----------  ------------  -------  ------------
Excess of cost over fair value of net
 assets acquired......................    $477.7        $334.0       $354.6       $143.5      $34.8      $  9.0
                                       ===========  ============  ==========  ============  =======  ============
</TABLE>

<TABLE>
<CAPTION>
                                                                  ACQUIRED IN 1995
                                                       ------------------------------------
                                                         KNIGHTS
                                                           INN      CENTURY 21    CCI, INC.
                                                       ---------  ------------  -----------
                                                                                      $
<S>                                                    <C>        <C>           <C>
Cash paid.............................................   $14.5        $100.2           --
Common stock issued...................................      --          64.8         36.8
Preferred stock issued................................      --          80.0           --
                                                       ---------  ------------  -----------
Total consideration...................................   $14.5        $245.0        $36.8
                                                       ---------  ------------  -----------
                                                                                      $
Cash and cash equivalents.............................   $  --        $ 14.0           --
Royalty and notes receivable..........................                  57.4
Property and equipment................................                   4.6          8.5
Intangibles...........................................     5.2          33.5           --
Other assets..........................................      .4          11.1          1.5
Accounts payable and other............................     1.0          58.9          5.9
Other non-current liabilities ........................      --          16.4          3.8
                                                       ---------  ------------  -----------
Fair value of net assets acquired ....................     4.6          45.3           .3
                                                       ---------  ------------  -----------
Excess of cost over fair value of net assets
 acquired.............................................   $ 9.9        $199.7        $36.5
                                                       =========  ============  ===========
</TABLE>

                              F-13
<PAGE>

   In connection with the acquisitions of CENTURY 21, the Century 21 NORS,
ERA, Coldwell Banker and RCI, the Company developed related business plans to
restructure each of the respective companies. Acquisition liabilities were
recorded at the dates of consummation and are included in the respective
purchase price allocations. These liabilities include costs associated with
restructuring activities such as planned involuntary termination and relocation
of employees, the consolidation and closing of certain facilities and the
elimination of duplicative operating and overhead activities. Restructuring
costs recognized as accrued acquisition obligations related to each acquired
entity are summarized by type as follows ($000's):

<TABLE>
<CAPTION>
                                      CENTURY              COLDWELL
                        CENTURY 21    21 NORS     ERA       BANKER       RCI
                      ------------  ---------  --------  ----------  ---------
<S>                   <C>           <C>        <C>       <C>         <C>
Personnel related ...    $12,647      $1,720     $3,822     $4,237     $ 9,845
Facility related ....     16,511       2,293      1,558      5,491       6,929
Other costs .........        990         711        169        211       7,025
                      ------------  ---------  --------  ----------  ---------
Total................    $30,148      $4,724     $5,549     $9,939     $23,799
                      ============  =========  ========  ==========  =========
Terminated
 employees...........        319          73        202         87         252
</TABLE>

   Personnel related charges include termination benefits such as severance,
wage continuation, medical and other benefits. Facility related costs include
contract and lease terminations, temporary storage and relocation costs
associated with assets to be disposed of, and other charges incurred in the
consolidation and closure of excess space.

   During 1995, approximately $14.3 million was paid and charged against the
acquisition liability for restructuring charges related to the Century 21
acquisition. During 1996, approximately $11.3 million, $2.6 million, $5.1
million, $3.9 million and $ 0.5 million was paid and charged against the
acquisition liabilities for restructuring charges related to the Century 21,
CENTURY 21 NORS, ERA, Coldwell Banker and RCI, respectively. Additional
restructuring charges were accrued during 1996 for Century 21 of $6.1 million.
The adjustment to the restructuring liability represented revised cost
estimates for activities contemplated in management's original restructuring
plans.

   The Company has fully executed its business plans to restructure Century
21, the CENTURY 21 NORS, ERA and Coldwell Banker. Remaining accrued
acquisition obligations related to the restructuring of such acquired
companies pertain primarily to future lease commitments and other contractual
obligations that existed at the respective acquisition dates. The Company is
in the process of executing and completing its current business plan to
restructure RCI, which it expects to complete in the second half of 1997.

PRO FORMA INFORMATION

   The following information reflects pro forma statements of income data for
the years ended December 31, 1996 and 1995 assuming the aforementioned
completed acquisitions were consummated on January 1, 1995. Accordingly, the
pro forma statements of income data excludes the PHH Merger which was not
consummated by December 31, 1996.

   The acquisitions have been accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed have been
recorded at their estimated fair values, which are subject to further
refinement, based upon appraisals and other analyses with appropriate
recognition given to the effect of current interest rates and income taxes.
Management does not expect that the final allocation of the purchase price
for the above acquisitions will differ materially from the preliminary
allocations. The pro forma results are not necessarily indicative of the
operating results that would have occurred had the transactions been
consummated as indicated nor are they intended to indicate results that may
occur in the future. The underlying pro forma information includes the
amortization expense associated with the assets acquired, the reflection of
the Company's financing arrangements and the related income tax effects.
Certain other Company acquisitions were not material and therefore were not
reflected in the pro forma statements of income data.

                              F-14
<PAGE>
(In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                      --------------------------
                                                           1996          1995
                                                      ------------  ------------
<S>                                                   <C>           <C>
Net revenues.........................................   $1,160,853    $1,061,202
Income before income taxes...........................      336,181       272,320
Net income...........................................      201,346       159,925
Net income per share:
 Primary.............................................         1.37          1.15
 Fully Diluted.......................................         1.37          1.14
Weighted average common and common equivalent shares
 outstanding:
 Primary.............................................      150,598       142,498
 Fully Diluted.......................................      150,735       144,335
</TABLE>

3. INVESTMENT IN ARAC

   As discussed in Note 2B, at the time the Company acquired Avis, it had
developed and announced a plan (the "Plan") to do the following:

   1. Retain certain assets acquired, including the reservation system,
      franchise agreements, trademarks and tradenames and certain
      liabilities.

   2. Segregate the assets used in the car rental operations in ARAC, a
      separate subsidiary and dispose of an approximately 75% interest in
      ARAC within one year through an initial public offering (the "IPO")
      of ARAC.

   3. Enter into a license agreement with ARAC for use of the trademarks
      and tradename and other franchise services.

   Based on the Plan, the purchase price for Avis has been allocated to the
assets acquired and liabilities assumed by the Company, including its
investment in ARAC, based on their respective estimated fair values. The amount
allocated to Car Rental Operating Company was based on the estimated valuation
of ARAC including the effect of royalty, reservation and information technology
agreements with the Company. Under the Plan, ARAC will sell approximately
a 75% interest at an assumed price of $225 million thereby diluting the
Company's interest to 25%. All of the proceeds from the IPO will be retained
by ARAC.

                              F-15
<PAGE>
    The condensed balance sheet at December 31, 1996 and the condensed income
statement for the period October 17, 1996 through December 31, 1996 of ARAC
is as follows:

                  RENTAL CAR OPERATIONS OF AVIS, INC. (ARAC)
                            COMBINED BALANCE SHEET
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
<S>                                                      <C>
ASSETS
Cash and cash equivalents...............................   $   50,886
Accounts receivable, net................................      311,179
Due from affiliates, net................................       61,807
Vehicles, net...........................................    2,243,492
Property and equipment..................................       98,887
Cost in excess of net assets acquired net...............      196,765
Other...................................................      168,341
                                                         ------------
                                                           $3,131,357
                                                         ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable on accrued liabilities.................      504,780
Income tax liabilities..................................       40,778
Public liability, property damage and other
 liabilities............................................      213,785
Debt....................................................    2,295,474
                                                         ------------
 Total liabilities......................................    3,054,817
Stockholder's equity....................................       76,540
                                                         ------------
                                                           $3,131,357
                                                         ============
</TABLE>

                  RENTAL CAR OPERATIONS OF AVIS, INC. (ARAC)
                          CONDENSED INCOME STATEMENT
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
<S>                                                   <C>
Revenue..............................................   $362,844
                                                      ----------
Costs and expenses
 Direct operating....................................    167,682
 Vehicle depreciation and lease charges..............     95,245
 Selling general and administrative..................     62,418
 Interest, net.......................................     34,212
 Amortization of cost in excess of net assets
  acquired...........................................      1,026
                                                      ----------
                                                         360,583
                                                      ----------
Income before provision for income tax...............      2,261
Provision for income tax.............................      1,040
                                                      ----------
Net income...........................................   $  1,221
                                                      ==========
</TABLE>

  NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Vehicles

  Vehicles are stated at cost net of accumulated depreciation. In accordance
  with industry practice, when vehicles are sold, gains or losses are
  reflected as an adjustment to depreciation. Vehicles are generally
  depreciated at rates ranging from 10% to 25% per annum. Manufacturers
  provide ARAC with incentives and allowances (such as rebates and
  volume discounts) which are amortized to income over the holding period of
  the vehicles.

                              F-16
<PAGE>
    Cost in Excess of Net Assets Acquired

  Cost in excess of net assets acquired is amortized over a 40 year period
  and is shown net of accumulated amortization of $1.0 million at December
  31, 1996.

   Public Liability, Property Damage and Other Insurance Liabilities

  Insurance liabilities on the accompanying combined statement of financial
  position include additional liability insurance, personal effects
  protection insurance, public liability and property damage ("PLPD") and
  personal accident insurance claims for which ARAC is self-insured.
  ARAC is self-insured up to $1.0 million per claim under its auto
  liability insurance program for PLPD and additional liability insurance.
  Costs in excess of $1.0 million per claim are insured under various
  contracts with commercial insurance carriers. The insurance liabilities
  include a provision for both claims reported to ARAC as well as
  claims incurred but not yet reported to ARAC.

   Income Taxes

  ARAC is included in the consolidated federal income tax return of the
  Company. Pursuant to the regulations under the Internal Revenue Code,
  ARAC's pro rata share of the consolidated federal income tax liability
  of the Company is allocated to ARAC on a separate return basis. ARAC
  files separate income tax returns in states where a consolidated return is
  not permitted. In accordance with Statement of Financial Accounting
  Standards No. 109, "Accounting for Income Taxes", deferred income tax
  assets and liabilities are measured based upon the difference between the
  financial accounting and tax basis of assets and liabilities.

  NOTE B -- INTERCOMPANY TRANSACTIONS

  Amount due from affiliates represents the net balance due to or from the
  Company which will be settled upon or before consummation of the IPO.
  Net amount of approximately $61.8 million consists of notes receivable due
  to the Company from an indirect wholly owned subsidiary of the Company, long
  term subordinated vehicle financing notes payable to the Vehicle Trust (see
  note C) and miscellaneous non-interest bearing advances made by ARAC to the
  Company. Expense items include charges from the Company and affiliates of the
  Company totaling $31.8 million.

   Reservations and data processing services are charged to the Company based
on actual cost plus a profit thereon of 20%. All other charges are based on
actual costs incurred. Effective January 1, 1997, the Company will charge ARAC
a franchise fee of 3.5% of revenue for the use of the Avis trade name. On an
unaudited pro forma basis, had the franchise fee been charged to ARAC
beginning on October 17, 1996, net income for the period October 17, 1996 to
December 31, 1996 would have been reduced by $7.5 million resulting in a pro
forma net loss of approximately $6.3 million.

                              F-17
<PAGE>
NOTE C -- FINANCING AND DEBT

  Debt outstanding at December 31, 1996 is not guaranteed by the Company and
  consists of the following (000's):

                             VEHICLE TRUST FINANCING

<TABLE>
<CAPTION>
<S>                                                              <C>
 Short term vehicle trust financing-revolving credit
 facilities...................................................   $1,970,000
Long-term vehicle manufacturer's notes--payable through 2001 .      185,000
</TABLE>

                                 OTHER FINANCING

<TABLE>
<CAPTION>
<S>                                                                    <C>
Short-term debt including foreign short-term notes, capital leases
 and current portion of other long-term debt..........................     106,745
Floating rate notes--foreign subsidiaries due through August 1998 ....      30,813
Other debt--domestic..................................................       2,916
                                                                       -----------
                                                                        $2,295,474
                                                                       ===========
</TABLE>

  The primary source of funding for domestic vehicles is provided by the
  Vehicle Trust (a grantor trust). Amounts drawn against this facility may be
  used to purchase vehicles and pay certain expenses of the Vehicle Trust.
  The security for the Vehicle Trust financing facility consists of a lien on
  the vehicles acquired under the facility, which at December 31, 1996
  totaled approximately $2.1 billion, exclusive of related valuation
  reserves. The security for the Vehicle Trust financing facility also
  consists of security interests in certain other assets of the Vehicle
  Trust. Additionally, the Vehicle Trust and its security agreement require
  that there be outstanding, at all times, subordinated debt in a specified
  percentage range (10% -25%) of the net book value of the vehicles owned by
  the Vehicle Trust. Pursuant to the agreement, the subordinated debt is to
  be provided by vehicle manufacturer finance companies and by a Company
  subsidiary. The Vehicle Trust consists of loans from banks, vehicle
  manufacturer finance companies and a Company subsidiary. The short-term notes
  are issued pursuant to a $2.5 billion revolving credit facility dated as of
  October 17, 1996 which expires on October 16, 1997. On December 31, 1996,
  the weighted average interest rate of borrowings under this facility was
  6.00%. For the period from October 17, 1996 to December 31, 1996, the
  average outstanding borrowings under this facility were $2.0 billion with a
  weighted average interest rate of 5.98%. This facility requires a fee of
  1/8 of 1% on the committed amount. Subordinated debt of $318 million was
  required under the Vehicle Trust financing, of which $247.5 million is due
  to a Company subsidiary. At December 31, 1996, the Vehicle Trust had financing
  outstanding from vehicle manufacturer finance companies under terms of loan
  agreements dated October 17, 1996. Under these agreements, the maximum
  amount of borrowings allowed is $267 million, of which up to $260 million
  may be issued as subordinated debt. On December 31, 1996, $185 million was
  outstanding of which $70.5 million of the outstanding debt was deemed
  subordinated. On December 31, 1996, the weighted average interest rate of
  borrowings under this facility was 8.50%. For the period October 17, 1996
  to December 31, 1996, the average outstanding borrowings under this
  facility was $185 million with a weighted average interest rate of 8.41%.

  In November 1992, the predecessor to ARAC entered into a five year
  capital lease under which $96.7 million of vehicles were leased. The lease
  is cancelable at ARAC's option, however, additional costs may be
  incurred upon termination based upon the fair value of the vehicles at the
  time the option is exercised. At the termination of the lease, ARAC
  may purchase the vehicles at an agreed upon fair market value or return
  them to the lessor.

  The future minimum lease payments due under ARAC's capital lease
  obligation, which terminates on November 30, 1997, are $41,500,000
  (including interest of $1,331,000).

                              F-18
<PAGE>
  Mandatory maturities of long-term obligations for each of the five years
  ending December 31, and thereafter, are as follows (in thousands):

<TABLE>
<CAPTION>
<S>             <C>
1997.........  $ 41,229
1998.........    98,950
1999.........     1,086
2000.........       209
2001.........   118,228
Thereafter ..       256
</TABLE>

   Other Credit Facilities

  At December 31, 1996, ARAC had letters of credit/working capital agreements
  totaling $102.6 million, which may be renewed bi-annually at ARAC's option
  and the banks' discretion. The collateral for certain of these agreements
  consists of a lien on property and equipment and certain receivables with a
  carrying value of $136.9 million. At December 31, 1996, ARAC has
  outstanding letters of credit amounting to $55.1 million.

