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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2007

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period fromto.

Commission file number 001-31906



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HIGHLAND
HOSPITALITY CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|MARYLAND                                                       |  | 57-1183293                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)

8405 Greensboro Drive, Suite 500, McLean, Virginia 22102

Telephone Number (703) 336-4901



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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Securities Exchange Act of 1934:



|                           |  |                    |  |                       
|-------------------------- |  | ------------------ |  | ----------------------
|Large accelerated filer  x |  | Accelerated filer ̈ |  | Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Securities Exchange Act of 1934).    Yes ̈No  x

As of May 4, 2007, there were 61,449,744 shares of the registrants common stock issued and
outstanding.



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HIGHLAND HOSPITALITY CORPORATION

INDEX



|                                                                                              |  |     
|--------------------------------------------------------------------------------------------- |  | ----
|                                                                                              |  | Page
|                                                                                              | 
|PART I                                                                                        |  |     
|                                                                                              | 
|Item 1.
Financial Statements                                                                  |  | 3   
|                                                                                              | 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 18  
|                                                                                              | 
|Item 3.
Quantitative and Qualitative Disclosures About Market Risk                            |  | 27  
|                                                                                              | 
|Item 4.
Controls and Procedures                                                               |  | 27  
|                                                                                              | 
|PART II                                                                                       |  |     
|                                                                                              | 
|Item 1.
Legal Proceedings                                                                     |  | 28  
|                                                                                              | 
|Item 1A.
Risk Factors                                                                         |  | 28  
|                                                                                              | 
|Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 28  
|                                                                                              | 
|Item 3.
Defaults Upon Senior Securities                                                       |  | 28  
|                                                                                              | 
|Item 4.
Submission of Matters to a Vote of Security Holders                                   |  | 28  
|                                                                                              | 
|Item 5.
Other Information                                                                     |  | 28  
|                                                                                              | 
|Item 6.
Exhibits                                                                              |  | 29  



2



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PART I



|Item 1. | Financial Statements
|------- | --------------------

HIGHLAND
HOSPITALITY CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



|                                                                                                                                                                                       |  |                |           |   |                   |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | - | ----------------- | - | --------- | -
|                                                                                                                                                                                       |  | March 31, 2007 |           |   | December 31, 2006 |  
|                                                                                                                                                                                       |  | (unaudited)    |           |   |                   |  
|ASSETS                                                                                                                                                                                 |  |                |           |   |                   |   |           |  
|Investment in hotel properties, net                                                                                                                                                    |  | $              | 1,237,871 |   |                   | $ | 1,207,812 |  
|Deposits on hotel property acquisitions                                                                                                                                                |  |                | 2,000     |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                              |  |                | 33,808    |   |                   |   | 37,302    |  
|Restricted cash                                                                                                                                                                        |  |                | 24,951    |   |                   |   | 22,310    |  
|Accounts receivable, net of allowance for doubtful accountsof $346 and $320, respectively                                                                                              |  |                | 27,579    |   |                   |   | 17,162    |  
|Prepaid expenses and other assets                                                                                                                                                      |  |                | 24,726    |   |                   |   | 24,182    |  
|Deferred financing costs, net of accumulated amortizationof $1,892 and $1,607, respectively                                                                                            |  |                | 4,314     |   |                   |   | 4,429     |  
|                                                                                                                                                                                       |  |                |           |   |                   |   |           |  
|Total assets                                                                                                                                                                           |  | $              | 1,355,249 |   |                   | $ | 1,313,197 |  
|                                                                                                                                                                                       |  |                |           |   |                   |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                   |  |                |           |   |                   |   |           |  
|Long-term debt                                                                                                                                                                         |  | $              | 688,554   |   |                   | $ | 646,432   |  
|Accounts payable and accrued expenses                                                                                                                                                  |  |                | 42,587    |   |                   |   | 39,675    |  
|Dividends payable                                                                                                                                                                      |  |                | 14,940    |   |                   |   | 14,055    |  
|Other liabilities                                                                                                                                                                      |  |                | 4,141     |   |                   |   | 2,901     |  
|                                                                                                                                                                                       |  |                |           |   |                   |   |           |  
|Total liabilities                                                                                                                                                                      |  |                | 750,222   |   |                   |   | 703,063   |  
|                                                                                                                                                                                       |  |                |           |   |                   |   |           |  
|Minority interest in operating partnership                                                                                                                                             |  |                | 4,452     |   |                   |   | 4,497     |  
|Commitments and contingencies (Note 12)                                                                                                                                                |  |                |           |   |                   |   |           |  
|                                                                                                                                                                                       |  |               
|Preferred stock, $.01 par value; 100,000,000 shares authorized;Series A Cumulative Redeemable Preferred Stock; 3,200,000 sharesissued
and outstanding ($81,033 liquidation preference) |  |                | 77,112    |   |                   |   | 77,112    |  
|Common stock, $.01 par value; 500,000,000 shares authorized;61,726,776 shares and 61,327,647 shares issued, respectively                                                               |  |                | 617       |   |                   |   | 613       |  
|Additional paid-in capital                                                                                                                                                             |  |                | 581,446   |   |                   |   | 578,966   |  
|Treasury stock, at cost; 277,032 shares and 223,160 shares, respectively                                                                                                               |  |                | (3,521    | ) |                   |   | (2,612    | )
|Cumulative dividends in excess of net income                                                                                                                                           |  |                | (55,079   | ) |                   |   | (48,442   | )
|                                                                                                                                                                                       |  |                |           |   |                   |   |           |  
|Total stockholders equity                                                                                                                                                             |  |                | 600,575   |   |                   |   | 605,637   |  
|                                                                                                                                                                                       |  |                |           |   |                   |   |           |  
|Total liabilities and stockholders equity                                                                                                                                             |  | $              | 1,355,249 |   |                   | $ | 1,313,197 |  
|                                                                                                                                                                                       |  |                |           |   |                   |   |           |  

The accompanying notes are an integral part of these financial statements.



3



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HIGHLAND HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                                                                                  |  |                              |         |   |      |   |        |  
|------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                                  |  | Three Months Ended March 31, |        
|                                                                                                  |  | 2007                         |         |   | 2006 |  
|REVENUE                                                                                           |  |                              |         |   |      |   |        |  
|Rooms                                                                                             |  | $                            | 79,988  |   |      | $ | 56,422 |  
|Food and beverage                                                                                 |  |                              | 36,654  |   |      |   | 24,839 |  
|Other                                                                                             |  |                              | 6,686   |   |      |   | 3,739  |  
|                                                                                                  |  |                              |         |   |      |   |        |  
|Total revenue                                                                                     |  |                              | 123,328 |   |      |   | 85,000 |  
|                                                                                                  |  |                              |         |   |      |   |        |  
|EXPENSES                                                                                          |  |                              |         |   |      |   |        |  
|Hotel operating expenses:                                                                         |  |                              |         |   |      |   |        |  
|Rooms                                                                                             |  |                              | 17,216  |   |      |   | 12,065 |  
|Food and beverage                                                                                 |  |                              | 24,179  |   |      |   | 16,346 |  
|Other direct                                                                                      |  |                              | 3,156   |   |      |   | 1,540  |  
|Indirect                                                                                          |  |                              | 41,267  |   |      |   | 30,131 |  
|                                                                                                  |  |                              |         |   |      |   |        |  
|Total hotel operating expenses                                                                    |  |                              | 85,818  |   |      |   | 60,082 |  
|Depreciation and amortization                                                                     |  |                              | 12,745  |   |      |   | 8,626  |  
|                                                                                                  |  |                             
|Corporate general and administrative:                                                             |  |                              |         |   |      |   |        |  
|Stock-based compensation                                                                          |  |                              | 1,793   |   |      |   | 791    |  
|Other                                                                                             |  |                              | 2,862   |   |      |   | 1,980  |  
|                                                                                                  |  |                              |         |   |      |   |        |  
|Total operating expenses                                                                          |  |                              | 103,218 |   |      |   | 71,479 |  
|                                                                                                  |  |                              |         |   |      |   |        |  
|Operating income                                                                                  |  |                              | 20,110  |   |      |   | 13,521 |  
|Interest income                                                                                   |  |                              | 410     |   |      |   | 703    |  
|Interest expense                                                                                  |  |                              | 11,095  |   |      |   | 8,216  |  
|Loss on early extinguishment of debt                                                              |  |                              |        |   |      |   | 996    |  
|                                                                                                  |  |                              |         |   |      |   |        |  
|Income before income taxes, minority interest inoperating partnership and discontinued operations |  |                              | 9,425   |   |      |   | 5,012  |  
|Income tax benefit (expense)                                                                      |  |                              | (275    | ) |      |   | 413    |  
|Minority interest in operating partnership                                                        |  |                              | (78     | ) |      |   | (54    | )
|                                                                                                  |  |                              |         |   |      |   |        |  
|Income from continuing operations                                                                 |  |                              | 9,072   |   |      |   | 5,371  |  
|                                                                                                  |  |                              |         |   |      |   |        |  
|Discontinued operations:                                                                          |  |                              |         |   |      |   |        |  
|Loss from hotel properties sold                                                                   |  |                              |        |   |      |   | (79    | )
|Gain on sale of hotel properties                                                                  |  |                              |        |   |      |   |       |  
|                                                                                                  |  |                              |         |   |      |   |        |  
|Total loss from discontinued operations                                                           |  |                              |        |   |      |   | (79    | )
|                                                                                                  |  |                              |         |   |      |   |        |  
|Net income                                                                                        |  |                              | 9,072   |   |      |   | 5,292  |  
|Preferred stock dividends                                                                         |  |                              | (1,575  | ) |      |   | (1,575 | )
|                                                                                                  |  |                              |         |   |      |   |        |  
|Net income available to common stockholders                                                       |  | $                            | 7,497   |   |      | $ | 3,717  |  
|                                                                                                  |  |                              |         |   |      |   |        |  
|Net income per common sharebasic:                                                                |  |                              |         |   |      |   |        |  
|Continuing operations                                                                             |  | $                            | .12     |   |      | $ | .07    |  
|Discontinued operations                                                                           |  |                              |        |   |      |   |       |  
|                                                                                                  |  |                              |         |   |      |   |        |  
|Net income available to common stockholders                                                       |  | $                            | .12     |   |      | $ | .07    |  
|                                                                                                  |  |                              |         |   |      |   |        |  
|Net income per common sharediluted:                                                              |  |                              |         |   |      |   |        |  
|Continuing operations                                                                             |  | $                            | .12     |   |      | $ | .07    |  
|Discontinued operations                                                                           |  |                              |        |   |      |   |       |  
|                                                                                                  |  |                              |         |   |      |   |        |  
|Net income available to common stockholders                                                       |  | $                            | .12     |   |      | $ | .07    |  
|                                                                                                  |  |                              |         |   |      |   |        |  

The accompanying notes are an integral part of these financial statements.



