##### 



Exhibit 13

INDEPENDENT AUDITORS REPORT

The Board of Directors

MeriStar Hospitality Corporation:


We have audited the accompanying consolidated
financial statements of MeriStar Hospitality Corporation and
subsidiaries (the Company) as listed in the accompanying index.
In connection with our audits of the consolidated financial
statements, we have also audited the financial statement
schedule as listed in the accompanying index. These consolidated
financial statements and the financial statement schedule are
the responsibility of the Company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, 2003 and
2002, and the results of their operations and their cash flows
for each of the years in the three-year period ended
December 31, 2003, 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
(SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assetsin 2002 and SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Correctionsin 2003.



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

McLean, VA

February 12, 2004, except as to note 17, 
   which is as of March 8, 2004


44



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##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED BALANCE SHEETS


DECEMBER 31, 2003 AND 2002


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


|                                                                                   |                                                            |                                   |           |           |     |   |           |           |     | 
|---------------------------------------------------------------------------------- | ---------------------------------------------------------- | --------------------------------- | --------- | --------- | --- | - | --------- | --------- | --- | 
|                                                                                   |                                                            | 2003                              |           | 2002     
|                                                                                   |                                                            |                                   |           |          
|ASSETS                                                                             |                                                            |                                   |           |           |     |   |           |          
|Property and equipment                                                             |                                                            | $                                 | 2,481,752 |           |     | $ | 2,895,055 |          
|Accumulated depreciation                                                           |                                                            |                                   | (446,032  | )         |     |   | (445,324  | )        
|                                                                                   |                                                            |                                   |           |           |     |   |           |          
|                                                                                   |                                                            |                                   | 2,035,720 |           |     |   | 2,449,731 |          
|Assets held for sale                                                               |                                                            |                                   | 51,169    |           |     |   | 110,206   |          
|Restricted cash                                                                    |                                                            |                                   | 42,523    |           |     |   | 20,365    |          
|Investment in affiliate                                                            |                                                            |                                   | 15,000    |           |     |   | 40,000    |          
|Note receivable from Interstate Hotels &
    Resorts                               |                                                            |                                   |          |           |     |   | 42,052    |          
|Prepaid expenses and other assets                                                  |                                                            |                                   | 47,934    |           |     |   | 44,942    |          
|Accounts receivable, net of allowance for
    doubtful accounts of $2,040 and $848 |                                                            |                                   | 64,709    |           |     |   | 56,828    |          
|Cash and cash equivalents                                                          |                                                            |                                   | 230,884   |           |     |   | 33,896    |          
|                                                                                   |                                                            |                                   |           |           |     |   |           |          
|                                                                                   |                                                            | $                                 | 2,487,939 |           |     | $ | 2,798,020 |          
|                                                                                   |                                                            |                                   |           |           |     |   |           |          
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                           |                                                            |                                   |           |           |     |   |           |          
|Long-term debt                                                                     |                                                            | $                                 | 1,638,028 |           |     | $ | 1,654,102 |          
|Accounts payable and accrued expenses                                              |                                                            |                                   | 83,458    |           |     |   | 114,109   |          
|Accrued interest                                                                   |                                                            |                                   | 46,813    |           |     |   | 49,898    |          
|Due to Interstate Hotels & Resorts                                                 |                                                            |                                   | 16,411    |           |     |   | 10,500    |          
|Other liabilities                                                                  |                                                            |                                   | 11,831    |           |     |   | 18,013    |          
|                                                                                   |                                                            |                                   |           |           |     |   |           |          
|Total liabilities                                                                  |                                                            |                                   | 1,796,541 |           |     |   | 1,846,622 |          
|                                                                                   |                                                            |                                   |           |           |     |   |           |          
|                                                                                  
|Minority interests                                                                 |                                                            |                                   | 37,785    |           |     |   | 73,112    |          
|Stockholders equity:                                                              |                                                            |                                   |           |           |     |   |           |          
|                                                                                   | Common stock, par value $0.01 per share                    |                                   |           |           |     |   |           |           |    
|                                                                                   |                                                            | Authorized  100,000 shares       |           |           |     |   |           |           |     | 
|                                                                                   |                                                            | Issued  69,135 and 49,555 shares |           |           | 691 |   |           |           | 495 | 
|                                                                                   | Additional paid-in capital                                 |                                   |           | 1,338,959 |     |   |           | 1,192,387 |    
|                                                                                   | Accumulated deficit                                        |                                   |           | (642,094  | )   |   |           | (230,870  | )  
|                                                                                   | Accumulated other comprehensive loss                       |                                   |           | (977      | )   |   |           | (7,052    | )  
|                                                                                   | Common stock held in treasury  2,345
    and 4,324 shares |                                   |           | (42,966   | )   |   |           | (76,674   | )  
|                                                                                   |                                                            |                                   |           |           |     |   |           |          
|Total stockholders equity                                                         |                                                            |                                   | 653,613   |           |     |   | 878,286   |          
|                                                                                   |                                                            |                                   |           |           |     |   |           |          
|                                                                                   |                                                            | $                                 | 2,487,939 |           |     | $ | 2,798,020 |          
|                                                                                   |                                                            |                                   |           |           |     |   |           |          

See
accompanying notes to the consolidated financial statements.

45



---



##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS


YEARS ENDED DECEMBER 31, 2003, 2002 AND
2001


(Dollars in thousands, except per share
amounts)


|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |         |         | 
|------------------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------------------------------------------------ | -------- | -------- | ------- | ---- | -------- | ------- | ------- | - | -------- | ------- | ------- | 
|                                                                          |                                                                 | 2003                                                               |          | 2002     |         | 2001
|                                                                          |                                                                 |                                                                    |          |          |         |     
|Revenue:                                                                  |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|                                                                          | Hotel operations:                                               |                                                                    |          |          |         |      |          |         |         |   |          |         |        
|                                                                          |                                                                 | Rooms                                                              |          | $        | 539,084 |      |          | $       | 559,634 |   |          | $       | 606,956 | 
|                                                                          |                                                                 | Food and beverage                                                  |          |          | 222,608 |      |          |         | 223,411 |   |          |         | 231,662 | 
|                                                                          |                                                                 | Other hotel operations                                             |          |          | 68,332  |      |          |         | 66,755  |   |          |         | 72,781  | 
|                                                                          | Office rental, parking and other revenue                        |                                                                    |          | 13,810   |         |      |          | 15,893  |         |   |          | 15,865  |        
|                                                                          | Participating lease revenue                                     |                                                                    |          |         |         |      |          |        |         |   |          | 2,057   |        
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|Total revenue                                                             |                                                                 |                                                                    | 843,834  |          |         |      | 865,693  |         |         |   | 929,321  |        
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|Hotel operating expenses:                                                 |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|                                                                          |                                                                 | Rooms                                                              |          |          | 137,804 |      |          |         | 135,285 |   |          |         | 145,012 | 
|                                                                          |                                                                 | Food and beverage                                                  |          |          | 161,749 |      |          |         | 158,201 |   |          |         | 165,244 | 
|                                                                          |                                                                 | Other hotel operating expenses                                     |          |          | 41,089  |      |          |         | 37,928  |   |          |         | 38,382  | 
|Office rental, parking and other expenses                                 |                                                                 |                                                                    | 2,784    |          |         |      | 3,004    |         |         |   | 2,805    |        
|Other operating expenses:                                                 |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|                                                                          |                                                                 | General and administrative                                         |          |          | 147,924 |      |          |         | 148,019 |   |          |         | 145,201 | 
|                                                                          |                                                                 | Property operating costs                                           |          |          | 129,270 |      |          |         | 127,017 |   |          |         | 133,906 | 
|                                                                          |                                                                 | Depreciation and amortization                                      |          |          | 105,451 |      |          |         | 109,196 |   |          |         | 101,162 | 
|                                                                          |                                                                 | Property taxes, insurance and other                                |          |          | 67,162  |      |          |         | 59,186  |   |          |         | 66,043  | 
|                                                                          |                                                                 | Loss on asset impairments                                          |          |          | 163,390 |      |          |         | 6,925   |   |          |         | 2,278   | 
|                                                                          |                                                                 | Impairment of investment in affiliate                              |          |          | 25,000  |      |          |         |        |   |          |         |        | 
|                                                                          |                                                                 | Write-down of note receivable with Interstate
    Hotels & Resorts |          |          |        |      |          |         | 14,517  |   |          |         |        | 
|                                                                          |                                                                 | 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                                                        |                                                                 |                                                                    | 981,623  |          |         |      | 799,278  |         |         |   | 818,574  |        
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|Operating (loss) income                                                   |                                                                 |                                                                    | (137,789 | )        |         |      | 66,415   |         |         |   | 110,747  |        
|Gain on early extinguishments of debt                                     |                                                                 |                                                                    | 4,085    |          |         |      |         |         |         |   |         |        
|Change in fair value of non-hedging derivatives,
    net of swap payments |                                                                 |                                                                    |         |          |         |      | (4,446   | )       |         |   |         |        
|Loss on fair value of non-hedging derivatives                             |                                                                 |                                                                    |         |          |         |      | (4,735   | )       |         |   | (6,666   | )      
|Loss on sale of assets                                                    |                                                                 |                                                                    |         |          |         |      |         |         |         |   | (2,176   | )      
|Minority interest income, net                                             |                                                                 |                                                                    | 17,877   |          |         |      | 10,574   |         |         |   | 2,958    |        
|Interest expense, net                                                     |                                                                 |                                                                    | (141,443 | )        |         |      | (136,880 | )       |         |   | (122,655 | )      
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|Loss before income taxes and discontinued
    operations                  |                                                                 |                                                                    | (257,270 | )        |         |      | (69,072  | )       |         |   | (17,792  | )      
|Income tax benefit                                                        |                                                                 |                                                                    | 3,293    |          |         |      | 1,398    |         |         |   | 557      |        
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|Loss from continuing operations                                           |                                                                 |                                                                    | (253,977 | )        |         |      | (67,674  | )       |         |   | (17,235  | )      
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|Discontinued operations:                                                  |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|                                                                          | Loss from discontinued operations before income
    tax benefit |                                                                    |          | (135,798 | )       |      |          | (94,342 | )       |   |          | (26,249 | )      
|                                                                          | Income tax benefit                                              |                                                                    |          | 911      |         |      |          | 768     |         |   |          | 722     |        
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|Loss from discontinued operations                                         |                                                                 |                                                                    | (134,887 | )        |         |      | (93,574  | )       |         |   | (25,527  | )      
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|Net loss                                                                  |                                                                 | $                                                                  | (388,864 | )        |         | $    | (161,248 | )       |         | $ | (42,762  | )      
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        