  In addition, for certain of its international operations, ARAC has
  available at December 31, 1996, unused lines of credit of $224.3 million.
  The unused lines of credit agreements require a quarterly fee of 0.2% to
  0.5% of the unused line.

   Interest Rate Swap Agreements

  ARAC has entered into interest rate swap agreements to reduce the impact of
  changes in interest rates on certain outstanding debt obligations. These
  agreements effectively change ARAC's interest rate exposure on $44.0
  million of its outstanding debt from a weighted average variable interest
  rate to a fixed rate of 7.1% at December 31, 1996. The variable interest
  element with respect to these interest rate swap agreements is reset
  quarterly. The interest rate swap agreements will terminate in March 1997,
  July 1998 and November 1998. The differential to be paid or received is
  recognized ratably as interest rates change over the life of the agreements
  as an adjustment to interest expense.

  The net interest differential charged to interest expense for the period
  October 17, 1996 to December 31, 1996 was $285,000. ARAC is exposed to
  credit risk in the event of nonperformance by counterparties to its
  interest rate swap agreements. Credit risk is limited by entering into such
  agreements with primary dealers only; therefore, ARAC does not anticipate
  that nonperformance by counterparties will occur. Notwithstanding this,
  ARAC's treasury department monitors counterparty credit ratings at least
  quarterly through reviewing independent credit agency reports. Both current
  and potential exposure are evaluated as necessary, by obtaining replacement
  cost information from alternative dealers. Potential loss to ARAC from
  credit risk on these agreements is limited to amounts receivable, if any.

  NOTE D -- LITIGATION

  Certain litigation has been initiated against ARAC which have arisen during
  the normal course of operations, the outcome of which is not predictable
  with any degree of certainty. On May 22, 1996, a complaint was filed in the
  United States District Court for the Eastern District of North Carolina
  against Avis Rent A Car System, Inc. and one of its licensees,
  New Hanover Rent A Car, Inc. ("New Hanover") alleging discrimination by New
  Hanover in the rental of automobiles based on race. Plaintiff seeks an
  unspecified amount of compensatory and punitive damages and a permanent
  injunction barring Avis Rent A Car System, Inc. and New Hanover from
  continuing to engage in illegally discriminatory conduct. ARAC is not
  currently involved in any legal proceeding which it believes would have a
  material adverse effect upon its combined financial condition or results of
  operations. ARAC maintains insurance policies that cover most of the actions
  brought against ARAC.

                                    * * *

                              F-19
<PAGE>
  Accounting Treatment

   The Company's investment in ARAC of $75 million at the October 17, 1996
acquisition date represents the estimated value of its 100% interest in ARAC
at the date of acquisition and is accounted for under the equity method since
the Company's control is temporary based on the planned IPO of ARAC. Upon
completion of the IPO, the value of ARAC is expected to increase to $300
million (with the $225 million of IPO proceeds retained by ARAC) with
the Company's interest at 25% equal to $75 million, its current investment
balance. If the results of the IPO do not confirm the preliminary purchase
price allocation for the investment in ARAC, then such investment will be
adjusted with a corresponding adjustment to excess of cost over fair value of
net assets acquired.

   If the IPO is not consummated within one year of HFS' acquisition of Avis,
HFS will consolidate ARAC.

   Following is a Pro Forma Condensed Consolidated Balance Sheet at December
31, 1996 and a Pro Forma Condensed Consolidated Income Statement for the year
ended December 31, 1996 assuming ARAC was consolidated.

                               HFS INCORPORATED
                PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
<S>                                                    <C>
ASSETS
Cash and cash equivalents.............................   $  106,648
Receivables...........................................      458,517
Equity advances.......................................      125,662
Other current assets..................................      140,520
                                                       ------------
  Total current assets................................      831,347
Property and equipment, net...........................      335,270
Vehicles, net.........................................    2,243,492
Franchise agreements, net.............................      995,947
Other intangibles.....................................      604,535
Excess of cost over fair value of net assets
 acquired.............................................    1,932,895
Other.................................................      338,445
                                                       ------------
                                                         $7,281,931
                                                       ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other............................   $  827,357
Income tax liabilities................................       58,238
Deferred income.......................................      160,619
Short-term debt.......................................      150,000
Current portion of long term debt ....................        2,995
                                                       ------------
  Total current liabilities...........................    1,199,209
Public liability, property damage and other  .........      213,785
Debt .................................................    3,043,895
Income tax liabilities................................       82,100
Other.................................................      266,441
Stockholders' equity..................................    2,476,501
                                                       ------------
                                                         $7,281,931
                                                       ============
</TABLE>

                              F-20
<PAGE>
                               HFS INCORPORATED
                   PRO FORMA CONSOLIDATED INCOME STATEMENT
                   (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
<S>                                                     <C>
REVENUES...............................................   $1,160,663

EXPENSES...............................................

Marketing and reservation..............................      169,315
Direct operating expenses of ARAC......................      167,682
Vehicle depreciation and lease charges ................       95,245
Selling, general and administrative ...................      306,507
Depreciation and amortization..........................       70,260
Interest...............................................       66,967
                                                        ------------
 Total expenses........................................      875,976
Income before income taxes.............................      284,687
Provision for income taxes.............................      115,103
                                                        ------------
Net income.............................................   $  169,584
                                                        ============
</TABLE>

4. ACCOUNTS PAYABLE AND OTHER

Accounts payable and other consists of ($000's):

<TABLE>
<CAPTION>
                                                         DECEMBER 31,
                                                    --------------------
                                                        1996       1995
                                                    ----------  --------
<S>                                                 <C>         <C>
Accounts payable...................................   $ 99,156   $ 6,887
Marketing and reservation liabilities..............     15,018    12,508
License restructuring and acquisition obligations       62,698    10,276
Accrued payroll and related .......................     57,448    11,809
Other .............................................     88,257    23,414
                                                    ----------  --------
Accounts payable and other.........................   $322,577   $64,894
                                                    ==========  ========
</TABLE>

5. PROPERTY AND EQUIPMENT

Property and equipment consists of ($000's):

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                             USEFUL LIVES   ----------------------
                                               IN YEARS       1996         1995
                                            --------------  ----------  ----------
<S>                                         <C>             <C>         <C>
Land.......................................                   $  3,000    $  3,000
Building...................................        30           31,634      11,311
Furniture and fixtures.....................       5 -7           3,723       2,341
Leasehold improvements.....................      5 -11          70,757       6,784
Information technology support systems ....      3 -10         154,111      55,730
Leased equipment under capital leases .....        7             8,293       8,293
                                                            ----------  ----------
                                                               271,518      87,459
Accumulated depreciation and amortization                      (35,135)    (19,567)
                                                            ----------  ----------
Property and equipment--net ...............                   $236,383    $ 67,892
                                                            ==========  ==========
</TABLE>

   Depreciation and amortization expense approximated $15.6 million, $8.1
million and $5.2 million for the years ended December 31, 1996, 1995 and
1994, respectively.

                              F-21
<PAGE>
6. MARKETING AND RESERVATION ACTIVITIES

   A. DAYS INN, HOWARD JOHNSON, SUPER 8, TRAVELODGE, KNIGHTS INN AND VILLAGER
-- The Company receives marketing and reservation fees, in each case calculated
on the basis which is a specified percentage of revenue sales from its Days
Inn, Howard Johnson, Super 8, Travelodge, Knights Inn and Villager franchisee,
and Gross Closed Commissions from its Coldwell Banker and ERA franchisees. As
provided in the franchise agreements, at the Company's discretion, all of
these fees are to be expended for marketing purposes and the operation of a
centralized brand-specific reservation system for lodging franchisees and are
controlled by the Company until disbursement. Franchise revenue includes
marketing and reservation fees of approximately, $110.6 million, $93.4
million, $86.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively.

   B. RAMADA -- Ramada Inns National Association ("RINA") is an
unincorporated association representing the owners of the hotels in the
Ramada system. RINA provides a worldwide reservation system and provides
advertising, promotional services and training to Ramada franchisees. The
Company receives a combined fee for marketing and reservation activities
based on a percentage of monthly gross room revenues from members of RINA
which are controlled by the Company until disbursement. As provided in the
franchise agreements, at the Company's discretion, all of these fees will be
expended for advertising, promotional services, training and the operation of
a worldwide reservation system. Included in the franchise fees are RINA fees
approximating $47.0 million, $46.7 million and $44.4 million for the periods
ended December 31, 1996, 1995 and 1994, respectively. Included in marketing
and reservation receivables is approximately $7.3 million and $5.8 million
due from RINA as of December 31, 1996 and 1995, respectively.

   C. CENTURY 21 -- The CENTURY 21 National Advertising Fund ("NAF") is an
independent entity managed by the Company, the funds of which are used
exclusively for advertising and public relations purposes for the collective
benefit of the CENTURY 21 organization, including all CENTURY 21 franchisees.
The NAF receives fees from CENTURY 21 franchisees equal to 2% of their
respective gross closed commissions earned on sales of residential real
estate properties, subject to monthly minimum and maximum contributions. In
addition, the Company is required to contribute, 10% of royalty fees collected
from CENTURY 21 franchisees to the NAF. The contributions are expensed by
the Company when the corresponding royalty fee is recognized. Included in
marketing and reservation expense is approximately $11.7 million for 1996 and
$4.2 million, representing the Company's contribution to the NAF for the five
months period ended December 31, 1995. The NAF cash balance was $7.0 million
and $4.3 million at December 31, 1996 and 1995. Such amount is not included
in the Company's consolidated financial statements.

   Advertising expense approximated $48.6 million, $42.8 million and $36.1
million for the years ended December 31, 1996, 1995 and 1994, respectively.

7. DEBT

 Short-term debt

   Short-term debt consists of acquired Avis fleet financing, borrowed on
behalf of ARAC, and is expected to be repaid upon settlement of the
corresponding intercompany loan due from ARAC prior to the IPO. The credit
facilities provide up to $150 million of financing and expire in September
1997. The outstanding borrowings under these facilities as of December 31,
1996 totaled $150 million and had a weighted average interest rate of 7.47%.

 Long-term debt

   Long-term debt consists of the following ($000's):

<TABLE>
<CAPTION>
                                                        DECEMBER 31,
                                                   ---------------------
                                                       1996       1995
                                                   ----------  ---------
<S>                                                <C>         <C>
Revolving Credit Facilities (A)...................   $205,000   $     --
5 7/8% Senior Notes (B)...........................    149,811    149,715
4 1/2% Convertible Senior Notes (C)...............    146,678    149,971
4 3/4 Convertible Senior Notes (D.................    240,000         --
Obligations under capital leases and other loans        9,927      3,341
                                                   ----------  ---------
                                                      751,416    303,027
Less current portion .............................      2,995      2,249
                                                   ----------  ---------
Long-term debt....................................   $748,421   $300,778
                                                   ==========  =========
</TABLE>

                              F-22
<PAGE>
    A. REVOLVING CREDIT FACILITIES -- On October 2, 1996, the Company
replaced an existing $300 million revolving credit facility with $1 billion
in revolving credit facilities consisting of (i) a $500 million, five year
revolving credit facility (the "Five Year Revolving Credit Facility") and
(ii) a $500 million, 364 day revolving credit facility (the "364 Day
Revolving Credit Facility" and collectively with the five year Revolving Credit
Facility the "Revolving Credit Facilities"). The Company may renew the 364 Day
Revolving Credit Facility on an annual basis for an additional 364 days up to
a maximum aggregate term of five years upon receiving lender approval. The
Five Year Revolving Credit Facility and the 364 Day Revolving Credit Facility,
at the option of the Company, bear interest based on competitive bids of
lenders participating in the facilities, at the prime rates or at LIBOR plus
a margin of 25 basis points.

   The Company is required to pay a per annum facility fee of .09% and .07%
of the average daily availability of the Five Year Revolving Credit Facility
and 364 Revolving Credit Facility, respectively. The interest rates and
facility fees are subject to change based upon credit ratings on the
Company's senior unsecured long-term debt by nationally recognized
statistical rating companies. The Revolving Credit Facilities contain certain
restrictive covenants including restrictions on indebtedness, mergers,
liquidations and sale and leaseback transactions and requires the maintenance
of certain financial ratios, including a 3:1 minimum interest average ratio
and a 3.5:1 maximum leverage ratio, as defined. Amounts outstanding under the
Revolving Credit Facilities as of December 31, 1996 are classified as long-term
based on the Company's intent and ability to maintain these loans on a
long-term basis.

   B. SENIOR NOTES -- In December 1993, the Company completed a public
offering of $150 million, unsecured 5 7/8% Senior Notes due December 15, 1998
(the "Senior Notes"). Interest is payable semi-annually. An original issue
discount approximating $478,000 was recorded at the date of issuance and is
being amortized over the life of the senior notes using the interest method.
The unamortized balance at December 31, 1996 and 1995 was $189,000 and $285,000,
respectively.

   C. 4 1/2% CONVERTIBLE SENIOR NOTES -- In October 1994, the Company
completed a public offering of $150 million unsecured 4 1/2% Convertible
Senior Notes (the "4 1/2% Notes") due 1999, which are convertible at the option
of the holders at any time prior to maturity into shares of the Company's
common stock at a conversion price of $18.15 per $1,000 principal amount of
Notes. The 4 1/2% Notes are redeemable at the option of the Company, in whole
or in part, at any time on or after October 1, 1997 at a redemption price of
101.125% of principal if redeemed prior to September 30, 1998 or at 100% of
principal any time thereafter until maturity. Interest is payable
semi-annually commencing April 1995.

   D. 4 3/4% CONVERTIBLE SENIOR NOTES -- On February 22, 1996, the Company
completed a public offering of $240 million unsecured 4 3/4% convertible
senior notes (the "4 3/4% Notes") due 2003, which are convertible at the
option of the holder at any time prior to maturity into 14.993 shares of the
Company's common stock per $1,000 principal amount of the 4 3/4% Notes,
representing a conversion price of $66.70 per share. The 4 3/4% Notes are
redeemable at the option of the Company, in whole or in part, at any time on
or after March 3, 1998 at redemption prices decreasing from 103.393% of
principal at March 3, 1998 to 100% of principal at March 3, 2003. However, on
or after March 3, 1998 and prior to March 3, 2000, the 4 3/4% Notes will not
be redeemable at the option of the Company unless the closing price of the
Company's common stock shall have exceeded $93.38 per share (subject to
adjustment upon the occurrence of certain events) for 20 trading days within
a period of 30 consecutive trading days ending within five days prior to
redemption. Interest on the 4 3/4% Notes is payable semi-annually commencing
September 1, 1996.

Long-term debt payments including obligations under capital leases at
December 31, 1996 are due as follows ($000's):

<TABLE>
<CAPTION>
 YEAR             AMOUNT
-------------  ----------
<S>            <C>
1997..........   $  2,995
1998..........    151,542
1999..........    148,333
2000..........        977
2001..........    205,925
Thereafter  ..    241,644
               ----------
TOTAL.........   $751,416
               ==========
</TABLE>

                              F-23
<PAGE>
 8. FAIR VALUE OF FINANCIAL INSTRUMENTS

   The following methods and assumptions were used by the Company in
estimating its fair value disclosures for material financial instruments for
which it is practicable to estimate that value. The fair values of the
financial instruments presented may not be indicative of their future values.

   Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.

   Investment in securities: The Company has classified a certain equity
security as available-for-sale at December 31, 1996. In accordance with SFAS
115, the security is recorded at fair value with an unrealized holding gain
of $4.4 million, net of the related tax effect, reported as a component of
stockholders' equity. The fair value recorded is based on quoted market
prices.

   Long and short-term debt: The carrying amount of the Company's borrowings
under its revolving credit facilities approximates fair value. The fair
values of the Company's Senior Notes and Convertible Senior Notes are
estimated based on quoted market prices.

   The carrying amounts and fair values of the Company's financial
instruments at December 31, are as follows ($000's):

<TABLE>
<CAPTION>
                             CARRYING      FAIR
1996                          AMOUNT      VALUE
-------------------------  ----------  ----------
<S>                        <C>         <C>
Cash and cash
 equivalents..............   $ 55,762   $   55,762
Investment in securities..     22,500       22,500
Equity advances...........    125,662      125,662
Long and short-term debt .    901,416    1,329,359
</TABLE>

<TABLE>
<CAPTION>
                                     CARRYING     FAIR
1995                                  AMOUNT      VALUE
---------------------------------  ----------  ---------
<S>                                <C>         <C>
Cash and cash equivalents.........   $ 16,109   $ 16,109
Investment in securities (a)......     15,353     19,200
Equity advances...................     51,180     51,180
Long and short-term debt..........    303,027    403,341
</TABLE>

  (a) At December 31, 1995, the sale of the Company's investment in equity
      security was restricted by contractual requirement.

9. COMMITMENTS AND CONTINGENCIES

   A. NEW WORLD LICENSE -- In 1990 the Company acquired the management of the
domestic U.S. Ramada franchise agreements and the rights to sub-license the
Ramada trademarks to U.S. lodging facilities under a 40-year, extendable
license agreement with the licensor of the trademarks, a special purpose
subsidiary of New World (USA) Inc. ("New World"), that governs the use of the
Ramada trademark domestically.

   In September 1990, Prime Hospitality, Inc. ("Prime"), the seller of the
domestic Ramada franchise system filed for protection under Chapter 11 of
the United States Bankruptcy Code. In July 1991, the Company entered into a
restructuring agreement with New World to, among other things, obtain the
ability to assign the license and eliminate the existing minimum net worth
requirement. In connection with this restructuring, the Company paid to New
World $3.7 million, including $2.5 million relating to payments made prior to
the date of the agreement by New World on behalf of Prime. In addition, the
Company agreed to assume certain additional obligations owed by Prime to New
World, which have been recorded at an estimated value of $10.5 million. The
payment to New World and the value of the assumed obligations have been
reflected as excess of cost over fair value of the net assets acquired.

   Effective August 4, 1992, New World and Prime reached a settlement which
resulted in a benefit available of $1.5 million per year through 2003 plus
$13.0 million in 2004 to reimburse the Company for advances made and to be
made by the Company pursuant to the restructuring agreement. At December 31,
1996 the Company had made advances of $14.9 million, which are repaid at the
rate of $375,000 per quarter and is included in other income. Any additional
advances, up to the aggregate benefit described above, will be repaid in the
same manner.

   The license agreement, as modified, contains covenants, including
maintenance of quality standards, minimum system-wide room sales and minimum
net worth. Under the license agreement, royalty payments, subject to certain
minimums, are calculated based on a percentage of Ramada system-wide gross
room sales and are due quarterly in advance. Included in other current assets
as prepaid license fees is $4.6 million and $4.4 million as of December 31,
1996 and 1995, respectively.

   B. LEASES -- The Company has noncancelable operating leases covering
various equipment and facilities, which expire through 2004. Rental expense
for the years ended December 31, 1996, 1995 and

                              F-24
<PAGE>
1994 approximated $16.1 million, $5.0 million and $3.8 million respectively,
excluding real estate taxes and other fees that are also the responsibility
of the Company.

Operating lease commitments over the next five years and thereafter are as
follows ($000's):

<TABLE>
<CAPTION>
 FOR THE YEAR ENDING DECEMBER 31,
--------------------------------
<S>                               <C>
1997.............................  $ 32,665
1998.............................    28,315
1999.............................    20,717
2000.............................    15,972
2001.............................    10,626
Remaining years .................    16,268
                                  ---------
Total minimum lease payments ....  $124,563
                                  =========
</TABLE>

   The future minimum lease payments exclude future minimum sublease income
of approximately $1.0 million annually for each year presented.

   The Company has been granted rent abatements for varying periods on
certain of its facilities. Deferred rent relating to those abatements is
being amortized on a straight-line basis over the applicable lease terms.

   C. EMPLOYMENT AGREEMENTS -- The Company has employment agreements with
certain employees for terms of from one to four years. Annual commitments
under these agreements are as follows ($000's):

<TABLE>
<CAPTION>
 FOR THE YEAR ENDING DECEMBER 31,
--------------------------------
<S>                               <C>
1997.............................   $3,447
1998.............................    2,089
1999.............................    1,500
2000 ............................    1,500
                                  --------
                                    $8,536
                                  ========
</TABLE>

   Most of these agreements provide for severance pay should the employee be
terminated without cause.

   D. LITIGATION -- In the normal course of business, certain litigation is
initiated against the Company. Generally, these claims are insured and, in
the opinion of management, disposition of such litigation will not have a
material adverse effect on the Company's liquidity, consolidated financial
position or results of operation.


                              F-25
<PAGE>
 10. INCOME TAXES

The income tax provision consists of ($000's):

<TABLE>
<CAPTION>
                              FOR THE YEARS ENDED DECEMBER 31,
                             --------------------------------
                                 1996       1995       1994
                             ----------  ---------  ---------
<S>                          <C>         <C>        <C>
Current
 Federal....................   $ 22,943    $41,456    $23,747
 State .....................      4,184      4,619      5,107
                             ----------  ---------  ---------
                               $ 27,127    $46,075    $28,854
                             ----------  ---------  ---------
Deferred
 Federal ...................   $ 73,935    $ 8,054    $ 6,831
 State .....................     13,001      1,046      1,469
                             ----------  ---------  ---------
                                 86,936      9,100      8,300
                             ----------  ---------  ---------
Provision for income taxes     $114,063    $55,175    $37,154
                             ==========  =========  =========
</TABLE>

Net deferred income tax assets and liabilities are comprised of the following
($000's):

<TABLE>
<CAPTION>
                                              DECEMBER 31,
                                       -------------------------
                                            1996         1995
                                       ------------  -----------
<S>                                    <C>           <C>
Provision for doubtful accounts  .....   $   8,100     $  7,600
Deferred income.......................      46,400        7,800
Acquisition related reserves..........      19,600        4,200
Franchise acquisition costs ..........      (2,600)      (2,400)
Other ................................         700        3,000
                                       ------------  -----------
Current net deferred tax asset  ......   $  72,200     $ 20,200
                                       ============  ===========
Intangible asset amortization  .......   $(166,800)    $(73,600)
Deferred income.......................      23,100           --
Acquired net operating loss...........      85,900           --
Other ................................     (24,300)      (9,200)
                                       ------------  -----------
Noncurrent net deferred tax
 liability............................   $ (82,100)    $(82,800)
                                       ============  ===========
</TABLE>

Net operating loss carryforwards at December 31, 1996 acquired in connection
with the acquisition of Avis, Inc. expire as follows: 2001, $14.8 million;
2002, $89.6 million; 2005, $7.2 million; 2009, $17.7 million; and 2010,
$116.0 million.

The Company's effective income tax rate differs from the statutory federal
rate as follows:

<TABLE>
<CAPTION>
                                              FOR THE YEARS ENDING
                                                  DECEMBER 31,
                                           -------------------------
                                             1996     1995     1994
                                           -------  -------  -------
<S>                                        <C>      <C>      <C>
Federal statutory rate....................   35.0%    35.0%    35.0%
State income taxes net of federal
 benefit..................................    3.8      4.0      4.7
Other ....................................    1.4      1.9      1.3
                                           -------  -------  -------
Effective tax rate........................   40.2%    40.9%    41.0%
                                           =======  =======  =======
</TABLE>

11. STOCKHOLDERS' EQUITY

   A. STOCK WARRANTS -- On December 15, 1995, the Company redeemed all
outstanding warrants in accordance with the provisions of the warrant
agreement underlying warrant obligations assumed in the CCI Merger
transaction (See Note 2). The Company received aggregate proceeds
approximating $14.8 million from the exercise of such warrants, resulting in
the issuance of approximately 1.0 million shares of Company common stock.

                              F-26
<PAGE>
    B. AUTHORIZED SHARES -- On January 22, 1996, the Company's shareholders
approved an amendment to the Company's Restated Certificate of Incorporation
to increase the number of authorized shares of common stock to 300 million.
On November 10, 1996, the Board of Directors of the Company authorized an
amendment to the Company's Restated Certificate of Incorporation, subject to
shareholder approval, to increase the number of authorized shares of common
stock to 600 million. Such amendment has been proposed to the Company's
shareholders for approval at a special meeting of shareholders to be held on
April 30, 1997.

   C. DIVIDENDS -- The Company expects to retain its earnings for the
development and expansion of its business and the repayment of indebtedness
and does not anticipate paying dividends on common stock in the foreseeable
future.

12. STOCK OPTION PLANS

   The Company has two stock option plans, the 1992 Stock Option Plan (the
"1992 Plan") and the amended and restated 1993 Stock Option Plan, as amended
(the "1993 Plan"). The 1993 Plan provides for the granting of options to
certain directors, officers, employees and independent contractors of the
Company's common stock at prices not less than the fair market value at the
date of grant. No further grants will be made under the 1992 Plan. Generally,
stock options have a ten-year term and vest within five years from the date
of grant. On November 10, 1996, the Board of Directors of the Company
authorized an amendment to the 1993 Plan, subject to shareholder approval, to
increase the number of authorized shares of common stock for which options
may be granted to 34,541,600. Such amendment has been proposed to the
Company's shareholders for approval as a special meeting of shareholders to
be held on April 30, 1997.

   The Company adopted the disclosure-only provisions of SFAS No. 123 and
accordingly, no compensation cost was recognized in connection with its stock
option plans. Had the Company elected to recognize compensation cost for its
stock option plans based on the calculated fair value at the grant dates for
awards issued after January 1, 1995 under such plans, consistent with the
method prescribed by SFAS No. 123, net income and earnings per share would
reflect the pro forma amounts indicated below ($000's, except per share data):

<TABLE>
<CAPTION>
                                FOR THE YEARS ENDED
                                   DECEMBER 31,
                              ---------------------
                                  1996       1995
                              ----------  ---------
<S>                           <C>         <C>
Net income as reported.......   $169,584    $79,730
                  pro forma .     93,902     77,593
----------------------------  ----------  ---------
Net income per share
Primary as reported..........   $   1.29    $   .73
                  pro forma .        .75        .73
Fully diluted as reported....       1.29        .73
                  pro forma .        .74        .71
----------------------------  ----------  ---------
</TABLE>

   The fair values of the Company's stock options are estimated on the dates
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions for options granted in 1996 and 1995: dividend
yield of 0%; expected volatility of 37.5%; a risk-free interest rate of 6.45%
and an expected holding period of 9.1 years. The effect of applying SFAS 123
on the pro forma net income and earnings per share disclosures are not
indicative of future amounts because it does not take into consideration
option grants made prior to 1995 or in future years.

                              F-27
<PAGE>
 The table below summaries the annual activity of the Company's stock option
plans ($000's, except per share data):

<TABLE>
<CAPTION>

                                  OPTIONS         OPTION
                                OUTSTANDING     PRICE RANGE
                              -------------  ---------------
 <S>                          <C>            <C>              <C>
 BALANCE AT JANUARY 1, 1994..     12,468       $ 2.87 -$11.17
 Granted.....................      3,228        11.71 - 13.41
 Canceled ...................       (122)        3.74  - 7.94
 Exercised ..................       (240)        3.13  - 7.94
 Distribution of CHRT........        454         7.94 - 13.41
 ---------------------------  -------------  ---------------
 BALANCE AT DECEMBER 31, 1994     15,788         2.87 - 13.41
 Granted.....................      5,476        13.63 - 29.13     WEIGHTED
 Canceled ...................       (152)        4.08 - 23.44  AVERAGE EXERCISE
 Exercised ..................       (605)        3.31 - 12.53       PRICE
 ---------------------------  -------------  ---------------  ----------------
 BALANCE AT DECEMBER 31, 1995     20,507         2.87 - 29.13        9.81
 Granted.....................     10,946        40.31 - 77.88       57.03
 Canceled ...................       (488)        7.94 - 76.75       56.64
 Exercised ..................     (1,462)        2.87 - 40.31       11.75
 ---------------------------  -------------  ---------------  ----------------
 BALANCE AT DECEMBER 31, 1996     29,503         2.87 - 77.88       26.46
 ---------------------------  -------------  ---------------  ----------------
</TABLE>

   The weighted average fair value of stock options granted during the years
ended December 31, 1996 and 1995 is $46.269 and $20.11 , respectively.

The table below summarizes information regarding stock options outstanding
and exercisable as of
December 31, 1996:

<TABLE>
<CAPTION>
                                         OPTIONS OUTSTANDING       OPTIONS EXERCISABLE
                                    ---------------------------  ---------------------
                                      WEIGHTED AVG.    WEIGHTED               WEIGHTED
                                        REMAINING      AVERAGE                AVERAGE
                                       CONTRACTUAL     EXERCISE               EXERCISE
RANGE OF EXERCISE PRICES    SHARES        LIFE          PRICE      SHARES      PRICE
------------------------  --------  ---------------  ----------  ---------  ----------
<S>                       <C>       <C>              <C>         <C>        <C>
$ 2.87 to $19.99            17,776         6.4          $ 8.68      14,792     $ 8.09
$20.00 to $39.99             1,262         8.6           24.11         226      24.21
$40.00 to $59.99             5,276         9.2           44.92       2,016      40.31
$60.00 to $77.88             5,189         9.6           69.16         320      62.13
                          --------  ---------------  ----------  ---------  ----------
Total                       29,503         7.5          $26.46      17,354     $13.04
                          --------  ---------------  ----------  ---------  ----------
</TABLE>
   Shares exercisable at December 31, 1996 ad 1995 were 17,353,899 and
7,078,886, respectively. Shares available for grant at December 31, 1996 and
1995 were 1,646,906 and 35,266, respectively.

13. EMPLOYEE SAVINGS PLANS

   The Company has an employee savings plan in which any eligible employee
may participate. The plan is a defined contribution 401(k) plan qualified
under the Internal Revenue Code. The Company contributes an amount equal to
twenty-five to fifty percent, based on years of service, of the pre-tax
contributions made by participating employees with respect to the first six
percent of an employee's compensation. The Company has elected to pay the
administrative expenses of the plan. The total charges to income relative to
such expenses and Company matching were approximately $803,000, $405,000 and
$332,000, respectively in 1996, 1995 and 1994.