4



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HIGHLAND HOSPITALITY CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

(in thousands, except
share data)

(unaudited)



|                                                         |  |                 |  |              |        |          |                          |        |   |                                           |  |          |        |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------------------- |  | --------------- |  | ------------ | ------ | -------- | ------------------------ | ------ | - | ----------------------------------------- |  | -------- | ------ |  | - | ------ | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                         |  |                 |  | Common Stock |        |          | AdditionalPaid-InCapital |        |   | CumulativeDividends inExcess ofNet Income |  |          | Total  | 
|                                                         |  | Preferred Stock |  | Issued       |        | Treasury |                          |        |   |                                          
|                                                         |  | Shares          |  | Amount       |        | Shares   |                          | Amount |   | Shares                                    |  |          | Amount |  |   |        |  
|Balances at December 31, 2006                            |  | 3,200,000       |  | $            | 77,112 |          | 61,327,647               |        | $ | 613                                       |  | (223,160 | )      |  | $ | (2,612 | ) |  | $ | 578,966 |   |  | $ | (48,442 | ) |  | $ | 605,637 |  
|Issuance of common stock related to exercise of warrants |  |                |  |              |       |          | 69,129                   |        |   | 1                                         |  |         |        |  |   |       |   |  |   | 690     |   |  |   |        |   |  |   | 691     |  
|Issuance of restricted common stock to employees         |  |                |  |              |       |          | 230,000                  |        |   | 2                                         |  |         |        |  |   |       |   |  |   | (2      | ) |  |   |        |   |  |   |        |  
|Issuance of restricted common stock to director          |  |                |  |              |       |          | 100,000                  |        |   | 1                                         |  |         |        |  |   |       |   |  |   | (1      | ) |  |   |        |   |  |   |        |  
|Purchase of treasury stock                               |  |                |  |              |       |          |                         |        |   |                                          |  | (53,872  | )      |  |   | (909   | ) |  |   |        |   |  |   |        |   |  |   | (909    | )
|Stock-based compensation                                 |  |                |  |              |       |          |                         |        |   |                                          |  |         |        |  |   |       |   |  |   | 1,793   |   |  |   |        |   |  |   | 1,793   |  
|Declaration of dividends on common stock                 |  |                |  |              |       |          |                         |        |   |                                          |  |         |        |  |   |       |   |  |   |        |   |  |   | (14,134 | ) |  |   | (14,134 | )
|Declaration of dividends on preferred stock              |  |                |  |              |       |          |                         |        |   |                                          |  |         |        |  |   |       |   |  |   |        |   |  |   | (1,575  | ) |  |   | (1,575  | )
|Net income                                               |  |                |  |              |       |          |                         |        |   |                                          |  |         |        |  |   |       |   |  |   |        |   |  |   | 9,072   |   |  |   | 9,072   |  
|                                                         |  |                 |  |              |        |          |                          |        |   |                                           |  |          |        |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|Balances at March 31, 2007                               |  | 3,200,000       |  | $            | 77,112 |          | 61,726,776               |        | $ | 617                                       |  | (277,032 | )      |  | $ | (3,521 | ) |  | $ | 581,446 |   |  | $ | (55,079 | ) |  | $ | 600,575 |  
|                                                         |  |                 |  |              |        |          |                          |        |   |                                           |  |          |        |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |  

The accompanying notes are an integral part of these financial statements.



5



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HIGHLAND HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                 |  |                              |         |   |      |   |          |  
|-------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | -------- | -
|                                                                                 |  | Three Months Ended March 31, |        
|                                                                                 |  | 2007                         |         |   | 2006 |  
|Cash flows from operating activities:                                            |  |                              |         |   |      |   |          |  
|Net income                                                                       |  | $                            | 9,072   |   |      | $ | 5,292    |  
|Adjustments to reconcile net income to net cashprovided by operating activities: |  |                              |         |   |      |   |          |  
|Depreciation and amortization                                                    |  |                              | 12,745  |   |      |   | 8,626    |  
|Amortization of deferred financing costs                                         |  |                              | 285     |   |      |   | 225      |  
|Amortization of discount on mortgage loan                                        |  |                              | 18      |   |      |   | 18       |  
|Change in fair value of interest rate swaps                                      |  |                              | 141     |   |      |   | (407     | )
|Minority interest in operating partnership                                       |  |                              | 78      |   |      |   | 54       |  
|Stock-based compensation                                                         |  |                              | 1,793   |   |      |   | 791      |  
|Loss on early extinguishment of debt                                             |  |                              |        |   |      |   | 996      |  
|                                                                                 |  |                             
|Changes in assets and liabilities:                                               |  |                              |         |   |      |   |          |  
|Accounts receivable, net                                                         |  |                              | (10,375 | ) |      |   | (4,800   | )
|Prepaid expenses and other assets                                                |  |                              | (448    | ) |      |   | (8,098   | )
|Accounts payable and accrued expenses                                            |  |                              | 2,467   |   |      |   | 4,769    |  
|Other liabilities                                                                |  |                              | 1,030   |   |      |   |         |  
|Discontinued operations                                                          |  |                              |        |   |      |   | (223     | )
|                                                                                 |  |                              |         |   |      |   |          |  
|Net cash provided by operating activities                                        |  |                              | 16,806  |   |      |   | 7,243    |  
|                                                                                 |  |                              |         |   |      |   |          |  
|Cash flows from investing activities:                                            |  |                              |         |   |      |   |          |  
|Acquisition of hotel properties, net of cash acquired                            |  |                              | (34,387 | ) |      |   | (239,038 | )
|Value-added taxes (VAT) refund related to foreign hotel acquisition              |  |                              |        |   |      |   | 3,774    |  
|Improvements and additions to hotel properties                                   |  |                              | (8,042  | ) |      |   | (15,824  | )
|Deposits on hotel property acquisitions                                          |  |                              | (2,000  | ) |      |   |         |  
|Proceeds from insurance claim                                                    |  |                              |        |   |      |   | 2,000    |  
|Change in restricted cash                                                        |  |                              | (2,641  | ) |      |   | 3,495    |  
|                                                                                 |  |                              |         |   |      |   |          |  
|Net cash used in investing activities                                            |  |                              | (47,070 | ) |      |   | (245,593 | )
|                                                                                 |  |                              |         |   |      |   |          |  
|Cash flows from financing activities:                                            |  |                              |         |   |      |   |          |  
|Proceeds from sale of common stock                                               |  |                              | 691     |   |      |   | 94,476   |  
|Payment of offering expenses related to sale of common stock                     |  |                              |        |   |      |   | (82      | )
|Purchase of treasury stock                                                       |  |                              | (909    | ) |      |   | (122     | )
|Net borrowings from revolving credit facility                                    |  |                              | 44,000  |   |      |   | 126,000  |  
|Proceeds from term loan facility                                                 |  |                              |        |   |      |   | 10,000   |  
|Payment on term loan facility                                                    |  |                              |        |   |      |   | (100,000 | )
|Proceeds from issuance of mortgage debt                                          |  |                              |        |   |      |   | 87,000   |  
|Scheduled principal payments on mortgage debt                                    |  |                              | (1,896  | ) |      |   | (1,301   | )
|Payment of deferred financing costs                                              |  |                              | (170    | ) |      |   | (1,305   | )
|Deposits on loan applications                                                    |  |                              |        |   |      |   | 754      |  
|Payment of dividends to common stockholders                                      |  |                              | (13,254 | ) |      |   | (7,253   | )
|Payment of dividends to preferred stockholders                                   |  |                              | (1,575  | ) |      |   | (1,575   | )
|Payment of distributions to minority interests                                   |  |                              | (117    | ) |      |   | (74      | )
|                                                                                 |  |                              |         |   |      |   |          |  
|Net cash provided by financing activities                                        |  |                              | 26,770  |   |      |   | 206,518  |  
|                                                                                 |  |                              |         |   |      |   |          |  
|Net decrease in cash                                                             |  |                              | (3,494  | ) |      |   | (31,832  | )
|Cash and cash equivalents, beginning of period                                   |  |                              | 37,302  |   |      |   | 64,761   |  
|                                                                                 |  |                              |         |   |      |   |          |  
|Cash and cash equivalents, end of period                                         |  | $                            | 33,808  |   |      | $ | 32,929   |  
|                                                                                 |  |                              |         |   |      |   |          |  
|Supplemental disclosure of cash flow information:                                |  |                              |         |   |      |   |          |  
|Cash paid for interest                                                           |  | $                            | 9,758   |   |      | $ | 8,013    |  
|Cash paid for income taxes                                                       |  |                              | 100     |   |      |   |         |  

The accompanying notes are an integral part of these financial statements.