46



---



##### 



|                |                                      |      |   |       |   |      |   |       |   |  |   |       |  
|--------------- | ------------------------------------ | ---- | - | ----- | - | ---- | - | ----- | - |  | - | ----- | -
|                |                                      | 2003 |   | 2002  |   | 2001
|                |                                      |      |   |       |   |     
|Loss per share: |                                      |      |   |       |   |      |   |       |   |  |   |      
|                | Basic and Diluted:                   |      |   |       |   |      |   |       |   |  |   |       |  
|                | Loss from continuing operations      |      | $ | (5.00 | ) |      | $ | (1.51 | ) |  | $ | (0.40 | )
|                | Loss from discontinued operations    |      |   | (2.65 | ) |      |   | (2.08 | ) |  |   | (0.57 | )
|                |                                      |      |   |       |   |      |   |       |   |  |   |      
|                | Net loss per basic and diluted share |      | $ | (7.65 | ) |      | $ | (3.59 | ) |  | $ | (0.97 | )
|                |                                      |      |   |       |   |      |   |       |   |  |   |      

See
accompanying notes to the consolidated financial statements.

47



---



##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY


YEARS ENDED DECEMBER 31, 2003, 2002 AND
2001


(Dollars and shares in thousands)


|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |          |  
|--------------------------------------------------------------------------- | ------------------ | ------------ | ------ | -------- |  | ---------- | --- | ----------- |  | --------------- | ------ | --------- |  | ------ | ------- | ----- |  | - | --------- | - |  | - | -------- | - |  | - | ------- | - |  | - | --------- | -------- | -
|                                                                            |                    |              |        |          |  |            |     |             |  |                
|                                                                            |                    | Common Stock |        |          |  |            |     |             |  |                
|                                                                            |                    |              |        |          |  |            |     | Accumulated |  |                
|                                                                            |                    |              |        |          |  |            |     |             |  | Other           |        |          
|                                                                            |                    | Issued       |        | Treasury |  |            |     | Retained    |  | Comprehen-      |        |          
|                                                                            |                    |              |        |          |  | Additional |     | Earnings    |  | sive Income     |        |          
|                                                                            |                    | Shares       |        | Amount   |  | Shares     |     | Amount      |  | Paid In Capital |        | (Deficit) |  | (Loss) |         | Total
|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |      
|Balance, January 1, 2001                                                    |                    |              | 48,463 |          |  | $          | 485 |             |  |                 | (4,083 | )         |  | $      | (72,354 | )     |  | $ | 1,169,668 |   |  | $ | 42,837   |   |  | $ | (6,081  | ) |  | $ | 1,134,555 |         
|Comprehensive loss:                                                         |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         
|Net loss                                                                    |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   |          |   |  |   | (42,762  | ) |  |   |        |   |  |   | (42,762   | )       
|Foreign currency translation Adjustment                                     |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   |          |   |  |   |         |   |  |   | (1,176  | ) |  |   | (1,176    | )       
|Derivative instruments translation adjustment                               |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   |          |   |  |   |         |   |  |   | (2,842  | ) |  |   | (2,842    | )       
|Change in valuation of hedging derivative
    instruments                   |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   |          |   |  |   |         |   |  |   | (2,404  | ) |  |   | (2,404    | )       
|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         
|                                                                            | Comprehensive loss |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           | (49,184  | )
|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         
|Options exercised                                                           |                    |              | 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 | )     |  |   | 1,178,176 |   |  |   | (68,241  | ) |  |   | (12,503 | ) |  |   | 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 | )
|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         
|Options exercised                                                           |                    |              | 192    |          |  |            | 2   |             |  |                 |       |           |  |        |        |       |  |   | 3,151     |   |  |   |         |   |  |   |        |   |  |   | 3,153     |         
|Conversion of POPs to common stock                                          |                    |              | 188    |          |  |            | 2   |             |  |                 |       |           |  |        |        |       |  |   | 2,913     |   |  |   |         |   |  |   |        |   |  |   | 2,915     |         
|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 | )     |  |   | 1,192,387 |   |  |   | (230,870 | ) |  |   | (7,052  | ) |  |   | 878,286   |         
|Comprehensive loss:                                                         |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         
|Net loss                                                                    |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   |          |   |  |   | (388,864 | ) |  |   |        |   |  |   | (388,864  | )       
|Foreign currency translation adjustment                                     |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   |          |   |  |   |         |   |  |   | 6,075   |   |  |   | 6,075     |         
|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         
|                                                                            | Comprehensive loss |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           | (382,789 | )
|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         
|Issuances of common stock                                                   |                    |              | 13,800 |          |  |            | 138 |             |  |                 |       |           |  |        |        |       |  |   | 95,070    |   |  |   |         |   |  |   |        |   |  |   | 95,208    |         
|Issuance of restricted stock                                                |                    |              | 232    |          |  |            | 2   |             |  |                 |       |           |  |        |        |       |  |   | 1,151     |   |  |   |         |   |  |   |        |   |  |   | 1,153     |         
|Debt for equity exchanges                                                   |                    |              | 4,613  |          |  |            | 46  |             |  |                 | 2,056  |           |  |        | 34,084  |       |  |   | 26,308    |   |  |   | (22,360  | ) |  |   |        |   |  |   | 38,078    |         
|Conversion of POPs to common stock                                          |                    |              | 50     |          |  |            | 1   |             |  |                 |       |           |  |        |        |       |  |   | 920       |   |  |   |         |   |  |   |        |   |  |   | 921       |         
|Amortization of unearned stock-based compensation                           |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   | 1,349     |   |  |   |         |   |  |   |        |   |  |   | 1,349     |         
|Stock option expense                                                        |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   | 22        |   |  |   |         |   |  |   |        |   |  |   | 22        |         
|Shares repurchased                                                          |                    |              |       |          |  |            |    |             |  |                 | (77    | )         |  |        | (376    | )     |  |   |          |   |  |   |         |   |  |   |        |   |  |   | (376      | )       
|Redemption of OP Units                                                      |                    |              | 885    |          |  |            | 9   |             |  |                 |       |           |  |        |        |       |  |   | 21,752    |   |  |   |         |   |  |   |        |   |  |   | 21,761    |         
|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         
|Balance, December 31, 2003                                                  |                    |              | 69,135 |          |  | $          | 691 |             |  |                 | (2,345 | )         |  | $      | (42,966 | )     |  | $ | 1,338,959 |   |  | $ | (642,094 | ) |  | $ | (977    | ) |  | $ | 653,613   |         
|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         

See
accompanying notes to the consolidated financial statements.

48



---



##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS


YEARS ENDED DECEMBER 31, 2003, 2002 AND
2001


(Dollars in thousands)