   During 1996, the Company implemented a Deferred Compensation Plan
providing senior executives with the opportunity to participate in a funded,
deferred compensation program. The assets of the Deferred Compensation Plan
are held in an irrevocable rabbi trust. Under the program, participants may
defer up to 80% of their base compensation and up to 98% of bonuses earned.
The Company contributes $0.50 for each $1.00 contributed by a participant,
regardless of length of service, up to a maximum of six percent of the
employee's compensation. The program is not qualified under Section 401 of
the Internal Revenue Code. The Company's matching contribution to the Deferred
Compensation Plan in 1996 was approximately $111,000.

                              F-28
<PAGE>
 14. FRANCHISING ACTIVITIES

   Revenue from franchising activities consists of initial fees charged to
lodging properties and real estate brokerage offices upon execution of a
franchise contract based on the number of rooms at the lodging property and
estimated Gross Closed Commissions. Initial franchise fees approximated
$24,221,000, $15,735,000 and $13,816,000 for the years ended December 31, 1996,
1995 and 1994, respectively.

Franchising activity for the years ended December 31, 1996, 1995 and 1994 is
as follows:

<TABLE>
<CAPTION>
                                   LODGING              REAL ESTATE
                         -------------------------  -----------------
                           1996     1995     1994      1996     1995
                         -------  -------  -------  --------  -------
<S>                      <C>      <C>      <C>      <C>       <C>
FRANCHISES IN OPERATION
Units at end of year ...   5,397    4,603    4,229    11,349    5,990
EXECUTED BUT NOT OPENED
Acquired................      24       31       --       110      104
New agreements..........   1,142      983      870       829      248
Backlog, end of year ...     786      682      594       275      176
</TABLE>

15. INDUSTRY SEGMENT INFORMATION

   The Company is a leading global provider of services to various businesses
in consumer industries. The Company's major business segments are reflective
of the industries which it serves. See Note 1A, "Summary of Significant
Accounting Policies -- Description of Business" for a more detailed
description of each of the Company's industry segments. The following table
presents certain financial information regarding the Company's industry
segments.

Operations by segment ($000's):

Year Ended December 31, 1996

<TABLE>
<CAPTION>
                                      REAL
                        LODGING      ESTATE      RELOCATION    TIMESHARE
                      ----------  -----------  ------------  -----------
<S>                   <C>         <C>          <C>           <C>
Revenues                $385,410   $  242,877     $ 77,983     $ 30,723
Operating income         140,174      103,711       28,462        5,710
Corporate expenses            --           --           --           --
Identifiable assets      998,060    1,295,501      120,176      772,585
Depreciation and
 amortization             30,852       27,317          247        2,559
Capital expenditures      19,302        9,932        3,586        1,473
                      ----------  -----------  ------------  -----------
</TABLE>

                    (RESTUBBED TABLE CONTINUED FROM ABOVE)

<TABLE>
<CAPTION>
                          CAR
                        RENTAL     CORPORATE     OTHER     CONSOLIDATED
                      ---------  -----------  ---------  --------------
<S>                   <C>        <C>          <C>        <C>
Revenues               $  9,517          --    $ 52,530     $  799,040
Operating income          6,078          --      37,210        321,345
Corporate expenses           --     $(4,943)         --         (4,943)
Identifiable assets     820,425      18,768     306,817      4,332,332
Depreciation and
 amortization             3,439         566       4,254         69,234
Capital expenditures         --       6,710         208         41,211
                      ---------  -----------  ---------  --------------
</TABLE>

Year Ended December 31, 1995

<TABLE>
<CAPTION>
                                              REAL
                                 LODGING     ESTATE     RELOCATION    CORPORATE     OTHER     CONSOLIDATED
                               ----------  ---------  ------------  -----------  ---------  --------------
<S>                            <C>         <C>        <C>           <C>          <C>        <C>
Revenues......................   $336,475   $ 47,965     $ 8,204            --    $ 20,339     $  412,983
Operating income..............    121,679     19,277       4,421            --      15,779        161,156
Corporate expenses............         --         --          --       $(4,462)         --         (4,462)
Identifiable assets...........    724,673    195,157      52,781        14,311     178,886      1,165,808
Depreciation and
 amortization.................     26,058      2,997          --           663       1,139         30,857
Capital expenditures..........     33,384      1,658          --        19,282         (37)        54,287
</TABLE>

                              F-29
<PAGE>
 16. SELECTED QUARTERLY FINANCIAL DATA -- (UNAUDITED)

(In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                          TOTAL
1996                      FIRST       SECOND      THIRD       FOURTH       YEAR
---------------------  ----------  ----------  ----------  ----------  ----------
<S>                    <C>         <C>         <C>         <C>         <C>
Revenues..............   $124,544    $179,665    $245,800    $249,031    $799,040
Income before income
 taxes ...............     38,823      64,484     101,954      78,386     283,647
Net income ...........     22,818      38,744      61,070      46,952     169,584
                       ==========  ==========  ==========  ==========  ==========
Net income per share:
 Primary and
 fully diluted .......   $    .20    $    .31    $    .44    $    .33    $   1.29
                       ==========  ==========  ==========  ==========  ==========
1995
---------------------
Revenues..............   $ 74,153    $ 96,329    $129,249    $113,252    $412,983
Income before income
 taxes ...............     20,440      34,304      46,440      33,721     134,905
Net income ...........     12,062      20,183      27,119      20,366      79,730
                       ==========  ==========  ==========  ==========  ==========
Net income per share:
 Primary..............   $    .12    $    .19    $    .25    $    .18    $    .74
 Fully diluted........   $    .12    $    .19    $    .24    $    .18    $    .73
</TABLE>

                              F-30
<PAGE>
                      HFS INCORPORATED AND SUBSIDIARIES
                SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
             FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
                                                                    COLUMN C
                                     ---------------------------------------------------------------------
                                       COLUMN B--      -(1)-         -(2)-                      COLUMN E--
                                       BALANCE AT    CHARGED TO     CHARGED                     BALANCE AT
                                       BEGINNING     COSTS AND     TO OTHER       COLUMN D        END OF
COLUMN A--DESCRIPTION                  OF PERIOD      EXPENSES     ACCOUNTS    DEDUCTIONS (1)     PERIOD
-----------------------------------  ------------  ------------  -----------  --------------  ------------
<S>                                  <C>           <C>           <C>          <C>             <C>
Year ended December 31, 1994
 Allowance for doubtful accounts
 Accounts and notes receivable .....    $ 9,440       $3,970            --        $3,582          $9,828
Marketing and reservation accounts
 receivable.........................      4,797        2,292            --         3,229           3,860
Year ended December 31, 1995
 Allowance for doubtful accounts
 Accounts and notes receivable .....      9,828        6,352            --         3,826          12,354
Marketing and reservation accounts
 receivable.........................      3,860        3,825            --           827           6,858
Year ended December 31, 1996
 Allowance for doubtful accounts
 Accounts and notes receivable .....     12,354        5,016            --         4,122          13,248
 Marketing and reservation accounts
  receivable........................      6,858        3,087            --         2,247           7,698
</TABLE>
------------
(1)    Uncollectible accounts written off, net of recoveries.

                              F-31
<PAGE>
                         INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholder of
Avis, Inc.
Garden City, New York

We have audited the accompanying combined statement of financial position of
Rental Car System Holdings, Inc. and subsidiaries, Avis International, Ltd.
and subsidiaries, Avis Enterprises, Inc. and subsidiaries, Pathfinder
Insurance Company and Global Excess & Reinsurance Ltd. (collectively referred
to as the "Rental Car Operations of Avis, Inc." or the "Company") as of
December 31, 1996, and the related combined statements of operations,
stockholder's equity and cash flows for the period October 17, 1996 (Date of
Acquisition) to December 31, 1996. Our audit also includes the financial
statement schedule of Rental Car Operations of Avis, Inc. Listed in the index
at Item 14(a)(2). These combined financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these combined financial statements and financial statement schedule based on
our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, such combined financial statements presents fairly, in all
material respects, the combined financial position of the Company at
December 31, 1996, and the results of their operations and their cash flows
for the period October 17, 1996 to December 31, 1996 in conformity with
generally accepted accounting principles also, in our opinion such financial
statement schedule, when considered in relation to the basic combined
financial statement taken as a whole, present fairly, in all material respects,
the information set forth therein.

/s/ DELOITTE & TOUCHE LLP

New York, New York
January 24, 1997

                              F-32
<PAGE>
                     RENTAL CAR OPERATIONS OF AVIS, INC.
                   COMBINED STATEMENT OF FINANCIAL POSITION
                              DECEMBER 31, 1996
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
<S>                                                               <C>
ASSETS
Cash and cash equivalents .......................................   $   50,886
Accounts receivable, net ........................................      311,179
Due from affiliates, net ........................................       61,807
Prepaid expenses.................................................       40,155
Vehicles, net ...................................................    2,243,492
Property and equipment, net .....................................       98,887
Other assets.....................................................       14,526
Deferred income tax assets ......................................      113,660
Cost in excess of net assets acquired, net ......................      196,765
                                                                  ------------
  Total assets ..................................................   $3,131,357
                                                                  ============
LIABILITIES AND COMBINED STOCKHOLDER'S EQUITY
Accounts payable ................................................   $  175,535
Accrued liabilities..............................................      329,245
Current income tax liabilities...................................        4,790
Deferred income tax liabilities .................................       35,988
Public liability, property damage and other insurance
 liabilities.....................................................      213,785
Debt ............................................................    2,295,474
                                                                  ------------
  Total liabilities..............................................    3,054,817
                                                                  ------------
Commitments and contingencies
Combined stockholder's equity:
 Common stock ...................................................        3,902
 Additional-paid-in capital......................................       71,098
 Retained earnings...............................................        1,184
 Foreign currency translation adjustment ........................          356
                                                                  ------------
  Total combined stockholder's equity............................       76,540
                                                                  ------------
  Total liabilities and combined stockholder's equity ...........   $3,131,357
                                                                  ============
</TABLE>

See accompanying notes to the combined financial statements.

                              F-33
<PAGE>
                      RENTAL CAR OPERATIONS OF AVIS, INC.
                       COMBINED STATEMENT OF OPERATIONS
  FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
<S>                                                     <C>
 Revenue................................................  $362,844
                                                        ----------
Cost and expenses:
 Direct operating......................................    167,682
 Vehicle depreciation .................................     72,587
 Vehicle lease charges.................................     22,658
 Selling, general and administrative...................     62,418
 Interest, net ........................................     34,212
 Amortization of cost in excess of net assets acquired       1,026
                                                        ----------
                                                           360,583
                                                        ----------
Income before provision for income taxes ..............      2,261
Provision for income taxes.............................      1,040
                                                        ----------
Net income.............................................   $  1,221
                                                        ==========
</TABLE>

See accompanying notes to the combined financial statements.

                              F-34
<PAGE>
                      RENTAL CAR OPERATIONS OF AVIS, INC.
                  COMBINED STATEMENT OF STOCKHOLDER'S EQUITY
  FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
                     (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                   FOREIGN
                                                       ADDITIONAL                 CURRENCY
                                             COMMON     PAID-IN-     RETAINED    TRANSLATION
                                             STOCK      CAPITAL      EARNINGS    ADJUSTMENT     TOTAL
                                           --------  ------------  ----------  -------------  --------
<S>                                        <C>       <C>           <C>         <C>            <C>
Rental Car System Holdings, Inc.
 ($.01 par value, 1,000 shares
 authorized; 100 shares outstanding at
 October 17, 1996) .......................   $   --     $ 3,459                                $ 3,459
Avis International, Ltd.
 ($1.00 par value, 1,000 shares
 authorized and outstanding at October
 17, 1996) ...............................        1      58,488                                 58,489
Avis Enterprises, Inc.
 ($1.00 par value, 1,000 shares
 authorized and outstanding at October
 17, 1996) ...............................        1       2,271                                  2,272
Pathfinder Insurance Company
 ($1.00 par value, 3,000,000 shares
 authorized; 2,500,000 shares outstanding
 at October 17, 1996) ....................    2,500       4,824                                  7,324
Global Excess & Reinsurance Ltd.
 ($1.00 par value, 1,400,000 shares
 authorized and outstanding at
 October 17, 1996)........................    1,400       2,056                                  3,456
                                           --------  ------------  ----------  -------------  --------
Balance, October 17, 1996 ................    3,902      71,098                                 75,000
Net Income ...............................                            $1,221                     1,221
Foreign Currency Equity Adjustment  ......                                          $356           356
Additional Minimum Pension Liability  ....                               (37)                      (37)
                                           --------  ------------  ----------  -------------  --------
Balance, December 31, 1996 ...............   $3,902     $71,098       $1,184        $356       $76,540
                                           ========  ============  ==========  =============  ========
</TABLE>

See accompanying notes to the combined financial statements.

                              F-35
<PAGE>
                      RENTAL CAR OPERATIONS OF AVIS, INC.
                       COMBINED STATEMENT OF CASH FLOWS
  FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
<S>                                                                               <C>
 Cash flows from operating activities:
 Net income......................................................................   $   1,221
 Adjustments to reconcile net income to net cash provided by operating
  activities:
  Vehicle depreciation...........................................................      77,140
  Depreciation and amortization of property and equipment .......................       2,212
  Amortization of cost in excess of net assets acquired .........................       1,026
  Deferred income tax provision..................................................          33
  Provision for losses on accounts receivable....................................         227
  Change in operating assets and liabilities:
   Accounts receivable...........................................................      10,327
   Prepaid expenses..............................................................      (2,664)
   Other assets..................................................................      (3,459)
   Accounts payable .............................................................     (18,712)
   Accrued liabilities...........................................................     (24,718)
   Public liability, property damage and other insurance liabilities ............       1,340
                                                                                  -----------
   Net cash provided by operating activities.....................................      43,973
                                                                                  -----------
Cash flows from investing activities:
 Payments for vehicle additions..................................................    (561,117)
 Vehicle deletions...............................................................     560,099
 Payments for additions to property and equipment................................      (3,484)
 Sales of property and equipment.................................................         361
                                                                                  -----------
   Net cash used in investing activities ........................................      (4,141)
                                                                                  -----------
Cash flows from financing activities:
 Decrease in debt:
  Proceeds.......................................................................      63,903
  Repayments.....................................................................    (133,457)
                                                                                  -----------
  Net decrease in debt ..........................................................     (69,554)
 Payments on intercompany loans..................................................      (6,661)
                                                                                  -----------
   Net cash used in financing activities ........................................     (76,215)
                                                                                  -----------
Effect of exchange rate changes on cash .........................................          94
                                                                                  -----------
Net decrease in cash and cash equivalents........................................     (36,289)
Cash and cash equivalents at beginning of period ................................      87,175
                                                                                  -----------
Cash and cash equivalents at end of period ......................................   $  50,886
                                                                                  ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 Cash paid during the period for:
  Interest.......................................................................   $  28,170
                                                                                  ===========
  Income taxes ..................................................................   $     827
                                                                                  ===========
</TABLE>

See accompanying notes to the combined financial statements.