6



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HIGHLAND HOSPITALITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Description of Business

Highland Hospitality Corporation (the Company) is a self-advised real estate investment trust (REIT) that was
incorporated in the state of Maryland and owns upscale full-service, premium limited-service, and extended-stay properties located in major convention, business, resort and airport markets in the United States. The Company commenced operations on
December 19, 2003 when it completed its initial public offering (IPO) and concurrently acquired its first three hotel properties. As of March 31, 2007, the Company owned 27 hotel properties with 8,379 rooms located in 14 states
and the District of Columbia.

Substantially all of the Companys assets are held by, and all of its operations are conducted through,
Highland Hospitality, L.P., a Delaware limited partnership (the Operating Partnership). For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership, which is owned approximately 99% by the Company
and approximately 1% by other limited partners, leases its hotels to subsidiaries of HHC TRS Holding Corporation (collectively, HHC TRS), which is a wholly owned subsidiary of the Operating Partnership. HHC TRS then engages hotel
management companies to operate the hotels pursuant to management contracts. HHC TRS is treated as a taxable REIT subsidiary for federal income tax purposes.

2. Summary of Significant Accounting Policies

Basis of PresentationThe consolidated financial statements
presented herein include all of the accounts of Highland Hospitality Corporation and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

The information in these consolidated financial statements is unaudited but, in the opinion of management, reflects all adjustments necessary for a fair
presentation of the results for the periods covered. All such adjustments are of a normal, recurring nature unless disclosed otherwise. These consolidated financial statements, including notes, have been prepared in accordance with the applicable
rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by U.S. generally accepted accounting principles for complete financial statements. Additional information is contained in the
Highland Hospitality Corporation Form 10-K for the year ended December 31, 2006.

Cash and Cash EquivalentsThe Company
considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

Restricted
CashRestricted cash includes reserves held in escrow for hotel renovations, normal replacements of furniture, fixtures and equipment, real estate taxes, and insurance, pursuant to certain requirements in the Companys hotel
management, franchise, and loan agreements.

Derivative InstrumentsThe Company accounts for derivative instruments in
accordance with the provisions of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted (SFAS 133). Under SFAS 133, all derivative
instruments are required to be recognized as either assets or liabilities in the balance sheet and measured at fair value. Derivative instruments used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment
attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are
considered cash flow hedges. For a derivative instrument designated as a cash flow hedge, the change in fair value each period is reported in accumulated other comprehensive income in stockholders equity to the extent the hedge is effective.
For a derivative instrument designated as a fair value hedge, the change in fair value each period is reported in earnings along with the change in fair value of the hedged item attributable to the risk being hedged. For a derivative instrument that
does not qualify for hedge accounting or is not designated as a hedge, the change in fair value each period is reported in earnings. The Company does not enter into derivative instruments for speculative trading purposes.



7



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HIGHLAND HOSPITALITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Investment in Hotel PropertiesInvestments in hotel properties are recorded at
acquisition cost and allocated to land, property and equipment and identifiable intangible assets in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. Replacements and improvements are
capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation are removed from the Companys accounts and any resulting gain or loss is included
in the consolidated statements of operations.

Depreciation is computed using the straight-line method over the estimated useful lives of
the assets, generally 15 to 40 years for buildings and building improvements and three to ten years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related
assets.

The Company reviews its investments in hotel properties for impairment whenever events or changes in circumstances indicate that
the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the properties due to declining national or local
economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from
the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel propertys
estimated fair market value is recorded and an impairment loss recognized. No impairment losses have been recorded for the three months ended March 31, 2007 and 2006.

The Company classifies a hotel property as held for sale in the period in which it has made the decision to dispose of the hotel property, a binding
agreement to purchase the property has been signed under which the buyer has committed a significant amount of nonrefundable cash, and no significant financing contingencies exist which could cause the transaction not to be completed in a timely
manner. If these criteria are met, depreciation of the hotel property will cease and an impairment loss will be recorded if the fair value of the hotel property, less the costs to sell, is lower than the carrying amount of the hotel property. The
Company will classify the loss, together with the related operating results, as discontinued operations in the consolidated statements of operations and classify the assets and related liabilities as held for sale in the consolidated balance sheets.

The Company capitalizes interest related to hotel properties undergoing major renovations. Interest capitalized for the three months ended
March 31, 2007 and 2006 was $35,000 and $0.2 million, respectively.

Minority Interest in Operating PartnershipCertain
hotel properties have been acquired by the Operating Partnership, in part, through the issuance of limited partnership units of the Operating Partnership. The minority interest in the Operating Partnership is: (i) increased or decreased by the
limited partners pro-rata share of the Operating Partnerships net income or net loss, respectively; (ii) decreased by distributions; (iii) decreased by redemption of partnership units for the Companys common stock; and
(iv) adjusted to equal the net equity of the Operating Partnership multiplied by the limited partners ownership percentage immediately after each issuance of units of the Operating Partnership and/or shares of the Companys common
stock and after each purchase of treasury stock through an adjustment to additional paid-in capital. Net income or net loss is allocated to the minority interest in the Operating Partnership based on the weighted-average percentage ownership
throughout the period.

Revenue RecognitionRevenues from operations of the hotels are recognized when the services are
provided. Revenues consist of room sales, food and beverage sales, and other hotel department revenues, such as golf, parking, telephone, and gift shop sales.

Deferred Financing CostsDeferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt. Amortization of deferred financing costs is computed using a method
that approximates the effective interest method over the term of the related debt and is included in interest expense in the consolidated statements of operations.



8



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HIGHLAND HOSPITALITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Debt Discounts or PremiumsDebt assumed in connection with hotel property acquisitions is
recorded at fair value at the acquisition date and any resulting discount or premium is amortized through interest expense in the consolidated statements of operations over the remaining term of the debt.

Income TaxesThe Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. As a REIT, the
Company generally will not be subject to federal income tax on that portion of its net income (loss) that does not relate to HHC TRS, the Companys wholly owned taxable REIT subsidiary. HHC TRS, which leases the Companys hotels from the
Operating Partnership, is subject to federal and state income taxes.

The Company accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109). Under SFAS 109, the Company accounts for income taxes using the asset and liability method under which deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Valuation allowances are provided
if based upon the weight of the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

On January 1, 2007, the Company implemented FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). As of March 31, 2007 and
December 31, 2006, the Company had no uncertain tax positions. Open tax years include 2003 through 2006 for federal income tax purposes and all states in which we own hotels including Arizona, California, Colorado, Florida, Georgia, Illinois,
Maryland, Massachusetts, Nebraska, New Jersey, New York, Tennessee, Texas, Virginia, and the District of Columbia.

Earnings Per
ShareBasic net income (loss) per common share is calculated by dividing net income (loss) available to common stockholders, less dividends on unvested restricted common stock, by the weighted-average number of common shares outstanding
during the period. Diluted net income (loss) per common share is calculated by dividing net income (loss) available to common stockholders, less dividends on unvested restricted common stock, by the weighted-average number of common shares
outstanding during the period, plus other potentially dilutive securities, such as unvested shares of restricted common stock and warrants. The outstanding Operating Partnership units (which may be redeemed for common shares) have been excluded from
the diluted net income (loss) per common share calculation, as there would be no effect on reported diluted net income (loss) per common share.

Stock-Based CompensationFrom time-to-time, the Company grants restricted stock awards to employees. To-date, the Company has granted three types of restricted stock awards: (1) awards that vest solely on continued
employment (time-based awards); (2) awards that vest based on the Company achieving specified levels of funds from operations (FFO) and continued employment (performance-based awards); and (3) awards that vest based on the Company
achieving specified levels of relative total shareholder return and continued employment (market-based awards). The Company measures stock-based compensation expense for the restricted stock awards based on the fair value of the awards on the date
of grant. The fair value of time-based awards and performance-based awards is determined based on the average trading price of the Companys common stock on the measurement date, which is generally the date of grant. The fair value of
market-based awards is determined using a Monte Carlo simulation. For time-based awards, stock-based compensation expense is recognized on a straight-line basis over the life of the entire award. For performance-based awards and market-based awards,
stock-based compensation expense is recognized over the requisite service period for each award. No compensation cost is recognized for awards for which employees do not render the requisite service.



9



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HIGHLAND HOSPITALITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Comprehensive Income (Loss)Comprehensive income (loss), as defined, includes all changes
in stockholders equity during a period from non-owner sources. The Company does not have any items of comprehensive income (loss) other than net income (loss).

Treasury StockThe Company records treasury stock purchases under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock.

Segment InformationStatement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information (SFAS 131), requires public entities to report certain information about operating segments. Based on the guidance provided in SFAS 131, the Company has determined that its business is conducted in one reportable segment,
hotel ownership.

Use of EstimatesThe preparation of the financial statements in conformity with U.S. generally accepted
accounting principles 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 from those estimates.

