##### 



Exhibit 13

INDEPENDENT AUDITORS REPORT

The Board of Directors

MeriStar Hospitality Corporation:


We have audited the accompanying consolidated
balance sheets of MeriStar Hospitality Corporation and
subsidiaries (the Company) as of December 31, 2002 and 2001
and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the years
in the three-year period ended December 31, 2002. In
connection with our audits of the consolidated financial
statements, we have also audited the financial statement
schedule of real estate and accumulated depreciation. These
consolidated financial statements and the financial statement
schedule are the responsibility of MeriStar Hospitalitys
management. Our responsibility is to express an opinion on these
consolidated financial statements and the financial statement
schedule based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. 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, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of MeriStar Hospitality
Corporation and subsidiaries as of December 31, 2002 and
2001, and the results of their operations and their cash flows
for each of the years in the three-year period ended
December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, the 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.

As discussed in note 2, the Company adopted
Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, in 2002.

| |  |                      |  | 
| |  | -------------------- |  | 
| |  | /s/ KPMG LLPKPMG LLP |  | 

Washington, D.C.

February 12, 2003, except as to notes 4
and 15, 
   which are as of March 27, 2003


46



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##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED BALANCE SHEETS


DECEMBER 31, 2002 AND 2001


(Dollars and shares in thousands, except per
share amounts)


|                                                                                 |                                                                                                               |      |           |           |   |   |           |           |  
|-------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------- | ---- | --------- | --------- | - | - | --------- | --------- | -
|                                                                                 |                                                                                                               | 2002 |           | 2001     
|                                                                                 |                                                                                                               |      |           |          
|ASSETS                                                                           |                                                                                                               |      |           |           |   |   |           |          
|Investments in hotel properties                                                  |                                                                                                               | $    | 3,057,658 |           |   | $ | 3,183,677 |          
|Accumulated depreciation                                                         |                                                                                                               |      | (497,721  | )         |   |   | (397,380  | )        
|                                                                                 |                                                                                                               |      |           |           |   |   |           |          
|                                                                                 |                                                                                                               |      | 2,559,937 |           |   |   | 2,786,297 |          
|Restricted cash                                                                  |                                                                                                               |      | 20,365    |           |   |   | 21,304    |          
|Investments in and advances to affiliates                                        |                                                                                                               |      | 41,714    |           |   |   | 41,714    |          
|Due from Interstate Hotels & Resorts                                             |                                                                                                               |      |          |           |   |   | 8,877     |          
|Note receivable from Interstate Hotels &
    Resorts                             |                                                                                                               |      | 42,052    |           |   |   | 36,000    |          
|Prepaid expenses and other assets                                                |                                                                                                               |      | 43,228    |           |   |   | 45,042    |          
|Accounts receivable, net of allowance for
    doubtful accounts of $848 and $973 |                                                                                                               |      | 56,828    |           |   |   | 47,178    |          
|Cash and cash equivalents                                                        |                                                                                                               |      | 33,896    |           |   |   | 23,448    |          
|                                                                                 |                                                                                                               |      |           |           |   |   |           |          
|                                                                                 |                                                                                                               | $    | 2,798,020 |           |   | $ | 3,009,860 |          
|                                                                                 |                                                                                                               |      |           |           |   |   |           |          
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                         |                                                                                                               |      |           |           |   |   |           |          
|Long-term debt                                                                   |                                                                                                               | $    | 1,654,102 |           |   | $ | 1,700,134 |          
|Accounts payable and accrued expenses                                            |                                                                                                               |      | 109,790   |           |   |   | 130,099   |          
|Accrued interest                                                                 |                                                                                                               |      | 52,907    |           |   |   | 45,009    |          
|Due to Interstate Hotels & Resorts                                               |                                                                                                               |      | 10,500    |           |   |   |          |          
|Other liabilities                                                                |                                                                                                               |      | 18,013    |           |   |   | 22,258    |          
|                                                                                 |                                                                                                               |      |           |           |   |   |           |          
|Total liabilities                                                                |                                                                                                               |      | 1,845,312 |           |   |   | 1,897,500 |          
|                                                                                 |                                                                                                               |      |           |           |   |   |           |          
|                                                                                
|Minority interests                                                               |                                                                                                               |      | 74,422    |           |   |   | 89,797    |          
|Stockholders equity:                                                            |                                                                                                               |      |           |           |   |   |           |          
|                                                                                 | Common stock, par value $0.01 per share
    Authorized  250,000 shares
    Issued  49,555 and 48,761 shares |      |           | 495       |   |   |           | 487       |  
|                                                                                 | Additional paid-in capital                                                                                    |      |           | 1,196,025 |   |   |           | 1,183,463 |  
|                                                                                 | Retained deficit                                                                                              |      |           | (230,870  | ) |   |           | (68,241   | )
|                                                                                 | Accumulated other comprehensive loss                                                                          |      |           | (7,052    | ) |   |           | (12,503   | )
|                                                                                 | Unearned stock-based compensation                                                                             |      |           | (3,638    | ) |   |           | (5,287    | )
|                                                                                 | Common stock held in treasury  4,324
    and 4,237 shares                                                    |      |           | (76,674   | ) |   |           | (75,356   | )
|                                                                                 |                                                                                                               |      |           |           |   |   |           |          
|Total stockholders equity                                                       |                                                                                                               |      | 878,286   |           |   |   | 1,022,563 |          
|                                                                                 |                                                                                                               |      |           |           |   |   |           |          
|                                                                                 |                                                                                                               | $    | 2,798,020 |           |   | $ | 3,009,860 |          
|                                                                                 |                                                                                                               |      |           |           |   |   |           |          

See
accompanying notes to the consolidated financial statements.

47



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##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS


YEARS ENDED DECEMBER 31, 2002, 2001 AND
2000


(Dollars in thousands, except per share
amounts)


|                                                                                                                                                     |                                                                             |                                                                           |          |         |         |      |           |        |         |   |         |         |         | 
|---------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------------------- | -------- | ------- | ------- | ---- | --------- | ------ | ------- | - | ------- | ------- | ------- | 
|                                                                                                                                                     |                                                                             | 2002                                                                      |          | 2001    |         | 2000
|                                                                                                                                                     |                                                                             |                                                                           |          |         |         |     
|Revenue:                                                                                                                                             |                                                                             |                                                                           |          |         |         |      |           |        |         |   |         |        
|                                                                                                                                                     | Hotel operations:                                                           |                                                                           |          |         |         |      |           |        |         |   |         |         |        
|                                                                                                                                                     |                                                                             | Rooms                                                                     |          | $       | 634,920 |      |           | $      | 689,215 |   |         | $       |        | 
|                                                                                                                                                     |                                                                             | Food and beverage                                                         |          |         | 257,034 |      |           |        | 265,815 |   |         |         |        | 
|                                                                                                                                                     |                                                                             | Other hotel operations                                                    |          |         | 73,817  |      |           |        | 80,385  |   |         |         |        | 
|                                                                                                                                                     | Office rental, parking and other revenue                                    |                                                                           |          | 17,682  |         |      |           | 16,829 |         |   |         | 8,609   |        
|                                                                                                                                                     | Participating lease revenue                                                 |                                                                           |          |        |         |      |           | 5,094  |         |   |         | 377,424 |        
|                                                                                                                                                     |                                                                             |                                                                           |          |         |         |      |           |        |         |   |         |        
|Total revenue                                                                                                                                        |                                                                             |                                                                           | 983,453  |         |         |      | 1,057,338 |        |         |   | 386,033 |        
|                                                                                                                                                     |                                                                             |                                                                           |          |         |         |      |           |        |         |   |         |        
|Hotel operating expenses:                                                                                                                            |                                                                             |                                                                           |          |         |         |      |           |        |         |   |         |        
|                                                                                                                                                     |                                                                             | Rooms                                                                     |          |         | 156,773 |      |           |        | 167,265 |   |         |         |        | 
|                                                                                                                                                     |                                                                             | Food and beverage                                                         |          |         | 184,913 |      |           |        | 191,838 |   |         |         |        | 
|                                                                                                                                                     |                                                                             | Other hotel operating expenses                                            |          |         | 43,003  |      |           |        | 43,032  |   |         |         |        | 
|Office rental, parking and other expenses                                                                                                            |                                                                             |                                                                           | 3,004    |         |         |      | 3,057     |        |         |   | 2,523   |        
|Other operating expenses:                                                                                                                            |                                                                             |                                                                           |          |         |         |      |           |        |         |   |         |        
|                                                                                                                                                     |                                                                             | Administrative and general                                                |          |         | 170,456 |      |           |        | 166,726 |   |         |         | 9,431   | 
|                                                                                                                                                     |                                                                             | Property operating costs                                                  |          |         | 149,971 |      |           |        | 156,350 |   |         |         |        | 
|                                                                                                                                                     |                                                                             | Depreciation and amortization                                             |          |         | 119,998 |      |           |        | 113,278 |   |         |         | 107,554 | 
|                                                                                                                                                     |                                                                             | Property taxes, insurance and other                                       |          |         | 67,732  |      |           |        | 73,418  |   |         |         | 46,015  | 
|                                                                                                                                                     |                                                                             | Loss on asset impairments                                                 |          |         | 63,364  |      |           |        | 32,335  |   |         |         |        | 
|                                                                                                                                                     |                                                                             | Write-down of note receivable with Interstate
    Hotels & Resorts        |          |         | 14,517  |      |           |        |        |   |         |         |        | 
|                                                                                                                                                     |                                                                             | Loss on fair value of non-hedging derivatives                             |          |         | 4,735   |      |           |        | 6,666   |   |         |         |        | 
|                                                                                                                                                     |                                                                             | Change in fair value of non-hedging derivatives,
    net of swap payments |          |         | 4,446   |      |           |        |        |   |         |         |        | 
|                                                                                                                                                     |                                                                             | Write-off of deferred financing costs                                     |          |         | 3,144   |      |           |        |        |   |         |         |        | 
|                                                                                                                                                     |                                                                             | Swap termination costs                                                    |          |         |        |      |           |        | 9,297   |   |         |         |        | 
|                                                                                                                                                     |                                                                             | Write-down of investment in STS Hotel Net                                 |          |         |        |      |           |        | 2,112   |   |         |         |        | 
|                                                                                                                                                     |                                                                             | FelCor merger costs                                                       |          |         |        |      |           |        | 5,817   |   |         |         |        | 
|                                                                                                                                                     |                                                                             | Costs to terminate leases with Prime Hospitality
    Corporation          |          |         |        |      |           |        | 1,315   |   |         |         |        | 
|                                                                                                                                                     |                                                                             |                                                                           |          |         |         |      |           |        |         |   |         |        
|Operating expenses                                                                                                                                   |                                                                             |                                                                           | 986,056  |         |         |      | 972,506   |        |         |   | 165,523 |        
|                                                                                                                                                     |                                                                             |                                                                           |          |         |         |      |           |        |         |   |         |        
|Operating (loss) income                                                                                                                              |                                                                             |                                                                           | (2,603   | )       |         |      | 84,832    |        |         |   | 220,510 |        
|Interest expense, net                                                                                                                                |                                                                             |                                                                           | 136,429  |         |         |      | 122,472   |        |         |   | 117,613 |        
|                                                                                                                                                     |                                                                             |                                                                           |          |         |         |      |           |        |         |   |         |        
|(Loss) income before minority interests,
    (loss) gain on sale of assets, income taxes, discontinued
    operations, and extraordinary (loss) gain |                                                                             |                                                                           | (139,032 | )       |         |      | (37,640   | )      |         |   | 102,897 |        
|Minority interests                                                                                                                                   |                                                                             |                                                                           | 10,574   |         |         |      | 2,958     |        |         |   | (10,240 | )      
|(Loss) gain on sale of assets                                                                                                                        |                                                                             |                                                                           |         |         |         |      | (2,176    | )      |         |   | 3,495   |        
|Income tax benefit (expense)                                                                                                                         |                                                                             |                                                                           | 1,479    |         |         |      | 1,101     |        |         |   | (1,923  | )      
|                                                                                                                                                     |                                                                             |                                                                           |          |         |         |      |           |        |         |   |         |        
|(Loss) income from continuing operations                                                                                                             |                                                                             |                                                                           | (126,979 | )       |         |      | (35,757   | )      |         |   | 94,229  |        
|Discontinued operations:                                                                                                                             |                                                                             |                                                                           |          |         |         |      |           |        |         |   |         |        
|                                                                                                                                                     | (Loss) income from discontinued operations before
    tax (expense) benefit |                                                                           |          | (34,956 | )       |      |           | (4,413 | )       |   |         | 8,753   |        
|                                                                                                                                                     | Income tax benefit (expense)                                                |                                                                           |          | 687     |         |      |           | 121    |         |   |         | (175    | )      
|                                                                                                                                                     |                                                                             |                                                                           |          |         |         |      |           |        |         |   |         |        
|                                                                                                                                                     | (Loss) income from discontinued operations                                  |                                                                           |          | (34,269 | )       |      |           | (4,292 | )       |   |         | 8,578   |        
|                                                                                                                                                     |                                                                             |                                                                           |          |         |         |      |           |        |         |   |         |        
|(Loss) income before extraordinary
    (loss) gain                                                                                                   |                                                                             |                                                                           | (161,248 | )       |         |      | (40,049   | )      |         |   | 102,807 |        
|                                                                                                                                                     |                                                                             |                                                                           |          |         |         |      |           |        |         |   |         |        
|Extraordinary (loss) gain on early
    extinguishment of debt, net of tax effect of $(57) in 2001 and
    $62 in 2000                                |                                                                             |                                                                           |         |         |         |      | (2,713    | )      |         |   | 3,054   |        
|                                                                                                                                                     |                                                                             |                                                                           |          |         |         |      |           |        |         |   |         |        
|Net (loss) income                                                                                                                                    |                                                                             | $                                                                         | (161,248 | )       |         | $    | (42,762   | )      |         | $ | 105,861 |        
|                                                                                                                                                     |                                                                             |                                                                           |          |         |         |      |           |        |         |   |         |        