                              F-36
<PAGE>
                     RENTAL CAR OPERATIONS OF AVIS, INC.
                  NOTES TO THE COMBINED FINANCIAL STATEMENTS
  FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 Basis of Presentation

   The accompanying combined financial statements include Rental Car System
Holdings, Inc. and subsidiaries (including the carved out corporate
operations of Avis, Inc. and Prime Vehicles Trust (the "Vehicle Trust")),
Avis International, Ltd. and subsidiaries, Avis Enterprises, Inc. and
subsidiaries, Pathfinder Insurance Company and Global Excess & Reinsurance
Ltd. (collectively referred to as the "Rental Car Operations of Avis, Inc."
or the "Company"). All of the foregoing companies are ultimately wholly owned
subsidiaries of Avis, Inc., which was acquired by HFS Incorporated ("HFS") on
October 17, 1996 (the "Date of Acquisition") for approximately $806.5
million. The purchase price was comprised of approximately $367.2 million in
cash, $100.9 million of indebtedness and $338.4 million of HFS common stock.
It is anticipated that Avis, Inc. will contribute, effective January 1, 1997,
the net assets of its corporate operations and all of its common stock
ownership in Avis International, Ltd., Avis Enterprises, Inc., Pathfinder
Insurance Company and Global Excess and Reinsurance, Ltd. to Rental Car
System Holdings, Inc. Pursuant to a plan developed by HFS prior to the Date
of Acquisition, HFS will cause the Company to undertake an initial public
offering ("IPO") within one year of the Date of Acquisition, which will
reduce HFS' equity interest in the Company to 25%. HFS owns and operates the
reservation system as well as the telecommunications and computer processing
systems which service the rental car operations for reservations, rental
agreement processing, accounting and vehicle control. HFS will charge a fee
for such services (Note 3). In addition, HFS will retain the Avis trade name
and charge the rental car operations a franchise fee for the use of the Avis
name.

   The acquisition was accounted for under the purchase method and includes
the operations of the Company subsequent to the Date of Acquisition. A
portion of the purchase price has been allocated to the estimated fair value
of the Company. This estimate is calculated assuming that the Company is an
independent franchisee of Avis, Inc. and is required to pay certain fees for
use of the Avis trade name, reservation services and other franchise related
services. The estimated fair value of the Company is $75 million at the Date
of Acquisition. This amount has been allocated to individual assets and
liabilities based on their estimated fair value at the Date of Acquisition.
This allocation is preliminary and subject to adjustment when the asset and
liability valuations are finalized. The final asset and liability fair values
may differ from those set forth in the accompanying combined statement of
financial position on December 31, 1996; however, the changes are not
expected to have a material effect on the combined financial position of the
Company. The preliminary purchase cost allocation at the Date of Acquisition
has been allocated to the Company as follows (in thousands):

<TABLE>
<CAPTION>
<S>                                                <C>
Allocated purchase cost...........................  $   75,000
                                                   -----------
Fair Value of:
Liabilities assumed...............................   3,145,395
Assets acquired...................................   3,022,712
                                                   -----------
Net Liabilities...................................     122,683
                                                   -----------
Excess of purchase price over net assets
 acquired.........................................  $  197,683
                                                   ===========
</TABLE>

 Principles of Combination

   All material intercompany transactions have been eliminated.

 Accounting Estimates

   Generally accepted accounting principles require the use of estimates,
which are subject to change, in the preparation of financial statements.
Significant accounting estimates used include estimates for determining
public liability, property damage and other insurance liabilities and the
realization of deferred income tax assets. Management has exercised
reasonableness at deriving these estimates. However, actual results may
differ.

                              F-37
<PAGE>
                     RENTAL CAR OPERATIONS OF AVIS, INC.
                  NOTES TO THE COMBINED FINANCIAL STATEMENTS
 FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
 (CONTINUED)

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued)
  Cash and Cash Equivalents

   The Company considers deposits and short-term investments with an original
maturity of three months or less to be cash equivalents.

 Vehicles

   Vehicles are stated at cost net of accumulated depreciation. In accordance
with industry practice, when vehicles are sold, gains or losses are reflected
as an adjustment to depreciation. Vehicles are generally depreciated at rates
ranging from 10% to 25% per annum. Manufacturers provide the Company with
incentives and allowances (such as rebates and volume discounts) which are
amortized to income over the holding period of the vehicles.

 Property and Equipment

   Property and equipment is stated at cost net of accumulated depreciation
and amortization. Depreciation is calculated using the straight-line method
over the estimated useful life of the assets. Estimated useful lives range
from five to ten years for furniture and office equipment to thirty years for
buildings. Leasehold improvements are amortized over the shorter of twenty
years or the remaining life of the lease. Maintenance and repairs are
expensed; renewals and improvements are capitalized. When depreciable assets
are retired or sold, the cost and related accumulated depreciation are
removed from the accounts with any resulting gain or loss reflected in the
combined statement of operations.

 Cost in Excess of Net Assets Acquired

   Cost in excess of net assets acquired is amortized over a 40 year period
and is shown net of accumulated amortization of $1.0 million at December 31,
1996.

 Impairment Accounting

   In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." The Company reviews the recoverability
of its long-lived assets, including cost in excess of net assets acquired,
when events or changes in circumstances occur that indicate that the carrying
value of the assets may not be recoverable. The measurement of possible
impairment is based on the Company's ability to recover the asset from the
expected future pre-tax undiscounted future cash flows generated. The
measurement of impairment requires management to use estimates of expected
future cash flows. It is at least reasonably possible that future events or
circumstances could cause these estimates to change.

 Public Liability, Property Damage and Other Insurance Liabilities

   Insurance liabilities on the accompanying combined statement of financial
position include additional liability insurance, personal effects protection
insurance, public liability and property damage ("PLPD") and personal
accident insurance claims for which the Company is self-insured. The Company
is self-insured up to $1.0 million per claim under its auto liability
insurance program for PLPD and additional liability insurance. Costs in
excess of $1.0 million per claim are insured under various contracts with
commercial insurance carriers. The liability for claims is estimated based on
the Company's historical loss and loss adjustment expense experience and
adjusted for current trends.

   The insurance liabilities include a provision for both claims reported to
the Company as well as claims incurred but not yet reported to the Company.
This method is an actuarially accepted loss reserve method. Adjustments to
this estimate and differences between estimates and the amounts subsequently
paid are reflected in operations as they occur.

                              F-38
<PAGE>
                     RENTAL CAR OPERATIONS OF AVIS, INC.
                  NOTES TO THE COMBINED FINANCIAL STATEMENTS
 FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
 (CONTINUED)

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued)
  Foreign Currency Translation

   The assets and liabilities of foreign companies are translated at the
year-end exchange rates. Results of operations are translated at the average
rates of exchange in effect during the year. The resultant translation
adjustment is included as a component of combined stockholder's equity.

 Income Taxes

   The Company is included in the consolidated federal income tax return of
HFS. Pursuant to the regulations under the Internal Revenue Code, the
Company's pro rata share of the consolidated federal income tax liability of
HFS is allocated to the Company on a separate return basis. The Company files
separate income tax returns in states where a consolidated return is not
permitted. In accordance with Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes", deferred income tax assets and
liabilities are measured based upon the difference between the financial
accounting and tax basis of assets and liabilities.

 Advertising

   Advertising costs are expensed as incurred. Advertising costs are $10.3
million for the period October 17, 1996 to December 31, 1996. There are no
deferred advertising costs at December 31, 1996.

 Environmental Costs

   The Company's operations include the storage and dispensing of gasoline.
Expenses in connection with the remediation of accidental fuel discharges at
various locations are provided for when it is probable that obligations have
been incurred and amounts can be reasonably estimated.

NOTE 2 -- ACCOUNTS RECEIVABLE

   Accounts receivable at December 31, 1996 consists of the following (in
thousands):

<TABLE>
<CAPTION>
<S>                                    <C>
Vehicle rentals ......................   $ 94,480
Due from vehicle manufacturers  ......    183,304
Damage claims ........................     10,697
Due from licensees ...................      3,903
Other ................................     19,022
                                       ----------
                                          311,406
Less allowance for doubtful accounts         (227)
                                       ----------
                                         $311,179
                                       ==========
</TABLE>

   Amounts due from vehicle manufacturers include receivables for vehicles
sold under guaranteed repurchase contracts and amounts due for incentives and
allowances. Incentives and allowances are available based on the volume of
vehicles to be purchased for a model year or from the manufacturers'
willingness to encourage the Company to retain vehicles rather than return
the vehicles back to the manufacturer, or arise from the purchase of
particular models not subject to repurchase under "buyback" arrangements.
Incentives and allowances are amortized to income over the holding period of
the vehicles.

                              F-39
<PAGE>
                     RENTAL CAR OPERATIONS OF AVIS, INC.
                  NOTES TO THE COMBINED FINANCIAL STATEMENTS
 FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
 (CONTINUED)

NOTE 3 -- DUE FROM AFFILIATES

   Due from affiliates at December 31, 1996 consists of the following
balances due to or from HFS or its consolidated subsidiaries which will be
settled on or before the previously mentioned IPO (in thousands):

<TABLE>
<CAPTION>
<S>                                         <C>
Note receivable from Wizard Co., Inc. (a)     $ 196,965
Subordinated vehicle financing notes (b)  .    (247,500)
Non-interest bearing advances (c)  ........     112,342
                                            -----------
                                              $  61,807
                                            ===========
</TABLE>

NOTES:

(a)     Consists of a $194.1 million note receivable from Wizard Co., Inc.,
        an indirect wholly owned subsidiary of HFS, plus accrued interest.
        The note bears interest at 7.13% and is due on October 1, 2006 and is
        guaranteed by HFS.

(b)     Represents loans from an HFS subsidiary to the Vehicle Trust, as
        described in Note 7, to provide additional subordinated financing.
        The amounts provided reduce, within certain limits, the amount of
        subordinated financing required from other lenders. The loans are
        made under terms of a credit agreement which terminates on October
        29, 2003. As of December 31, 1996, the weighted average interest rate
        under these loans was 10.75%.

(c)     Primarily represents the transfer of assets from the Company to HFS
        and subsidiaries, recorded in connection with the October 17, 1996
        acquisition of Avis, Inc. by HFS, as well as intercompany
        transactions relating to management, service and administrative fees
        since the Date of Acquisition. The amounts due to or from HFS and
        subsidiaries are interest free and guaranteed by HFS.

   Expense items of the Company include the following charges from HFS and
affiliates of HFS for the period October 17, 1996 to December 31, 1996 (in
thousands):

<TABLE>
<CAPTION>
<S>                                           <C>
Reservations.................................   $13,080
Data processing .............................    10,526
Management, service and administrative fees       4,634
Interest on intercompany debt, net ..........     2,561
Rent ........................................       950
                                              ---------
                                                $31,751
                                              =========
</TABLE>

   Reservations and data processing services are charged to the Company based
on actual cost plus a profit thereon of 20%. All other charges are based on
actual costs incurred. Effective January 1, 1997, HFS will charge the Company
a franchise fee of 3.5% of revenue for the use of the Avis trade name. On an
unaudited pro forma basis, had the franchise fee been charged to the Company
beginning on October 17, 1996, net income for the period October 17, 1996 to
December 31, 1996 would have been reduced by $7.5 million resulting in a pro
forma net loss of approximately $6.3 million.

                              F-40
<PAGE>
                     RENTAL CAR OPERATIONS OF AVIS, INC.
                  NOTES TO THE COMBINED FINANCIAL STATEMENTS
 FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
 (CONTINUED)

NOTE 4 -- VEHICLES

   Vehicles at December 31, 1996 consist of the following (in thousands):

<TABLE>
<CAPTION>
<S>                                                       <C>
Vehicles ................................................   $2,250,309
Vehicles acquired under long-term capital lease (Note 7)        19,324
Buses and support vehicles ..............................       45,868
Vehicles held for sale ..................................       36,378
                                                          ------------
                                                             2,351,879
Less accumulated depreciation ...........................     (108,387)
                                                          ------------
                                                            $2,243,492
                                                          ============
</TABLE>

   For the period October 17, 1996 to December 31, 1996, depreciation expense
recorded for vehicles was $72.6 million. Depreciation expense reflects a net
gain on the disposal of vehicles of $4.5 million. It also reflects the
amortization of certain incentives and allowances from various vehicle
manufacturers of approximately $18 million.

   In April 1990, the predecessor to the Company entered into a seven year
operating lease under which an original amount of $110 million of vehicles
were leased, with the ability to exchange such leased vehicles for newly
manufactured vehicles with the same value to the lessor. The lease is
cancelable at the Company's option, however, additional costs may be incurred
upon termination based upon the fair value of the vehicles at the time the
option is exercised. At the termination of the leases, the Company may
purchase the vehicles at the agreed upon fair market value or return them to
the lessor.

   In December 1994, the predecessor to the Company entered into a financing
arrangement whereby it may lease up to $503 million of vehicles. This
arrangement was amended on October 17, 1996 to increase the amount to $650
million. Under this arrangement, at December 31, 1996, there were $322
million of vehicles under operating leases. The vehicles leased under this
arrangement may be leased for periods of up to 18 months. The lease cost
charged to the Company varies with the number of vehicles leased and the
repurchase agreement offered by the vehicle manufacturer to the lessor and
includes all expenses including the interest costs of the financing company.

   The rental payments due in each of the years ending December 31 for the
operating leases as described above are as follows (in thousands):

<TABLE>
<CAPTION>
<S>         <C>
1997....   $69,444
1998 ...    15,388
</TABLE>

   Rental expense for those vehicles under operating leases as described
above was $16.1 million for the period October 17, 1996 to December 31, 1996.