3. Acquisition of Hotel Properties

During 2006, the Company acquired five hotel properties, consisting of 2,152 rooms, for approximately $346.6 million. The hotel
properties acquired were:



|                                            |  |                |  |                  |  |                   
|------------------------------------------- |  | -------------- |  | ---------------- |  | ------------------
|Property                                    |  | Number ofRooms |  | Location         |  | Acquired          
|Nashville Renaissance                       |  | 673            |  | Nashville, TN    |  | February 24, 2006 
|The Melrose                                 |  | 240            |  | Washington, DC   |  | March 15, 2006    
|Pointe Hilton Tapatio Cliffs                |  | 585            |  | Phoenix, AZ      |  | March 16, 2006    
|Courtyard Gaithersburg Washingtonian Center |  | 210            |  | Gaithersburg, MD |  | June 1, 2006      
|Ritz-Carlton Atlanta Downtown               |  | 444            |  | Atlanta, GA      |  | September 22, 2006
|                                            |  |                |  |                  |  |                   
|Total number of rooms                       |  | 2,152          |  |                  |  |                   
|                                            |  |                |  |                  |  |                   

On February 23, 2007, the Company acquired the 143-room Crowne Plaza Chicago-Silversmith
hotel in Chicago, Illinois for approximately $34.4 million. The Company entered into a long-term agreement with Crestline Hotels & Resorts, Inc. to manage the property as an independent hotel.

The preliminary allocation of the purchase price to the acquired assets and liabilities based on their fair values was as follows (in thousands):



|                                      |  |                  |        |  
|------------------------------------- |  | ---------------- | ------ | -
|                                      |  | 2007 Acquisition |       
|Land and land improvements            |  | $                | 6,350  |  
|Buildings and leasehold improvements  |  |                  | 24,812 |  
|Furniture, fixtures and equipment     |  |                  | 3,600  |  
|Cash                                  |  |                  | 7      |  
|Accounts receivable, net              |  |                  | 42     |  
|Prepaid assets and other assets       |  |                  | 29     |  
|Accounts payable and accrued expenses |  |                  | (446   | )
|                                      |  |                  |        |  
|Net assets acquired                   |  | $                | 34,394 |  
|                                      |  |                  |        |  



10



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HIGHLAND HOSPITALITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The results of operations for each of the hotel properties are included in the Companys
consolidated statements of operations from their respective acquisition dates. The following pro forma financial information presents the results of operations of the Company for the three months ended March 31, 2007 and 2006 as if The
Silversmith hotel, as well as the five hotel acquisitions that occurred in 2006 and the financing transactions necessary to acquire the hotel properties had taken place on January 1, 2006. The pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the results of operations that would have actually occurred had the transactions taken place on January 1, 2006, or of future results of operations (in thousands, except per share
data).



|                                            |  |                              |         |      |   |        
|------------------------------------------- |  | ---------------------------- | ------- | ---- | - | -------
|                                            |  | Three Months Ended March 31,
|                                            |  | 2007                         |         | 2006
|Total revenue                               |  | $                            | 123,962 |      | $ | 118,324
|Total operating expenses                    |  |                              | 104,244 |      |   | 98,356 
|Operating income                            |  |                              | 19,718  |      |   | 19,968 
|Net income                                  |  |                              | 8,401   |      |   | 9,547  
|Net income available to common stockholders |  |                              | 6,826   |      |   | 7,972  
|Net income per common share:                |  |                              |         |      |   |        
|Basic and diluted                           |  |                              | .11     |      |   | .13    

At the beginning of 2007, the Company began converting one of the wings at the Hilton Parsippany
hotel to a Hampton Inn. Once the conversion is completed, the Hampton Inn Parsippany hotel will have 152 rooms, leaving the Hilton Parsippany hotel with 354 rooms. The conversion will include constructing a new lobby and porte-cochere off of the
Hampton Inn wing. Crestline Hotels & Resorts, Inc. will continue to manage both hotel properties under separate management agreements.

4.
Investment in Hotel Properties

Investment in hotel properties as of March 31, 2007 and December 31, 2006 consisted of the
following (in thousands):



|                                                |  |                |           |   |                   |   |           |  
|----------------------------------------------- |  | -------------- | --------- | - | ----------------- | - | --------- | -
|                                                |  | March 31, 2007 |           |   | December 31, 2006 |  
|Land and land improvements                      |  | $              | 148,828   |   |                   | $ | 142,478   |  
|Buildings and leasehold improvements            |  |                | 1,045,687 |   |                   |   | 1,019,490 |  
|Furniture, fixtures and equipment               |  |                | 128,002   |   |                   |   | 122,300   |  
|Construction-in-progress                        |  |                | 8,194     |   |                   |   | 3,639     |  
|                                                |  |                |           |   |                   |   |           |  
|                                                |  |                | 1,330,711 |   |                   |   | 1,287,907 |  
|Less: accumulated depreciation and amortization |  |                | (92,840   | ) |                   |   | (80,095   | )
|                                                |  |                |           |   |                   |   |           |  
|                                                |  | $              | 1,237,871 |   |                   | $ | 1,207,812 |  
|                                                |  |                |           |   |                   |   |           |  

5. Discontinued Operations

On June 29, 2006, the Company sold the Marriott Mount Laurel hotel in Mount Laurel, New Jersey for net sales proceeds of approximately $31.8 million and recognized a gain of approximately $7.4 million.

On August 31, 2006, the Company sold the Barceló Tucancun Beach resort to Playa Hotels & Resorts, S.L. for net sales
proceeds of approximately $38.5 million and recognized a gain of approximately $1.8 million, net of taxes of $0.1 million. Playa Hotels & Resorts, S.L., a related party, is partially owned by Barceló Corporación Empresarial,
S.A. (Barceló). Barceló is the parent company of Barceló Crestline Corporation (Barceló



11



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HIGHLAND HOSPITALITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Crestline), which sponsored the Companys formation and IPO. Barceló Crestline advises Playa Hotels & Resorts, S.L. in evaluating
investment opportunities. The Companys non-executive Chairman, Bruce D. Wardinski, is the Chief Executive Officer of Barceló Crestline and the Chairman and Chief Executive Officer of Playa Hotels & Resorts, S.L. The sale of
this resort was unanimously approved by a special committee consisting of the Companys independent directors.

The results of
operations for the Marriott Mount Laurel hotel and the Barceló Tucancun Beach resort have been reclassified as discontinued operations in the consolidated statements of operations for all periods presented. For the three months ended
March 31, 2006, total revenues for the Marriott Mount Laurel hotel and the Barceló Tucancun Beach resort were approximately $1.5 million and pre-tax loss from operations was $(0.7) million.

6. Long-Term Debt

During the three months ended
March 31, 2007, the Company borrowed $44.0 million under its revolving credit facility, the majority of which was used to fund the acquisition of the Crowne Plaza Chicago-Silversmith hotel.

As of March 31, 2007, the Company was in compliance with the financial covenants contained in its loan agreements. Also as of that date, the
Companys weighted-average interest rate on its long-term debt was 6.39%.

7. Earnings Per Share

The following is a reconciliation of the amounts used in calculating basic and diluted net income per common share (in thousands, except share and per
share data):



|                                                                       |  |                              |            |   |      |   |            |  
|---------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                       |  | Three Months Ended March 31, |           
|                                                                       |  | 2007                         |            |   | 2006 |  
|Numerator:                                                             |  |                              |            |   |      |   |            |  
|Net income available to common stockholders                            |  | $                            | 7,497      |   |      | $ | 3,717      |  
|Less: discontinued operations                                          |  |                              |           |   |      |   | 79         |  
|Less: dividends on unvested restricted common stock                    |  |                              | (302       | ) |      |   | (53        | )
|                                                                       |  |                              |            |   |      |   |            |  
|Net income from continuing operations available to common stockholders |  | $                            | 7,195      |   |      | $ | 3,743      |  
|                                                                       |  |                              |            |   |      |   |            |  
|                                                                       |  |                             
|Denominator:                                                           |  |                              |            |   |      |   |            |  
|Weighted-average number of common shares outstandingbasic             |  |                              | 59,825,464 |   |      |   | 52,944,557 |  
|Effect of dilutive securities:                                         |  |                              |            |   |      |   |            |  
|Unvested restricted common stock                                       |  |                              | 397,058    |   |      |   | 118,975    |  
|Warrants                                                               |  |                              | 69,503     |   |      |   | 147,463    |  
|                                                                       |  |                              |            |   |      |   |            |  
|Weighted-average number of common shares outstandingdiluted           |  |                              | 60,292,025 |   |      |   | 53,210,995 |  
|                                                                       |  |                              |            |   |      |   |            |  
|                                                                       |  |                             
|Net income per common sharebasic:                                     |  |                              |            |   |      |   |            |  
|Continuing operations                                                  |  | $                            | .12        |   |      | $ | .07        |  
|Discontinued operations                                                |  |                              |           |   |      |   |           |  
|                                                                       |  |                              |            |   |      |   |            |  
|Net income available to common stockholders                            |  | $                            | .12        |   |      | $ | .07        |  
|                                                                       |  |                              |            |   |      |   |            |  
|                                                                       |  |                             
|Net income per common sharediluted:                                   |  |                              |            |   |      |   |            |  
|Continuing operations                                                  |  | $                            | .12        |   |      | $ | .07        |  
|Discontinued operations                                                |  |                              |           |   |      |   |           |  
|                                                                       |  |                              |            |   |      |   |            |  
|Net income available to common stockholders                            |  | $                            | .12        |   |      | $ | .07        |  
|                                                                       |  |                              |            |   |      |   |            |  



12



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HIGHLAND HOSPITALITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



8. Dividends

On January 12, 2007, the Company paid a quarterly cash dividend of $.22 per common share. For the three months ended March 31, 2007, the Companys board of directors declared a cash dividend payable to
the Companys common stockholders of record as of March 30, 2007 of $.23 per common share. The dividend was paid on April 13, 2007.