48



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##### 



|                    |          |                                            |                   |      |       |       |   |   |       |       |   |   |      |      | 
|------------------- | -------- | ------------------------------------------ | ----------------- | ---- | ----- | ----- | - | - | ----- | ----- | - | - | ---- | ---- | 
|                    |          | 2002                                       |                   | 2001 |       | 2000 
|                    |          |                                            |                   |      |       |      
|Earnings per share: |          |                                            |                   |      |       |       |   |   |       |       |   |  
|                    | Basic:   |                                            |                   |      |       |       |   |   |       |       |   |   |     
|                    |          | (Loss) income from continuing operations   |                   | $    | (2.83 | )     |   | $ | (0.81 | )     |   | $ | 2.02 |     
|                    |          | (Loss) income from discontinued operations |                   |      | (0.76 | )     |   |   | (0.10 | )     |   |   | 0.19 |     
|                    |          | Extraordinary (loss) gain                  |                   |      |      |       |   |   | (0.06 | )     |   |   | 0.07 |     
|                    |          |                                            |                   |      |       |       |   |   |       |       |   |  
|                    |          |                                            | Net (loss) income |      | $     | (3.59 | ) |   | $     | (0.97 | ) |   | $    | 2.28 | 
|                    |          |                                            |                   |      |       |       |   |   |       |       |   |  
|                    | Diluted: |                                            |                   |      |       |       |   |   |       |       |   |   |     
|                    |          | (Loss) income from continuing operations   |                   | $    | (2.83 | )     |   | $ | (0.81 | )     |   | $ | 1.97 |     
|                    |          | (Loss) income from discontinued operations |                   |      | (0.76 | )     |   |   | (0.10 | )     |   |   | 0.17 |     
|                    |          | Extraordinary (loss) gain                  |                   |      |      |       |   |   | (0.06 | )     |   |   | 0.06 |     
|                    |          |                                            |                   |      |       |       |   |   |       |       |   |  
|                    |          |                                            | Net (loss) income |      | $     | (3.59 | ) |   | $     | (0.97 | ) |   | $    | 2.20 | 
|                    |          |                                            |                   |      |       |       |   |   |       |       |   |  

See
accompanying notes to the consolidated financial statements.

49



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##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY


YEARS ENDED DECEMBER 31, 2002, 2001 AND
2000


(Dollars and shares in thousands)


|                                                                            |                      |              |        |          |  |            |     |             |  |             |        |             |  |        |         |              |  |       |           |   |  |   |          |   |  |   |         |   |  |   |         |   |  |   |           |          |  
|--------------------------------------------------------------------------- | -------------------- | ------------ | ------ | -------- |  | ---------- | --- | ----------- |  | ----------- | ------ | ----------- |  | ------ | ------- | ------------ |  | ----- | --------- | - |  | - | -------- | - |  | - | ------- | - |  | - | ------- | - |  | - | --------- | -------- | -
|                                                                            |                      |              |        |          |  |            |     |             |  |             |        |            
|                                                                            |                      | Common Stock |        |          |  |            |     |             |  |             |        |            
|                                                                            |                      |              |        |          |  |            |     | Accumulated |  |             |        |            
|                                                                            |                      |              |        |          |  |            |     |             |  | Other       |        |             |  |       
|                                                                            |                      | Issued       |        | Treasury |  | Additional |     | Retained    |  | Comprehen-  |        | Unearned    |  |       
|                                                                            |                      |              |        |          |  | Paid In    |     | Earnings    |  | sive Income |        | Stock-Based |  |       
|                                                                            |                      | Shares       |        | Amount   |  | Shares     |     | Amount      |  | Capital     |        | (Deficit)   |  | (Loss) |         | Compensation |  | Total
|                                                                            |                      |              |        |          |  |            |     |             |  |             |        |             |  |        |         |              |  |      
|Balance, January 1, 2000                                                    |                      |              | 47,664 |          |  | $          | 477 |             |  |             | (407   | )           |  | $      | (6,252  | )            |  | $     | 1,164,750 |   |  | $ | 30,168   |   |  | $ | (5,247  | ) |  | $ |        |   |  | $ | 1,183,896 |         
|Comprehensive income:                                                       |                      |              |        |          |  |            |     |             |  |             |        |             |  |        |         |              |  |       |           |   |  |   |          |   |  |   |         |   |  |   |         |   |  |   |           |         
|Net income                                                                  |                      |              |       |          |  |            |    |             |  |             |       |             |  |        |        |              |  |       |          |   |  |   | 105,861  |   |  |   |        |   |  |   |        |   |  |   | 105,861   |         
|Foreign currency translation Adjustment                                     |                      |              |       |          |  |            |    |             |  |             |       |             |  |        |        |              |  |       |          |   |  |   |         |   |  |   | (834    | ) |  |   |        |   |  |   | (834      | )       
|                                                                            |                      |              |        |          |  |            |     |             |  |             |        |             |  |        |         |              |  |       |           |   |  |   |          |   |  |   |         |   |  |   |         |   |  |   |           |         
|                                                                            | Comprehensive income |              |        |          |  |            |     |             |  |             |        |             |  |        |         |              |  |       |           |   |  |   |          |   |  |   |         |   |  |   |         |   |  |   |           | 105,027  |  
|                                                                            |                      |              |        |          |  |            |     |             |  |             |        |             |  |        |         |              |  |       |           |   |  |   |          |   |  |   |         |   |  |   |         |   |  |   |           |         
|Issuances of common stock                                                   |                      |              | 133    |          |  |            | 1   |             |  |             |       |             |  |        |        |              |  |       | 1,831     |   |  |   |         |   |  |   |        |   |  |   |        |   |  |   | 1,832     |         
|Issuances of restricted stock                                               |                      |              | 589    |          |  |            | 6   |             |  |             |       |             |  |        |        |              |  |       | 10,614    |   |  |   |         |   |  |   |        |   |  |   | (10,620 | ) |  |   |          |         
|Amortization of unearned Stock-based compensation                           |                      |              |       |          |  |            |    |             |  |             |       |             |  |        |        |              |  |       |          |   |  |   |         |   |  |   |        |   |  |   | 3,070   |   |  |   | 3,070     |         
|Shares repurchased                                                          |                      |              |       |          |  |            |    |             |  |             | (3,676 | )           |  |        | (66,102 | )            |  |       |          |   |  |   |         |   |  |   |        |   |  |   |        |   |  |   | (66,102   | )       
|Redemption of OP Units                                                      |                      |              | 77     |          |  |            | 1   |             |  |             |       |             |  |        |        |              |  |       | 23        |   |  |   |         |   |  |   |        |   |  |   |        |   |  |   | 24        |         
|Dividends declared                                                          |                      |              |       |          |  |            |    |             |  |             |       |             |  |        |        |              |  |       |          |   |  |   | (93,192  | ) |  |   |        |   |  |   |        |   |  |   | (93,192   | )       
|                                                                            |                      |              |        |          |  |            |     |             |  |             |        |             |  |        |         |              |  |       |           |   |  |   |          |   |  |   |         |   |  |   |         |   |  |   |           |         
|Balance, December 31, 2000                                                  |                      |              | 48,463 |          |  |            | 485 |             |  |             | (4,083 | )           |  |        | (72,354 | )            |  |       | 1,177,218 |   |  |   | 42,837   |   |  |   | (6,081  | ) |  |   | (7,550  | ) |  |   | 1,134,555 |         
|Comprehensive loss:                                                         |                      |              |        |          |  |            |     |             |  |             |        |             |  |        |         |              |  |       |           |   |  |   |          |   |  |   |         |   |  |   |         |   |  |   |           |         
|Net loss                                                                    |                      |              |       |          |  |            |    |             |  |             |       |             |  |        |        |              |  |       |          |   |  |   | (42,762  | ) |  |   |        |   |  |   |        |   |  |   | (42,762   | )       
|Foreign currency translation Adjustment                                     |                      |              |       |          |  |            |    |             |  |             |       |             |  |        |        |              |  |       |          |   |  |   |         |   |  |   | (1,176  | ) |  |   |        |   |  |   | (1,176    | )       
|Derivative instruments Transition adjustment                                |                      |              |       |          |  |            |    |             |  |             |       |             |  |        |        |              |  |       |          |   |  |   |         |   |  |   | (2,842  | ) |  |   |        |   |  |   | (2,842    | )       
|Change in valuation of hedging derivative
    instruments                   |                      |              |       |          |  |            |    |             |  |             |       |             |  |        |        |              |  |       |          |   |  |   |         |   |  |   | (2,404  | ) |  |   |        |   |  |   | (2,404    | )       
|                                                                            |                      |              |        |          |  |            |     |             |  |             |        |             |  |        |         |              |  |       |           |   |  |   |          |   |  |   |         |   |  |   |         |   |  |   |           |         
|                                                                            | Comprehensive loss   |              |        |          |  |            |     |             |  |             |        |             |  |        |         |              |  |       |           |   |  |   |          |   |  |   |         |   |  |   |         |   |  |   |           | (49,184  | )
|                                                                            |                      |              |        |          |  |            |     |             |  |             |        |             |  |        |         |              |  |       |           |   |  |   |          |   |  |   |         |   |  |   |         |   |  |   |           |         
|Issuances of common stock                                                   |                      |              | 48     |          |  |            |    |             |  |             |       |             |  |        |        |              |  |       | 847       |   |  |   |         |   |  |   |        |   |  |   |        |   |  |   | 847       |         
|Forfeiture of restricted stock                                              |                      |              |       |          |  |            |    |             |  |             |       |             |  |        |        |              |  |       | (28       | ) |  |   |         |   |  |   |        |   |  |   |        |   |  |   | (28       | )       
|Amortization of unearned Stock-based compensation                           |                      |              |       |          |  |            |    |             |  |             |       |             |  |        |        |              |  |       |          |   |  |   |         |   |  |   |        |   |  |   | 2,263   |   |  |   | 2,263     |         
|Shares repurchased                                                          |                      |              |       |          |  |            |    |             |  |             | (154   | )           |  |        | (3,002  | )            |  |       |          |   |  |   |         |   |  |   |        |   |  |   |        |   |  |   | (3,002    | )       
|Redemption of OP Units                                                      |                      |              | 250    |          |  |            | 2   |             |  |             |       |             |  |        |        |              |  |       | 5,426     |   |  |   |         |   |  |   |        |   |  |   |        |   |  |   | 5,428     |         
|Dividends declared                                                          |                      |              |       |          |  |            |    |             |  |             |       |             |  |        |        |              |  |       |          |   |  |   | (68,316  | ) |  |   |        |   |  |   |        |   |  |   | (68,316   | )       
|                                                                            |                      |              |        |          |  |            |     |             |  |             |        |             |  |        |         |              |  |       |           |   |  |   |          |   |  |   |         |   |  |   |         |   |  |   |           |         
|Balance, December 31, 2001                                                  |                      |              | 48,761 |          |  |            | 487 |             |  |             | (4,237 | )           |  |        | (75,356 | )            |  |       | 1,183,463 |   |  |   | (68,241  | ) |  |   | (12,503 | ) |  |   | (5,287  | ) |  |   | 1,022,563 |         
|Comprehensive loss:                                                         |                      |              |        |          |  |            |     |             |  |             |        |             |  |        |         |              |  |       |           |   |  |   |          |   |  |   |         |   |  |   |         |   |  |   |           |         
|Net loss                                                                    |                      |              |       |          |  |            |    |             |  |             |       |             |  |        |        |              |  |       |          |   |  |   | (161,248 | ) |  |   |        |   |  |   |        |   |  |   | (161,248  | )       
|Foreign currency translation Adjustment                                     |                      |              |       |          |  |            |    |             |  |             |       |             |  |        |        |              |  |       |          |   |  |   |         |   |  |   | 205     |   |  |   |        |   |  |   | 205       |         
|Change in valuation of hedging derivative
    instruments                   |                      |              |       |          |  |            |    |             |  |             |       |             |  |        |        |              |  |       |          |   |  |   |         |   |  |   | 511     |   |  |   |        |   |  |   | 511       |         
|Reclassification of loss on derivatives due to
    repayment of hedged debt |                      |              |       |          |  |            |    |             |  |             |       |             |  |        |        |              |  |       |          |   |  |   |         |   |  |   | 4,735   |   |  |   |        |   |  |   | 4,735     |         
|                                                                            |                      |              |        |          |  |            |     |             |  |             |        |             |  |        |         |              |  |       |           |   |  |   |          |   |  |   |         |   |  |   |         |   |  |   |           |         
|                                                                            | Comprehensive loss   |              |        |          |  |            |     |             |  |             |        |             |  |        |         |              |  |       |           |   |  |   |          |   |  |   |         |   |  |   |         |   |  |   |           | (155,797 | )
|                                                                            |                      |              |        |          |  |            |     |             |  |             |        |             |  |        |         |              |  |       |           |   |  |   |          |   |  |   |         |   |  |   |         |   |  |   |           |         
|Issuances of common stock                                                   |                      |              | 380    |          |  |            | 4   |             |  |             |       |             |  |        |        |              |  |       | 6,064     |   |  |   |         |   |  |   |        |   |  |   |        |   |  |   | 6,068     |         
|Amortization of unearned Stock-based compensation                           |                      |              |       |          |  |            |    |             |  |             |       |             |  |        |        |              |  |       |          |   |  |   |         |   |  |   |        |   |  |   | 1,649   |   |  |   | 1,649     |         
|Shares repurchased                                                          |                      |              |       |          |  |            |    |             |  |             | (87    | )           |  |        | (1,318  | )            |  |       |          |   |  |   |         |   |  |   |        |   |  |   |        |   |  |   | (1,318    | )       
|Redemption of OP Units                                                      |                      |              | 414    |          |  |            | 4   |             |  |             |       |             |  |        |        |              |  |       | 6,498     |   |  |   |         |   |  |   |        |   |  |   |        |   |  |   | 6,502     |         
|Dividends declared                                                          |                      |              |       |          |  |            |    |             |  |             |       |             |  |        |        |              |  |       |          |   |  |   | (1,381   | ) |  |   |        |   |  |   |        |   |  |   | (1,381    | )       
|                                                                            |                      |              |        |          |  |            |     |             |  |             |        |             |  |        |         |              |  |       |           |   |  |   |          |   |  |   |         |   |  |   |         |   |  |   |           |         
|Balance, December 31, 2002                                                  |                      |              | 49,555 |          |  | $          | 495 |             |  |             | (4,324 | )           |  | $      | (76,674 | )            |  | $     | 1,196,025 |   |  | $ | (230,870 | ) |  | $ | (7,052  | ) |  | $ | (3,638  | ) |  | $ | 878,286   |         
|                                                                            |                      |              |        |          |  |            |     |             |  |             |        |             |  |        |         |              |  |       |           |   |  |   |          |   |  |   |         |   |  |   |         |   |  |   |           |         

See accompanying notes to the consolidated
financial statements.