                              F-41
<PAGE>
                     RENTAL CAR OPERATIONS OF AVIS, INC.
                  NOTES TO THE COMBINED FINANCIAL STATEMENTS
 FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
 (CONTINUED)

NOTE 5 -- PROPERTY AND EQUIPMENT

   Property and equipment at December 31, 1996 consists of the following (in
thousands):

<TABLE>
<CAPTION>
<S>                                              <C>
Land ...........................................   $ 19,523
Buildings ......................................     11,862
Leasehold improvements .........................     48,898
Furniture, fixtures and equipment ..............     10,997
Construction-in-progress .......................      9,946
                                                 ----------
                                                    101,226
Less accumulated depreciation and amortization       (2,339)
                                                 ----------
                                                   $ 98,887
                                                 ==========
</TABLE>

NOTE 6 -- ACCRUED LIABILITIES

   Accrued liabilities at December 31, 1996 consists of the following (in
thousands):

<TABLE>
<CAPTION>
<S>                              <C>
Payroll and related costs  .....   $ 73,142
Taxes, other than income taxes       29,522
Rents and property related .....     30,889
Interest .......................     18,531
Sales and marketing ............     20,395
Vehicle related ................     18,784
Other various ..................    137,982
                                 ----------
                                   $329,245
                                 ==========
</TABLE>

NOTE 7 -- FINANCING AND DEBT

   Debt outstanding at December 31, 1996 is not guaranteed by HFS and
consists of the following (in thousands):

<TABLE>
<CAPTION>
<S>                                                                         <C>
                          VEHICLE TRUST FINANCING
Short-term vehicle trust financing--revolving credit facilities  ..........   $1,970,000
                                                                            ------------
Vehicle manufacturer's floating rate notes due September 1998 ($50,719
 senior at 8.50% and $16,281 subordinated at 10.0%) .......................       67,000
Vehicle manufacturer's floating rate notes due October 2001 ($63,731
 senior at 7.16% and $54,269 subordinated at 8.91%)........................      118,000
                                                                            ------------
Total long-term portion of vehicle trust financing.........................      185,000
                                                                            ------------
                              OTHER FINANCING
Short-term notes--foreign .................................................       65,516
7.50% capital lease terminating November 1997 and current portion of
 long-term debt ...........................................................       41,229
                                                                            ------------
Total current debt ........................................................      106,745
                                                                            ------------
Other domestic ............................................................        2,916
Debt of foreign subsidiaries:
Floating rate notes due February 1998 .....................................        2,935
Floating rate notes due August 1998 .......................................       27,878
                                                                            ------------
Total long-term debt ......................................................       33,729
                                                                            ------------
                                                                              $2,295,474
                                                                            ============
</TABLE>

                              F-42
<PAGE>
                     RENTAL CAR OPERATIONS OF AVIS, INC.
                  NOTES TO THE COMBINED FINANCIAL STATEMENTS
 FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
 (CONTINUED)

NOTE 7 -- FINANCING AND DEBT  (Continued)

    The primary source of funding for domestic vehicles is provided by the
Vehicle Trust (a grantor trust). Amounts drawn against this facility may be
used to purchase vehicles and pay certain expenses of the Vehicle Trust. The
security for the Vehicle Trust financing facility consists of a lien on the
vehicles acquired under the facility, which at December 31, 1996 totaled
approximately $2.1 billion, exclusive of related valuation reserves. The
security for the Vehicle Trust financing facility also consists of security
interests in certain other assets of the Vehicle Trust. Additionally, the
Vehicle Trust and its security agreement require that there be outstanding,
at all times, subordinated debt in a specified percentage range (10% -25%) of
the net book value of the vehicles owned by the Vehicle Trust. Pursuant to
the agreement, the subordinated debt is to be provided by vehicle
manufacturer finance companies and by an HFS subsidiary. The Vehicle Trust
consists of loans from banks, vehicle manufacturer finance companies and an
HFS subsidiary. The short-term notes are issued pursuant to a $2.5 billion
revolving credit facility dated as of October 17, 1996 which expires on
October 16, 1997. On December 31, 1996, the weighted average interest rate of
borrowings under this facility was 6.00%. For the period from October 17,
1996 to December 31, 1996, the average outstanding borrowings under this
facility were $2.0 billion with a weighted average interest rate of 5.98%.
This facility requires a fee of 1/8 of 1% on the committed amount.
Subordinated debt of $318 million was required under the Vehicle Trust
financing, of which $247.5 million is due to an HFS subsidiary (Note 3). At
December 31, 1996, the Vehicle Trust had financing outstanding from vehicle
manufacturer finance companies under terms of loan agreements dated October
17, 1996. Under these agreements, the maximum amount of borrowings allowed is
$267 million, of which up to $260 million may be used as subordinated debt.
On December 31, 1996, $185 million was outstanding of which $70.5 million of
the outstanding debt was deemed subordinated. On December 31, 1996, the
weighted average interest rate of borrowings under this facility was 8.50%.
For the period October 17, 1996 to December 31, 1996, the average outstanding
borrowings under this facility was $185 million with a weighted average
interest rate of 8.41%.

   In November 1992, the predecessor to the Company entered into a five year
capital lease under which $96.7 million of vehicles were leased. The lease is
cancelable at the Company's option, however, additional costs may be incurred
upon termination based upon the fair value of the vehicles at the time the
option is exercised. At the termination of the lease, the Company may
purchase the vehicles at an agreed upon fair market value or return them to
the lessor.

   The future minimum lease payments due under the Company's capital lease
obligation, which terminates on November 30, 1997, are $41,500,000 (including
interest of $1,331,000).

   Under the terms of the Company's loan agreements, the Company must
maintain a minimum net worth, minimum earnings and cash flow ratios.

   Mandatory maturities of long-term obligations for each of the five years
ending December 31, and thereafter, are as follows (in thousands):

<TABLE>
<CAPTION>
<S>             <C>
1997.........  $ 41,229
1998.........    98,950
1999.........     1,086
2000.........       209
2001.........   118,228
Thereafter ..       256
</TABLE>

                              F-43
<PAGE>
                     RENTAL CAR OPERATIONS OF AVIS, INC.
                  NOTES TO THE COMBINED FINANCIAL STATEMENTS
 FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
 (CONTINUED)

NOTE 7 -- FINANCING AND DEBT  (Continued)

  Other Credit Facilities

   At December 31, 1996, the Company has letters of credit/working capital
agreements totaling $102.6 million, which may be renewed bi-annually at the
Company's option and the banks' discretion. The collateral for certain of
these agreements consists of a lien on property and equipment and certain
receivables with a carrying value of $136.9 million. At December 31, 1996,
the Company has outstanding letters of credit amounting to $55.1 million.

   In addition, for certain of its international operations, the Company has
available at December 31, 1996, unused lines of credit of $224.3 million. The
unused lines of credit agreements require a quarterly fee of 0.2% to 0.5% of
the unused line.

 Interest Rate Swap Agreements

   The Company has entered into interest rate swap agreements to reduce the
impact of changes in interest rates on certain outstanding debt obligations.
These agreements effectively change the Company's interest rate exposure on
$44.0 million of its outstanding debt from a weighted average variable
interest rate to a fixed rate of 7.1% at December 31, 1996. The variable
interest element with respect to these interest rate swap agreements is reset
quarterly. The interest rate swap agreements will terminate in March 1997,
July 1998 and November 1998. The differential to be paid or received is
recognized ratably as interest rates change over the life of the agreements
as an adjustment to interest expense.

   The net interest differential charged to interest expense for the period
October 17, 1996 to December 31, 1996 was $285,000. The Company is exposed to
credit risk in the event of nonperformance by counterparties to its interest
rate swap agreements. Credit risk is limited by entering into such agreements
with primary dealers only; therefore, the Company does not anticipate that
nonperformance by counterparties will occur. Notwithstanding this, the
Company's treasury department monitors counterparty credit ratings at least
quarterly through reviewing independent credit agency reports. Both current
and potential exposure are evaluated as necessary, by obtaining replacement
cost information from alternative dealers. Potential loss to the Company from
credit risk on these agreements is limited to amounts receivable, if any.

NOTE 8 -- FAIR VALUE OF FINANCIAL INSTRUMENTS

   The carrying amount and the estimated fair value of the Company's interest
rate swap agreements represent liabilities of approximately $578,000 and $1.4
million, respectively, at December 31, 1996.

   For instruments including cash and cash equivalents, accounts receivable
and accounts payable, the carrying amount approximates fair value because of
the short maturity of these instruments. The fair value of floating-rate debt
approximates carrying value because these instruments re-price frequently at
current market prices.

   The Company believes that it is not practicable to estimate the current
fair value of the amount due to an HFS subsidiary for subordinated vehicle
financing and the note receivable from Wizard Co., Inc. because of the
related party nature of the instruments (Note 3).

                              F-44
<PAGE>
                     RENTAL CAR OPERATIONS OF AVIS, INC.
                  NOTES TO THE COMBINED FINANCIAL STATEMENTS
 FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
 (CONTINUED)

 NOTE 9 -- INCOME TAXES

   The provision for income taxes for the period October 17, 1996 to December
31, 1996 consists of the following (in thousands):

<TABLE>
<CAPTION>
<S>                         <C>
 Current:
 State.....................  $  719
 Foreign...................     288
                            -------
                              1,007
                            -------
Deferred:
 Federal...................     (85)
 Foreign...................     118
                            -------
                                 33
                            -------
Provision for income
 taxes.....................  $1,040
                            =======
</TABLE>

   The effective income tax rate for the period October 17, 1996 to December
31, 1996 varies from the statutory U.S. federal income tax rate due to the
following:

<TABLE>
<CAPTION>
<S>                                                                         <C>        <C>            <C>
Statutory U.S. federal income tax rate.....................................   $   791     35.0%
Tax effect of foreign operations...........................................    (1,073)   (47.5)
Amortization of cost in excess of net assets acquired and other
 intangibles...............................................................       359     15.9
State income taxes, net of federal tax benefit.............................       469     20.8
Other non-deductible business expenses.....................................       494     21.8
                                                                            ---------  --------
Effective income tax rate..................................................   $ 1,040     46.0%
                                                                            =========  ========
</TABLE>

   In accordance with SFAS 109, deferred income tax assets at December 31,
1996 include the following (in thousands):

<TABLE>
<CAPTION>
<S>                                                                      <C>
 Gross deferred income tax assets:
 Accrued liabilities....................................................   $ 171,050
 Net operating loss carryforwards.......................................      78,172
 Alternative minimum income tax credit carryforwards....................       3,025
                                                                         -----------
                                                                             252,247
                                                                         -----------
Gross deferred income tax liabilities:
 Tax depreciation in excess of book depreciation........................    (152,346)
 Tax amortization in excess of book amortization of cost in excess of
  net assets acquired and difference in book and tax basis of
  intangibles...........................................................     (13,547)
 Prepaids and other.....................................................      (8,682)
                                                                         -----------
                                                                            (174,575)
                                                                         -----------
Net deferred income tax assets..........................................   $  77,672
                                                                         ===========
</TABLE>

   The Company, under its tax sharing agreement with HFS, has allocated
alternative minimum tax net operating loss carryforwards of $139.8 million.
The net operating loss carryforwards expire as follows: 2001, $4.3 million;
2002, $2.5 million; 2005, $32.6 million; 2008, $23.7 million; 2009, $15.1
million. The Company also has available unused investment tax credits of
approximately $5.8 million which expire on February 28, 2002.

                              F-45
<PAGE>
                     RENTAL CAR OPERATIONS OF AVIS, INC.
                  NOTES TO THE COMBINED FINANCIAL STATEMENTS
 FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
 (CONTINUED

NOTE 10 - RETIREMENT BENEFITS

   The Company, through its subsidiary, Avis Rent A Car System, Inc.
("ARACS"), sponsors non-contributory defined benefit plans covering U.S.
employees who are members of certain collective bargaining units and
non-union full-time employees hired prior to December 31, 1983 who were age
25 or above on January 1, 1985. ARACS also contributes to union sponsored
pension plans.

   Through ARACS, the Company sponsors a Voluntary Investment Savings Plan
under a "qualified cash or deferred arrangement" under Section 401(k) of the
Internal Revenue Code. For the period October 17, 1996 to December 31, 1996,
the cost of this plan was approximately $352,000. Included in the Investment
Savings Plan, ARACS sponsors a defined contribution plan for substantially
all non-union full-time employees not otherwise covered. Costs for this plan
are determined at 2% of each covered employees compensation. Employer
contributions and costs of the plan for the period October 17, 1996 to
December 31, 1996 amounted to $394,000.

   The defined benefit plans provide benefits based upon years of credited
service, highest average compensation and social security benefits. Annual
retirement benefits, at age 65, are equal to 1 1/2% of the participating
employee's final average compensation (average compensation during the
highest five consecutive years of employment in the ten years prior to
retirement) less 1 3/7% of the Social Security benefits for each year of
service up to a maximum of 35 years. In addition, the plan provides for
reduced benefits before age 65 and for a joint and survivor annuity option.

   The status of the defined benefit plans at December 31, 1996 is as follows
(in thousands):

<TABLE>
<CAPTION>
                                                         SALARIED AND
                                                            HOURLY
                                                          EMPLOYEES
                                                          AS OF JUNE
                                                           30, 1985      BARGAINING
                                                       --------------  ------------
<S>                                                    <C>             <C>
Actuarial present value of benefit obligations:
 Vested benefit obligation............................     $(43,406)      $(7,147)
                                                       ==============  ============
 Accumulated benefit obligation.......................     $(48,077)      $(7,431)
                                                       ==============  ============
 Projected benefit obligation.........................     $(66,083)      $(7,431)
Plan assets at fair value.............................       60,697         6,623
                                                       --------------  ------------
Projected benefit obligation in excess of plan
 assets...............................................       (5,386)         (808)
Unrecognized net actuarial loss.......................        1,440            37
Unrecognized prior service cost.......................                        878
Additional minimum liability..........................                       (915)
                                                       --------------  ------------
Accrued pension liability.............................     $ (3,946)      $  (808)
                                                       ==============  ============
</TABLE>

   At December 31, 1996, the measurement of the projected benefit obligation
was based on a discount rate of 7.75%, compensation increase of 5.0% per year
and a long-term rate of return on plan assets of 8.75%. The plan assets are
invested in corporate bonds, U.S. government securities and common stock
mutual funds.

                              F-46
<PAGE>
                     RENTAL CAR OPERATIONS OF AVIS, INC.
                  NOTES TO THE COMBINED FINANCIAL STATEMENTS
 FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
 (CONTINUED)

NOTE 10 -RETIREMENT BENEFITS  (Continued)
    Net pension costs for the defined benefit plans for the period October
17, 1996 to December 31, 1996 include the following components (in
thousands):

<TABLE>
<CAPTION>
<S>                                                         <C>
Service cost ..............................................   $  302
Interest cost .............................................      357
Actual return (gain) on plan assets .......................     (551)
Net amortization of actuarial gains and prior service cost       390
Contributions to union plans ..............................      697
Contributions to foreign plans ............................       36
                                                            --------
Net pension cost ..........................................   $1,231
                                                            ========
</TABLE>

   The Company also sponsors a non-qualified defined benefit pension plan.
The liability for this unfunded plan was $8.8 million at December 31, 1996.
The projected benefit obligation of the plan was $10.0 at December 31, 1996.
The Company also sponsors several foreign pension plans. The most significant
of these is the Canadian pension plan.

   The status of the Canadian defined benefit plan at December 31, 1996 is as
follows (in thousands):

<TABLE>
<CAPTION>
<S>                                                    <C>
 Actuarial present value of benefit obligations:
 Vested benefit obligation............................   $(3,389)
                                                       ==========
 Accumulated benefit obligation.......................   $(3,389)
                                                       ==========
 Projected benefit obligation.........................   $(3,703)
Plan assets at fair value.............................     8,323
                                                       ----------
Plan assets in excess of projected benefit
 obligation...........................................     4,620
Unrecognized net actuarial gain.......................      (336)
Unrecognized net transition asset.....................    (2,833)
                                                       ----------
Deferred pension cost.................................   $ 1,451
                                                       ==========
</TABLE>

   At December 31, 1996, the measurement of the projected benefit obligation
was based on a discount rate of 7.0%, compensation increase of 4.0% per year
and a long-term rate of return on plan assets of 7.0%. The plan assets are
held in mutual funds which are invested in Canadian stocks, bonds, real
estate and money market funds.

   Net pension benefit for the Canadian defined benefit plan for the period
October 17, 1996 to December 31, 1996 (the latest information available)
includes the following components (in thousands):

<TABLE>
<CAPTION>
<S>                                                    <C>
Service cost .........................................   $  28
Interest cost ........................................      54
Expected return on plan assets .......................    (115)
Amortization of unrecognized net asset at transition       (28)
                                                       -------
Net pension benefit ..................................   $ (61)
                                                       =======
</TABLE>

                              F-47
<PAGE>
                     RENTAL CAR OPERATIONS OF AVIS, INC.
                  NOTES TO THE COMBINED FINANCIAL STATEMENTS
 FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
 (CONTINUED)

NOTE 11 -- LEASES, AIRPORT CONCESSION FEES AND COMMITMENTS

   The Company is committed to make rental payments under noncancelable
operating leases relating principally to vehicle rental facilities and
equipment. Under certain leases, the Company is obligated to pay certain
additional costs, such as property taxes, insurance and maintenance. Airport
concession agreements usually require a guaranteed minimum amount plus
contingent fees which are generally based on a percentage of revenues.