|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |          |         |        |  
|---------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ------------------------------------------------------------------------------ | -------- | ------- | ------- | ------- | -------- | ------- | ------ | ------- | -------- | ------- | ------ | -
|                                                                 |                                                                                               | 2003                                                               |                                                                                | 2002     |         | 2001   
|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |        
|Operating activities:                                            |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|                                                                 | Net loss                                                                                      |                                                                    | $                                                                              | (388,864 | )       |         | $       | (161,248 | )       |        | $       | (42,762  | )      
|                                                                 | Adjustments to reconcile net loss to net cash
    (used in) provided by operating activities: |                                                                    |                                                                                |          |         |         |         |          |         |        |         |          |        
|                                                                 |                                                                                               | Depreciation and amortization                                      |                                                                                |          | 114,581 |         |         |          | 126,602 |        |         |          | 120,502 |       
|                                                                 |                                                                                               | Loss on asset impairments                                          |                                                                                |          | 320,037 |         |         |          | 78,732  |        |         |          | 43,582  |       
|                                                                 |                                                                                               | Loss on sale of assets, before tax effect                          |                                                                                |          | 2,356   |         |         |          | 21,197  |        |         |          | 2,176   |       
|                                                                 |                                                                                               | Gain on early extinguishments of debt                              |                                                                                |          | (4,085  | )       |         |          |        |        |         |          |        |       
|                                                                 |                                                                                               | Loss on fair value of non-hedging derivatives                      |                                                                                |          |        |         |         |          | 4,735   |        |         |          | 6,666   |       
|                                                                 |                                                                                               | Write-down of note receivable with Interstate
    Hotels & Resorts |                                                                                |          |        |         |         |          | 14,517  |        |         |          |        |       
|                                                                 |                                                                                               | Write-down of investment in STS Hotel Net                          |                                                                                |          |        |         |         |          |        |        |         |          | 2,112   |       
|                                                                 |                                                                                               | Minority interests                                                 |                                                                                |          | (17,877 | )       |         |          | (10,574 | )      |         |          | (2,958  | )     
|                                                                 |                                                                                               | Amortization of unearned stock-based compensation                  |                                                                                |          | 2,544   |         |         |          | 4,543   |        |         |          | 2,263   |       
|                                                                 |                                                                                               | Change in value of interest rate swaps                             |                                                                                |          | (3,977  | )       |         |          | (7,612  | )      |         |          |        |       
|                                                                 |                                                                                               | Deferred income taxes                                              |                                                                                |          | (5,199  | )       |         |          | (2,316  | )      |         |          | (1,779  | )     
|                                                                 |                                                                                               | Changes in operating assets and liabilities:                       |                                                                                |          |         |         |         |          |         |        |         |          |         |       
|                                                                 |                                                                                               |                                                                    | Accounts receivable                                                            |          |         | (7,881  | )       |          |         | (9,650 | )       |          |         | 2,855  |  
|                                                                 |                                                                                               |                                                                    | Prepaid expenses and other assets                                              |          |         | (345    | )       |          |         | (3,401 | )       |          |         | (2,039 | )
|                                                                 |                                                                                               |                                                                    | Due from/to Interstate Hotels & Resorts                                        |          |         | 5,911   |         |          |         | 6,757  |         |          |         | 13,344 |  
|                                                                 |                                                                                               |                                                                    | Accounts payable, accrued expenses, accrued
    interest and other liabilities |          |         | (34,337 | )       |          |         | (4,384 | )       |          |         | 3,205  |  
|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|Net cash (used in) provided by operating
    activities          |                                                                                               |                                                                    | (17,136                                                                        | )        |         |         | 57,898  |          |         |        | 147,167 |         
|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|Investing activities:                                            |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|                                                                 | Capital expenditures for property and equipment                                               |                                                                    |                                                                                | (36,190  | )       |         |         | (47,347  | )       |        |         | (44,476  | )      
|                                                                 | Proceeds from sales of assets                                                                 |                                                                    |                                                                                | 127,885  |         |         |         | 60,650   |         |        |         | 10,400   |        
|                                                                 | Purchases of marketable securities                                                            |                                                                    |                                                                                | 18,040   |         |         |         |         |         |        |         |         |        
|                                                                 | Sales of marketable securities                                                                |                                                                    |                                                                                | (18,040  | )       |         |         |         |         |        |         |         |        
|                                                                 | Hotel operating cash received in lease conversions                                            |                                                                    |                                                                                |         |         |         |         |         |         |        |         | 3,257    |        
|                                                                 | Net payments from (advances to) Interstate Hotels
    & Resorts                               |                                                                    |                                                                                | 42,052   |         |         |         | (7,500   | )       |        |         | (36,000  | )      
|                                                                 | (Increase) decrease in restricted cash                                                        |                                                                    |                                                                                | (22,158  | )       |         |         | 939      |         |        |         | (1,386   | )      
|                                                                 | Costs associated with disposition program and
    other, net                                  |                                                                    |                                                                                | (6,821   | )       |         |         | (2,476   | )       |        |         | (719     | )      
|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|Net cash provided by (used in) investing
    activities          |                                                                                               |                                                                    | 104,768                                                                        |          |         |         | 4,266   |          |         |        | (68,924 | )       
|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|Financing activities:                                            |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|                                                                 | Principal payments on long-term debt                                                          |                                                                    |                                                                                | (245,711 | )       |         |         | (352,466 | )       |        |         | (871,467 | )      
|                                                                 | Proceeds from issuance of long-term debt                                                      |                                                                    |                                                                                | 271,000  |         |         |         | 305,258  |         |        |         | 933,250  |        
|                                                                 | Deferred financing fees                                                                       |                                                                    |                                                                                | (10,532  | )       |         |         | (4,806   | )       |        |         | (18,927  | )      
|                                                                 | Proceeds from common stock issuances                                                          |                                                                    |                                                                                | 95,358   |         |         |         |         |         |        |         |         |        
|                                                                 | Proceeds from option exercises                                                                |                                                                    |                                                                                |         |         |         |         | 3,153    |         |        |         | 847      |        
|                                                                 | Dividends paid to stockholders                                                                |                                                                    |                                                                                |         |         |         |         | (1,846   | )       |        |         | (89,470  | )      
|                                                                 | Distributions to minority investors                                                           |                                                                    |                                                                                | (565     | )       |         |         | (1,214   | )       |        |         | (8,069   | )      
|                                                                 | Purchase of limited partnership unit                                                          |                                                                    |                                                                                | (65      | )       |         |         |         |         |        |         |         |        
|                                                                 | Purchases of OP units                                                                         |                                                                    |                                                                                |         |         |         |         |         |         |        |         | (1,513   | )      
|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|Net cash provided by (used in) financing
    activities          |                                                                                               |                                                                    | 109,485                                                                        |          |         |         | (51,921 | )        |         |        | (55,349 | )       
|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|Effect of exchange rate changes on cash and cash
    equivalents |                                                                                               |                                                                    | (129                                                                           | )        |         |         | 205     |          |         |        | 304     |         
|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|Net increase in cash and cash equivalents                        |                                                                                               |                                                                    | 196,988                                                                        |          |         |         | 10,448  |          |         |        | 23,198  |         
|Cash and cash equivalents, beginning of year                     |                                                                                               |                                                                    | 33,896                                                                         |          |         |         | 23,448  |          |         |        | 250     |         
|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|Cash and cash equivalents, end of year                           |                                                                                               | $                                                                  | 230,884                                                                        |          |         | $       | 33,896  |          |         | $      | 23,448  |         
|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         

49



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##### 



|                                                                                                                                          |                                                                     |                                 |   |         |  |      |   |         |  |  |   |         |        | 
|----------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------------- | - | ------- |  | ---- | - | ------- |  |  | - | ------- | ------ | 
|                                                                                                                                          |                                                                     | 2003                            |   | 2002    |  | 2001
|                                                                                                                                          |                                                                     |                                 |   |         |  |     
|Supplemental Cash Flow Information                                                                                                        |                                                                     |                                 |   |         |  |      |   |         |  |  |   |        
|Cash paid for interest and income taxes:                                                                                                  |                                                                     |                                 |   |         |  |      |   |         |  |  |   |        
|                                                                                                                                          | Interest, net of capitalized interest                               |                                 | $ | 144,856 |  |      | $ | 132,977 |  |  | $ | 105,732 |       
|                                                                                                                                          | Income taxes                                                        |                                 |   | 2,131   |  |      |   | 827     |  |  |   | 698     |       
|Non-cash investing and financing activities:                                                                                              |                                                                     |                                 |   |         |  |      |   |         |  |  |   |        
|                                                                                                                                          | Senior subordinated debt redeemed in exchange for
    common stock  |                                 |   | 38,078  |  |      |   |        |  |  |   |        |       
|                                                                                                                                          | Redemption of OP units                                              |                                 |   | 21,761  |  |      |   | 6,502   |  |  |   | 5,428   |       
|                                                                                                                                          | Issuance of POPs                                                    |                                 |   |        |  |      |   | 2,894   |  |  |   | 1,243   |       
|                                                                                                                                          | POPs converted to common stock                                      |                                 |   | 921     |  |      |   | 2,915   |  |  |   |        |       
|                                                                                                                                          | Issuance of restricted stock                                        |                                 |   | 1,153   |  |      |   |        |  |  |   |        |       
|We received the following operating assets and
    assumed the following liabilities in connection with our lease
    conversion in 2001: |                                                                     |                                 |   |         |  |      |   |         |  |  |   |        
|                                                                                                                                          | Accounts receivable                                                 |                                 |   |         |  |      |   |         |  |  | $ | 47,200  |       
|                                                                                                                                          | Prepaid expense 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 | 
|                                                                                                                                          |                                                                     |                                 |   |         |  |      |   |         |  |  |   |        

See accompanying notes to the consolidated
financial statements.

50



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##### 



MERISTAR HOSPITALITY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


DECEMBER 31, 2003, 2002 AND 2001




|   |             
|-- | ------------
|1. | Organization

MeriStar Hospitality Corporation is a real estate
investment trust, or REIT. We own a portfolio of primarily
upscale, full-service hotels and resorts in the United States
and one in Canada. Our portfolio is diversified geographically
as well as by franchise and brand affiliations. As of
December 31, 2003, we owned 92 hotels with 24,733 rooms,
all of which were leased by our taxable subsidiaries and managed
by Interstate Hotels & Resorts, Inc. (Interstate
Hotels). We have sold nine hotels with 2,197 rooms since
January 1, 2004. Ten of the remaining 83 hotels are
currently planned for disposition.

On January 1, 2001, changes to the federal
tax laws governing REITs, commonly known as the REIT
Modernization Act, or RMA, became effective. 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 for each property to a
subsidiary of Interstate Hotels. The taxable subsidiaries in
turn make rental payments to our subsidiary operating
partnership 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 an additional 1.5% of total
hotel revenue. All of the agreements expire in 2010 and have
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. In December 2003, the Financial
Accounting Standards Board (FASB) revised its
Interpretation No. (FIN) 46, Consolidation of
Variable Interest Entities, previously issued in January
2003, to eliminate from its scope entities that are deemed to be
a business (as defined in the interpretation) unless they meet
certain conditions therein specified. The application of this
revised interpretation had no effect on our results of
operations or financial condition as we do not have an interest
in any such variable interest entity.

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.

Property and Equipment.We record our property and equipment
at cost or at fair value at the time of contribution for
contributed property. We use the straight-line method for
depreciation. We depreciate the majority of our buildings and
improvements over a life of 40 years. We depreciate
furniture, fixtures and equipment over lives ranging from five
to seven years. For the years ended December 31, 2003, 2002
and 2001, we capitalized interest of $3.1 million,
$4 million, and $6.1 million, respectively.

51



---



##### 



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 assets and liabilities relating to our held for
sale properties on our consolidated balance sheet.

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 classify investments with original
maturities of three months or less as cash equivalents. Our cash
equivalents include investments in debt securities, including
commercial paper, overnight repurchase agreements and money
market funds. Restricted cash represents amounts held in escrow
in accordance with the requirements of certain of our credit
facilities.

Revenue Recognition.Our revenues are derived from the
operations of our hospitality properties, including room, food
and beverage revenues. We recognize hotel operational revenues
as hotel services are delivered. We also derive revenues from
the leases of office, retail and parking rentals, whereby we
generally recognize the revenue on a straight-line basis over
the terms of the respective leases.

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 to be recorded as discontinued
operations. Any gains or losses on final disposition are also
included in 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 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 or
potential sale of the asset. 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.