50



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##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS


YEARS ENDED DECEMBER 31, 2002, 2001 AND
2000


(Dollars in thousands)


|                                                                 |                                                                                              |                                                                                  |                                                                                |          |         |        |         |          |         |        |          |          |         |         |  
|---------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | -------- | ------- | ------ | ------- | -------- | ------- | ------ | -------- | -------- | ------- | ------- | -
|                                                                 |                                                                                              | 2002                                                                             |                                                                                | 2001     |         | 2000  
|                                                                 |                                                                                              |                                                                                  |                                                                                |          |         |       
|Operating activities:                                            |                                                                                              |                                                                                  |                                                                                |          |         |        |         |          |         |        |          |         
|                                                                 | Net (loss) income                                                                            |                                                                                  | $                                                                              | (161,248 | )       |        | $       | (42,762  | )       |        | $        | 105,861  |        
|                                                                 | Adjustments to reconcile net (loss) income
    to net cash provided by operating activities: |                                                                                  |                                                                                |          |         |        |         |          |         |        |          |          |        
|                                                                 |                                                                                              | Depreciation and amortization                                                    |                                                                                |          | 123,458 |        |         |          | 117,732 |        |          |          | 111,947 |        
|                                                                 |                                                                                              | Loss (gain) on sale of assets, before tax
    effect                             |                                                                                |          | 21,197  |        |         |          | 2,176   |        |          |          | (3,495  | )      
|                                                                 |                                                                                              | Extraordinary loss (gain) on early
    extinguishment of debt, before tax effect |                                                                                |          |        |        |         |          | 2,770   |        |          |          | (3,116  | )      
|                                                                 |                                                                                              | Loss on asset impairments                                                        |                                                                                |          | 78,732  |        |         |          | 43,582  |        |          |          |        |        
|                                                                 |                                                                                              | Write-down of note receivable with Interstate
    Hotels & Resorts               |                                                                                |          | 14,517  |        |         |          |        |        |          |          |        |        
|                                                                 |                                                                                              | Write-off of deferred financing costs                                            |                                                                                |          | 3,144   |        |         |          |        |        |          |          |        |        
|                                                                 |                                                                                              | Loss on fair value of non-hedging derivatives                                    |                                                                                |          | 4,735   |        |         |          | 6,666   |        |          |          |        |        
|                                                                 |                                                                                              | Write-down of investment in STS Hotel Net                                        |                                                                                |          |        |        |         |          | 2,112   |        |          |          |        |        
|                                                                 |                                                                                              | Minority interests                                                               |                                                                                |          | (10,574 | )      |         |          | (2,958  | )      |          |          | 10,240  |        
|                                                                 |                                                                                              | Amortization of unearned stock-based compensation                                |                                                                                |          | 4,543   |        |         |          | 2,263   |        |          |          | 3,070   |        
|                                                                 |                                                                                              | Unrealized loss on interest rate swaps recognized
    in net loss                |                                                                                |          | (7,612  | )      |         |          |        |        |          |          |        |        
|                                                                 |                                                                                              | Deferred income taxes                                                            |                                                                                |          | (2,606  | )      |         |          | (1,109  | )      |          |          | 795     |        
|                                                                 |                                                                                              | Changes in operating assets and liabilities:                                     |                                                                                |          |         |        |         |          |         |        |          |          |         |        
|                                                                 |                                                                                              |                                                                                  | Accounts receivable                                                            |          |         | (9,650 | )       |          |         | 2,855  |          |          |         | (1,505  | )
|                                                                 |                                                                                              |                                                                                  | Prepaid expenses and other assets                                              |          |         | (3,401 | )       |          |         | (2,039 | )        |          |         | 6,370   |  
|                                                                 |                                                                                              |                                                                                  | Due from/to Interstate Hotels & Resorts                                        |          |         | 6,757  |         |          |         | 13,344 |          |          |         | (10,745 | )
|                                                                 |                                                                                              |                                                                                  | Accounts payable, accrued expenses, accrued
    interest and other liabilities |          |         | (5,252 | )       |          |         | 5,503  |          |          |         | 4,615   |  
|                                                                 |                                                                                              |                                                                                  |                                                                                |          |         |        |         |          |         |        |          |         
|Net cash provided by operating activities                        |                                                                                              |                                                                                  | 56,740                                                                         |          |         |        | 150,135 |          |         |        | 224,037  |         
|                                                                 |                                                                                              |                                                                                  |                                                                                |          |         |        |         |          |         |        |          |         
|Investing activities:                                            |                                                                                              |                                                                                  |                                                                                |          |         |        |         |          |         |        |          |         
|                                                                 | Investments in hotel properties                                                              |                                                                                  |                                                                                | (47,347  | )       |        |         | (44,476  | )       |        |          | (90,703  | )      
|                                                                 | Proceeds from sales of assets                                                                |                                                                                  |                                                                                | 60,650   |         |        |         | 9,715    |         |        |          | 24,148   |        
|                                                                 | Investments in and advances to affiliates, net                                               |                                                                                  |                                                                                |         |         |        |         |         |         |        |          | (2,111   | )      
|                                                                 | Hotel operating cash received in lease conversions                                           |                                                                                  |                                                                                |         |         |        |         | 3,257    |         |        |          |         |        
|                                                                 | Net (advances to) payments from Interstate Hotels
    & Resorts                              |                                                                                  |                                                                                | (7,500   | )       |        |         | (36,000  | )       |        |          | 57,110   |        
|                                                                 | Decrease (increase) in restricted cash                                                       |                                                                                  |                                                                                | 939      |         |        |         | (1,386   | )       |        |          | (2,730   | )      
|                                                                 |                                                                                              |                                                                                  |                                                                                |          |         |        |         |          |         |        |          |         
|Net cash provided by (used in) investing
    activities          |                                                                                              |                                                                                  | 6,742                                                                          |          |         |        | (68,890 | )        |         |        | (14,286  | )       
|                                                                 |                                                                                              |                                                                                  |                                                                                |          |         |        |         |          |         |        |          |         
|Financing activities:                                            |                                                                                              |                                                                                  |                                                                                |          |         |        |         |          |         |        |          |         
|                                                                 | Deferred financing costs                                                                     |                                                                                  |                                                                                | (4,806   | )       |        |         | (18,927  | )       |        |          | (1,615   | )      
|                                                                 | Proceeds from issuance of long-term debt                                                     |                                                                                  |                                                                                | 305,258  |         |        |         | 933,250  |         |        |          | 179,388  |        
|                                                                 | Principal payments on long-term debt                                                         |                                                                                  |                                                                                | (352,466 | )       |        |         | (871,467 | )       |        |          | (214,724 | )      
|                                                                 | Proceeds from issuances of common stock                                                      |                                                                                  |                                                                                | 3,153    |         |        |         | 847      |         |        |          | 1,741    |        
|                                                                 | Purchases of OP units                                                                        |                                                                                  |                                                                                |         |         |        |         | (1,513   | )       |        |          | (7,535   | )      
|                                                                 | Purchases of common stock                                                                    |                                                                                  |                                                                                | (1,318   | )       |        |         | (3,002   | )       |        |          | (66,102  | )      
|                                                                 | Dividends paid to stockholders                                                               |                                                                                  |                                                                                | (1,846   | )       |        |         | (89,470  | )       |        |          | (94,062  | )      
|                                                                 | Distributions to minority investors                                                          |                                                                                  |                                                                                | (1,214   | )       |        |         | (8,069   | )       |        |          | (9,212   | )      
|                                                                 |                                                                                              |                                                                                  |                                                                                |          |         |        |         |          |         |        |          |         
|Net cash used in financing activities                            |                                                                                              |                                                                                  | (53,239                                                                        | )        |         |        | (58,351 | )        |         |        | (212,121 | )       
|                                                                 |                                                                                              |                                                                                  |                                                                                |          |         |        |         |          |         |        |          |         
|Effect of exchange rate changes on cash and cash
    equivalents |                                                                                              |                                                                                  | 205                                                                            |          |         |        | 304     |          |         |        | 64       |         
|Net increase (decrease) in cash and cash
    equivalents         |                                                                                              |                                                                                  | 10,448                                                                         |          |         |        | 23,198  |          |         |        | (2,306   | )       
|Cash and cash equivalents, beginning of year                     |                                                                                              |                                                                                  | 23,448                                                                         |          |         |        | 250     |          |         |        | 2,556    |         
|                                                                 |                                                                                              |                                                                                  |                                                                                |          |         |        |         |          |         |        |          |         
|Cash and cash equivalents, end of year                           |                                                                                              | $                                                                                | 33,896                                                                         |          |         | $      | 23,448  |          |         | $      | 250      |         
|                                                                 |                                                                                              |                                                                                  |                                                                                |          |         |        |         |          |         |        |          |         

See
accompanying notes to the consolidated financial statements.

51



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##### 



MERISTAR HOSPITALITY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


DECEMBER 31, 2002, 2001 AND 2000


(Amounts in thousands, except per share and
share amounts)


1.          Organization

MeriStar Hospitality Corporation is a real estate
investment trust, or REIT. We own a portfolio of upscale,
full-service hotels and resorts in the United States and Canada.
Our portfolio is diversified geographically and by franchise and
brand affiliations. As of December 31, 2002, we owned
107 hotels with 27,581 rooms, all of which were leased by
our taxable subsidiaries and managed by Interstate Hotels &
Resorts, Inc. (Interstate Hotels). Interstate Hotels
was created on July 31, 2002 through the merger of MeriStar
Hotels & Resorts, Inc. and Interstate Hotels
Corporation.

We were created on August 3, 1998, when
American General Hospitality Corporation, a corporation
operating as a real estate investment trust, merged with CapStar
Hotel Company. In connection with this merger, we created
MeriStar Hotels & Resorts, Inc. (now part of Interstate
Hotels) to be the lessee and manager of nearly all of our hotels.

On January 1, 2001, changes to the federal
tax laws governing REITs became effective. Those changes are
commonly known as the REIT Modernization Act, or RMA. As
permitted by the RMA, we formed a number of wholly-owned taxable
subsidiaries to lease our real property. The RMA prohibits our
taxable subsidiaries from engaging in the following activities:



| |   |                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Managing the properties they lease (our taxable
    subsidiaries must enter into an arms-length
    management agreement with an independent third-party manager
    actively involved in the trade or business of hotel management
    and manages properties on behalf of other owners);
|
| |  | Leasing a property that contains gambling
    operations; and                                                                                                                                                                                                                                
|
| |  | Owning a brand or franchise.                                                                                                                                                                                                                                                                 

Our taxable subsidiaries are parties to
management agreements with a subsidiary of Interstate Hotels to
manage all of our hotels. Under these management agreements, the
taxable subsidiaries pay a management fee to Interstate Hotels
for each property. The taxable subsidiaries in turn make rental
payments to us under the participating leases. Under the
management agreements, the base management fee is 2.5% of total
hotel revenue, plus incentive payments based on meeting
performance thresholds that could total up to 1.5% of total
hotel revenue. All of the agreements, except for three
agreements with terms that renew annually, have an initial term
of 10 years with three renewal periods of five years each
at the option of Interstate Hotels, subject to some exceptions.

2.          Summary
of Significant Accounting Policies

Principles of Consolidation.Our consolidated financial statements
include the accounts of all wholly-owned and majority-owned
subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation.

We use the equity method to account for
investments in unconsolidated joint ventures and affiliated
companies in which we hold a voting interest of 50% or less and
exercise significant influence. We use the cost method to
account for our investments in entities in which we do not have
the ability to exercise significant influence.

Use of Estimates.Preparing financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ significantly from these estimates.