   Operating lease payments and airport concession fees charged to expense
for the period October 17, 1996 to December 31, 1996 are as follows (in
thousands):

<TABLE>
<CAPTION>
<S>                     <C>
Minimum fees...........   $23,576
Contingent fees .......    13,220
                        ----------
                           36,796
Less sublease rentals      (1,000)
                        ----------
                          $35,796
                        ==========
</TABLE>

   Future minimum rental commitments under noncancelable operating leases
amounted to approximately $338.0 million at December 31, 1996. The minimum
rental payments due in each of the five years ending December 31, and
thereafter, are as follows (in thousands):

<TABLE>
<CAPTION>
<S>              <C>
1997.........   $86,264
1998.........    62,400
1999.........    43,179
2000.........    32,669
2001.........    20,805
Thereafter ..    92,709
</TABLE>

   In addition to the Company's lease commitments, the Company has
outstanding purchase commitments of approximately $1.5 billion at December
31, 1996 which relate principally to vehicle purchases.

                              F-48
<PAGE>
                     RENTAL CAR OPERATIONS OF AVIS, INC.
                  NOTES TO THE COMBINED FINANCIAL STATEMENTS
 FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
 (CONCLUDED)

 NOTE 12 -- SEGMENT INFORMATION

   The Company operates in the United States and in foreign countries. The
operations within major geographic areas for the period October 17, 1996 to
December 31, 1996 are summarized as follows (in thousands):

<TABLE>
<CAPTION>
<S>                                <C>
 Revenue
 United States....................   $  312,194
 Australia/New Zealand............       31,107
 Canada...........................       13,467
 Other foreign operations.........        6,076
                                   ------------
                                     $  362,844
                                   ============
Income (loss) before income taxes
 United States....................   $   (2,346)
 Australia/New Zealand............        4,706
 Canada...........................       (1,752)
 Other foreign operations.........        1,653
                                   ------------
                                     $    2,261
                                   ============
Total assets at end of year
 United States....................   $2,750,119
 Australia/New Zealand............      120,216
 Canada...........................      122,657
 Other foreign operations.........      138,365
                                   ------------
                                     $3,131,357
                                   ============
</TABLE>

                              F-49
<PAGE>

NOTE 13 -- LITIGATION

   Certain litigation has been initiated against the Company which have
arisen during the normal course of operations. Since litigation is subject to
many uncertainties, the outcome of any individual matter is not predictable
with any degree of certainty, and it is reasonably possible that one or more
of these matters could be decided unfavorably against the Company. On May 22,
1996, a complaint was filed in the United States District Court for the
Eastern District of North Carolina against Avis Rent A Car System, Inc.
("ARACS") and one of its licensees, New Hanover Rent A Car, Inc. ("New
Hanover") alleging discrimination by New Hanover in the rental of automobiles
based on race. Plaintiff seeks an unspecified amount of compensatory and
punitive damages and a permanent injunction barring ARACS and New Hanover
from continuing to engage in illegally discriminatory conduct. ARACS has
asserted claims for indemnification against New Hanover and intends to
vigorously defend the complaint, ARACS believes that it has meritorious
defenses against the complaint. The Company maintains insurance policies that
cover most of the actions brought against the Company. The Company is
currently not involved in any legal proceeding which it believes would have a
material adverse effect upon its combined financial condition or results of
operations.


                              F-50
<PAGE>
                     RENTAL CAR OPERATIONS OF AVIS, INC.
                      VALUATION AND QUALIFYING ACCOUNTS
  FOR THE PERIOD OCTOBER 17, 1996 (DATE OF ACQUISITION) TO DECEMBER 31, 1996
                                (IN THOUSANDS)

<TABLE>
<CAPTION>
                                               BALANCE AT     CHARGED TO                                  BALANCE AT
                                              BEGINNING OF    COSTS AND      CHARGED TO                     END OF
DESCRIPTION                                      PERIOD        EXPENSES    OTHER ACCOUNTS   DEDUCTIONS      PERIOD
------------------------------------------  --------------  ------------  --------------  ------------  ------------
<S>                                         <C>             <C>           <C>             <C>           <C>
Allowance for doubtful accounts--accounts
 receivable ...............................        --           $  227           --             --          $  227
Accumulated amortization--goodwill ........        --           $1,026           --             --          $1,026
</TABLE>

                              F-51






<PAGE>



                                                   EXHIBIT INDEX

Exhibit
No.           Description
-------       ------------


2.1           Agreement Among Purchasers dated as of January 22, 1996 among
              National Lodging Corp., Motels of America, Inc. and Bear
              Acquisition Corp. (Incorporated by reference to the Registrant's
              Annual Report on Form 10-K for the fiscal year ended December
              31, 1995, Exhibit 2.10)

2.2           Purchase and Sale Agreement dated February 9, 1996 among
              Electronic Realty Associates, L.P., the Registrant and ERA
              Acquisition Co. (Incorporated by reference to the Registrant's
              Annual Report on Form 10-K for the fiscal year ended December
              31, 1995, Exhibit 2.11)

2.3           Agreement dated February 9, 1996 among Heller Financial, Inc.
              the Registrant and ERA Acquisition Co. (Incorporated by
              reference to the Registrant's Annual Report on Form 10-K for the
              fiscal year ended December 31, 1995, Exhibit 2.12).

2.4           Agreement and Plan of Merger and Reorganization, dated as of
              April 15, 1996, by and between HFS Incorporated, Century 21
              Region V, Inc. and Yeager Real Estate and Financial Services,
              Inc. (Incorporated by reference to Registrant's Registration
              Statement on Form S-3 (Registration No. 333- 03646), Exhibit No.
              2.1)

2.5           Stock Purchase Agreement dated as of July 12, 1995 between the
              Registrant and Metropolitan Life Insurance Company (Incorporated
              by reference to the Registrant's Quarterly Report on Form 10-Q
              for the quarterly period ended June 30, 1995, Exhibit 2.1)

2.6           Stock Purchase Agreement dated as of July 12, 1995 between the
              Registrant and C21 Acquisition Corp. (Incorporated by reference
              to the Registrant's Quarterly Report on Form 10-Q for the
              quarterly period ended June 30, 1995, Exhibit 2.2)

2.7           Stock Purchase Agreement dated as of July 12, 1995 between the
              Registrant and Metropolitan Tower Corp. (Incorporated by
              reference to the Registrant's Quarterly Report on Form 10-Q for
              the quarterly period ended June 30, 1995, Exhibit 2.3)

2.8           Stock Purchase Agreement dated as of October 17, 1995 between
              the Registrant and AMRE, Inc. (Incorporated by reference to the
              Registrant's Quarterly Report on Form 10-Q for the quarterly
              period ended September 30, 1995).

2.9           Purchase Agreement dated as of December 19, 1995 among the
              Registrant, Forte Hotels, Inc. and Forte USA, Inc. (Incorporated
              by reference to Registrant's Annual Report on Form 10-K for the
              fiscal year ended December 31, 1995, Exhibit 2.9)

2.10          Agreement and Plan of Merger dated as of April 3, 1996 among the
              Registrant, C-21 Holding Corp., Century 21 Real Estate of the
              Mid-Atlantic States, Inc. and George F. Kettle. (Incorporated by
              reference to Registrant's Quarterly Report on Form 10-Q for the
              quarterly period ended March 31, 1996, Exhibit 2.1)

2.11          Agreement and Plan of Merger dated as of April 3, 1996 among the
              Registrant, C21 Holding Corp., Century 21 of Eastern
              Pennsylvania, Inc., George F. Kettle and James O. Nelson.
              (Incorporated by

--------------
* Filed herewith

                                      E-1

<PAGE>


Exhibit
No.           Description
-------       ------------

              reference to Registrant's Quarterly Report on Form 10-Q for the
              quarterly period ended March 31, 1996, Exhibit 2.2)

2.12          Agreement and Plan of Merger dated as of May 1, 1996 among the
              Registrant, CBC Acquisition Corp., Fremont Investors, Inc. and
              Coldwell Banker Corporation. (Incorporated by reference to
              Registrant's Quarterly Report on Form 10-Q for the quarterly
              period ended March 31, 1996, Exhibit 2.4)

2.13          Agreement and Plan of Merger, dated as of August 23, 1996, by
              and among HFS Incorporated, Avis Acquisition Corp., U.S. Trust
              Company of California, N.A. as Trustee of the Trust forming a
              part of the Avis, Inc. Employee Stock Ownership Plan and Avis,
              Inc. (Incorporated by reference to Registrant's Registration
              Statement on Form S-3 (Registration No. 333-11029, Exhibit 2.1)

2.14          Stock Purchase Agreement, dated as of August 28, 1996, by and
              between HFS Incorporated and General Motors Corporation.
              (Incorporated by reference to Registrant's Registration
              Statement on Form S-3 (Registration No. 333-11029, Exhibit 2.2)

2.15          Stock Purchase Agreement dated as of October 6, 1996 by and
              among the Company, Christel DeHaan and Resort Condominiums
              International, Inc. (Incorporated by reference to Registrant's
              Quarterly Report on Form 10-Q for the quarterly period ended
              September 30, 1996, Exhibit 2.1)

2.16          Registration Rights Agreement, dated as of November 12, 1996, by
              and between HFS Incorporated and Ms. Christel DeHaan
              (Incorporated by reference to Registrant's Registration
              Statement on Form S-3 (Registration No. 333-17371), Exhibit 2.2)

2.17          Agreement and Plan of Merger dated as of November 10, 1996, by
              and among HFS Incorporated, PHH Corporation and Mercury
              Acquisition Corp. (Incorporated by reference to the Company's
              Current Report on Form 8-K dated November 14, 1996, Exhibit 2.1)

2.18          Asset Purchase Agreement dated as of April 2, 1996 among Century
              21 Real Estate of Southern Florida, Inc., the Registrant and
              Richard C. Ritchey (Incorporated by reference to Registrant's
              Quarterly Report on Form 10-Q for the quarterly period ended
              March 31, 1996, Exhibit 10.1)

2.19          Asset Purchase Agreement dated as of April 3, 1996 among Century
              21 Real Estate Corporation, the Registrant, Century 21 of the
              Southwest, Inc. and Larry E. Bryson. (Incorporated by reference
              to Registrant's Quarterly Report on Form 10-Q for the quarterly
              period ended March 31, 1996, Exhibit 10.2)

3.1           Restated Certificate of Incorporation of the Registrant
              (Incorporated by reference to Exhibit 4 to the Registrant's
              Registration Statement on Form 8-A filed on February 21, 1996)


--------------
* Filed herewith

                                      E-2

<PAGE>


Exhibit
No.           Description
-------       ------------

3.2           Amended and Restated By-laws of the Registrant (Incorporated by
              reference to the Registrant's Quarterly Report on Form 10-Q for
              the quarterly period ended September 30, 1996, Exhibit 3.1)

4.1           Form of certificate for the Registrant's Common Stock, par value
              $0.1 per share (Incorporated by reference to the Registrant's
              Registration Statement on Form S-1 (Registration No. 33-51422),
              Exhibit No. 4.1)

4.2           Form of Indenture between the Registrant and Continental Bank,
              National Association, as trustee (Incorporated by reference to
              the Registrant's Registration Statement on Form S-1
              (Registration No.
              33-71736), Exhibit No. 4.1)

4.3           Form of Indenture between the Registrant and Bank of America
              Illinois as trustee (the "Senior Trustee") (Incorporated by
              reference to the Registrant's Current Report on Form 8-K dated
              September 28, 1994, Exhibit 2)

4.4           Form of Supplemental Indenture between the Registrant and the
              Senior Trustee (Incorporated by reference to the Registrant's
              Current Report on Form 8-K dated September 28, 1994, Exhibit 3).

4.5           Indenture dated as of February 28, 1996 between the Registrant
              and First Trust of Illinois, National Association, as trustee
              (Incorporated by reference to the Registrant's Current Report on
              Form 8-K dated March 8, 1996, Exhibit 4.01)

4.6           Supplemental Indenture No. 1 dated as of February 28, 1996
              between the Registrant and First Trust of Illinois, National
              Association, as trustee (Incorporated by reference to the
              Registrant's Current Report on Form 8-K dated March 8, 1996,
              Exhibit 4.02)

4.7           Form of Senior Indenture entered into by the Registrant and The
              Bank of Nova Scotia Trust Company of New York, as Trustee.
              (Incorporated by reference to Registrant's Registration
              Statement on Form S-3 (Registration No. 333-03276), Exhibit 4.2)

4.8           Form of Subordinated Indenture entered into by the Registrant
              and the Bank of Nova Scotia Trust Company of New York, as
              Trustee (Incorporated by reference to Registrant's Registration
              Statement on Form S-3 (Registration No. 333-03276), Exhibit 4.3)

10.1          364-Day Competitive Advance and Revolving Credit Agreement dated
              as of October 2, 1996 among HFS Incorporated and The Lenders
              Referred to Therein and The Chase Manhattan Bank as
              Administrative Agent (Incorporated by reference to Registrant's
              Current Report on Form 8-K dated October 15, 1996, Exhibit 10.1)

10.2          Five Year Competitive Advance and Revolving Credit Agreement
              dated as of October 2, 1996 among HFS Incorporated and The
              Lenders Referred to Therein and The Chase Manhattan Bank as
              Administrative Agent (Incorporated by reference to Registrant's
              Current Report on Form 8-K dated October 15, 1996, Exhibit 10.2)

10.3          License Agreement dated as of September 18, 1989 amended and
              restated as of July 15, 1991 between Franchise System Holdings,
              Inc. and Ramada Franchise Systems, Inc. (Incorporated by
              reference to the Registrant's Registration Statement on Form S-1
              (Registration No. 33-51422), Exhibit No. 10.2)

10.4          Restructuring Agreement dated as of July 15, 1991 by and among
              New World Development Co., Ltd., Ramada International Hotels &
              Resorts, Inc. Ramada Inc., Franchise System Holdings, Inc., the
              Registrant and Ramada Franchise Systems, Inc. (Incorporated by
              reference to the Registrant's Registration Statement on Form S-1
              (Registration No. 33-51422), Exhibit No. 10.3)


--------------
* Filed herewith

                                      E-3

<PAGE>


Exhibit
No.           Description
-------       ------------

10.5          License Agreement dated as of November 1, 1991 between Franchise
              Systems Holdings, Inc. and Ramada Franchise Systems, Inc.
              (Incorporated by reference to the Registrant's Registration
              Statement on Form S-1 (Registration No. 33-51422), Exhibit No.
              10.4)

10.6          Amendment to License Agreement, Restructuring Agreement and
              Certain Other Restructuring Documents dated as of November 1,
              1991 by and among New World Development Co., Ltd., Ramada
              International Hotels & Resorts, Inc., Ramada Inc., Franchise
              System Holdings, Inc., the Registrant and Ramada Franchise
              Systems, Inc. (Incorporated by reference to the Registrant's
              Registration Statement on Form S-1 (Registration No. 33-51422),
              Exhibit No. 10.5)

10.7          The Registrant's 1992 Incentive Stock Option Plan and Form of
              Stock Option Agreement. (Incorporated by reference to the
              Registrant's Registration Statement on Form S-1 (Registration
              No. 33-51422), Exhibit No. 10.6)

10.8          Form of Amended and Restated Employment Agreement dated as of
              June 30, 1996 between the Registrant and Henry R. Silverman.
              (Incorporated by reference to Registrant's Quarterly Report on
              Form 10-Q for the quarterly period ended June 30, 1996, Exhibit
              10.1)

10.8(a)*      Amendment dated January 27, 1997 to Amended and Restated
              Employment Agreement dated as of June 30, 1996 between the
              Registrant and Henry R. Silverman.