On January 11, 2007, the Companys board of directors declared a quarterly cash dividend of $.4921875 per share of Series A preferred stock. The dividend was paid on February 15, 2007 to holders of record as of
February 1, 2007.

9. Capital Stock

WarrantsIn connection with the IPO, the Company granted to its underwriters, as partial consideration for its services, warrants representing the right to acquire 888,488 shares of common stock. The warrants are exercisable for
a period of five years commencing December 19, 2003 at an exercise price of $10 per share. For the three months ended March 31, 2007, the underwriters exercised warrants representing the right to acquire 69,129 shares of common stock. As
of March 31, 2007, the Company has reserved 138,084 shares of common stock for issuance upon additional exercises of the warrants.

Treasury StockFor the three months ended March 31, 2007 and 2006, the Company purchased 53,872 shares and 10,330 shares, respectively, of common stock from employees to satisfy the minimum statutory tax withholding
requirements related to the vesting of their shares of restricted common stock.

10. Stock Incentive Plan

In January 2007, the Company granted 225,000 shares of restricted common stock to the president and chief executive officer. Three types of shares
were granted: (1) 150,000 shares that vest solely on continued employment (time-based awards); (2) 25,000 shares that vest based on the Company achieving specified levels of FFO and continued employment (performance-based awards); and
(3) 50,000 shares that vest based on the Company achieving specified levels of relative total shareholder return and continued employment (market-based awards). The time-based awards are eligible to vest 10% in 2007, 25% in 2008, 30% in 2009,
and 35% in 2010. The performance-based awards and market-based awards are eligible to vest 25% in each of 2007 through 2010. Additional vesting of market-based awards may also occur in 2010 if the cumulative level of relative total shareholder
return during the entire performance measurement period results in a higher total number of shares being vested than the total number of shares that vested based on relative total shareholder return on an individual year basis. Dividends on the
shares of restricted common stock will accrue, but will not be paid unless the related shares vest. The fair value of the market-based awards was determined using a Monte Carlo simulation with the following assumptions: volatility of 24.8% based on
the Companys stock price since the IPO; an expected term equal to the requisite service period for the awards; and a three-year risk-free interest rate of 4.58%.

Also in January 2007, the Company granted 100,000 shares of restricted common stock to the chairman of the board of directors. The shares, which were time-based awards, are eligible to vest 25% in each of 2008 through
2011. The Company also granted 5,000 shares of restricted common stock to certain employees. The shares, which were time-based awards, are eligible to vest 33.33% in each of 2008 through 2010.



13



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HIGHLAND HOSPITALITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



As of March 31, 2007, there was approximately $14.4 million of unrecognized stock-based
compensation expense related to shares of restricted common stock. The unrecognized stock-based compensation expense is expected to be recognized over a weighted-average period of 2.1 years. The following is a summary of the Companys shares of
restricted common stock for the three months ended March 31, 2007:



|                                                |  |                  |   |  |                                        |       |    
|----------------------------------------------- |  | ---------------- | - |  | -------------------------------------- | ----- | ---
|                                                |  | Number of Shares |   |  | Weighted-Average Grant-Date Fair Value |      
|Restricted common stock as of December 31, 2006 |  | 1,394,169        |   |  | $                                      | 11.48 |    
|Granted                                         |  | 330,000          |   |  | $                                      | 13.77 | (1)
|Vested                                          |  | (225,807         | ) |  | $                                      | 11.64 |    
|Forfeited                                       |  |                 |   |  |                                        |      |    
|                                                |  |                  |   |  |                                        |       |    
|Restricted common stock as of March 31, 2007    |  | 1,498,362        |   |  | $                                      | 12.07 | (1)
|                                                |  |                  |   |  |                                        |       |    

---

|(1) | The calculated weighted-average grant-date fair value does not include performance-based awards that are eligible to vest in 2009 and 2010 because their fair value was not
determinable on the date of grant.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11. Related-Party Transactions

Management AgreementsAs of March 31, 2007, 15 of the Companys 27 hotels operated pursuant to long-term management agreements with
Crestline Hotels & Resorts, Inc. Crestline Hotels & Resorts, Inc. is a wholly owned subsidiary of Barceló Crestline. Crestline Hotels & Resorts, Inc. receives a base management fee, and if the hotels meet and exceed
certain performance thresholds, an incentive management fee. The base management fee for the hotels is generally between 2% and 3.5% of total gross revenues from the hotels. The incentive management fee, if any, for each hotel will be equal to 15%
of the amount by which operating income for the fiscal year exceeds 11% of the Companys capitalized investment in the hotel and will be due annually in arrears within 105 days after the end of each fiscal year. The management agreements place
a cap on the total amount of combined base and incentive management fees paid to Crestline Hotels & Resorts, Inc. for each hotel at 4.5% of gross revenues for each fiscal year.

For the three months ended March 31, 2007 and 2006, the Company paid Crestline Hotels & Resorts, Inc. approximately $1.2 million in
management fees.

Overhead and Cost-Sharing ArrangementSince the Companys inception, it has had an informal overhead and
cost-sharing arrangement with Barceló Crestline whereby the Company has shared Barceló Crestlines office space and related furniture, fixtures and equipment and certain support services, including human resources and information
technology functions, in exchange for a monthly reimbursement of the estimated value to the Company from this sharing arrangement. For the three months ended March 31, 2007 and 2006, the Company paid Barceló Crestline approximately
$58,000 and $40,000, respectively, under this arrangement.

12. Commitments and Contingencies

Ground and Building LeasesThe Company leases the Portsmouth Renaissance hotel and adjoining conference center pursuant to two separate lease
agreements, each with an initial term ending May 2049, with four ten-year renewal options and one nine-year renewal option. Base rent under the hotel lease is $50,000 per year. Annual percentage rent, if any, is equal to 100% of available net cash
flow after payment of all hotel operating expenses, the base rent, real estate taxes, insurance and a cumulative priority annual return to the Company of approximately $2 million, up to $0.2 million, then 50% of any remaining net cash flow until the
landlord has been paid percentage (and additional) rent of $10 million in aggregate, and thereafter 10% of net cash flow annually. If



14



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HIGHLAND HOSPITALITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



the Company sells or assigns the hotel lease, an additional rent payment equal to 50% of the net sales proceeds in excess of the Companys capital
investment in the hotel and unpaid annual return of 15% on the investment will be due. Annual rent under the conference center lease is equal to the lesser of $75,000 per year or the maximum amount of rent allowable under tax regulations so as to
preserve the tax-exempt status of the Portsmouth Industrial Development Authority bonds issued in connection with the hotel and conference center.

The Company leases the conference center and parking facility adjoining the Sugar Land Marriott hotel pursuant to a lease agreement with an initial term ending October 2102. The minimum rent is $1 per year, plus an incentive rent payment
for the first 25 years of the term of the lease. If during any of those first 25 years, the Companys cumulative internal rate of return on investment in the hotel exceeds 15%, then the Company will pay incentive rent in an amount equal to 36%
of the net cash flow for the applicable year in excess of the amount of net cash flow that would be necessary to generate a cumulative internal rate of return of 15%.

The Company leases the land underlying the Nashville Renaissance hotel and a portion of the adjoining convention center pursuant to a lease agreement with an initial term ending June 2017, with seven 10-year renewal
options. Base rent under the lease is $0.5 million per year. Annual percentage rent is equal to 20% of available net cash flow after payment of all hotel operating expenses, the base rent, real estate taxes, insurance, debt service, property
improvement reserve funding, and a priority annual return to the Company of 15% of the Companys capitalized investment in the hotel. If the Company sells or assigns the hotel lease, an additional payment equal to 20% of the net sales proceeds
in excess of the Companys capital investment in the hotel will be due. In addition, if the Company refinances the debt secured by the hotel, an additional payment equal to 20% of the net cash proceeds will be due.

Percentage and incentive rent is accrued when it becomes probable that the specified thresholds will be achieved. No percentage or incentive rent was
recognized in any period presented in the consolidated financial statements, as the thresholds were not expected to be met.

The Company
leases the land underlying the Sheraton Annapolis hotel pursuant to a lease agreement with an initial term ending September 2059. Annual rent due under the lease is approximately $0.3 million and increases each year over the remaining term of the
lease by 40% of the increase in the Consumer Price Index (CPI) for that year. In addition, the land will be appraised every five years and the annual rent will be increased to an amount equal to the product of the appraised value and 12%. However,
annual rent will not be increased by an amount greater than 10% of the annual rent for the preceding year.

The Company leases the land
underlying the Wyndham Palm Springs hotel pursuant to a sub-lease agreement with an initial term ending December 2059, with a 25-year renewal option. Annual rent due under the lease is the greater of base rent or percentage rent. Annual base rent
for the years 2005 through 2009 is approximately $0.9 million. Base rent increases every five years over the remaining term of the lease by the increase in the CPI over that same five-year period; however, the increase in base rent every five years
will not be increased by an amount greater than 30% of the base rent for the preceding five-year period. Annual percentage rent is equal to the sum of 4% of rooms gross receipts, 2% of food and beverage gross receipts, and 10% of tenant rentals.

Management AgreementsAs of March 31, 2007, the Companys hotel properties operated pursuant to long-term agreements
with five management companies, including Crestline Hotels & Resorts, Inc. (15 hotels), Marriott International, Inc. (6 hotels), Hyatt Corporation (2 hotels), McKibbon Hotel Management, Inc. (2 hotels) and Hilton Hotels
Corporation (2 hotels). Each management company receives a base management fee generally between 2% and 4% of hotel revenues. The management companies are also eligible to receive an incentive management fee if hotel operating income, as defined in
the management agreements, exceeds certain performance thresholds. The incentive management fee is generally calculated as a percentage of hotel operating income after the Company has received a priority return on its investment in the hotel.