52



---



##### 



Investments in Hotel Properties.We record investments in hotel
properties at cost (the allocated purchase price for hotel
acquisitions) or at fair value at the time of contribution (for
contributed property). We depreciate buildings using the
straight-line method over a life of 40 years. We depreciate
furniture, fixtures and equipment using the straight-line method
over lives ranging from five to seven years. For the years ended
December 31, 2002, 2001 and 2000, we capitalized interest
of $3,993, $6,098, and $8,613, respectively.

Held for Sale Properties.We classify the properties we are
actively marketing as held for sale once all of the following
conditions are met:



| |   |                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our board has approved the sale,                                                                                                                                           
|
| |  | We have a fully executed agreement with a
    qualified buyer which provides for no significant outstanding or
    continuing obligations with the property after sale, and
|
| |  | We have a significant non-refundable deposit.                                                                                                                              

We carry properties held for sale at the lower of
their carrying values or estimated fair values less costs to
sell. We cease depreciation at the time the asset is classified
as held for sale. If material to our total portfolio, we
segregate the held for sale properties on our consolidated
balance sheet.

Impairment or Disposal of Long-Lived Assets.We adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, on January 1, 2002. SFAS No. 144
requires the current and prior period operating results of any
asset that has been classified as held for sale or has been
disposed of on or after January 1, 2002 and where we have
no continuing involvement, including any gain or loss
recognized, to be recorded as discontinued operations.

The provisions of SFAS No. 144 also require
that whenever events or changes in circumstances indicate that
the carrying value of a long-lived asset (including property and
equipment and all intangibles) may be impaired that an analysis
be performed to determine the recoverability of the assets
carrying value. We make estimates of the undiscounted cash flows
from the expected future operations of the asset, or in the case
of an asset actively being marketed but not yet held for sale,
we look at a range of expected sales prices. If the analysis
indicates that the carrying value is not recoverable from these
estimates of cash flows, we write down the asset to estimated
fair value and recognize an impairment loss. Any impairment
losses we recognize on assets held for use are recorded as
operating expenses. We record any impairment losses on assets
held for sale as a component of discontinued operations.

Intangible Assets.Intangible assets consist primarily of
deferred financing fees. We amortize these deferred fees on a
straight-line basis (which approximates the interest method)
over the lives of the related borrowings.

Cash Equivalents and Restricted Cash.We consider all highly liquid
investments with an original maturity of three months or less to
be cash equivalents. Restricted cash represents amounts held in
escrow in accordance with the requirements of certain of our
credit facilities.

Income Taxes.We
account for income taxes in accordance with the provisions of
SFAS No. 109, Accounting for Income Taxes.
Deferred income taxes reflect the tax consequences on future
years of differences between the tax and financial reporting
bases of assets and liabilities.

In conjunction with the merger on August 3,
1998, we became a REIT and are no longer subject to federal
income taxes, provided that we comply with various requirements
necessary to maintain REIT status. REITs are subject to state
and local taxes in certain jurisdictions.

Revenue Recognition.Prior to January 1, 2001, we
earned participating lease revenue from the lease of our hotel
operating properties. Participating lease revenue represented
lease payments from lessees pursuant to participating lease
agreements. Effective January 1, 2001, in conjunction with
the RMA, we began to earn room, food and beverage, and other
revenue through the operations of our hospitality properties. We
did earn participating lease revenues from eight hotels in 2001.
We recognize hotel operational revenues as hotel services are
delivered. Office, retail and parking rentals are generally
recognized on a straight-line basis over the terms of the
respective leases.

53



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##### 



Derivative Instruments and Hedging Activities.We adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 137 and 138, on
January 1, 2001. SFAS No. 133 requires an entity to
recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair value.
Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income based
on whether the derivative has been designated as a hedge.

Our policy is to manage interest rates through
the use of a combination of fixed and variable rate debt. Our
interest rate risk management objective is to limit the impact
of interest rate changes on earnings and cash flows. We only
enter into derivative or interest rate transactions for cash
flow hedging purposes.

Stock-Based Compensation.We apply the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, in accounting for our stock option
compensation programs. As we grant compensation awards at market
value, no compensation cost has been recognized. For our other
equity-based compensation plans, we record the fair value of the
cost at the time of issuance and recognize compensation expense
over the respective vesting period. We will adopt the
recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, as amended in December 2002
by SFAS No. 148, on January 1, 2003 for our stock
option compensation programs. As permitted by SFAS No. 148,
we will elect to apply the provisions prospectively, which will
include recognizing compensation expense for only those stock
options issued in 2003 and forward. We do not expect the
adoption of the recognition provisions to have a material effect
on our results of operations or financial condition. We have
adopted the disclosure provisions of SFAS No. 148 as of
December 31, 2002.

Pro forma information regarding net income and
earnings per share is required by SFAS No. 123, and has
been determined as if we had accounted for our employee stock
options under the fair value method. We estimated the fair value
for these options at the date of grant using a Black-Scholes
option pricing model with the following weighted average
assumptions:

|                               |  |      |            |      |  |      |            |  |  |   |            | 
|------------------------------ |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  | - | ---------- | 
|                               |  | 2002 |            | 2001 |  | 2000
|                               |  |      |            |      |  |     
|Risk-free interest rate        |  |      | 2.1%       |      |  |      | 3.6%       |  |  |   | 6.71%      | 
|Dividend rate                  |  |      |           |      |  | $    | 1.525      |  |  | $ | 2.02       | 
|Volatility factor              |  |      | 0.04       |      |  |      | 0.57       |  |  |   | 0.27       | 
|Weighted average expected life |  |      | 3.77 years |      |  |      | 3.10 years |  |  |   | 3.06 years | 

Had compensation cost for stock options been
determined based on the fair value at the grant date for awards
under our plans, our net (loss) income and per share amounts
would have been reduced to the pro forma amounts indicated as
follows:

|                               |                                                                                                                                                     |                         |          |        |   |      |         |        |   |   |         |        |  
|------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | -------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------ | -
|                               |                                                                                                                                                     |                        
|                               |                                                                                                                                                     | Year Ended December 31,
|                               |                                                                                                                                                     | 2002                    |          | 2001   |   | 2000
|                               |                                                                                                                                                     |                         |          |        |   |     
|Net (loss) income, as reported |                                                                                                                                                     | $                       | (161,248 | )      |   | $    | (42,762 | )      |   | $ | 105,861 |       
|                               | Add: Stock-based employee compensation expense
    included in reported net income, net of related tax effect                                       |                         |          | 4,692  |   |      |         | 4,434  |   |   |         | 1,958  |  
|                               | Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                         |          | (5,526 | ) |      |         | (9,098 | ) |   |         | (5,381 | )
|                               |                                                                                                                                                     |                         |          |        |   |      |         |        |   |   |         |       
|Net (loss) income, pro forma   |                                                                                                                                                     | $                       | (162,082 | )      |   | $    | (47,426 | )      |   | $ | 102,438 |       
|                               |                                                                                                                                                     |                         |          |        |   |      |         |        |   |   |         |       

54



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##### 



|                                               |                      |                         |      |       |   |      |      |       |   |   |      |      | 
|---------------------------------------------- | -------------------- | ----------------------- | ---- | ----- | - | ---- | ---- | ----- | - | - | ---- | ---- | 
|                                               |                      |                        
|                                               |                      | Year Ended December 31,
|                                               |                      | 2002                    |      | 2001  |   | 2000
|                                               |                      |                         |      |       |   |     
|Earnings per share:                            |                      |                         |      |       |   |      |      |       |   |   |      |     
|                                               | Basic, as reported   |                         | $    | (3.59 | ) |      | $    | (0.97 | ) |   | $    | 2.28 | 
|                                               | Basic, pro forma     |                         | $    | (3.61 | ) |      | $    | (1.08 | ) |   | $    | 2.20 | 
|                                               |                      |                         |      |       |   |      |      |       |   |   |      |     
|                                               | Diluted, as reported |                         | $    | (3.59 | ) |      | $    | (0.97 | ) |   | $    | 2.20 | 
|                                               | Diluted, pro forma   |                         | $    | (3.61 | ) |      | $    | (1.08 | ) |   | $    | 2.13 | 
|                                               |                      |                         |      |       |   |      |      |       |   |   |      |     
|Weighted average fair value of options granted |                      | $                       | 0.72 |       |   | $    | 6.59 |       |   | $ | 3.75 |     
|                                               |                      |                         |      |       |   |      |      |       |   |   |      |     

The effects of applying SFAS No. 123 for
disclosing pro forma compensation costs may not be
representative of the actual effects on reported net income and
earnings per share in future years.

Foreign Currency Translation.We maintain the results of operations
for our four Canadian hotels in Canadian dollars and translate
those results to U.S. dollars using the average exchange rates
for each period. We translate assets and liabilities using the
exchange rate in effect at the balance sheet date. We reflect
any resulting translation adjustments in accumulated other
comprehensive income (loss).

New Accounting Pronouncements.The Financial Accounting Standards
Board (FASB) issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51,
Consolidated Financial Statements, in January 2003.
The interpretation addresses how to identify variable interest
entities and when to consolidate those entities. Consolidation
of variable interest entities is required by the primary
beneficiary. FIN 46 applies immediately to variable
interest entities created after January 31, 2003 and no
later than the beginning of the first interim or annual
reporting period beginning after June 15, 2003 for
interests in variable interest entities that were acquired prior
to February 1, 2003. We do not expect the adoption of this
interpretation to have a material effect on our results of
operations or financial condition.

The FASB issued FIN 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57, and 107 and
rescission of FASB Interpretation No. 34, in November 2002.
For 2002, the interpretation requires disclosures, which we have
included in Footnote 12, Commitments and
Contingencies. Beginning in 2003, the interpretation
requires recognition of liabilities at their fair value for
newly issued guarantees. We do not expect the adoption of the
recognition provisions of this interpretation to have a material
effect on our results of operations or financial condition.

The FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4 (Reporting Gains
and Losses from Extinguishment of Debt), No. 44 (Accounting
for Intangible Assets of Motor Carriers) and No. 64
(Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements), Amendment of SFAS No. 13 (Accounting for
Leases), Technical Corrections, in April 2002. The
rescission of SFAS No. 4 and No. 64 requires that all
gains and losses from extinguishments of debt be classified as
extraordinary only if the gains and losses are from unusual or
infrequent transactions. It also requires prior period gains or
losses that are not from unusual or infrequent transactions to
be reclassified as an operational expense. The amendment to SFAS
No. 13 requires that if a capital lease is modified in such
a way that the change in terms creates a new agreement
classified as an operating lease, then the original capital
lease asset and obligation be removed and a gain or loss be
recognized for the difference. The new lease will be accounted
for as any other operating lease. SFAS No. 44 does not
apply to us. We will adopt the provisions of this statement
beginning on January 1, 2003. Our prior period
extraordinary items will be reclassified as operational expenses
during 2003, and in the future we expect any gains and losses
from the extinguishment of our debt to be classified as
operational. We do not expect the adoption of the other
provisions to have a material effect on our results of
operations or financial condition.

Classification.We
have reclassified certain prior year amounts to conform to the
current year presentation.

55



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##### 



3.          Investments
in Hotel Properties

Investments in hotel properties consisted of the
following:

|                                  |  |              |           |      |  |   |           | 
|--------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                                  |  |             
|                                  |  | December 31,
|                                  |  |             
|                                  |  | 2002         |           | 2001
|                                  |  |              |           |     
|Land                              |  | $            | 288,611   |      |  | $ | 310,921   | 
|Buildings                         |  |              | 2,371,861 |      |  |   | 2,473,651 | 
|Furniture, fixtures and equipment |  |              | 361,197   |      |  |   | 354,392   | 
|Construction-in-progress          |  |              | 35,989    |      |  |   | 44,713    | 
|                                  |  |              |           |      |  |   |           | 
|                                  |  | $            | 3,057,658 |      |  | $ | 3,183,677 | 
|                                  |  |              |           |      |  |   |           | 

Due to changes in economic conditions and our
deleveraging strategy, which includes the potential sales of
non-core assets, we performed an analysis to determine the
recoverability of each of our hotel properties during both the
years ended December 31, 2002 and 2001. We recognized an
impairment loss of $78,732 during the fourth quarter of 2002. A
portion of this loss, $15,368, related to an asset classified as
held for sale at December 31, 2002, and is therefore
included in loss from discontinued operations in the
accompanying consolidated statements of operations. We
recognized an impairment loss of $43,582 during the fourth
quarter of 2001. Certain of these assets were sold during 2002,
and as required by SFAS No. 144, the associated impairment
loss of $11,247 recognized in 2001, as well as the assets
related operations for all periods presented, have been
reclassified to loss from discontinued operations in the
accompanying consolidated statements of operations.

4.          Investments
in and Advances to Affiliates

We have ownership interests in certain
unconsolidated joint ventures and affiliated companies.

In conjunction with the lease assignments from
MeriStar Hotels (now Interstate Hotels) on January 1, 2001,
we acquired an ownership interest in Ballston Parking Associates
for $1,629. We account for this investment using the cost method.

In 1999, we invested $40,000 in MeriStar
Investment Partners, LP (MIP), a joint venture
established to acquire upscale, full-service hotels. Our
investment is in the form of a preferred partnership interest,
in which we receive a 16% preferred return on our investment. We
account for this investment using the cost method. As of
December 31, 2002, cumulative preferred returns of $10,808
were due from MIP. We have included this receivable in accounts
receivable on the accompanying consolidated balance sheet. Due
to restrictions placed on MIP by its existing bank covenants,
MIP was required to use excess cash flow for principal
amortization rather than distributions to equity holders. We
evaluate the collectibility of our preferred return based on the
underlying value of the hotel properties and our preference to
distributions. On March 27, 2003, MIP completed a
refinancing of its long-term debt, which allows the release of
excess cash flow to pay our preferred return currently. We
expect to begin receiving distributions representing payments of
our current return during the second quarter of 2003. In the
future, we expect that our cumulative unpaid preferred returns
will be paid from excess cash flow above our current return and
from potential disposition proceeds in excess of debt allocated
to individual assets. Given the current economic environment, we
do not expect the partnerships operations to provide
adequate cash flow in the near term for significant repayments
of our cumulative unpaid preferred returns.