Accounting for Costs Associated with Exit or
Disposal Activities.We adopted the
provisions of SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, on
January 1, 2003. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value only
when the liability is incurred. Our strategy includes the
disposition of certain hotel assets, all of which are managed
under agreements that typically require payments to Interstate
Hotels as a result of termination. Any such liability will be
recognized at the time the asset disposition is complete and a
termination notice is provided to Interstate Hotels. At that
time, the recognition of the termination obligation will be
included in the calculation of the final gain or loss on sale.
For further discussion of potential termination obligations, see
Asset Dispositions included in Item 7 of this
Annual Report on Form 10-K.

Gains and Losses From Extinguishments of Debt.We adopted the provisions of SFAS
No. 145, Rescission of FASB Statements No. 4,
No. 44 and No. 64, Amendment of SFAS No. 13, and
Technical Corrections, on January 1, 2003. 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

52



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infrequent transactions. It also requires prior
period gains or losses that are not from unusual and infrequent
transactions to be reclassified. See Note 6 for details on
the early extinguishment of substantially all of our 4.75%
convertible notes and a significant portion of our 8.75% senior
subordinated notes during the year ended December 31, 2003.


Stock-Based Compensation.We adopted the recognition provisions
of SFAS No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, on
January 1, 2003 for new stock options issued under our
compensation programs. As permitted by SFAS No. 148, we
elected to apply the provisions prospectively, which includes
recognizing compensation expense for only those stock options
issued in 2003 and after. During the year ended
December 31, 2003, we granted 235,000 stock options to
employees which vest ratably over three years. Compensation
costs related to these stock options are included in general and
administrative expenses on the accompanying consolidated
statement of operations. We apply the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, in accounting for our stock options
issued under our compensation programs prior to January 1,
2003. As we granted these stock options at fair market value, no
compensation cost has been recognized. For our other
equity-based compensation plans, we recognize compensation
expense over the vesting period based on the fair market value
of the award at the date of grant.

Pro forma information regarding net loss and loss
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:

|                               |  |      |            |      |  |      |            |   |  |   |            |  
|------------------------------ |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                               |  | 2003 |            | 2002 |  | 2001
|                               |  |      |            |      |  |     
|Risk-free interest rate        |  |      | 2.1        | %    |  |      | 2.1        | % |  |   | 3.6        | %
|Dividend rate                  |  |      |           |      |  |      |           |   |  | $ | 1.525      |  
|Volatility factor              |  |      | 0.04       |      |  |      | 0.04       |   |  |   | 0.57       |  
|Weighted average expected life |  |      | 4.12 years |      |  |      | 3.77 years |   |  |   | 3.10 years |  

Had compensation cost been determined based on
fair value at the grant date for awards granted prior to our
adoption of the fair value method, our net loss and per share
amounts would have been adjusted to the pro forma amounts
indicated as follows (in thousands, except per share amounts):

|                                               |                                                                                                                                                     |                         |          |        |   |      |          |        |   |   |         |        |  
|---------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | -------- | ------ | - | ---- | -------- | ------ | - | - | ------- | ------ | -
|                                               |                                                                                                                                                     |                        
|                                               |                                                                                                                                                     | Year Ended December 31,
|                                               |                                                                                                                                                     |                        
|                                               |                                                                                                                                                     | 2003                    |          | 2002   |   | 2001
|                                               |                                                                                                                                                     |                         |          |        |   |     
|Net loss, as reported                          |                                                                                                                                                     | $                       | (388,864 | )      |   | $    | (161,248 | )      |   | $ | (42,762 | )     
|                                               | Add: Stock-based employee compensation expense
    included in reported net loss, net of related tax effect                                         |                         |          | 3,077  |   |      |          | 4,692  |   |   |         | 4,434  |  
|                                               | Deduct: Total stock-based employee compensation
    expense determined under fair value-based method for all awards,
    net of related tax effects |                         |          | (3,603 | ) |      |          | (5,528 | ) |   |         | (9,098 | )
|                                               |                                                                                                                                                     |                         |          |        |   |      |          |        |   |   |         |       
|Net loss, pro forma                            |                                                                                                                                                     | $                       | (389,390 | )      |   | $    | (162,084 | )      |   | $ | (47,426 | )     
|                                               |                                                                                                                                                     |                         |          |        |   |      |          |        |   |   |         |       
|Loss per share:                                |                                                                                                                                                     |                         |          |        |   |      |          |        |   |   |         |       
|                                               | Basic and diluted, as reported                                                                                                                      |                         | $        | (7.65  | ) |      | $        | (3.59  | ) |   | $       | (0.97  | )
|                                               | Basic and diluted, pro forma                                                                                                                        |                         | $        | (7.66  | ) |      | $        | (3.61  | ) |   | $       | (1.08  | )
|Weighted average fair value of options granted |                                                                                                                                                     | $                       | 0.23     |        |   | $    | 0.72     |        |   | $ | 6.59    |       

These pro forma compensation costs may not be
representative of the actual effects on reported net loss and
loss per share in future years.

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

53



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##### 



differences between the tax and financial
reporting bases of assets and liabilities. As a REIT, we are not
subject to federal income taxes, provided that we comply with
various requirements necessary to maintain REIT status. We are
subject to state and local taxes in certain jurisdictions.


Foreign Currency Translation.We sold three of our four Canadian
hotels in December 2003. We maintained the results of operations
for our Canadian hotels in Canadian dollars and translated those
results to U.S. dollars using the average exchange rates for
each period. We translated assets and liabilities using the
exchange rate in effect at the balance sheet date. We reflected
any resulting translation adjustments in accumulated other
comprehensive loss.

Accounting for Guarantees.FASB 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, became effective
on January 1, 2003. The interpretation requires recognition
of liabilities at their fair value for newly-issued guarantees.
We have no guarantees which require recognition under the
provisions of this interpretation.

Derivative Instruments and Hedging Activities.Our interest rate risk management
objective is to limit the effect of interest rate changes on
earnings and cash flows. While all of our outstanding debt is
currently fixed rate, we look to manage interest rates through
the use of a combination of fixed and variable rate debt. We
only enter into derivative or interest rate transactions for
cash flow hedging purposes. We 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. SFAS No. 149, Amendment
of Statement 133 on Derivative Instruments and Hedging
Activities became effective on July 1, 2003. The
statement clarifies under what circumstances a contract with an
initial net investment meets the characteristics of a
derivative, clarifies when a derivative contains a financing
component, amends the definition of an underlying derivative,
and amends certain other provisions. This statement applies to
any freestanding financial derivative instruments entered into
or modified after June 30, 2003. This standard did not
affect our results of operations or financial condition as we
have not entered into any freestanding financial derivative
instruments since June 30, 2003.

Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and
Equity.The FASB issued SFAS
No. 150 Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity in May
2003. The provisions of the statement require many instruments
which were previously classified as equity to now be classified
as a liability (or an asset in some circumstances), including:
mandatorily redeemable instruments, instruments with repurchase
obligations and instruments with obligations to issue a variable
number of shares. The statement applied immediately to any such
financial instrument entered into or modified after May 31,
2003, and to all other instruments on July 1, 2003. We have
not entered into or modified any financial instruments within
the scope of this standard subsequent to May 31, 2003, nor
do we have any existing financial instruments that fall within
the scope of SFAS No. 150.

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

54



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|   |                       
|-- | ----------------------
|3. | Property and Equipment

Property and equipment consisted of the following
(in thousands):

|                                  |  |              |           |      |  |   |           | 
|--------------------------------- |  | ------------ | --------- | ---- |  | - | --------- | 
|                                  |  |             
|                                  |  | December 31,
|                                  |  |             
|                                  |  | 2003         |           | 2002
|                                  |  |              |           |     
|Land                              |  | $            | 238,772   |      |  | $ | 277,642   | 
|Buildings and improvements        |  |              | 1,930,155 |      |  |   | 2,250,703 | 
|Furniture, fixtures and equipment |  |              | 284,602   |      |  |   | 331,899   | 
|Construction-in-progress          |  |              | 28,223    |      |  |   | 34,811    | 
|                                  |  |              |           |      |  |   |           | 
|                                  |  | $            | 2,481,752 |      |  | $ | 2,895,055 | 
|                                  |  |              |           |      |  |   |           | 

For the years ended December 31, 2003 and
2002, we capitalized interest of $3.1 million and
$4.0 million, respectively.

In late 2002, due to the decision to market
non-core assets as a part of our program to dispose of assets
that do not fit our long-term strategy and changes in economic
conditions, we performed an analysis to determine the
recoverability of each of our hotel properties. Assets we have
identified as non-core typically have one or more of
the following characteristics: secondary market locations,
secondary brand affiliations, higher than average future capital
expenditure requirements, limited future growth potential, or an
over-weighted market location.

We recognized an impairment loss in 2002 on
certain non-core assets we were then actively marketing. Late in
the first quarter of 2003, we expanded our asset disposition
program to include a total of 16 non-core assets and recognized
an impairment loss of $56.7 million as a result of the
change in our expected holding period for these assets.

During the second quarter of 2003, we made the
determination to dispose of an additional 19 non-core assets,
and due to the market interest in certain of our other hotel
assets, we decided to add an additional six assets to our
disposition program. Due to this change in our expected holding
period for these assets, we recognized an additional impairment
loss of $208 million related to the contemplated
disposition of these 41 assets during the second quarter of 2003.

During the third quarter of 2003, we made the
determination to dispose of one additional asset and retain one
of our assets previously included in our disposition program. We
also changed our expected holding period for another asset and
revised our estimated sales prices on certain other assets
included in our disposition program and recognized an additional
impairment loss of $21 million.

During the fourth quarter of 2003, we made the
determination to retain eight of our assets previously included
in our disposition program, and revised our estimated sales
prices on certain other assets. We recognized an additional
impairment loss of $9.4 million.

The impairment charges are based on our estimates
of the fair value of the properties included in our disposition
program. These estimates require us to make assumptions about
the sales prices that we expect to realize for each property as
well as the timing of a potential sale. In making these
estimates, we consider the operating results of the assets, the
market for comparable properties, and quotes from brokers, among
other information. In nearly all cases, our estimates have
reflected the results of an extensive marketing effort and
negotiations with prospective buyers. Actual results could
differ materially from these estimates.