15



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HIGHLAND HOSPITALITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Franchise AgreementsAs of March 31, 2007, 14 of the Companys 27 hotel
properties operated pursuant to franchise agreements from national hotel companies. Pursuant to the franchise agreements, the Company pays a royalty fee generally between 4% and 5% of room revenues, plus additional fees for marketing, central
reservation systems, and other franchisor costs that amount to between 3% and 4% of room revenues from the hotels. Ten of the Companys 27 hotel properties, which include the Hyatt Regency Savannah hotel, the Hyatt Regency Wind Watch Long
Island hotel, the Dallas/Fort Worth Airport Marriott hotel, the Nashville Renaissance hotel, the Ritz-Carlton Atlanta Downtown hotel, the Courtyard Boston Tremont hotel, the Courtyard Denver Airport hotel, the Courtyard Gaithersburg Washingtonian
Center hotel, the Hilton Boston Back Bay hotel, and the Pointe Hilton Tapatio Cliffs resort are managed by Hyatt Corporation, Marriott International, Inc., or Hilton Hotels Corporation. The management agreements for these ten hotel properties allow
the hotel property to operate under the respective brand. With respect to the Companys other three hotel properties, The Churchill hotel, The Melrose hotel and The Silversmith hotel all operate as independent hotels.

Property Improvement ReservesPursuant to its management, franchise and loan agreements, the Company is required to establish a property
improvement reserve for each hotel to cover the cost of replacing furniture, fixtures and equipment at the hotels. Contributions to the property improvement reserve are based on a percentage of gross revenues or receipts at each hotel. The Company
is generally required to contribute between 3% and 5% of gross revenues each month over the term of the agreements.

LitigationThe Company is not involved in any material litigation nor, to its knowledge, is any material litigation threatened against the Company.

13. Subsequent Event

On April 24, 2007, the Company and the Operating Partnership entered into
an Agreement and Plan of Merger (the Merger Agreement) with Blackjack Holdings, LLC, a Delaware limited liability company (Parent), Blackjack Merger Corporation, a Maryland corporation and wholly owned subsidiary of the
Parent (MergerCo), and Blackjack Merger Partnership, LP, a Delaware limited partnership whose general partner is MergerCo (Merger Partnership). Parent, MergerCo, and Merger Partnership (collectively, the Buyer
Parties) are affiliates of JER Partners Acquisitions IV, LLC (JER). The Merger Agreement and the transactions contemplated thereby were approved unanimously by the Companys board of directors and the board of directors of HHC
GP Corporation, a wholly owned subsidiary of the Company and the sole general partner of the Operating Partnership (GP).

Pursuant to the Merger Agreement, at closing the Company will be merged into MergerCo with MergerCo continuing as the surviving corporation (the Company Merger). Closing is currently expected to occur in the third quarter 2007.
Immediately after the Company Merger, Merger Partnership will be merged into the Operating Partnership with the Operating Partnership continuing as the surviving limited partnership (the Partnership Merger, and together with the Company
Merger, the Mergers).

At the effective time of the Mergers, (i) each share of common stock of the Company issued and
outstanding immediately prior to the effective time of the Company Merger will be converted automatically into the right to receive $19.50 in cash, (ii) each share of 7.8750% Series A preferred stock of the Company issued and outstanding
immediately prior to the effective time of the Company Merger will be converted automatically into the right to receive one share of 7.8750% Series A preferred stock of MergerCo having terms materially the same as the terms of the Companys
Series A preferred stock (MergerCo Preferred Stock), and (iii) each unit of limited partnership interest in Operating Partnership issued and outstanding immediately prior to the effective time and not owned by the Company or any of
its subsidiaries or by MergerCo will be converted automatically into the right to receive $19.50 in cash. As promptly as practicable following the Company Merger, and



16



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HIGHLAND HOSPITALITY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



following the requisite notice periods, MergerCo will liquidate the MergerCo Preferred Stock, in connection with which the holders of the MergerCo Preferred
Stock will be entitled to receive a $25.00 liquidation preference per share plus any then accrued but unpaid dividends.

Each outstanding
restricted stock award, to the extent not previously vested, shall become fully vested and free of any forfeiture restrictions immediately prior to the effective time of the Company Merger. Each warrant to purchase Company common stock will be
cancelled in exchange for the right to receive a single lump sum cash payment, equal to the product of (i) the number of Company common shares subject to such Company warrant immediately prior to the effective time of the Company Merger, and
(ii) the excess, if any, of the amount of the difference between $19.50 and the exercise price per share of any such Company warrant.

The Company, the Operating Partnership and the Buyer Parties have made customary representations, warranties and covenants in the Merger Agreement, including, among others, the Companys covenant not to, nor to permit the Operating
Partnership or any other subsidiary of the Company to, solicit alternative transactions or, subject to certain exceptions, participate in discussions relating to an alternative transaction or furnish non-public information relating to an alternative
transaction. The Company will not be permitted to pay further cash dividends on its common stock unless required to maintain its qualification as a REIT under the Internal Revenue Code.

The Mergers are subject to customary closing conditions including, among other things, the adoption of the Merger Agreement by the affirmative vote of
holders of at least a majority of the outstanding common stock of the Company. The closing of the Mergers is not subject to a financing condition.

The Merger Agreement contains certain termination rights for both the Parent and the Company and further provides that, upon termination of the Merger Agreement under specified circumstances, the Company will be required to pay a fee of
$50 million to Parent, or to reimburse up to $15 million of Parents expenses. Parent may be required, upon termination of the Merger Agreement under specified circumstances, to pay a fee of $50 million to Company, or to
reimburse up to $15 million of Companys expenses.



17



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Overview

Highland Hospitality Corporation is a
self-advised REIT that owns upscale full-service, premium limited-service, and extended-stay properties located in major convention, business, resort and airport markets in the United States. We commenced operations on December 19, 2003 when we
completed our IPO and concurrently acquired our first three hotel properties. As of March 31, 2007, we owned the following 27 hotel properties:



|                                             |  |                 |  |                       |  |                   
|-------------------------------------------- |  | --------------- |  | --------------------- |  | ------------------
|Property                                     |  | Number of Rooms |  | Location              |  | Acquired          
|Portsmouth Renaissance and Conference Center |  | 249             |  | Portsmouth, VA        |  | December 19, 2003 
|Sugar Land Marriott and Conference Center    |  | 300             |  | Sugar Land, TX        |  | December 19, 2003 
|Hilton Garden Inn Virginia Beach Town Center |  | 176             |  | Virginia Beach, VA    |  | December 19, 2003 
|Plaza San Antonio Marriott                   |  | 252             |  | San Antonio, TX       |  | December 29, 2003 
|Hyatt Regency Savannah                       |  | 351             |  | Savannah, GA          |  | December 30, 2003 
|Hilton Tampa Westshore                       |  | 238             |  | Tampa, FL             |  | January 8, 2004   
|Hilton Garden Inn BWI Airport                |  | 158             |  | Linthicum, MD         |  | January 12, 2004  
|Dallas/Fort Worth Airport Marriott           |  | 491             |  | Dallas/Fort Worth, TX |  | May 10, 2004      
|Residence Inn Tampa Downtown                 |  | 109             |  | Tampa, FL             |  | August 2, 2004    
|Courtyard Savannah Historic District         |  | 156             |  | Savannah, GA          |  | August 2, 2004    
|Hyatt Regency Wind Watch Long Island         |  | 358             |  | Hauppauge, NY         |  | August 19, 2004   
|Courtyard Boston Tremont                     |  | 315             |  | Boston, MA            |  | August 19, 2004   
|Crowne Plaza Atlanta-Ravinia                 |  | 495             |  | Atlanta, GA           |  | August 19, 2004   
|Hilton Parsippany                            |  | 506             |  | Parsippany, NJ        |  | August 19, 2004   
|Omaha Marriott                               |  | 299             |  | Omaha, NE             |  | September 15, 2004
|Courtyard Denver Airport                     |  | 202             |  | Denver, CO            |  | September 17, 2004
|Sheraton Annapolis                           |  | 196             |  | Annapolis, MD         |  | February 4, 2005  
|Wyndham Palm Springs                         |  | 410             |  | Palm Springs, CA      |  | July 14, 2005     
|Hilton Boston Back Bay                       |  | 385             |  | Boston, MA            |  | October 24, 2005  
|Westin Princeton at Forrestal Village        |  | 294             |  | Princeton, NJ         |  | November 15, 2005 
|The Churchill                                |  | 144             |  | Washington, DC        |  | December 9, 2005  
|Nashville Renaissance                        |  | 673             |  | Nashville, TN         |  | February 24, 2006 
|The Melrose                                  |  | 240             |  | Washington, DC        |  | March 15, 2006    
|Pointe Hilton Tapatio Cliffs                 |  | 585             |  | Phoenix, AZ           |  | March 16, 2006    
|Courtyard Gaithersburg Washingtonian Center  |  | 210             |  | Gaithersburg, MD      |  | June 1, 2006      
|Ritz-Carlton Atlanta Downtown                |  | 444             |  | Atlanta, GA           |  | September 22, 2006
|The Silversmith                              |  | 143             |  | Chicago, IL           |  | February 23, 2007 
|                                             |  |                 |  |                       |  |                   
|Total number of rooms                        |  | 8,379           |  |                       |  |                   
|                                             |  |                 |  |                       |  |                   

Substantially all of our assets are held by, and all of our operations are conducted through,
Highland Hospitality, L.P. (our Operating Partnership). In order for us to qualify as a REIT, neither our company nor the Operating Partnership can operate hotels directly. Therefore, the Operating Partnership, which is owned
approximately 99% by us and approximately 1% by other limited partners, leases its hotels to subsidiaries of HHC TRS Holding Corporation (collectively, HHC TRS), which is a wholly owned subsidiary of the Operating Partnership. HHC TRS
then engages hotel management companies to operate the hotels pursuant to management contracts. HHC TRS is treated as a taxable REIT subsidiary for federal income tax purposes.