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##### 



5.          Long-Term
Debt

Long-term debt consisted of the following:

|                           |  |              |           |      |  |   |           |  
|-------------------------- |  | ------------ | --------- | ---- |  | - | --------- | -
|                           |  |             
|                           |  | December 31,
|                           |  |             
|                           |  | 2002         |           | 2001
|                           |  |              |           |     
|Senior unsecured notes     |  | $            | 950,000   |      |  | $ | 750,000   |  
|Credit facility            |  |              |          |      |  |   | 224,000   |  
|Secured facility           |  |              | 314,626   |      |  |   | 319,788   |  
|Senior subordinated notes  |  |              | 205,000   |      |  |   | 205,000   |  
|Convertible notes          |  |              | 154,300   |      |  |   | 154,300   |  
|Mortgage debt and other    |  |              | 38,030    |      |  |   | 52,335    |  
|Unamortized issue discount |  |              | (7,854    | )    |  |   | (5,289    | )
|                           |  |              |           |      |  |   |           |  
|                           |  | $            | 1,654,102 |      |  | $ | 1,700,134 |  
|                           |  |              |           |      |  |   |           |  

Aggregate future maturities as of
December 31, 2002 were as follows:

|           |  |   |           | 
|---------- |  | - | --------- | 
|2003       |  | $ | 8,263     | 
|2004       |  |   | 170,669   | 
|2005       |  |   | 8,666     | 
|2006       |  |   | 9,407     | 
|2007       |  |   | 213,417   | 
|Thereafter |  |   | 1,243,680 | 
|           |  |   |           | 
|           |  | $ | 1,654,102 | 
|           |  |   |           | 

Senior unsecured notes.In February 2002, we issued $200,000
($196,250, net of discount) aggregate principal amount of 9.13%
senior unsecured notes due 2011. We used the proceeds from the
issuance of these notes to repay approximately $195,000 of the
outstanding balance under our previous revolving credit facility.

In December 2001, we issued $250,000 aggregate
principal amount of 10.5% senior notes due June 2009. The net
proceeds from the sale of $248,420 were used to repay amounts
outstanding under our previous credit facility. The repayments
of term loans under the credit facility resulted in an
extraordinary loss of $1,527 ($1,489, net of tax) from the
write-off of deferred financing costs related to the amounts
repaid.

In January 2001, we issued $300,000 aggregate
principal amount of 9.0% senior notes due 2008 and $200,000 of
9.13% senior notes due 2011. The net proceeds from the sale of
$492,000 were used to repay amounts outstanding under our
previous credit facility, and to make payments to terminate
certain swap agreements that hedged variable rate loans that
were repaid. The repayments of term loans under the credit
facility resulted in an extraordinary loss of $1,243 ($1,224,
net of tax) from the write-off of deferred financing costs
related to the amounts repaid.

The total $950,000 notes are unsecured
obligations of certain subsidiaries of ours, and we guarantee
payment of principal and interest on the notes. These notes
contain various restrictive incurrence covenants, limiting our
ability to transact certain business activities, including
additional borrowings, if specific financial thresholds are not
achieved. One of those thresholds is maintaining a 2 to 1 fixed
charge coverage ratio (as defined in the indentures, fixed
charges only include interest on debt obligations and preferred
equity). As of December 31, 2002, our fixed charge coverage
ratio was 1.6 to 1, and therefore we were not able to enter into
certain transactions. These limitations include the repurchase
of our stock, the issuance of any preferred stock, the payment
of dividends (unless required to maintain our status as a REIT),
the incurrence of any additional debt, or the repayment of
outstanding debt before it comes due. There are certain
exceptions, or carve-out, features with respect to
the incurrence of additional debt and early repayment of debt
features in the indentures.

57



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##### 



Credit facility.In
conjunction with the merger between CapStar Hotel Company and
American General Hospitality Corporation in 1998, we entered
into a $1,000,000 senior secured credit facility. The credit
facility was structured as a $300,000, five-year term loan
facility; a $200,000, five-and-a-half year term loan facility;
and a $500,000, three-year revolving credit facility with two,
one-year optional extensions. As described above, we used the
proceeds from the sales of the senior unsecured notes issued in
2001 to repay amounts outstanding under the two term loans. The
credit facility was secured by our common stock and our general
partnership, limited partnership and limited liability ownership
interests in our subsidiaries. The interest rate on the term
loans and revolving facility ranged from 100 to 200 basis points
over the 30-day London Interbank Offered Rate, or LIBOR,
depending on certain financial performance covenants and
long-term senior unsecured debt ratings.

In December 2001, we amended the terms of this
credit facility, permanently relaxing the financial covenants
and extending the maturity date of the revolver from February
2002 to February 2003. We incurred $4,382 of financing costs
related to the amended agreement.

In February 2002, we amended the revolving credit
facility, reducing the revolving commitments to $310,000. In
March 2002, we reduced the borrowing capacity again from
$310,000 to $150,000. We recognized a $1,529 loss due to the
write-off of deferred financing costs related to this reduction
in our borrowing capacity.

New credit facility.On October 29, 2002, we entered into a new three-year
$100,000 senior revolving credit facility, secured by the equity
interest in most of our subsidiaries. The initial interest rate
is LIBOR plus 388 basis points. We terminated our previous
credit facility with this new revolving credit facility. We also
wrote off $1,615 of deferred financing fees related to the
termination. As of December 31, 2002, there were no
outstanding borrowings on this facility.

This facility contains customary compliance
measures we must meet in order to borrow on the facility, which
became more stringent on a quarterly basis beginning in the
first quarter of 2003. The sale of two hotels during the fourth
quarter of 2002 and one in January 2003, as well as the
settlement of our note receivable with Interstate Hotels,
impacted our leverage covenant due to the loss of trailing
12-month EBITDA (as defined in the credit agreement) on a pro
forma basis. While we cannot currently borrow under the
facility, we have obtained a waiver of compliance with this
leverage covenant from our lending group through May 20,
2003. We do not expect this compliance measurement to have a
material impact on our operations as we do not anticipate the
need to draw on this facility during 2003. We intend to either
negotiate an amendment to this facility to maintain our future
compliance until such time as we apply our unrestricted cash to
reduce our leverage, or we may terminate the facility.

Secured facility.In
1999, we completed a $330,000 10-year non-recourse financing
secured by a portfolio of 19 hotels. The loan bears a fixed
interest rate of 8.01% and matures in 2009. We used the majority
of the net proceeds to repay amounts outstanding under our prior
credit facilities.

Our secured facility contains standard provisions
that require the servicer to maintain in escrow cash balances
for certain items such as property taxes and funding of capital
expenditures. In addition, the facility contains a provision
that requires our mortgage servicer to retain in escrow the
excess cash from the encumbered hotels after payment of debt
service (Excess Cash), if net hotel operating income
after payment of FF&E reserves and franchise fees
(NOI) for the trailing twelve months declines below
$57,000. This provision was triggered in October 2002 and will
be effective until the hotels generate the minimum cash flow
required for two consecutive quarters, at which time the cash
being held in escrow will be released to us. Approximately
$4,500 of cash was held in escrow under this provision as of
December 31, 2002. Additional amounts continue to be held
in escrow. The security agreement permits us to substitute
unleveraged properties into the portfolio in place of existing
properties in order to increase the NOI to a level at which the
portfolio will meet this requirement. We have begun discussions
with the servicer regarding this substitution and expect to be
able to do so, thus resulting in the release of any Excess Cash
held in escrow. Implementation of this solution is subject to
rating agency approval and qualification for Real Estate
Mortgage Investment Conduit purposes. There can be no assurance
that the hotels will reach the minimum cash flow in the future.

58



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##### 



Senior subordinated notes.We completed in 1997 the offering of
$150,000 aggregate principal amount ($149,799, net of discount)
of 8.75% senior subordinated notes due 2007. The related
indenture contains various restrictive covenants, which are
similar to those in our senior unsecured notes. These notes are
unsecured obligations and provide for semi-annual payments of
interest each February 15 and August 15.

In 1999, we issued $55,000 aggregate principal
amount ($51,906, net of discount) of 8.75% senior subordinated
notes due 2007 under an indenture substantially similar to that
governing the 1997 notes. The net proceeds of $51,219 were used
to repay amounts outstanding under our previous credit facility
and to invest in MIP (as discussed in footnote 4). These
notes are unsecured obligations and provide for semi-annual
payments of interest each February 15 and August 15.

Convertible notes.We completed in 1997 the offering of
$172,500 aggregate principal amount of 4.75% convertible
subordinated notes due 2004, generating net proceeds of
$167,581, which were used to repay amounts outstanding under our
prior credit facility and to finance certain hotel acquisitions.
The convertible notes are unsecured obligations and provide for
semi-annual payments of interest on April 15 and
October 15. During 2000, we repurchased $18,200 of these
convertible notes at a discount, resulting in an extraordinary
gain of $3,116 ($3,054, net of tax effect).

Mortgage debt.In
connection with the merger between CapStar Hotel Company and
American General Hospitality Corporation in 1998, we assumed
mortgage debt secured by seven hotels. We repaid two of the
mortgages totaling $11,943 during 2002 and one in 2001 for
$3,978. The mortgage debt matures between 2003 and 2012, and the
interest rates on the mortgages range from 8.5% to 10.5%.

Hedge agreements and other derivatives.Upon adoption of
SFAS No. 133, we recognized a transition adjustment of
$2,842 representing the fair value of our derivative instruments
at January 1, 2001. We recorded a liability and
corresponding charge to accumulated comprehensive loss for this
amount.

Upon the sale of our $500,000 senior unsecured
notes in January 2001, we reduced the term loans under our
senior secured credit facility by $300,000. At that time, we
terminated three swap agreements with a notional amount of
$300,000. These swap agreements were originally designated as
cash flow hedges of interest rates on the variable rate term
loans that were repaid. We made net payments totaling $9,297 to
terminate these swap agreements, and recognized the loss in
earnings.

Upon the sale of our $250,000 senior unsecured
notes in December 2001, we reduced the term loans and our
revolver under our senior secured credit facility by an
aggregate amount of $248,400. At that time, we converted three
swap agreements to non-hedging derivatives. These swap
agreements had notional principal amounts of approximately
$151,400 and were originally designated to hedge interest rates
on borrowings under our senior secured credit facility that were
repaid. We recognized a $6,666 loss when this amount was
transferred out of accumulated other comprehensive income
because the debt being hedged was repaid.

Upon the issuance of $200,000 aggregate principal
amount of 9.13% senior unsecured notes due 2011 in February
2002, we reduced the borrowings under our previous senior
secured credit agreement by $195,000. As a result of this
financing, we re-designated two swap agreements as non-hedging
derivatives. These swap agreements had notional principal
amounts of approximately $200,000 and were originally designated
to hedge variable rate borrowings under our senior secured
credit facility that were repaid. We recognized a $4,735 loss
when this amount was transferred out of accumulated other
comprehensive income because the debt being hedged was repaid.

As of December 31, 2002, we had two swap
agreements with notional principal amounts totaling $200,000.
Both of these swap agreements have been converted to non-hedging
derivatives due to our repayment of the floating-rate borrowings
they originally hedged. The swap agreements expire between April
and July 2003. These swap agreements are currently being marked
to market through our statement of operations.

We have exposure going forward as the change in
fair value of our non-hedging derivatives will have an impact on
our operations. During the year ended December 31, 2002, we
recognized $7,612 of income related to these interest rate
swaps. For the years ended December 31, 2002 and 2001, we
made cash payments on

59



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##### 



these swaps of approximately $12,058 and $6,285,
respectively. The change in fair value during 2002 and the swap
payments are netted together on our statement of operations. The
fair value of these swap agreements was a liability of $3,977 at
December 31, 2002, and is included in other liabilities in
the accompanying consolidated balance sheets.


In anticipation of the August 1999 completion of
our secured facility, we entered into two separate hedge
transactions during July 1999. Upon completion of the secured
facility, we terminated the underlying treasury lock agreements,
resulting in a net payment to us of $5,100. This amount was
deferred and is being recognized as a reduction to interest
expense over the life of the underlying debt. As a result, the
effective interest rate on the secured facility is 7.76%.

Additionally, in anticipation of the August 1997
offering of $150,000 aggregate principal amount of our 8.75%
senior subordinated notes due 2007, we entered into separate
hedge transactions during June and July 1997. Upon completion of
the subordinated notes offering, we terminated the underlying
swap agreements, resulting in a net payment to us of $836. This
amount was deferred and is being recognized as a reduction to
interest expense over the life of the underlying debt. As a
result, the effective interest rate on the subordinated notes is
8.69%.

As of December 31, 2002, all of our debt was
fixed. Our overall weighted average interest rate was 8.6%. The
fair value of our fixed rate long-term debt was $1,463,699 at
December 31, 2002. We determined fair value based on market
prices as of December 31, 2002.

6.          Income
Taxes

When the RMA became effective on January 1,
2001, we formed taxable subsidiaries to lease certain of our
properties. These subsidiaries are subject to taxation similar
to subchapter C-corporations. The income of these taxable
subsidiaries is subject to federal and state income taxes. In
addition, the REIT is also subject to income taxes in certain
state and local jurisdictions.