4.          Assets
Held for Sale

Seven of the 19 properties included in our
disposition program met our criteria for held for sale
classification as of December 31, 2003. The other assets
included in our asset disposition program did not meet the
probability criteria as prescribed by SFAS No. 144 to
classify as held for sale. See Note 17 for sales activity
subsequent to year end.

55



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##### 



Assets held for sale consisted of the following
(in thousands). Prior year balances have been reclassified to
conform to the current year presentation:

|                                  |  |              |        |      |  |   |         |  
|--------------------------------- |  | ------------ | ------ | ---- |  | - | ------- | -
|                                  |  |             
|                                  |  | December 31,
|                                  |  |             
|                                  |  | 2003         |        | 2002
|                                  |  |              |        |     
|Land                              |  | $            | 5,061  |      |  | $ | 10,969  |  
|Buildings and improvements        |  |              | 43,391 |      |  |   | 101,066 |  
|Furniture, fixtures and equipment |  |              | 2,759  |      |  |   | 12,642  |  
|Construction-in-progress          |  |              | 1,114  |      |  |   | 1,177   |  
|                                  |  |              |        |      |  |   |         |  
|                                  |  |              | 52,325 |      |  |   | 125,854 |  
|Accumulated depreciation          |  |              | (1,156 | )    |  |   | (15,648 | )
|                                  |  |              |        |      |  |   |         |  
|                                  |  | $            | 51,169 |      |  | $ | 110,206 |  
|                                  |  |              |        |      |  |   |         |  



|   |                        
|-- | -----------------------
|5. | Investment in Affiliate

In 1999, we invested $40 million in MeriStar
Investment Partners, L.P. (MIP), a joint venture
established to acquire upscale, full-service hotels. Our
cost-basis investment is in the form of a partnership interest,
in which we earn a 16% cumulative preferred return. While the
return on this investment is preferred and cumulative, the
underlying investment ranks equally with the investments of the
other investors in MIP. We recognize the return quarterly as it
becomes due to us. As of December 31, 2003, cumulative
preferred returns of $19.6 million were due from MIP. We
reserved a portion of this balance during 2003, and have
included the net $18.2 million in accounts receivable on
the accompanying consolidated balance sheet. We expect that any
cumulative unpaid preferred returns will be paid in the future
from excess cash flow above our current return and from
potential partnership hotel disposition proceeds in excess of
debt allocated to individual assets. Given the current economic
environment, we do not expect MIPs operations to provide
adequate cash flow in the near term for significant payment of
our current returns or repayments of our cumulative unpaid
preferred returns. We evaluate the collectibility of our
preferred return based on our preference to distributions and
the underlying value of the hotel properties.

While we believe that our current and cumulative
returns continue to be fully collectible, the current value of
our underlying investment has declined due to the continued
decline in MIPs cash flow, particularly driven by results
in four of its hotel markets. While we believe that the cash
flow, and thus the value of our investment in MIP, will be
recoverable over time, we expect that any such recovery will
take a number of years to achieve. The accounting rules for cost
basis investments require that declines in value that are other
than temporary be recognized currently. Since the decline in the
value of our underlying investment in MIP is other than
temporary, we recognized an impairment loss of $25 million
during the fourth quarter of 2003.

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|   |               
|-- | --------------
|6. | Long-Term Debt

Long-term debt consisted of the following (in
thousands):

|                               |  |              |           |      |  |   |           |  
|------------------------------ |  | ------------ | --------- | ---- |  | - | --------- | -
|                               |  |             
|                               |  | December 31,
|                               |  |             
|                               |  | 2003         |           | 2002
|                               |  |              |           |     
|Senior unsecured notes         |  | $            | 950,000   |      |  | $ | 950,000   |  
|Secured facility, due 2009     |  |              | 309,035   |      |  |   | 314,626   |  
|Secured facility, due 2013     |  |              | 100,765   |      |  |   |          |  
|Convertible subordinated notes |  |              | 173,705   |      |  |   | 154,300   |  
|Senior subordinated notes      |  |              | 83,438    |      |  |   | 205,000   |  
|Mortgage and other debt        |  |              | 27,011    |      |  |   | 38,030    |  
|Unamortized issue discount     |  |              | (5,926    | )    |  |   | (7,854    | )
|                               |  |              |           |      |  |   |           |  
|                               |  | $            | 1,638,028 |      |  | $ | 1,654,102 |  
|                               |  |              |           |      |  |   |           |  

Aggregate future maturities as of
December 31, 2003 were as follows (in thousands):

|           |  |   |           | 
|---------- |  | - | --------- | 
|2004       |  | $ | 13,164    | 
|2005       |  |   | 10,268    | 
|2006       |  |   | 11,125    | 
|2007       |  |   | 94,822    | 
|2008       |  |   | 310,255   | 
|Thereafter |  |   | 1,198,394 | 
|           |  |   |           | 
|           |  | $ | 1,638,028 | 
|           |  |   |           | 

As of December 31, 2003, all of our debt
bore fixed rates of interest. Our overall weighted average
interest rate was 8.9%. Based on market prices at
December 31, 2003, the fair value of our long-term debt was
$1.73 billion.

Credit facility.On
December 23, 2003, we entered into a new three-year
$50 million senior credit facility, secured by six of our
hotels, and terminated our previous credit facility. In
connection with this termination, we wrote off approximately
$0.5 million in unamortized deferred financing fees. The
write off is included in depreciation and amortization on the
accompanying consolidated statement of operation. The facility
carries an annual interest rate of the London Interbank Offered
Rate, or LIBOR, plus 450 basis points. As of December 31,
2003, we had no outstanding borrowings under this facility. We
incurred approximately $2.7 million in debt issuance costs
related to the facility.

Our new $50 million senior credit facility
contains financial and other restrictive covenants. Our ability
to borrow under this facility is subject to financial covenants,
including leverage, fixed charge coverage and interest coverage
ratios and minimum net worth requirements. Our compliance with
these covenants in future periods will depend substantially upon
the financial results of our hotels. The agreement governing our
new senior credit facility limits our ability to effect mergers,
asset sales and change of control events and limits the payments
of dividends other than those required for us to maintain our
status as a REIT and our ability to incur additional secured and
total indebtedness.

Senior unsecured notes.In February 2002, we issued
$200 million aggregate principal amount of 9.125% senior
unsecured notes due 2011. In December 2001, we issued
$250 million aggregate principal amount of 10.5% senior
notes due June 2009. In January 2001, we issued
$300 million aggregate principal amount of 9.0% senior
notes due 2008 and $200 million of 9.125% senior notes due
2011. The net proceeds from the sales of these notes were used
to repay amounts outstanding under a previous credit facility.
See Note 17 for repurchase activity subsequent to year end.

57



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The total $950 million 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 initiate or transact certain business activities if
specific financial thresholds are not achieved. One of those
thresholds is having a 2 to 1 proforma fixed charge coverage
ratio (as defined in the indentures, fixed charges only include
interest on debt obligations and preferred equity) in order to
enter into certain types of transactions. As of
December 31, 2003, our fixed charge coverage ratio was
below 2 to 1, and therefore we were not permitted generally to
enter into certain transactions, including the repurchase of our
stock, the issuance of any preferred stock, the payment of
dividends, the incurrence of any additional debt, or the
repayment of outstanding debt before it comes due, except as
noted below.

There are certain exceptions with respect to the
incurrence of additional debt and early repayment of debt
features in the indentures. We have the ability to incur up to
$250 million of secured financing within restricted
subsidiaries, subject to meeting other maintenance tests under
the indentures. We also have a general carve-out to incur
$50 million of unspecified borrowings within a restricted
subsidiary. Additionally, we are permitted to repay subordinated
debt prior to its maturity from the proceeds of an equal or
junior financing with a longer term than the debt refinanced, an
equity offering, or a financing within an unrestricted
subsidiary.

Secured facilities.On September 26, 2003, as
permitted by the indentures to our senior unsecured notes and
senior subordinated notes, we completed a $101 million
commercial mortgage-backed securities financing, secured by a
portfolio of four hotels. The loan carries a fixed annual
interest rate of 6.88% and matures in 2013. We incurred
approximately $1.2 million in debt issuance costs related
to the facility. The proceeds will be used to repay debt
carrying higher interest rates, or to fund capital expenditures
or acquisitions to the extent that higher interest rate debt
cannot be acquired at attractive prices.

We completed a $330 million non-recourse
financing secured by a portfolio of 19 hotels in 1999. The loan
bears a fixed annual interest rate of 8.01% and matures in 2009.
The secured facility contains standard provisions that require
the servicer to maintain in escrow cash balances for certain
items such as property taxes and insurance. 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 (NOI) for the trailing
twelve months declines below $57 million. 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 $27.2 million
of cash was held in escrow under this provision as of
December 31, 2003. In July 2003, we signed an amendment to
the loan agreement that permits the release of cash placed in
escrow for all capital expenditures incurred on the 19
encumbered properties on or after April 1, 2003. Although
the servicer will continue to retain in escrow any excess cash
from the encumbered hotels, they will release cash for all
capital expenditures we have incurred from April 1, 2003
through the date of the amendment and future capital
expenditures we incur on the 19 properties. Escrowed funds
totaling approximately $18.4 million were available to fund
capital expenditures under this provision as of
December 31, 2003.

Convertible subordinated notes.On July 1, 2003, we completed an
offering of $170 million aggregate principal amount of 9.5%
convertible subordinated notes due 2010. These notes are
convertible into our common stock at any time prior to or at
maturity, April 1, 2010 at a conversion price of $10.18 per
share (equal to a conversion rate of 98.2318 shares per $1,000
principal amount of notes). We incurred approximately
$6.5 million in debt issuance costs related to the issuance.

The proceeds from the new issuance were used to
repurchase $150.6 million of our $154.3 million 4.75%
convertible notes due 2004, at varying prices, resulting in an
aggregate discount of approximately $1.4 million. We
recognized this gain and wrote off approximately
$0.6 million of deferred financing costs related to the
repurchase during the third quarter of 2003. The write off is
included in depreciation and amortization expense on the
accompanying consolidated statements of operations. These
convertible notes are convertible into our common stock at a
rate of 23.2558 shares per $1,000 in principal amount, which
equals approximately $43.00 per share. The remaining proceeds
from the issuance were also used to repurchase a portion of our
senior subordinated notes, which are described in more detail
below.