Key Operating Metrics

Hotel results of operations are best explained by three key performance
indicators: occupancy, average daily rate (ADR) and revenue per available room (RevPAR), which is room revenue divided by total number of room nights. RevPAR does not include food and beverage revenues or other ancillary
revenues, such as golf, telephone, parking or other guest services provided by the property.



18



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Occupancy is a major driver of room revenue, as well as other revenue categories, such as food and
beverage and telephone. ADR helps to drive room revenue as well; however, it does not have a direct effect on other revenue categories. Fluctuations in occupancy are accompanied by fluctuations in most categories of variable operating costs, such as
utility costs and certain labor costs such as housekeeping, resulting in varying levels of hotel profitability. Increases in ADR typically result in higher hotel profitability since variable hotel expenses generally do not increase correspondingly.
Thus, increases in RevPAR attributable to increases in occupancy are accompanied by increases in most categories of variable operating costs, while increases in RevPAR attributable to increases in ADR are accompanied by increases in limited
categories of operating costs, such as management fees and franchise fees.

Executive Summary of First Quarter Events

The first quarter 2007 was another solid quarter for Highland Hospitality. Considering the first quarter is traditionally our slowest quarter of the year
in terms of hotel revenue and hotel operating income, we were pleased with our hotel operating results as we exceeded the industry-wide RevPAR growth of 5.2%, as reported by Smith Travel Research. For our total hotel portfolio, RevPAR increased 7.1%
in the first quarter 2007, as compared to the first quarter 2006, and our comparable hotel portfolio RevPAR increased 6.8% for those same periods. In addition, for our total hotel portfolio, operating income margins increased 140 basis points in the
first quarter 2007, as compared to the first quarter 2006, and our comparable hotel portfolio operating income margins increased 110 basis points for those same periods.

In February 2007, we acquired the 143-room Crowne Plaza Chicago-Silversmith hotel in Chicago, Illinois for approximately $34.4 million. Crestline Hotels & Resorts, Inc. is managing The Silversmith hotel as an
independent hotel, similar to The Melrose hotel and The Churchill hotel in Washington, D.C. The hotel acquisition environment continues to be very competitive.

On April 24, 2007, we announced that our board of directors had unanimously approved the signing of a definitive agreement to be acquired by affiliates of JER Partners Acquisitions IV, LLC (JER). The
all-cash transaction is valued at approximately $2.0 billion, including the assumption of long-term debt. Under the terms of the agreement, JER will acquire all of Highlands outstanding common stock and operating partnership units for $19.50
per share and per operating partnership unit in cash. The purchase price represents a premium of approximately 15% over Highlands three-month average closing share price. Also, pursuant to the terms of the agreement, no future dividends will
be paid on the common stock. In addition, JER has agreed that, as promptly as practicable after the completion of the merger, it will liquidate the surviving corporation in the merger. In the liquidation, each holder of a share of Highlands
7.875% Series A preferred stock will receive $25.00 per share in cash plus any then accrued but unpaid dividends. Completion of the transaction, which is subject to stockholder approval as well as other customary closing conditions, is currently
expected to occur in the third quarter 2007.

Pending completion of the transaction, we have agreed to carry on our business in the
ordinary course consistent with past practice, subject to our compliance with various covenants regarding the conduct of our business and other general matters. These covenants include, among other things, limitations on our ability to purchase,
acquire, sell, encumber, transfer or dispose of our assets, enter into or amend any material contract and, subject to a list of enumerated exceptions in the definitive agreement, incur or repay indebtedness, issue or repurchase equity, pay dividends
on our common stock, make capital contributions to joint ventures or encumber Company properties.

Results of Operations

Comparison of three months ended March 31, 2007 and 2006

Results of operations for the three months ended March 31, 2007 include the operating activity of 26 hotels for a full quarter and one hotel for a partial quarter. Results of operations for the three months ended
March 31, 2006 include the operating activity of 23 hotels for a full quarter and three hotels for a partial quarter (see table above for hotel property acquisition dates). As such, comparisons of results of operations for the three months
ended March 31, 2007 versus the three months ended March 31, 2006 are not meaningful.



19



---

RevenuesTotal revenue for the three months ended March 31, 2007 was $123.3 million, as
compared to $85.0 million for the comparable period in 2006. Total revenue for the three months ended March 31, 2007 included rooms revenue of $80.0 million, food and beverage revenue of $36.7 million, and other revenue of $6.7 million. Total
revenue for the three months ended March 31, 2006 included rooms revenue of $56.4 million, food and beverage revenue of $24.8 million, and other revenue of $3.7 million.

Included in the following table are comparisons of the key operating metrics for our hotel portfolio for the three months ended March 31, 2007 and
2006. The comparisons do not include the operating results for the Marriott Mount Laurel hotel and the Barceló Tucancun Beach resort, which were sold in June 2006 and August 2006, respectively, or the Courtyard Gaithersburg Washingtonian
Center hotel, which opened for business in June 2006. Since five of our hotels owned as of March 31, 2007 were acquired at various times during 2006 and 2007, the key operating metrics for those five hotels reflect the results of operations of
the hotels under previous ownership for either a portion of, or the entire, three months ended March 31, 2007 and 2006.



|                                          |  |                              |   |                  |     |        |        |   |        |  |      |     |  |        |        |  |   |       
|----------------------------------------- |  | ---------------------------- | - | ---------------- | --- | ------ | ------ | - | ------ |  | ---- | --- |  | ------ | ------ |  | - | ------
|                                          |  | Three Months Ended March 31,
|                                          |  | 2007                         |   | 2006 (Pro Forma)
|                                          |  | Occ %                        |   |                  | ADR |        | RevPAR |   | Occ %  |  |      | ADR |  | RevPAR
|Total Hotel Portfolio (26 hotels)         |  | 73.0                         | % |                  | $   | 152.85 |        | $ | 111.51 |  | 71.8 | %   |  | $      | 145.06 |  | $ | 104.09
|Comparable Hotel Portfolio (21 hotels)(1) |  | 71.5                         | % |                  | $   | 143.27 |        | $ | 102.41 |  | 70.4 | %   |  | $      | 136.22 |  | $ | 95.85 

---

|(1) | Includes hotel properties owned on January 1, 2006
|--- | --------------------------------------------------

For the three months ended March 31, 2007, RevPAR for our total hotel portfolio increased 7.1% to $111.51 from the comparable period in 2006. Occupancy increased by 1.2 percentage points to 73.0%, while ADR increased by 5.4% to
$152.85. For our comparable hotel portfolio, RevPAR increased 6.8% to $102.41 from the comparable period in 2006. Occupancy increased by 1.1 percentage points to 71.5%, while ADR increased by 5.2% to $143.27. The increase in RevPAR for the first
quarter 2007 versus the first quarter 2006 was largely a result of the RevPAR increases at the Sheraton Annapolis hotel, the Courtyard Boston Tremont hotel, the Hilton Garden Inn Virginia Beach hotel, the Hilton Parsippany hotel, the Westin
Princeton at Forrestal Village hotel and The Melrose hotel.

Hotel operating expensesHotel operating expenses, excluding
depreciation and amortization, for the three months ended March 31, 2007 were $85.8 million, as compared to $60.1 million for the comparable period in 2006. Direct hotel operating expenses for the three months ended March 31, 2007 included
rooms expenses of $17.2 million, food and beverage expenses of $24.2 million, and other direct expenses of $3.2 million. Direct hotel operating expenses for the three months ended March 31, 2006 included rooms expenses of $12.1 million, food
and beverage expenses of $16.3 million, and other direct expenses of $1.5 million. Indirect hotel operating expenses, which includes management and franchise fees, real estate taxes, insurance, utilities, repairs and maintenance, advertising and
sales, and general and administrative expenses, for the three months ended March 31, 2007 were $41.3 million, as compared to $30.1 million for the comparable period in 2006.

Hotel operating income and marginsIncluded in the following table are comparisons of hotel operating income (hotel revenues less hotel
operating expenses) and hotel operating income margins (hotel operating income divided by hotel revenues) for our hotel portfolio for the three months ended March 31, 2007 and 2006. The comparisons do not include the operating results for the
Marriott Mount Laurel hotel and the Barceló Tucancun Beach resort, which were sold in June 2006 and August 2006, respectively, or the Courtyard Gaithersburg Washingtonian Center hotel, which opened for business in June 2006. Since five of our
hotels owned as of March 31, 2007 were acquired at various times during 2006 and 2007, the hotel operating income and hotel operating income margins for those five hotels reflect the results of operations of the hotels under previous ownership
for either a portion of, or the entire, three months ended March 31, 2007 and 2006.