Our income taxes were allocated as follows:

|                                                                                                        |  |      |        |      |  |      |        |   |  |   |       | 
|------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ----- | 
|                                                                                                        |  | 2002 |        | 2001 |  | 2000
|                                                                                                        |  |      |        |      |  |     
|Tax (benefit) expense on (loss) income before
    discontinued operations and extraordinary (loss) gain |  | $    | (1,479 | )    |  | $    | (1,101 | ) |  | $ | 1,923 | 
|Tax (benefit) expense on discontinued operations                                                        |  |      | (687   | )    |  |      | (121   | ) |  |   | 175   | 
|Tax (benefit) expense on extraordinary (loss) gain                                                      |  |      |       |      |  |      | (57    | ) |  |   | 62    | 
|                                                                                                        |  |      |        |      |  |      |        |   |  |   |       | 
|Total income tax (benefit) expense                                                                      |  | $    | (2,166 | )    |  | $    | (1,279 | ) |  | $ | 2,160 | 
|                                                                                                        |  |      |        |      |  |      |        |   |  |   |       | 

Our effective income tax rate differs from the
federal statutory income tax rate as follows:

|                                                         |  |      |       |      |  |      |       |   |  |  |       |  
|-------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                                         |  | 2002 |       | 2001 |  | 2000
|                                                         |  |      |       |      |  |     
|Statutory tax rate                                       |  |      | 35.0% |      |  |      | 35.0% |   |  |  | 35.0% |  
|Effect of REIT dividends paid deduction                  |  |      | (35.0 | )    |  |      | (34.3 | ) |  |  | (35.0 | )
|State and local taxes                                    |  |      | 1.2   |      |  |      | 1.8   |   |  |  | 1.7   |  
|Difference in effective rate on foreign
    subsidiaries |  |      | 0.1   |      |  |      | 0.2   |   |  |  | 0.3   |  
|                                                         |  |      |       |      |  |      |       |   |  |  |       |  
|                                                         |  |      | 1.3%  |      |  |      | 2.7%  |   |  |  | 2.0%  |  
|                                                         |  |      |       |      |  |      |       |   |  |  |       |  

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The components of income tax
(benefit) expense were as follows as of December 31:

|          |         |      |        |        |   |      |        |        |   |   |       |     | 
|--------- | ------- | ---- | ------ | ------ | - | ---- | ------ | ------ | - | - | ----- | --- | 
|          |         | 2002 |        | 2001   |   | 2000
|          |         |      |        |        |   |     
|Current:  |         |      |        |        |   |      |        |        |   |   |       |    
|          | State   |      | $      | 150    |   |      | $      | 400    |   |   | $     | 800 | 
|          | Foreign |      |        |       |   |      |        | 100    |   |   |       | 433 | 
|          |         |      |        |        |   |      |        |        |   |   |       |    
|          |         |      | 150    |        |   |      | 500    |        |   |   | 1,233 |    
|Deferred: |         |      |        |        |   |      |        |        |   |   |       |    
|          | Federal |      |        | 337    |   |      |        | (337   | ) |   |       |    | 
|          | State   |      |        | (2,543 | ) |      |        | (1,332 | ) |   |       | 817 | 
|          | Foreign |      |        | (110   | ) |      |        | (110   | ) |   |       | 110 | 
|          |         |      |        |        |   |      |        |        |   |   |       |    
|          |         |      | (2,316 | )      |   |      | (1,779 | )      |   |   | 927   |    
|          |         |      |        |        |   |      |        |        |   |   |       |    
|          |         | $    | (2,166 | )      |   | $    | (1,279 | )      |   | $ | 2,160 |    
|          |         |      |        |        |   |      |        |        |   |   |       |    

The tax effects of the principal temporary
differences that give rise to our net deferred tax liability
were as follows:

|                                                                |  |              |        |      |  |   |       |  
|--------------------------------------------------------------- |  | ------------ | ------ | ---- |  | - | ----- | -
|                                                                |  |             
|                                                                |  | December 31,
|                                                                |  |             
|                                                                |  | 2002         |        | 2001
|                                                                |  |              |        |     
|Fair value of hotel assets acquired                             |  | $            | 5,322  |      |  | $ | 6,800 |  
|Accelerated depreciation and basis difference                   |  |              | 1,987  |      |  |   | 2,130 |  
|Asset impairments, extraordinary items and
    one-time charges |  |              | (1,280 | )    |  |   |      |  
|Accrued expenses                                                |  |              | 467    |      |  |   | 467   |  
|Net operating loss carryforwards                                |  |              |       |      |  |   | (449  | )
|Other                                                           |  |              | 219    |      |  |   | 83    |  
|                                                                |  |              |        |      |  |   |       |  
|Net deferred tax liability                                      |  | $            | 6,715  |      |  | $ | 9,031 |  
|                                                                |  |              |        |      |  |   |       |  

At the time of the merger between CapStar Hotel
Company and American General Hospitality Corporation in 1998, we
established a new basis for the acquired assets and assumed
liabilities based on their fair values at the time of the
merger. We established a net deferred income tax liability for
the estimated future state and local income tax effect for
differences between the accounting and tax bases of these assets
and liabilities. As of December 31, 2002, this deferred tax
liability was $5,322.

For federal income tax purposes, the aggregate
net operating loss (NOL) carryforward for our taxable
subsidiaries was $25,600 as of December 31, 2002. Based on
our projections of the taxable subsidiaries ability to
utilize the NOL carryforward, we have recorded a valuation
allowance to reduce the carrying value of the NOL carryforward
deferred tax asset to zero at December 31, 2002.

REITs are subject to federal income taxes in
certain instances involving the disposition of hotel assets. For
a period of 10 years, beginning with the first year the
corporation elected REIT status, if the REIT disposes of an
asset that had appreciated in value at the time of the REIT
election, a corporate-level income tax may be incurred. The
amount of income subject to this corporate-level tax is limited
to the amount of built-in-gain established at the time of our
initial REIT election. We do not anticipate disposing of any
hotel assets subject to a built-in-gain and, therefore, we do
not expect the REIT to incur a corporate income tax liability.
Our asset dispositions in each of the years in the three-year
period ended December 31, 2002 were not subject to the
built-in-gains tax.

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7.          Stockholders
Equity and Minority Interests

Common Stock
Transactions.We are authorized to
issue up to 100,000,000 shares of our preferred stock, par value
$0.01 per share, from time to time with such rights, preferences
and priorities as the Board of Directors shall designate. We
have not issued any preferred stock.

In May 2000, we implemented a stock purchase plan
that allowed eligible employees to purchase our common stock at
a discount from market value. We issued 2,915 shares of
common stock under this plan. In September 2001, we discontinued
this stock purchase plan.

In September 1999, our Board of Directors
authorized the repurchase of up to five million shares of our
common stock from time to time in open market or privately
negotiated transactions. We have repurchased a total of
4,324,000 shares for $76,674 through December 31, 2002.

We issued 380,000, 48,000, and 133,000 shares of
common stock related to the exercise of stock options, the
conversion of POPs into common stock and dividend reinvestments
during the years ended December 31, 2002, 2001, and 2000,
respectively.

OP Units.Substantially all of our assets are held indirectly by and
operated through MeriStar Hospitality Operating Partnership,
L.P., our subsidiary operating partnership, Commission file
number 333-63768. Our operating partnerships partnership
agreement currently provides for five classes of partnership
interests: Common OP Units, Class B OP Units,
Class C OP Units, Class D OP Units and
Profits-Only OP Units. Holders of Common OP Units and
Class B OP Units receive distributions per OP Unit
equivalent to the dividend paid on each of our common shares.
Holders of Class C OP Units receive a non-cumulative,
quarterly distribution equal to $0.5575 per Class C
OP Unit so long as the Common OP Units and
Class B OP Units receive a distribution for such
quarter and the dividend rate on our common stock has not
exceeded $0.5575. Class C OP Units automatically
convert into Common OP Units once that dividend rate is
exceeded. Holders of Class D OP Units receive a 6.5%
cumulative annual preferred return based on an assumed price per
common share of $22.16; the return is compounded quarterly to
the extent not paid on a current basis, and holders are entitled
to a liquidation preference of $22.16 per Class D
OP Unit. All net income and capital received by the
operating partnership (after payment of the annual preferred
return and, if applicable, the liquidation preference) will be
shared by the holders of the Common OP Units in proportion to
the number of Common OP Units in the operating partnership owned
by each such holder.

Each Common OP Unit, Class B OP Unit and
Class C OP Unit held by third-parties is redeemable by the
holder for cash in an amount equal to the market value of a
share of our common stock or, at our option, for one share of
our common stock, determined in accordance with the terms of the
partnership agreement. We have the option to redeem the
Class D OP Units at any time after April 1, 2000, at a
price of $22.16 per share for cash or, at our option, for shares
of common stock having a value equal to the redemption price.
The holders have the option to redeem the Class D OP Units
at any time after April 1, 2004 for cash or, at the option
of the holders, for shares of common stock having a value equal
to $22.16 per share. If we or the holders of the preferred
Class D OP Units chose to redeem these units for common
stock instead of cash, and if our common stock was valued at
that time at less than $22.16 per share, we would have to issue
more shares of our common stock than the number of preferred
Class D OP Units being redeemed. For example, at
December 31, 2002, our stock price was $6.60 per share. If
the Class D OP Units were redeemed for common stock at
that date, we would have issued 1,316,697 shares of our common
stock, which would have represented approximately 2.9% of our
then outstanding common stock.

OP Unit holders converted 414,000, 250,000, and
77,000 of OP Units into common stock during the years ended
December 31, 2002, 2001, and 2000, respectively. There were
no conversions for cash during these years.

Dividends.On
March 30, 2002, June 26, 2002, and September 25,
2002, we declared our first, second, and third quarter dividends
for 2002, respectively, equivalent to an annual rate of $0.03
per share of common stock and Common OP Unit. We did not
declare a dividend in the fourth quarter. The amount of the
dividend for each quarter was $0.01 per share. The dividends
were paid on April 30, 2002, July 31, 2002, and
October 31, 2002.

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On March 21, 2001, June 28, 2001,
September 18, 2001, and December 17, 2001, we declared
our first, second, third and fourth quarter dividends for 2001,
respectively, equivalent to an annual rate of $1.525 per share
of common stock and Common OP Unit. The amount of the dividend
for each of the first three quarters was $0.505 per share and
$0.01 per share for the fourth quarter. The dividends were paid
on April 30, 2001, July 31, 2001, October 12,
2001, and January 31, 2002.

On March 21, 2000, June 21, 2000,
September 25, 2000, and December 20, 2000, we declared
our first, second, third and fourth quarter dividends for 2000,
respectively, equivalent to an annual rate of $2.02 per share of
common stock or Common OP Unit. The amount of the dividend for
each quarter was $0.505 per share. The dividends were paid on
April 28, 2000, July 31, 2000, October 31, 2000,
and January 31, 2001.

8.          Earnings
Per Share

The following table presents the computation of
basic and diluted earnings per share:

|                                        |                                                                                 |                             |   |          |   |      |   |         |   |  |   |         |       | 
|--------------------------------------- | ------------------------------------------------------------------------------- | --------------------------- | - | -------- | - | ---- | - | ------- | - |  | - | ------- | ----- | 
|                                        |                                                                                 |                            
|                                        |                                                                                 | Year Ended December 31,    
|                                        |                                                                                 |                            
|                                        |                                                                                 | 2002                        |   | 2001     |   | 2000
|                                        |                                                                                 |                             |   |          |   |     
|Basic Earnings Per Share Computation:   |                                                                                 |                             |   |          |   |      |   |         |   |  |   |        
|                                        | Net (loss) income from continuing operations                                    |                             | $ | (126,979 | ) |      | $ | (35,757 | ) |  | $ | 94,229  |      
|                                        | Dividends paid on unvested restricted stock                                     |                             |   | (4       | ) |      |   | (502    | ) |  |   | (1,168  | )    
|                                        |                                                                                 |                             |   |          |   |      |   |         |   |  |   |        
|                                        | (Loss) income available to common stockholders                                  |                             |   | (126,983 | ) |      |   | (36,259 | ) |  |   | 93,061  |      
|                                        | Weighted average number of shares of common stock
    outstanding               |                             |   | 44,931   |   |      |   | 44,507  |   |  |   | 45,958  |      
|                                        |                                                                                 |                             |   |          |   |      |   |         |   |  |   |        
|                                        | Basic (loss) earnings per share from
    continuing operations                  |                             | $ | (2.83    | ) |      | $ | (0.81   | ) |  | $ | 2.02    |      
|                                        |                                                                                 |                             |   |          |   |      |   |         |   |  |   |        
|                                       
|Diluted Earnings Per Share Computation: |                                                                                 |                             |   |          |   |      |   |         |   |  |   |        
|                                        | (Loss) income available to common shareholders                                  |                             | $ | (126,983 | ) |      | $ | (36,259 | ) |  | $ | 93,061  |      
|                                        | Minority interest, net of tax                                                   |                             |   |         |   |      |   |        |   |  |   | 554     |      
|                                        | Interest on convertible debt, net of tax                                        |                             |   |         |   |      |   |        |   |  |   | 7,338   |      
|                                        | Dividends on unvested restricted stock                                          |                             |   |         |   |      |   |        |   |  |   | 254     |      
|                                        |                                                                                 |                             |   |          |   |      |   |         |   |  |   |        
|                                        | Adjusted net (loss) income                                                      |                             |   | (126,983 | ) |      |   | (36,259 | ) |  |   | 101,207 |      
|                                        |                                                                                 |                             |   |          |   |      |   |         |   |  |   |        
|                                        | Weighted average number of basic shares of common
    stock outstanding         |                             |   | 44,931   |   |      |   | 44,507  |   |  |   | 45,958  |      
|                                        | Common stock equivalents:                                                       |                             |   |          |   |      |   |         |   |  |   |         |      
|                                        |                                                                                 | Operating partnership units |   |          |  |      |   |         |  |  |   |         | 441   | 
|                                        |                                                                                 | Stock options               |   |          |  |      |   |         |  |  |   |         | 208   | 
|                                        |                                                                                 | Convertible debt            |   |          |  |      |   |         |  |  |   |         | 4,612 | 
|                                        |                                                                                 | Restricted stock            |   |          |  |      |   |         |  |  |   |         | 176   | 
|                                        |                                                                                 |                             |   |          |   |      |   |         |   |  |   |        
|                                        | Total weighted average number of diluted shares
    of common stock outstanding |                             |   | 44,931   |   |      |   | 44,507  |   |  |   | 51,395  |      
|                                        |                                                                                 |                             |   |          |   |      |   |         |   |  |   |        
|                                        | Diluted (loss) earnings per share from
    continuing operations                |                             | $ | (2.83    | ) |      | $ | (0.81   | ) |  | $ | 1.97    |      
|                                        |                                                                                 |                             |   |          |   |      |   |         |   |  |   |        

9.          Related-Party
Transactions

Due to/from Interstate Hotels &
Resorts

In the normal course of managing our hotel
properties, Interstate Hotels incurs day-to-day operating costs
which are reimbursed by us. The balance due to Interstate Hotels
of $10,500 at December 31, 2002 includes management fees
due for each hotel, and reimbursements due for insurance,
employee benefits, sales and marketing expenses, and other
miscellaneous operating expenses. These amounts are normally
paid within 30 days.