58



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##### 



Senior subordinated notes.The notes are unsecured obligations
due in 2007, and provide for semi-annual payments of interest
each February 15 and August 15 at an annual rate of
8.75%. The related indenture contains various restrictive
covenants, which are similar to those in our senior unsecured
notes.

A portion of the proceeds from the July 2003
issuance of 9.5% convertible notes discussed above were used to
repurchase $22.6 million principal amount of our senior
subordinated notes, at varying prices, resulting in an aggregate
discount of approximately $1.5 million. We also repurchased
a further $59.8 million of these notes, at varying prices,
resulting in an aggregate loss of approximately
$0.3 million. In connection with the repurchases of these
notes, we wrote off deferred financing costs totaling
$1.0 million. Also during 2003, we exchanged
$39.2 million of these notes for 6,669,506 shares of our
common stock, resulting in a gain of $1.5 million. In
connection with the exchanges, we wrote off deferred financing
costs totaling $0.5 million. See Note 17 for further
redemption activity subsequent to year end.

Mortgage and other 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 in 2003 totaling
$8.5 million, two of the mortgages in 2002 totaling
$11.9 million, and one of the mortgages in 2001 totaling
$4.0 million. The remaining two mortgages mature in 2011
and 2012 with interest rates of 8.8% and 9.0%, respectively.

Derivatives.We had
three swap agreements that did not qualify for treatment as
cash-flow hedges under SFAS No. 133, expire since
September 30, 2002, one in December 2002, one in April 2003
and one in July 2003. As of December 31, 2003, we had no
outstanding derivative instruments.

During the year ended December 31, 2003, we
recognized $4.0 million of income related to the decrease
in fair value of the liability recorded for the interest rate
swap in place in that time period. For the year ended
December 31, 2003, we made cash payments on this swap of
$4.0 million. The change in fair value and the swap
payments are netted together on our statement of operations,
resulting in no effect.

During the year ended December 31, 2002, we
recognized $7.6 million of income related to the decrease
in fair value of the liability recorded for the interest rate
swaps in place in that time period. For the year ended
December 31, 2002, we made cash payments on those swaps of
$12.1 million. The change in fair value and the swap
payments are netted together on our statement of operations.
During the year ended December 31, 2002, we also recognized
a $4.7 million loss on the fair value of derivatives no
longer providing a hedge due to the repayment of the hedged debt.

For the year ended December 31, 2001, we
made cash payments on our swaps of $6.3 million. We also
recognized a $6.6 million loss on the fair value of
derivatives no longer providing a hedge due to the repayment of
the hedged debt.



|   |             
|-- | ------------
|7. | 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 (in
thousands):

|                                                 |  |      |        |      |  |      |        |   |  |   |        |  
|------------------------------------------------ |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                 |  | 2003 |        | 2002 |  | 2001
|                                                 |  |      |        |      |  |     
|Tax benefit on loss from continuing operations   |  | $    | (3,293 | )    |  | $    | (1,398 | ) |  | $ | (557   | )
|Tax benefit on loss from discontinued operations |  |      | (911   | )    |  |      | (768   | ) |  |   | (722   | )
|                                                 |  |      |        |      |  |      |        |   |  |   |        |  
|Total income tax benefit                         |  | $    | (4,204 | )    |  | $    | (2,166 | ) |  | $ | (1,279 | )
|                                                 |  |      |        |      |  |      |        |   |  |   |        |  

59



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##### 



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

|                                                         |  |      |       |      |  |      |       |   |  |  |       |  
|-------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                                         |  | 2003 |       | 2002 |  | 2001
|                                                         |  |      |       |      |  |     
|Statutory tax rate                                       |  |      | 35.0  | %    |  |      | 35.0  | % |  |  | 35.0  | %
|Effect of REIT dividends paid deduction                  |  |      | (35.0 | )    |  |      | (35.0 | ) |  |  | (34.3 | )
|State and local taxes                                    |  |      | 1.1   |      |  |      | 1.2   |   |  |  | 1.8   |  
|Difference in effective rate on foreign
    subsidiaries |  |      |      |      |  |      | 0.1   |   |  |  | 0.2   |  
|                                                         |  |      |       |      |  |      |       |   |  |  |       |  
|                                                         |  |      | 1.1   | %    |  |      | 1.3   | % |  |  | 2.7   | %
|                                                         |  |      |       |      |  |      |       |   |  |  |       |  

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

|          |         |      |        |        |   |      |        |        |   |   |        |        |  
|--------- | ------- | ---- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | -
|          |         | 2003 |        | 2002   |   | 2001
|          |         |      |        |        |   |     
|Current:  |         |      |        |        |   |      |        |        |   |   |        |       
|          | State   |      | $      | 495    |   |      | $      | 150    |   |   | $      | 400    |  
|          | Foreign |      |        | 500    |   |      |        |       |   |   |        | 100    |  
|          |         |      |        |        |   |      |        |        |   |   |        |       
|          |         |      | 995    |        |   |      | 150    |        |   |   | 500    |       
|Deferred: |         |      |        |        |   |      |        |        |   |   |        |       
|          | Federal |      |        |       |   |      |        | 337    |   |   |        | (337   | )
|          | State   |      |        | (5,419 | ) |      |        | (2,543 | ) |   |        | (1,332 | )
|          | Foreign |      |        | 220    |   |      |        | (110   | ) |   |        | (110   | )
|          |         |      |        |        |   |      |        |        |   |   |        |       
|          |         |      | (5,199 | )      |   |      | (2,316 | )      |   |   | (1,779 | )     
|          |         |      |        |        |   |      |        |        |   |   |        |       
|          |         | $    | (4,204 | )      |   | $    | (2,166 | )      |   | $ | (1,279 | )     
|          |         |      |        |        |   |      |        |        |   |   |        |       

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

|                                           |  |              |        |      |  |   |       |  
|------------------------------------------ |  | ------------ | ------ | ---- |  | - | ----- | -
|                                           |  |             
|                                           |  | December 31,
|                                           |  |             
|                                           |  | 2003         |        | 2002
|                                           |  |              |        |     
|Basis difference in property and equipment |  | $            | 3,895  |      |  | $ | 6,701 |  
|Amortization                               |  |              | (584   | )    |  |   | (672  | )
|Accrued expenses                           |  |              | 566    |      |  |   | 467   |  
|Net operating loss carryforwards           |  |              | (2,603 | )    |  |   |      |  
|Other                                      |  |              | 242    |      |  |   | 219   |  
|                                           |  |              |        |      |  |   |       |  
|Net deferred tax liability                 |  | $            | 1,516  |      |  | $ | 6,715 |  
|                                           |  |              |        |      |  |   |       |  

For state income tax purposes, the aggregate net
operating loss (NOL) carryforward, prior to apportionment, for
the REIT was $130.8 million and $38.2 million as of
December 31, 2003 and 2002, respectively. The net operating
loss for any jurisdiction, state or local, is subject to the
laws of that jurisdiction and may differ from the aggregate NOL
carryforward noted above for reasons other than apportionment.
Such differences in NOL characteristics may arise from, but are
not limited to, carry over period limitations and asset recovery
methods that are different from the federal income tax rules. We
have recorded a deferred tax asset relating to the NOL
carryovers for states where we are subject to corporate level
tax, based on our ability to use the losses against future
income and as an offset to our net deferred tax liability
relating to such state taxes.

The most significant component of our deferred
tax liability continues to be the basis difference in our fixed
assets. 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

60



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##### 



future state and local income tax effect for
differences between the accounting and tax bases of these assets
and liabilities. As of December 31, 2003, this component of
the deferred tax liability was $3.9 million.


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. As a result of our asset disposition
program, certain assets that were subject to the built-in-gains
tax were disposed of during 2003 and 2002. The disposition of
these assets resulted in a net built-in-loss of
$11.3 million. This built-in-loss is available to offset
any income from future sales of assets that are subject to the
built-in-gains tax. We do not anticipate our future dispositions
to result in the recognition of a net built-in-gain. As a
result, we have recorded a full valuation allowance against the
built-in-loss carryover.

For federal income tax purposes, the NOL
carryforward for our taxable subsidiaries was $63.7 million
and $25.6 million as of December 31, 2003 and 2002,
respectively. 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 both
December 31, 2003 and 2002.



|   |                                                
|-- | -----------------------------------------------
|8. | 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 September 2003, we issued 13,800,000 shares of
common stock at a price of $7.20 per share ($95.3 million
of net proceeds) pursuant to our effective shelf registration
statement filed under the Securities Act of 1933.

During 2003, we issued 6,669,506 shares of common
stock in exchange for $39.2 million of our senior
subordinated notes (see Note 6). We reissued 2,056,210
shares held in treasury in connection with these exchanges. See
Note 17 for exchange activity subsequent to year end.

We issued 50,000 shares of common stock to a
former executive officer and director in connection with the
formal separation of management functions with Interstate Hotels
during the first quarter of 2003. This former executive officer
and director also relinquished 50,000 Profits-Only OP Units
(POPs) in the first quarter in connection with the separation.

We issued 380,000, and 48,000 shares of common
stock with a value of $6.1 million and $0.8 million,
respectively, related to the exercise of stock options, the
conversion of POPs into common stock and dividend reinvestments
during the years ended December 31, 2002, and 2001.

Restricted Stock Transactions.In 2003, we issued 231,721 shares of
restricted stock to employees pursuant to employment agreements,
with an aggregate value of $1.2 million.

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 provides for five classes of partnership interests:
Common OP Units, Class B OP Units, Class C OP Units,
Class D OP Units and POPs.

Common OP Unit holders converted 885,000, 414,000
and 250,000 of their OP Units, with a value of
$21.8 million, $6.5 million and $5.4 million,
respectively, into common stock during the years ended
December 31, 2003, 2002, and 2001, respectively. There were
no material conversions for cash during the years ended
December 31, 2003, 2002, and 2001.