10.9          Employment Agreement dated as of January 31, 1992 between the
              Registrant and John D. Snodgrass, as amended as of January 31,
              1992. (Incorporated by reference to the Registrant's
              Registration Statement on Form S-1 (Registration No. 33-51422),
              Exhibit 10.23)

10.9(a)       Amendment to Employment Agreement dated as of October 30, 1996
              between the Registrant and John D. Snodgrass. (Incorporated by
              reference to Registrant's Quarterly Report on Form 10-Q for the
              quarterly period ended September 30, 1996, Exhibit 10.1)


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                                      E-4

<PAGE>


Exhibit
No.           Description
-------       ------------

10.10         Employment Agreement dated October 14, 1996 between the
              Registrant and Michael P. Monaco. (Incorporated by reference to
              Registrant's Quarterly Report on Form 10-Q for the quarterly
              period ended September 30, 1996, Exhibit 10.2)

10.11         Employment Agreement dated as of January 15, 1992 between the
              Registrant and James E. Buckman. (Incorporated by reference to
              the Registrant's Registration Statement on Form S-1
              (Registration No. 33-51422), Exhibit 10.24)

10.11(a)      Amendment to Employment Agreement between Registrant and James
              E. Buckman dated as of October 1, 1994. (Incorporated by
              reference to the Registrant's Annual Report on Form 10-K filed
              March 31, 1994, Exhibit No. 10.12(a))

10.12         Employment Agreement dated as of October 1, 1991 between the
              Registrant and Stephen P. Holmes. (Incorporated by reference to
              the Registrant's Registration Statement on Form S-1
              (Registration No. 33-51422 Exhibit 10.25)

10.12(a)      Amendment to Employment Agreement between Registrant and Stephen
              P. Holmes dated as of October 1, 1994. (Incorporated by
              reference to the Registrant's Annual Report on Form 10-K filed
              March 31, 1994, Exhibit NO. 10.13(a))

10.13         Employment Agreement dated as of January 31, 1992 between the
              Registrant and Richard A. Smith. (Incorporated by reference to
              the Registrant's Registration Statement on Form S-1
              (Registration No. 33-51422), Exhibit 10.27)

10.13(a)      Amendment to employment Agreement between Registrant and Richard
              A. Smith dated as of October 1, 1994. (Incorporated by reference
              to the Registrant's Annual Report on Form 10-K filed March 31,
              1994, Exhibit No. 10.14(a))

10.14         Letter Agreement between the Registrant and John Osborne
              regarding employment. (Incorporated by reference to the
              Registrant's Registration Statement on Form S-1 (Registration
              No. 33-70706), Exhibit No. 10.28)

10.15         U.S. Bankruptcy Court for the District of Delaware Order
              Incorporating Additional Terms Relating to the Relationship of
              Purchaser to Franchisees, dated December 20, 1991. (Incorporated
              by reference to the Registrant's Registration Statement on Form
              S-1 (Registration No. 33-51422), Exhibit 10.31)

10.16         Conversion Agreement between Chartwell Hotels Associates and HFS
              Brands, Inc., dated as of November 17, 1992. (Incorporated by
              reference to the Registrant's Registration Statement on Form S-1
              (Registration NO. 33-51422 Exhibit 10.33)

10.17         Conversion Agreement, dated as of may 9, 1993, between Chartwell
              Hotels II Associated and HFS Brands, Inc. (Incorporated by
              reference to the Registrant's Registration Statement on Form S-1
              (Registration No. 33-63398) Exhibit No. 10.35)


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                                      E-5

<PAGE>


Exhibit
No.           Description
-------       ------------

10.18         Letter Agreement among the Registrant, Bryanston Group, Inc. and
              National Gaming Corp. dated August 18, 1995. (Incorporated by
              reference to the Registrant's Registration Statement on Form S-3
              (Registration No. 33-96034), Exhibit 10.1)

10.19         Second Amendment of Casino Financing Agreement dated as of
              August 11, 1994 between the Registrant and Rainbow Casino
              Corporation. (Incorporated by reference tot he Registrant's
              Annual Report of Form 10-K filed March 31, 1994, Exhibit No.
              10.30(b))

10.20         Marketing Services Agreement dated as of march 15, 1994 between
              Rainbow Casino Corporation and HFS Gaming Corp. (Incorporated by
              reference to the Registrant's Form 10-K filed March 31, 1994,
              Exhibit No. 10.32)

10.21         The Registrant's Amended and Restated 1993 Stock Option Plan
              (Incorporated by reference to the Registrant's Registration
              Statement on Form S-8 (Registration No. 33-83956), Exhibit 4.1)

10.21(a)      First Amendment to the Amended and Restated 1993 Stock Option
              Plan dated May 5, 1995. (Incorporated by reference to the
              Registrant's Registration Statement on Form S-8 (Registration
              No. 33094756), Exhibit 4.1)

10.21(b)      Second Amendment to the Amended and Restated 1993 Stock Option
              Plan dated January 22, 1996. (Incorporated by reference to the
              Registrant's Annual Report on Form 10-K for the fiscal year
              ended December 31, 1995, Exhibit 10.21(b))

10.21(c)      Third Amendment to the Amended and Restated 1993 Stock Option
              Plan dated January 22, 1996. (Incorporated by reference to the
              Registrant's Annual Report on Form 10-K for the fiscal year
              ended December 31, 1995, Exhibit 10.21(c))

10.21(d)      Fourth Amendment to the Amended and Restated 1993 Stock Option
              Plan dated May 20, 1996. (Incorporated by reference to
              Registrant's Registration Statement on Form S-8 (Registration
              No. 333- 06733), Exhibit 4.5)

10.21(e)*     Fifth Amendment to the Amended and Restated 1993 Stock Option
              Plan dated July 24, 1996.

10.21(f)*     Sixth Amendment to the Amended and Restated 1993 Stock Option
              Plan dated September 24, 1996.

10.22         Marketing Services Agreement dated as of April 27, 1994 by and
              between HFS Gaming Corp. and Boomtown, Inc. (Incorporated by
              reference to the Registrant's Form 10-Q filed May 16, 1994,
              Exhibit 10.2)

10.23         Guarantee Letter, dated January 17, 1995, by and among
              Hospitality Franchise Systems, Inc., National Gaming Corp. and
              Boomtown, Inc. (Incorporated by reference to the Registrant's
              Form 8-K filed February 1, 1995, Exhibit 10.1)

10.24         Interim Financing Agreement dated as of November 22, 1994
              between the Registrant and National Gaming Corp. (Incorporated
              by reference to Exhibit Number 10.1 to the National Gaming Corp.
              Current Report on Form 8-K dated December 2, 1994)

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                                      E-6

<PAGE>


Exhibit
No.           Description
-------       ------------

10.25         Form of Amended and Restated Corporate Services Agreement dated
              as of January 24, 1996 between the Registrant and National
              Lodging Corp. (Incorporated by reference to Registrant's
              Quarterly Report on Form 10-Q for the quarterly period ended
              June 30, 1996, Exhibit 10.3)reference to the Registrant's
              Annual Report on Form 10-K for the fiscal year ended
              December 31, 1995, Exhibit 10.30)

10.26         Form of Second Amended and Restated Financing Agreement dated as
              of July 24, 1996 between the Registrant and National Lodging
              Corp. (Incorporated by reference to Registrant's Quarterly
              Report on Form 10-Q for the quarterly period ended June 30,
              1996, Exhibit 10.2)

10.27*        HFS Guaranty dated as of August 28, 1996 by the Registrant to
              The Chase Manhattan Bank, as Administrative Agent (as defined in
              such agreement) for the benefit of National Lodging Corp.

10.28         Tax Sharing and Indemnification Agreement dated as of November
              22, 1994 between the Registrant and National Gaming Corp.
              (Incorporated by reference to Exhibit Number 10.6 to the
              National Gaming Corp. Current Report on Form 8-K dated December
              2, 1994)

10.29*        Second Amended and Restated Agreement of Limited Partnership of
              Hotel Franchising Limited Partnership dated as of November 20,
              1996.

10.30         Support Agreement between the Registrant, General Franchise
              Systems, Inc. and Hotel Franchising Limited Partnership dated as
              of March 31, 1995 (Incorporated by reference to the Registrant's
              Quarterly Report on Form 10-Q for the quarterly period ended
              March 31, 1995, Exhibit 10.2)

10.31         Loan and Security Agreement dated as of March 31, 1995 between
              the Registrant and Franchise Investors L.L.C. (Incorporated by
              reference to the Registrant's Quarterly Report on Form 10-Q for
              the quarterly period ended March 31, 1995, Exhibit 10.3)

10.32         Guaranty Agreement dated as of March 31, 1995 between the
              Registrant and Franchise Investors L.L.C. (Incorporated by
              reference to the Registrant's Quarterly Report on Form 10-Q for
              the quarterly period ended March 31, 1995, Exhibit 10.4)

10.33         Asset Purchase Agreement dated April 21, 1995 among Knights
              Lodging, Inc. and Economy Lodging Systems, Inc., as Sellers, and
              KI Acquisition Corp., as Buyer (Incorporated by reference to the
              Registrant's Quarterly Report on Form 10-Q for the quarterly
              period ended March 31, 1995, Exhibit 10.5)

10.34         Agreement dated as of March 31, 1995 between the Registrant and
              Motels of America, Inc. (Incorporated by reference to the
              Registrant's Current Report on Form 8-K dated April 4, 1995,
              Exhibit 10.1)

10.35         Amended and Restated Warrant Agreement dated as of August 11,
              1993, as amended and restated as of May 15, 1995 between the
              Registrant and Chemical Mellon Shareholder Services
              (Incorporated by
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                                      E-7

<PAGE>


Exhibit
No.           Description
-------       ------------
              reference to the Registrant's Quarterly Report on Form 10-Q for
              the quarterly period ended June 30, 1995, Exhibit 10.1)

10.36         Indemnification Agreement dated as of July 12, 1995 among the
              Registrant, Metropolitan Life Insurance Company and Metropolitan
              Tower Corp. (Incorporated by reference to the Registrant's
              Quarterly Report on Form 10-Q for the quarterly period ended
              June 30, 1995, Exhibit 10.2)

10.37         Subscription and Stockholders Agreement dated as of August 1,
              1995 among C21 Holding Corp., the Registrant, Robert W. Pittman,
              Mark S. Mitzner and Mayo S. Stuntz, Jr. (Incorporated by
              reference to the Registrant's Quarterly Report on Form 10-Q for
              the quarterly period ended June 30, 1995, Exhibit 10.3)

10.38         Employment Agreement dated as of August 1, 1995 among Century 21
              Real Estate Corporation, the Registrant and Robert W. Pittman
              (Incorporated by reference to the Registrant's Quarterly Report
              on Form 10-Q for the quarterly period ended June 30, 1995,
              Exhibit 10.4)

10.39         Employment Agreement dated as of August 1, 1995 among Century 21
              Real Estate Corporation, the Registrant and Mark S. Mitzner
              (Incorporated by reference to the Registrant's Quarterly Report
              on Form 10-Q for the quarterly period ended June 30, 1995,
              Exhibit 10.5)

10.40         Employment Agreement dated as of August 1, 1995 among Century 21
              Real Estate Corporation, the Registrant and Mayo S. Stuntz, Jr.
              (Incorporated by reference to the Registrant's Quarterly Report
              on Form 10-Q for the quarterly period ended June 30, 1995,
              Exhibit 10.6)

10.41         Services Agreement dated as of July 12, 1995 between the
              Registrant and Metropolitan Life Insurance Company (Incorporated
              by reference to the Registrant's Quarterly Report on Form 10-Q
              for the quarterly period ended June 30, 1995, Exhibit 10.7)

10.42         Assignment Agreement dated as of August 1, 1995 between the
              Registrant and C21 Holding Corp. (Incorporated by reference to
              the Registrant's Current Report on Form 8-K dated August 16,
              1995, Exhibit 10.1)

10.43         Credit Agreement dated as of October 17, 1995 between AMRE,
              Inc., as borrower, and the Registrant, as lender (Incorporated
              by reference to the Registrant's Quarterly Report on Form 10-Q
              for the quarterly period ended September 30, 1995, Exhibit 10.1)

10.44         License Agreement among TM Acquisition Corp., Century 21 Real
              Estate Corporation and American Remodelling, Inc. dated October
              17, 1995 (Incorporated by reference to the Registrant's
              Quarterly Report on Form 10-Q for the quarterly period ended
              September 30, 1995, Exhibit 10.2)

10.45         Master License Agreement dated October 17, 1995 between Century
              21 Real Estate Corporation and TM Acquisition Corp.
              (Incorporated by reference to the Registrant's Quarterly Report
              on Form 10-Q for the quarterly period ended September 30, 1995,
              Exhibit 10.3)


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                                      E-8

<PAGE>


Exhibit
No.           Description
-------       ------------

10.46         Purchasing Services Agreement dated as of November 30, 1995
              between the Registrant and Compleat Resources Group, Inc.
              (Incorporated by reference to the Registrant's Current Report on
              Form 8-K dated December 11, 1995, Exhibit 10.1)

10.46(a)      First Amendment to Purchasing Services Agreement dated January
              31, 1997 between the Registrant and Compleat Resources Group,
              Inc.

10.47         Stock Purchase Agreement dated as of November 30, 1995 between
              the Registrant and Insignia Financial Group, Inc. (Incorporated
              by reference to the Registrant's Current Report on Form 8-K
              dated December 11, 1995, Exhibit 10.2)

10.48         Registration Rights Agreement dated as of November 30, 1995
              between the Registrant and Insignia Financial Group, Inc.
              (Incorporated by reference to the Registrant's Current Report on
              Form 8-K dated December 11, 1995, Exhibit 10.3)

10.49*        Credit Agreement dated as of November 20, 1996 among Wingate
              Financial LLC, the Lenders named therein and The Chase Manhattan
              Bank, as administrative agent and collateral agent, Westdeutsche
              Landesbank Girozentrale, as collateral agent, The Bank of Nova
              Scotia, as documentation agent and Bankers Trust Company, as
              syndication agent.

10.50*        Guaranty dated as of November 20, 1996 from the Registrant to
              The Chase Manhattan Bank, as agent for the Lenders named in the
              Credit Agreement dated as of November 20, 1996.

11*           Statement re: Historical Computation of Per Share Earnings

11.1*         Statement re: Pro Forma Computation of Per Share Earnings

12*           Statement re: Computation of Ratio of Earnings to Fixed Charges

21*           Subsidiaries of the Registrant

23.1*         Consent of Deloitte & Touche LLP relating to the financial
              statements of HFS Incorporated.

23.2*         Consent of Deloitte & Touch LLP relating to the financial
              statements of Rental Car Operations of Avis, Inc.

23.3*         Consent of Price Waterhouse LLP relating to the financial
              statements of Avis, Inc.


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* Filed herewith

                                      E-9