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Pursuant to an intercompany agreement, we and
Interstate Hotels provide each other with, among other things,
reciprocal rights to participate in certain transactions entered
into by each party. In particular, Interstate Hotels has a right
of first refusal to become the manager of any real property we
acquire. We also may provide each other with certain services.
These may include administrative, renovation supervision,
corporate, accounting, finance, risk management, legal, tax,
information technology, human resources, acquisition
identification and due diligence, and operational services, for
which Interstate Hotels is compensated in an amount that we
would be charged by a third party for comparable services. As of
December 31, 2001, Interstate Hotels owed us $8,877 for
these services, as well as for working capital deficits at the
RMA lease conversion date. During the years ended
December 31, 2002, 2001 and 2000, we paid Interstate Hotels
a net amount of $454, $151, and $1,165, respectively, for such
services.

Note Receivable From Interstate Hotels
& Resorts

Under a revolving credit agreement with
Interstate Hotels through July 31, 2002, we had the ability
to lend Interstate Hotels up to $50,000 for general corporate
purposes. The interest rate on this credit agreement was 650
basis points over the 30-day LIBOR. Repayment of the revolving
credit agreement was subordinate to Interstate Hotels bank
debt. As of December 31, 2001, Interstate Hotels owed us
$36,000 under this agreement.

Effective January 1, 2002, Interstate Hotels
issued us a term note for $13,069, which refinanced outstanding
accounts payable owed to us. The interest rate, maturity date
and subordinated feature were the same as that of the revolving
credit agreement.

In connection with the merger that created
Interstate Hotels on July 31, 2002, Interstate Hotels paid
$3,000 to reduce its borrowings outstanding on the credit
agreement. Simultaneously, the credit agreement and term note
were amended and combined into a term loan agreement with a
principal balance of $56,069 and a maturity date of
July 31, 2007. The interest rate remained at 650 basis
points over the 30-day LIBOR. This term loan was subordinated to
Interstate Hotels new bank credit facility, and the term
loan did not allow for any further borrowings by Interstate
Hotels. In late December 2002, we agreed to settle the term loan
with Interstate Hotels for $42,100, plus accrued interest. We
incurred a $14,517 charge in 2002 related to this settlement.
Cash payment was received in early January 2003.

During 2002, 2001, and 2000, we earned interest
of $4,780, $5,005, and $955, respectively, from these lending
arrangements.

Other Related-Party
Transactions

Of the $300,000 aggregate principal amount of
9.0% senior unsecured notes due in 2008 we issued in January
2001, $30,000 principal amount was issued at a price of 99.688%
to an affiliate of Oak Hill Capital Partners. The terms and
conditions of the notes purchased were identical to those
purchased by third parties.

Of the $200,000 aggregate principal amount of
9.13% senior unsecured notes due in 2011 we issued in January
2001, $20,000 principal amount was issued at a price of 99.603%
to an affiliate of Oak Hill Capital Partners. The terms and
conditions of the notes purchased were identical to those
purchased by third parties.

Of the $250,000 aggregate principal amount of
10.5% senior unsecured notes due in 2009 we issued in December
2001, $23,000 principal amount was issued at a price of 99.368%
to an affiliate of Oak Hill Capital Partners. The terms and
conditions of the notes purchased are identical to those
purchased by third parties.

10.          Stock-Based
Compensation

Stock Options

In connection with the merger between CapStar
Hotel Company and American General Hospitality Corporation in
1998, we adopted a new equity incentive plan. This plan
authorizes us to award up to 5,565,518 options on shares of our
common stock to our officers or other key employees. These
options are exercisable in three annual installments and expire
ten years from the grant date.

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We also adopted a new equity incentive plan for
non-employee directors. The directors plan authorizes us
to award up to 500,000 options, which are also exercisable in
three annual installments and expire ten years from the grant
date.

Stock option activity for 2002, 2001 and 2000 was
as follows:

|                                                       |           |                       |           |                 |   |           |       |          |  |  |         |         |  |   |       |       | 
|------------------------------------------------------ | --------- | --------------------- | --------- | --------------- | - | --------- | ----- | -------- |  |  | ------- | ------- |  | - | ----- | ----- | 
|                                                       |           |                       |           |                
|                                                       |           | Equity Incentive Plan |           | Directors Plan
|                                                       |           |                       |           |                
|                                                       |           |                       |           | Weighted        |   |           |       | Weighted
|                                                       |           |                       |           | Average         |   |           |       | Average 
|                                                       |           | Number of             |           | Exercise        |   | Number of |       | Exercise
|                                                       |           | Shares                |           | Price           |   | Shares    |       | Price   
|                                                       |           |                       |           |                 |   |           |       |         
|Outstanding at January 1, 2000                         |           |                       | 4,805,928 |                 |   | $         | 23.56 |          |  |  | 85,000  |         |  | $ | 22.36 |      
|                                                       | Granted   |                       |           | 140,000         |   |           |       | 16.13    |  |  |         | 30,000  |  |   |       | 19.00 | 
|                                                       | Exercised |                       |           | (47,153         | ) |           |       | 17.26    |  |  |         |        |  |   |       |      | 
|                                                       | Canceled  |                       |           | (113,441        | ) |           |       | 28.62    |  |  |         |        |  |   |       |      | 
|                                                       |           |                       |           |                 |   |           |       |          |  |  |         |         |  |   |       |      
|Outstanding at December 31, 2000                       |           |                       | 4,785,334 |                 |   |           | 22.68 |          |  |  | 115,000 |         |  |   | 21.34 |      
|                                                       | Granted   |                       |           | 88,500          |   |           |       | 13.33    |  |  |         | 47,500  |  |   |       | 23.00 | 
|                                                       | Exercised |                       |           | (41,839         | ) |           |       | 16.12    |  |  |         |        |  |   |       |      | 
|                                                       | Canceled  |                       |           | (2,194,165      | ) |           |       | 26.87    |  |  |         |        |  |   |       |      | 
|                                                       |           |                       |           |                 |   |           |       |          |  |  |         |         |  |   |       |      
|Outstanding at December 31, 2001                       |           |                       | 2,637,830 |                 |   |           | 19.47 |          |  |  | 162,500 |         |  |   | 21.83 |      
|                                                       | Granted   |                       |           | 690,000         |   |           |       | 11.05    |  |  |         | 42,500  |  |   |       | 15.41 | 
|                                                       | Exercised |                       |           | (201,296        | ) |           |       | 15.45    |  |  |         |        |  |   |       |      | 
|                                                       | Canceled  |                       |           | (164,829        | ) |           |       | 20.10    |  |  |         |        |  |   |       |      | 
|                                                       |           |                       |           |                 |   |           |       |          |  |  |         |         |  |   |       |      
|Outstanding at December 31, 2002                       |           |                       | 2,961,705 |                 |   | $         | 17.64 |          |  |  | 205,000 |         |  | $ | 20.49 |      
|                                                       |           |                       |           |                 |   |           |       |          |  |  |         |         |  |   |       |      
|Shares exercisable at December 31 were as
    follows: |           |                       |           |                 |   |           |       |          |  |  |         |         |  |   |       |      
|                                                       | 2000      |                       |           | 3,482,816       |   |           | $     | 23.99    |  |  |         | 26,667  |  |   | $     | 22.56 | 
|                                                       |           |                       |           |                 |   |           |       |          |  |  |         |         |  |   |       |      
|                                                       | 2001      |                       |           | 2,020,759       |   |           | $     | 20.09    |  |  |         | 80,000  |  |   | $     | 21.69 | 
|                                                       |           |                       |           |                 |   |           |       |          |  |  |         |         |  |   |       |      
|                                                       | 2002      |                       |           | 2,191,049       |   |           | $     | 19.81    |  |  |         | 119,167 |  |   | $     | 21.79 | 
|                                                       |           |                       |           |                 |   |           |       |          |  |  |         |         |  |   |       |      

The following table summarizes information about
stock options outstanding and exercisable at December 31,
2002:

|                 |  |                     |           |                     |  |          |      |             |  |          |       |  |  |  |           |  |  |   |       | 
|---------------- |  | ------------------- | --------- | ------------------- |  | -------- | ---- | ----------- |  | -------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                 |  |                     |           |                    
|                 |  | Options Outstanding |           | Options Exercisable
|                 |  |                     |           |                    
|                 |  |                     |           | Weighted            |  |          |      |            
|                 |  |                     |           | Average             |  | Weighted |      |             |  | Weighted
|                 |  |                     |           | Remaining           |  | Average  |      |             |  | Average 
|Range of         |  | Number              |           | Contractual Life    |  | Exercise |      | Number      |  | Exercise
|Exercise Prices  |  | Outstanding         |           | (in years)          |  | Price    |      | Exercisable |  | Price   
|                 |  |                     |           |                     |  |          |      |             |  |         
|$ 7.42 to $14.88 |  |                     | 991,000   |                     |  |          | 8.64 |             |  | $        | 11.64 |  |  |  | 404,503   |  |  | $ | 14.77 | 
|$15.60 to $19.00 |  |                     | 622,523   |                     |  |          | 5.89 |             |  |          | 16.32 |  |  |  | 407,527   |  |  |   | 15.88 | 
|$19.19 to $19.19 |  |                     | 850,000   |                     |  |          | 6.10 |             |  |          | 19.19 |  |  |  | 850,000   |  |  |   | 19.19 | 
|$19.75 to $32.42 |  |                     | 700,182   |                     |  |          | 5.50 |             |  |          | 26.19 |  |  |  | 645,186   |  |  |   | 26.57 | 
|$31.51 to $31.51 |  |                     | 3,000     |                     |  |          | 4.93 |             |  |          | 31.51 |  |  |  | 3,000     |  |  |   | 31.51 | 
|                 |  |                     |           |                     |  |          |      |             |  |          |       |  |  |  |           |  |  |   |       | 
|                 |  |                     | 3,166,705 |                     |  |          |      |             |  |          |       |  |  |  | 2,310,216 |  |  |   |       | 
|                 |  |                     |           |                     |  |          |      |             |  |          |       |  |  |  |           |  |  |   |       | 

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Other Stock-Based Compensation

As of December 31, 2002, we have granted
621,500 shares of restricted stock to our employees or to those
of an affiliate. This restricted stock vests ratably over three-
or five-year periods.

On March 29, 2000, our operating partnership
granted 462,500 Profits-Only OP Units, or POPs, to some of our
employees pursuant to our POPs Plan. These POPs were originally
eligible for vesting based on our achievement of certain
financial performance criteria. During 2001, our operating
partnership converted the 387,500 of outstanding POPs to fixed
awards and extended the vesting period to 2004. On
April 16, 2001, our operating partnership granted 350,000
POPs to some of our employees pursuant to our POPs Plan. These
POPs are fixed awards and vest ratably over three years. On
April 1, 2002, our operating partnership granted 25,000
POPs to some of our employees pursuant to our POPs Plan. These
POPs are fixed awards and vest ratably over five years. On
May 1, 2002, our operating partnership granted 162,500 POPs
to one of our employees pursuant to our POPs Plan. These POPs
are fixed awards and vest ratably over three years. There were
737,500 POPs outstanding and 409,028 POPs vested as of
December 31, 2002.

11.          Separation
and Restructuring Charges

In 2002, we incurred $3,244 of costs related to
the formal separation of management functions from Interstate
Hotels. In 2001, we incurred a restructuring charge of $1,080 in
connection with operational changes at our corporate
headquarters. The costs for both years are included in
administrative and general expenses on our income statement.