In May 2002, we issued 162,500 POPs to an
executive officer pursuant to an employment agreement. If all of
the vesting criteria for the POPs were met, then each POP would
have a value equivalent to the value of one share of our stock,
which for this issuance totaled $2.9 million.

61



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##### 



Dividends.We did
not declare or pay any dividends in 2003.

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.

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.



|   |               
|-- | --------------
|9. | Loss Per Share

The following table presents the computation of
basic and diluted loss per share (in thousands, except per share
amounts):

|                                  |                                                                                     |                         |   |          |   |      |   |         |   |  |   |         |  
|--------------------------------- | ----------------------------------------------------------------------------------- | ----------------------- | - | -------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                  |                                                                                     |                        
|                                  |                                                                                     | Year Ended December 31,
|                                  |                                                                                     |                        
|                                  |                                                                                     | 2003                    |   | 2002     |   | 2001
|                                  |                                                                                     |                         |   |          |   |     
|Basic and Diluted Loss Per Share: |                                                                                     |                         |   |          |   |      |   |         |   |  |   |        
|                                  | Loss from continuing operations                                                     |                         | $ | (253,977 | ) |      | $ | (67,674 | ) |  | $ | (17,235 | )
|                                  | Dividends paid on unvested restricted stock                                         |                         |   |         |   |      |   | (4      | ) |  |   | (502    | )
|                                  |                                                                                     |                         |   |          |   |      |   |         |   |  |   |        
|                                  | Loss available to common stockholders                                               |                         |   | (253,977 | ) |      |   | (67,678 | ) |  |   | (17,737 | )
|                                  | Weighted average number of basic and diluted
    shares of common stock outstanding |                         |   | 50,807   |   |      |   | 44,931  |   |  |   | 44,507  |  
|                                  |                                                                                     |                         |   |          |   |      |   |         |   |  |   |        
|                                  | Basic and diluted loss per share from continuing
    operations                     |                         | $ | (5.00    | ) |      | $ | (1.51   | ) |  | $ | (0.40   | )
|                                  |                                                                                     |                         |   |          |   |      |   |         |   |  |   |        

For the years ended December 31, 2003, 2002,
and 2001, 15,078, 9,525, and 9,225 shares, respectively,
consisting of stock options, operating partnership units and
assumed conversion of our outstanding convertible notes, were
excluded from the calculation of diluted loss per share as the
effect of their inclusion would be anti-dilutive.



|    |                           
|--- | --------------------------
|10. | 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 $16.4 million at December 31, 2003 included
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. The balance also included
accrued termination obligations related to our asset
dispositions.

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, under certain circumstances, 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. During the years ended
December 31, 2003, 2002 and 2001, we paid Interstate Hotels
a net amount of $0.07 million, $0.5 million, and
$0.1 million, respectively, for such services.

62



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##### 



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 million for general
corporate purposes. As of December 31, 2001, Interstate
Hotels owed us $36 million under this agreement. Effective
January 1, 2002, Interstate Hotels issued us a term note
for $13.1 million, which refinanced outstanding accounts
payable owed to us.

In connection with the merger that created
Interstate Hotels on July 31, 2002, we amended the terms of
certain loans outstanding to Interstate Hotels, combining them
into a term loan agreement with a principal balance of
$56.1 million and a maturity date of July 31, 2007.
The interest rate was 650 basis points over the 30-day LIBOR.
This term loan was subordinate to Interstate Hotels new
bank credit agreement.

In late December 2002, we reached an agreement to
settle the term loan with Interstate Hotels for
$42.1 million, plus accrued interest, which was paid in
January 2003. We incurred a $14.5 million charge in 2002,
including expenses of the transaction, related to this
settlement.

During 2002 and 2001, we earned interest of
$4.8 million, and $5.0 million, respectively, from
these lending arrangements.

Other Related-Party Transactions

Of the $300 million aggregate principal
amount of 9.0% senior unsecured notes due in 2008 we issued in
January 2001, $30 million 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 million aggregate principal
amount of 9.125% senior unsecured notes due in 2011 we issued in
January 2001, $20 million 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 million aggregate principal
amount of 10.5% senior unsecured notes due in 2009 we issued in
December 2001, $23 million 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.

11.          Incentive
Compensation

Under our incentive plan, we are authorized to
award up to a maximum of 12.5% of our outstanding shares of
common stock to our officers or other key employees. These
awards may be granted in cash, restricted shares of common stock
or options to purchase common stock. As of December 31,
2003, we were authorized to award up to a maximum of 8,348,703
shares of common stock, of which 4,052,975 shares remain
available for award.

Under our incentive plan for non-employee
directors, we are authorized to award up to 500,000 options to
purchase common stock to our non-employee directors. As of
December 31, 2003, 210,000 shares remain available for
award.

Stock Options

Stock options to officers, other key employees or
directors are exercisable in three annual installments and
expire ten years from the grant date.

63



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##### 



Stock option activity for 2003, 2002 and 2001 was
as follows:

|                                   |           |                |           |                 |   |           |       |          |  |  |         |         |  |   |       |       | 
|---------------------------------- | --------- | -------------- | --------- | --------------- | - | --------- | ----- | -------- |  |  | ------- | ------- |  | - | ----- | ----- | 
|                                   |           |                |           |                
|                                   |           | Incentive Plan |           | Directors Plan
|                                   |           |                |           |                
|                                   |           |                |           | Weighted        |   |           |       | Weighted
|                                   |           |                |           | Average         |   |           |       | Average 
|                                   |           | Number of      |           | Exercise        |   | Number of |       | Exercise
|                                   |           | Shares         |           | Price           |   | Shares    |       | Price   
|                                   |           |                |           |                 |   |           |       |         
|Outstanding at January 1, 2001     |           |                | 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   |                |           | 707,500         |   |           |       | 11.03    |  |  |         | 92,500  |  |   |       | 11.09 | 
|                                   | Exercised |                |           | (201,296        | ) |           |       | 15.45    |  |  |         |        |  |   |       |      | 
|                                   | Canceled  |                |           | (164,829        | ) |           |       | 20.10    |  |  |         |        |  |   |       |      | 
|                                   |           |                |           |                 |   |           |       |          |  |  |         |         |  |   |       |      
|Outstanding at December 31, 2002   |           |                | 2,979,205 |                 |   |           | 17.59 |          |  |  | 255,000 |         |  |   | 17.93 |      
|                                   | Granted   |                |           | 200,000         |   |           |       | 4.39     |  |  |         | 35,000  |  |   |       | 5.90  | 
|                                   | Canceled  |                |           | (405,322        | ) |           |       | 23.26    |  |  |         |        |  |   |       |      | 
|                                   |           |                |           |                 |   |           |       |          |  |  |         |         |  |   |       |      
|Outstanding at December 31, 2003   |           |                | 2,773,883 |                 |   | $         | 15.82 |          |  |  | 290,000 |         |  | $ | 16.48 |      
|                                   |           |                |           |                 |   |           |       |          |  |  |         |         |  |   |       |      
|Shares exercisable at December 31: |           |                |           |                 |   |           |       |          |  |  |         |         |  |   |       |      
|                                   | 2001      |                |           | 2,020,759       |   |           | $     | 20.09    |  |  |         | 80,000  |  |   | $     | 21.69 | 
|                                   |           |                |           |                 |   |           |       |          |  |  |         |         |  |   |       |      
|                                   | 2002      |                |           | 2,191,049       |   |           | $     | 19.81    |  |  |         | 119,167 |  |   | $     | 21.79 | 
|                                   |           |                |           |                 |   |           |       |          |  |  |         |         |  |   |       |      
|                                   | 2003      |                |           | 2,074,402       |   |           | $     | 17.99    |  |  |         | 177,500 |  |   | $     | 20.52 | 
|                                   |           |                |           |                 |   |           |       |          |  |  |         |         |  |   |       |      

The following table summarizes information about
stock options outstanding and exercisable at December 31,
2003:

|                 |  |                     |           |                     |  |          |      |             |  |          |       |  |  |  |           |  |  |   |       | 
|---------------- |  | ------------------- | --------- | ------------------- |  | -------- | ---- | ----------- |  | -------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                 |  |                     |           |                    
|                 |  | 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   
|                 |  |                     |           |                     |  |          |      |             |  |         
|$ 2.93 to $ 5.92 |  |                     | 207,500   |                     |  |          | 9.20 |             |  | $        | 4.35  |  |  |  |          |  |  | $ |      | 
|$ 6.60 to $ 7.42 |  |                     | 357,500   |                     |  |          | 9.00 |             |  | $        | 7.36  |  |  |  | 110,003   |  |  | $ | 7.42  | 
|$ 7.73 to $13.33 |  |                     | 346,000   |                     |  |          | 8.45 |             |  | $        | 11.43 |  |  |  | 144,839   |  |  | $ | 11.82 | 
|$14.50 to $14.50 |  |                     | 7,500     |                     |  |          | 8.04 |             |  | $        | 14.50 |  |  |  | 2,500     |  |  | $ | 14.50 | 
|$14.88 to $14.88 |  |                     | 375,000   |                     |  |          | 5.95 |             |  | $        | 14.88 |  |  |  | 375,000   |  |  | $ | 14.88 | 
|$15.60 to $15.64 |  |                     | 337,451   |                     |  |          | 3.23 |             |  | $        | 15.64 |  |  |  | 314,120   |  |  | $ | 15.64 | 
|$16.25 to $19.00 |  |                     | 242,750   |                     |  |          | 7.58 |             |  | $        | 17.38 |  |  |  | 129,420   |  |  | $ | 17.40 | 
|$19.19 to $19.19 |  |                     | 700,000   |                     |  |          | 5.10 |             |  | $        | 19.19 |  |  |  | 700,000   |  |  | $ | 19.19 | 
|$19.75 to $29.44 |  |                     | 391,757   |                     |  |          | 4.80 |             |  | $        | 24.23 |  |  |  | 377,595   |  |  | $ | 24.28 | 
|$29.44 to $31.42 |  |                     | 98,425    |                     |  |          | 3.87 |             |  | $        | 31.01 |  |  |  | 98,425    |  |  | $ | 31.01 | 
|                 |  |                     |           |                     |  |          |      |             |  |          |       |  |  |  |           |  |  |   |       | 
|                 |  |                     | 3,063,883 |                     |  |          |      |             |  |          |       |  |  |  | 2,251,902 |  |  |   |       | 
|                 |  |                     |           |                     |  |          |      |             |  |          |       |  |  |  |           |  |  |   |       | 