The 2001 restructuring charge included the
elimination of seven corporate staff positions and office space
no longer needed under the new structure. The restructuring
charge consisted of $168 of severance costs and $912 of
noncancelable lease costs. During 2002, we applied $184 of lease
termination costs against the restructuring reserve, and $168 in
severance and $520 of lease termination costs were applied
during 2001. As of December 31, 2002, $208 of the
restructuring accrual remains.

12.          Commitments
and Contingencies

Litigation.In the
course of our normal business activities, various lawsuits,
claims and proceedings have been or may be instituted or
asserted against us. Based on currently available facts, we
believe that the disposition of matters that are pending or
asserted will not have a material adverse effect on our
financial position, results of operations or liquidity.

Minimum Lease Payments.We lease the land at certain of our
hotels under long-term arrangements from third parties. Certain
leases contain contingent rent features based on gross revenues
at the respective property. Future minimum lease payments
required under these operating leases as of December 31,
2002 were as follows:

|           |  |   |        | 
|---------- |  | - | ------ | 
|2003       |  | $ | 1,437  | 
|2004       |  |   | 1,437  | 
|2005       |  |   | 1,440  | 
|2006       |  |   | 1,427  | 
|2007       |  |   | 1,427  | 
|Thereafter |  |   | 56,368 | 
|           |  |   |        | 
|           |  | $ | 63,536 | 
|           |  |   |        | 

Our obligations under other operating lease
commitments, primarily for equipment, are not significant.

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We lease certain office, retail and parking space
to outside parties under non-cancelable operating leases with
initial or remaining terms in excess of one year. Future minimum
rental receipts under these leases as of December 31, 2002
were as follows:

|           |  |   |        | 
|---------- |  | - | ------ | 
|2003       |  | $ | 4,697  | 
|2004       |  |   | 4,428  | 
|2005       |  |   | 2,896  | 
|2006       |  |   | 2,027  | 
|2007       |  |   | 1,456  | 
|Thereafter |  |   | 1,929  | 
|           |  |   |        | 
|           |  | $ | 17,433 | 
|           |  |   |        | 

13.          Dispositions
and Acquisitions

We sold three hotels during the third quarter and
two hotels during the fourth quarter of 2002. In January 2003,
we sold one hotel classified as held for sale at
December 31, 2002. We sold the five hotels in 2002 for
$60,650, which resulted in a loss on sale of assets of $21,197
($20,773, net of tax). We sold the one hotel in January 2003 for
$12,650, and recognized an impairment loss of $15,368 on this
asset during 2002. All operating results, including the loss on
disposal and impairment loss, have been recorded as discontinued
operations. We have reclassified prior periods to reflect
operations of the six hotels as discontinued operations.

Revenue and pre-tax (loss) income included in
discontinued operations for these six hotels were:

|                      |  |      |         |      |  |      |        |   |  |   |        | 
|--------------------- |  | ---- | ------- | ---- |  | ---- | ------ | - |  | - | ------ | 
|                      |  | 2002 |         | 2001 |  | 2000
|                      |  |      |         |      |  |     
|Revenue               |  | $    | 24,092  |      |  | $    | 27,550 |   |  | $ | 14,745 | 
|                      |  |      |         |      |  |      |        |   |  |   |        | 
|Pre-tax (loss) income |  | $    | (34,956 | )    |  | $    | (4,413 | ) |  | $ | 8,753  | 
|                      |  |      |         |      |  |      |        |   |  |   |        | 

During 2001, we sold two hotels and received
proceeds of $9,715. The sales resulted in a loss of $2,176. The
loss recognized on these sales, as well as the operating results
of these hotels, were included in continuing operations, as the
provisions of SFAS No. 144 requiring the presentation of
such results as discontinued operations applies to only those
assets classified as held for sale or disposed of on or after
January 1, 2002.

During 2001, we terminated the leases of eight of
our hotels from affiliates of Prime Hospitality Corporation for
a total cost of $1,315. Concurrently, we signed long-term
management agreements with Interstate Hotels (formerly MeriStar
Hotels) for four of these properties. The terms on the remaining
three management agreements with Interstate Hotels are one year
with additional one-year renewal periods.

On May 9, 2001, we and our operating
partnership entered into an Agreement and Plan of Merger with
FelCor Lodging Trust Incorporated and its operating partnership.
On September 21, 2001, we mutually agreed with FelCor to
terminate the merger agreement due to unfavorable market
conditions. We incurred $5,817 of costs related to this
potential merger. The costs are reflected in our statement of
operations.

During 2000, we sold three limited-service hotels
and received proceeds of $24,148. This resulted in a gain on
sale of assets of $3,495. The gain recognized on these sales, as
well as the operating results of these hotels, were included in
continuing operations, as the provisions of SFAS No. 144
requiring the presentation of such results as discontinued
operations applies to only those assets disposed of on or after
January 1, 2002. We also purchased a full-service hotel in
2000 for $19,400. Of the purchase amount, $11,400 was paid in
cash and $8,000 will be paid from the hotels future cash
flow through 2005. The acquisition was funded using existing
cash and borrowings on our credit facility.

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14.          Segment
Information

SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information,
requires public entities to report selected information about
operating segments. Based on the guidance provided in the
standard, we have determined that our business is conducted in
one reportable segment, hotel ownership.

The following summarizes certain geographic
information required under the standard:

|                                          |  |      |           |      |  |      |           |  |  |   |         | 
|----------------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | ------- | 
|                                          |  | 2002 |           | 2001 |  | 2000
|                                          |  |      |           |      |  |     
|Revenue:                                  |  |      |           |      |  |      |           |  |  |   |         | 
|U.S.                                      |  | $    | 961,753   |      |  | $    | 1,034,071 |  |  | $ | 379,512 | 
|Canada                                    |  |      | 21,700    |      |  |      | 23,267    |  |  |   | 6,521   | 
|                                          |  |      |           |      |  |      |           |  |  |   |         | 
|                                          |  | $    | 983,453   |      |  | $    | 1,057,338 |  |  | $ | 386,033 | 
|                                          |  |      |           |      |  |      |           |  |  |   |         | 
|Investments in hotel properties,
    net: |  |      |           |      |  |      |           |  |  |   |         | 
|U.S.                                      |  | $    | 2,509,117 |      |  | $    | 2,734,028 |  |  |   |         | 
|Canada                                    |  |      | 50,820    |      |  |      | 52,269    |  |  |   |         | 
|                                          |  |      |           |      |  |      |           |  |  |   |         | 
|                                          |  | $    | 2,559,937 |      |  | $    | 2,786,297 |  |  |   |         | 
|                                          |  |      |           |      |  |      |           |  |  |   |         | 

15.          Subsequent
Event

We continue to focus on a deleveraging strategy,
including the expansion of our program of selling non-core
assets. As of February 12, 2003, we were actively marketing
eight assets as part of our non-core asset disposition plan.
Based on a recent decision to raise additional cash to reduce
our overall leverage and provide additional capital for
reinvestment in our core holdings, we changed our expectation
about our holding period on eight additional hotels in our
portfolio. Based on expected sales proceeds, we will record an
impairment charge in the first quarter of 2003 of approximately
$50,000 to $55,000.

16.          Quarterly
Financial Information (Unaudited)

Quarterly information has been restated to
reflect assets sold or classified as held for sale in 2002 as
discontinued operations for all periods presented.

|                                         |  |         |         |         |  |         |         |         |  |         |         |         |  |         |          |         |  |   |         |  |  |   |         |  |  |   |         |   |  |   |         |  
|---------------------------------------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | ------- | -------- | ------- |  | - | ------- |  |  | - | ------- |  |  | - | ------- | - |  | - | ------- | -
|                                         |  |         |         |        
|                                         |  | 2002    |         | 2001   
|                                         |  |         |         |        
|                                         |  | First   |         | Second  |  | Third   |         | Fourth  |  | First   |         | Second  |  | Third   |          | Fourth 
|                                         |  | Quarter |         | Quarter |  | Quarter |         | Quarter |  | Quarter |         | Quarter |  | Quarter |          | Quarter
|                                         |  |         |         |         |  |         |         |         |  |         |         |         |  |         |          |        
|Total revenue                            |  | $       | 249,359 |         |  | $       | 273,226 |         |  | $       | 230,970 |         |  | $       | 229,898  |         |  | $ | 296,105 |  |  | $ | 299,482 |  |  | $ | 240,319 |   |  | $ | 221,432 |  
|Total operating expenses                 |  |         | 226,454 |         |  |         | 236,842 |         |  |         | 222,567 |         |  |         | 300,193  |         |  |   | 252,229 |  |  |   | 244,241 |  |  |   | 228,445 |   |  |   | 247,591 |  
|Operating (loss) income                  |  |         | 22,905  |         |  |         | 36,384  |         |  |         | 8,403   |         |  |         | (70,295  | )       |  |   | 43,876  |  |  |   | 55,241  |  |  |   | 11,874  |   |  |   | (26,159 | )
|(Loss) income from continuing operations |  |         | (10,784 | )       |  |         | 2,003   |         |  |         | (23,221 | )       |  |         | (94,977  | )       |  |   | 11,002  |  |  |   | 22,339  |  |  |   | (18,908 | ) |  |   | (50,190 | )
|Net (loss) income                        |  |         | (9,943  | )       |  |         | 2,973   |         |  |         | (29,402 | )       |  |         | (124,876 | )       |  |   | 11,815  |  |  |   | 24,560  |  |  |   | (17,302 | ) |  |   | (61,835 | )
|Diluted (loss) earnings per share        |  |         | (0.22   | )       |  |         | 0.06    |         |  |         | (0.65   | )       |  |         | (2.76    | )       |  |   | 0.25    |  |  |   | 0.52    |  |  |   | (0.39   | ) |  |   | (1.37   | )

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##### 



17.          Supplemental
Cash Flow Information

|                                             |                                       |      |   |         |  |      |   |         |  |  |   |         | 
|-------------------------------------------- | ------------------------------------- | ---- | - | ------- |  | ---- | - | ------- |  |  | - | ------- | 
|                                             |                                       | 2002 |   | 2001    |  | 2000
|                                             |                                       |      |   |         |  |     
|Cash paid for interest and income taxes:     |                                       |      |   |         |  |      |   |         |  |  |   |        
|                                             | Interest, net of capitalized interest |      | $ | 132,977 |  |      | $ | 105,732 |  |  | $ | 120,539 | 
|                                             | Income taxes                          |      |   | 827     |  |      |   | 698     |  |  |   | 874     | 
|Non-cash investing and financing activities: |                                       |      |   |         |  |      |   |         |  |  |   |        
|                                             | Redemption of OP Units                |      |   | 6,502   |  |      |   | 5,428   |  |  |   | 24      | 
|                                             | Issuances of POPs                     |      |   | 2,894   |  |      |   | 1,243   |  |  |   |        | 
|                                             | POPs converted to common stock        |      |   | 2,915   |  |      |   |        |  |  |   |        | 
|                                             | Dividends reinvested                  |      |   |        |  |      |   |        |  |  |   | 91      | 
|                                             | Issuance of restricted stock          |      |   |        |  |      |   |        |  |  |   | 10,620  | 
|                                             | Deferred purchase price               |      |   |        |  |      |   |        |  |  |   | 8,000   | 

We received the following operating assets and
assumed the following liabilities in connection with our lease
conversion in 2001:

|                                                                    |                                 |   |        |        |  |  |  |  |  |  |  |  | 
|------------------------------------------------------------------- | ------------------------------- | - | ------ | ------ |  |  |  |  |  |  |  |  | 
|Accounts receivable                                                 |                                 | $ | 47,200 |        |  |  |  |  |  |  |  | 
|Prepaid expenses and other                                          |                                 |   | 13,500 |        |  |  |  |  |  |  |  | 
|Furniture and fixtures, net of accumulated
    depreciation of $163 |                                 |   | 152    |        |  |  |  |  |  |  |  | 
|Investment in affiliates, net                                       |                                 |   | 1,629  |        |  |  |  |  |  |  |  | 
|                                                                    |                                 |   |        |        |  |  |  |  |  |  |  | 
|                                                                    | Total operating assets received |   | $      | 62,481 |  |  |  |  |  |  |  |  | 
|                                                                    |                                 |   |        |        |  |  |  |  |  |  |  | 
|Accounts payable and accrued expenses                               |                                 | $ | 65,706 |        |  |  |  |  |  |  |  | 
|Long-term debt                                                      |                                 |   | 32     |        |  |  |  |  |  |  |  | 
|                                                                    |                                 |   |        |        |  |  |  |  |  |  |  | 
|                                                                    | Total liabilities assumed       |   | $      | 65,738 |  |  |  |  |  |  |  |  | 
|                                                                    |                                 |   |        |        |  |  |  |  |  |  |  | 

18.          Consolidating
Financial Statements

We and certain subsidiaries of MeriStar
Hospitality Operating Partnership, L.P. (MHOP), our
subsidiary operating partnership, are guarantors of senior
unsecured notes issued by MHOP. MHOP and certain of its
subsidiaries are guarantors of our unsecured subordinated notes.
We own a one percent general partner interest in MHOP, and
MeriStar LP, Inc., our wholly-owned subsidiary, owns
approximately a 90 percent limited partner interest in
MHOP. All guarantees are full and unconditional, and joint and
several. Exhibit 99.1 to this Annual Report on
Form 10-K presents supplementary consolidating financial
statements for MHOP, including each of the guarantor
subsidiaries. This exhibit presents MHOPs consolidating
balance sheets as of December 31, 2002 and 2001,
consolidating statements of operations for the years ended
December 31, 2002, 2001, and 2000, and consolidating
statements of cash flows for the years ended December 31,
2002, 2001 and 2000.

69