64



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##### 



Other Stock-Based Compensation

As of December 31, 2003, we have granted
853,221 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
687,500 POPs outstanding and 588,195 POPs vested as of
December 31, 2003.



|    |                                     
|--- | ------------------------------------
|12. | Separation and Restructuring Charges

In 2002, we incurred $3.2 million of costs
related to the formal separation of management functions from
Interstate Hotels. In 2001, we incurred a restructuring charge
of $1.1 million 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.



|    |                              
|--- | -----------------------------
|13. | 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,
2003 were as follows (in thousands):

|           |  |   |        | 
|---------- |  | - | ------ | 
|2004       |  | $ | 1,785  | 
|2005       |  |   | 1,746  | 
|2006       |  |   | 1,648  | 
|2007       |  |   | 1,672  | 
|2008       |  |   | 1,672  | 
|Thereafter |  |   | 52,296 | 
|           |  |   |        | 
|           |  | $ | 60,819 | 
|           |  |   |        | 

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

65



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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, 2003
were as follows (in thousands):

|           |  |   |        | 
|---------- |  | - | ------ | 
|2004       |  | $ | 4,291  | 
|2005       |  |   | 2,838  | 
|2006       |  |   | 1,943  | 
|2007       |  |   | 1,677  | 
|2008       |  |   | 991    | 
|Thereafter |  |   | 1,909  | 
|           |  |   |        | 
|           |  | $ | 13,649 | 
|           |  |   |        | 

As we dispose of the 10 remaining assets in our
disposition program, we may incur termination obligations due to
Interstate Hotels of up to a maximum of approximately
$5.5 million,assuming the disposition of all 10 of
the properties in 2004 and assuming buyers of our hotel
properties elect to have the properties managed by parties other
than Interstate Hotels or do not assume the obligation as part
of the sale transaction. In addition, we may be obligated to pay
Interstate Hotels termination fees of up to a maximum of
approximately $9.8 million with respect to the 24
properties we have already sold. Any obligation due under the
termination provisions of the contract is payable over a period
of 30 months. This amount may be reduced by replacement
management contracts.



|    |                              
|--- | -----------------------------
|14. | Dispositions and Acquisitions

We sold five hotels in 2002 and fifteen hotels in
2003. As of December 31, 2003, we had 19 hotels planned for
disposition. Seven of these hotels met our criteria for
held-for-sale classification as of December 31, 2003 (see
Note 4). Operating results for the sold hotels, and where
applicable the gain or loss on final disposition, and the seven
classified as held-for-sale are included in discontinued
operations.

Summary financial information included in
discontinued operations for these hotels were as follows (in
thousands):

|                            |  |      |          |      |  |      |         |   |  |   |         |  
|--------------------------- |  | ---- | -------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                            |  | 2003 |          | 2002 |  | 2001
|                            |  |      |          |      |  |     
|Revenue                     |  | $    | 102,630  |      |  | $    | 140,344 |   |  | $ | 154,298 |  
|Loss on asset impairments   |  |      | (131,647 | )    |  |      | (71,807 | ) |  |   | (41,304 | )
|Pretax loss from operations |  |      | (133,442 | )    |  |      | (73,145 | ) |  |   | (26,249 | )
|Loss on disposal            |  |      | (2,356   | )    |  |      | (21,197 | ) |  |   |        |  

The remaining 12 properties included in our
disposition program as of December 31, 2003 represented
approximately 13% of our total portfolio, and their operating
results are included in continuing operations. For the year
ended December 31, 2003, these 12 properties accounted for
approximately 7% of our consolidated revenue and approximately
4% of our consolidated operating loss. For purposes of this
calculation, we excluded depreciation and amortization and loss
on asset impairments from operating income.

During 2001, we sold two hotels and received
proceeds of $9.7 million. The sales resulted in a loss of
$2.2 million. 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 $1.3 million. Concurrently, we signed
long-term management agreements with Interstate Hotels (formerly
MeriStar Hotels) for four of these properties.

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

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with FelCor to terminate the merger agreement due
to unfavorable market conditions. We incurred $5.8 million
of costs related to this potential merger. The costs are
reflected in our statement of operations.




|    |                    
|--- | -------------------
|15. | 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 (in thousands):

|                             |  |      |           |      |  |      |           |  |  |   |           | 
|---------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                             |  | 2003 |           | 2002 |  | 2001
|                             |  |      |           |      |  |     
|Revenue:                     |  |      |           |      |  |      |           |  |  |   |           | 
|U.S.                         |  | $    | 923,904   |      |  | $    | 984,337   |  |  | $ | 1,060,352 | 
|Canada                       |  |      | 22,560    |      |  |      | 21,700    |  |  |   | 23,267    | 
|                             |  |      |           |      |  |      |           |  |  |   |           | 
|                             |  | $    | 946,464   |      |  | $    | 1,006,037 |  |  | $ | 1,083,619 | 
|                             |  |      |           |      |  |      |           |  |  |   |           | 
|Property and equipment, net: |  |      |           |      |  |      |           |  |  |   |           | 
|U.S.                         |  | $    | 2,077,474 |      |  | $    | 2,509,117 |  |  |   |           | 
|Canada                       |  |      | 9,415     | (1)  |  |      | 50,820    |  |  |   |           | 
|                             |  |      |           |      |  |      |           |  |  |   |           | 
|                             |  | $    | 2,086,889 |      |  | $    | 2,559,937 |  |  |   |           | 
|                             |  |      |           |      |  |      |           |  |  |   |           | 



---



|    |                                                            
|--- | -----------------------------------------------------------
|(1) | We sold three of the four Canadian hotels in December 2003.



|    |                                                
|--- | -----------------------------------------------
|16. | Quarterly Financial Information
    (Unaudited)

Quarterly information has been restated to
reflect the operations of assets sold in 2003 and 2002 or
classified as held for sale as of December 31, 2003 as
discontinued operations for all periods presented (in thousands).

|                                         |  |         |         |         |  |         |          |         |  |         |         |         |  |         |         |         |  |   |         |   |  |   |         |  |  |   |         |   |  |   |          |  
|---------------------------------------- |  | ------- | ------- | ------- |  | ------- | -------- | ------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | - | ------- | - |  | - | ------- |  |  | - | ------- | - |  | - | -------- | -
|                                         |  |         |         |        
|                                         |  | 2003    |         | 2002   
|                                         |  |         |         |        
|                                         |  | First   |         | Second  |  | Third   |          | Fourth  |  | First   |         | Second  |  | Third   |         | Fourth 
|                                         |  | Quarter |         | Quarter |  | Quarter |          | Quarter |  | Quarter |         | Quarter |  | Quarter |         | Quarter
|                                         |  |         |         |         |  |         |          |         |  |         |         |         |  |         |         |        
|Total revenue                            |  | $       | 214,123 |         |  | $       | 230,307  |         |  | $       | 199,902 |         |  | $       | 199,502 |         |  | $ | 219,621 |   |  | $ | 240,415 |  |  | $ | 201,992 |   |  | $ | 203,665  |  
|Loss on asset impairments                |  |         | 14,443  |         |  |         | 120,160  |         |  |         | 20,626  |         |  |         | 8,161   |         |  |   |        |   |  |   |        |  |  |   |        |   |  |   | 6,925    |  
|Total operating expenses                 |  |         | 209,889 |         |  |         | 325,553  |         |  |         | 217,663 |         |  |         | 228,518 |         |  |   | 192,094 |   |  |   | 202,441 |  |  |   | 190,672 |   |  |   | 214,071  |  
|Operating income (loss)                  |  |         | 4,234   |         |  |         | (95,246  | )       |  |         | (17,761 | )       |  |         | (29,016 | )       |  |   | 27,527  |   |  |   | 37,974  |  |  |   | 11,320  |   |  |   | (10,406  | )
|(Loss) income from continuing operations |  |         | (26,699 | )       |  |         | (119,315 | )       |  |         | (47,444 | )       |  |         | (60,519 | )       |  |   | (10,982 | ) |  |   | 436     |  |  |   | (21,628 | ) |  |   | (35,500  | )
|Net (loss) income                        |  |         | (69,746 | )       |  |         | (206,361 | )       |  |         | (50,693 | )       |  |         | (62,064 | )       |  |   | (9,943  | ) |  |   | 2,973   |  |  |   | (29,402 | ) |  |   | (124,876 | )
|Diluted (loss) earnings per share        |  | $       | (1.53   | )       |  | $       | (4.48    | )       |  | $       | (1.06   | )       |  | $       | (0.97   | )       |  | $ | (0.22   | ) |  | $ | 0.06    |  |  | $ | (0.65   | ) |  | $ | (2.76    | )



|    |                  
|--- | -----------------
|17. | Subsequent Events

We have sold nine properties since
January 1, 2004 for total proceeds of $62.9 million.
Six of those properties were classified as held-for-sale as of
December 31, 2003.

In addition, subsequent to December 31,
2003, we repurchased from available cash $61.5 million of
senior unsecured notes, including $16.5 million of the 9%
notes due in 2008, $30.8 million of the 9.125% notes

67



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##### 



due in 2011 and $14.2 million of the 10.5%
notes due in 2009. We also acquired an additional
$13.5 million of senior subordinated notes due 2007 through
the issuance of 2,291,150 shares of common stock.




|    |                                   
|--- | ----------------------------------
|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
93 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, 2003 and 2002, consolidating statements of
operations for the years ended December 31, 2003, 2002, and
2001, and consolidating statements of cash flows for the years
ended December 31, 2003, 2002, and 2001.

68