20



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|                                          |  |                              |      |       |                  |   |       |   |       |  |      |  
|----------------------------------------- |  | ---------------------------- | ---- | ----- | ---------------- | - | ----- | - | ----- |  | ---- | -
|                                          |  | Three Months Ended March 31, |     
|                                          |  | 2007                         |      |       | 2006 (Pro Forma) |  
|                                          |  | $ (1)                        |      | % (2) |                  |   | $ (1) |   | % (2) | 
|Total Hotel Portfolio (26 hotels)         |  | $                            | 37.0 |       | 30.4             | % |       | $ | 34.1  |  | 29.0 | %
|Comparable Hotel Portfolio (21 hotels)(3) |  | $                            | 24.0 |       | 29.8             | % |       | $ | 22.3  |  | 28.7 | %

---

|(1) | In millions
|--- | -----------

|(2) | Percentage of hotel revenue
|--- | ---------------------------

|(3) | Includes hotel properties owned on January 1, 2006
|--- | --------------------------------------------------

For the three months ended March 31, 2007, hotel operating income for our total hotel portfolio increased 8.6% to $37.0 million from the comparable period in 2006 and hotel operating income margins increased by 1.4 percentage points to
30.4%. For our comparable hotel portfolio, hotel operating income increased 7.4% to $24.0 million from the comparable period in 2006 and hotel operating income margins increased by 1.1 percentage points to 29.8%. The increase in hotel operating
income and margins for the first quarter 2007 versus the first quarter 2006 was largely a result of the operating income increases at the Pointe Hilton Tapatio Cliffs resort, The Melrose hotel, the Westin Princeton at Forrestal Village hotel, and
the Dallas/Fort Worth Airport Marriott hotel.

Depreciation and amortizationDepreciation and amortization expense for the
three months ended March 31, 2007 was $12.7 million, as compared to $8.6 million for the comparable period in 2006. The increase in depreciation and amortization expense for the three months ended March 31, 2007 versus the comparable
period in 2006 was directly attributable to the increase in investment in hotel properties during 2006 and 2007.

Corporate
general and administrativeTotal corporate general and administrative expenses for the three months ended March 31, 2007 and 2006 were $4.7 million and $2.8 million, respectively. Included in corporate general and administrative
expenses for the three months ended March 31, 2007 and 2006 was $1.8 and $0.8 million of non-cash stock-based compensation expense. The increase in corporate general and administrative expenses is primarily a result of an increase in corporate
franchise tax expense, due to the mix of states in which we own hotels, an increase in employee salaries and bonuses, additional stock-based compensation expense related to restricted stock awards granted in May 2006, and professional service costs
incurred related to the merger.

Interest incomeInterest income for the three months ended March 31, 2007 and 2006 was
$0.4 million and $0.7 million, respectively.

Interest expenseInterest expense for the three months ended March 31, 2007
was $11.1 million, as compared to $8.2 million for the comparable period in 2006. The increase in interest expense for the three months ended March 31, 2007 versus the comparable period in 2006 was directly attributable to the increase in
long-term debt during 2006.

Income tax expenseIncome tax expense for the three months ended March 31, 2007 was $0.3
million, as compared to an income tax benefit for the three months ended March 31, 2006 of $0.4 million. Income tax expense for the three months ended March 31, 2007 resulted primarily from taxable operating income incurred by our TRS,
whereas the income tax benefit for the three months ended March 31, 2006 resulted from taxable operating losses incurred by our TRS.

Net incomeNet income for the three months ended March 31, 2007 was $9.1 million, as compared to $5.3 million for the comparable period in 2006, due to the items discussed above.

Non-GAAP Financial Measures

Non-GAAP financial
measures are measures of our historical or future financial performance that are different from measures calculated and presented in accordance with U.S. generally accepted accounting principles (GAAP). These include: funds from
operations (FFO) available to common stockholders, adjusted FFO available to common stockholders, EBITDA, and adjusted EBITDA.



21



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FFO available to common stockholdersFFO available to common stockholders is defined as net
income (loss) available to common stockholders, excluding depreciation and amortization and gains (losses) on sales of hotel properties. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets
diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most industry investors have considered presentations of operating results for real estate companies that use historical
cost accounting to be insufficient by themselves. Accordingly, we believe that FFO available to common stockholders is a useful financial measure for investors and management because it provides another indication of our performance, excluding real
estate related depreciation and amortization. We also exclude gains (losses) on sales of hotel properties from net income (loss) available to common stockholders because we believe that by excluding gains (losses) on sales of hotel properties,
investors and management are provided a more comparable financial measure of our operating performance.

Adjusted FFO available to
common stockholdersWe further adjust FFO available to common stockholders to exclude certain other non-recurring items, such as gains (losses) on early extinguishments of debt, because we believe that by excluding these non-recurring
items, investors and management are provided a more comparable financial measure of our operating performance.

The following table
reconciles FFO and adjusted FFO available to common stockholders to net income available to common stockholders for the three months ended March 31, 2007 and 2006 (in thousands):



|                                                           |  |                              |        |      |   |       
|---------------------------------------------------------- |  | ---------------------------- | ------ | ---- | - | ------
|                                                           |  | Three Months Ended March 31,
|                                                           |  | 2007                         |        | 2006
|Net income available to common stockholders                |  | $                            | 7,497  |      | $ | 3,717 
|Adjustments:                                               |  |                              |        |      |   |       
|Depreciation and amortization                              |  |                              | 12,745 |      |   | 8,626 
|Depreciation and amortization from discontinued operations |  |                              |       |      |   | 307   
|                                                           |  |                              |        |      |   |       
|FFO available to common stockholders                       |  |                              | 20,242 |      |   | 12,650
|Adjustment:                                                |  |                              |        |      |   |       
|Loss on early extinguishment of debt                       |  |                              |       |      |   | 996   
|                                                           |  |                              |        |      |   |       
|Adjusted FFO available to common stockholders              |  | $                            | 20,242 |      | $ | 13,646
|                                                           |  |                              |        |      |   |       

EBITDAEBITDA is defined as net income before interest, income taxes and depreciation
and amortization. We believe it is a useful financial measure for investors and management because it provides an indication of the operating performance of our hotel properties and is not impacted by our capital structure.

Adjusted EBITDAWe further adjust EBITDA to exclude gains (losses) on sales of hotel properties and certain other non-recurring items, such
as gains (losses) on early extinguishments of debt, because we believe that by excluding non-recurring items, investors and management are provided a more comparable financial measure of our operating performance.



22



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The following table reconciles EBITDA and adjusted EBITDA to net income for the three months ended
March 31, 2007 and 2006 (in thousands):



|                                     |  |                              |        |   |      |   |        |  
|------------------------------------ |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                     |  | Three Months Ended March 31, |       
|                                     |  | 2007                         |        |   | 2006 |  
|Net income                           |  | $                            | 9,072  |   |      | $ | 5,292  |  
|Adjustments:                         |  |                              |        |   |      |   |        |  
|Depreciation and amortization        |  |                              | 12,745 |   |      |   | 8,626  |  
|Interest expense                     |  |                              | 11,095 |   |      |   | 8,216  |  
|Interest income                      |  |                              | (410   | ) |      |   | (703   | )
|Income tax expense (benefit)         |  |                              | 275    |   |      |   | (413   | )
|Discontinued operations (1)          |  |                              |       |   |      |   | (187   | )
|                                     |  |                              |        |   |      |   |        |  
|EBITDA                               |  |                              | 32,777 |   |      |   | 20,831 |  
|Adjustment:                          |  |                              |        |   |      |   |        |  
|Loss on early extinguishment of debt |  |                              |       |   |      |   | 996    |  
|                                     |  |                              |        |   |      |   |        |  
|Adjusted EBITDA                      |  | $                            | 32,777 |   |      | $ | 21,827 |  
|                                     |  |                              |        |   |      |   |        |  

Neither adjusted FFO available to common stockholders nor adjusted EBITDA represent cash generated
from operating activities as determined by U.S. generally accepted accounting principles (GAAP) and neither should be considered as an alternative to GAAP net income available to common stockholders, as an indication of our financial
performance, or to cash flow from operating activities as determined by GAAP, as a measure of liquidity. In addition, adjusted FFO available to common stockholders and adjusted EBITDA are not indicative of funds available to fund cash needs,
including the ability to make cash distributions.

Sources and Uses of Cash

Our principal source of cash to meet our operating requirements, including distributions to stockholders and repayments of indebtedness, is from our
hotels results of operations. For the three months ended March 31, 2007, net cash provided by operating activities was approximately $16.8 million. We currently expect that our operating cash flows will be sufficient to fund our
continuing operations and our required debt service obligations pending completion of our transaction with JER.

For the three months ended
March 31, 2007, net cash used in investing activities was approximately $47.1 million, including approximately $34.4 million to purchase the 143-room Crowne Plaza Chicago-Silversmith hotel in Chicago, Illinois. We also used approximately $8.0
million for improvements and additions to our hotel properties.

For the three months ended March 31, 2007, net cash provided by
financing activities was approximately $26.8 million, including borrowings of $44.0 million under our revolving credit facility, partially offset by approximately $14.8 million for payment of dividends to common and preferred stockholders.

Liquidity and Capital Resources

As of
March 31, 2007, we had cash and cash equivalents of approximately $33.8 million, restricted cash of approximately $25.0 million, and $52 million of borrowing capacity under our $200 million revolving credit facility. Under the terms of our
definitive agreement with JER, we have agreed that we will generally not incur more than $15 million of additional indebtedness without obtaining JERs prior written consent.

Capital Expenditures

We maintain each hotel in good repair and condition and in conformity with
applicable laws and regulations and in accordance with the franchisors standards and the agreed-upon requirements in our management



23



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agreements. The cost of all such routine improvements and alterations will be paid out of a property improvement fund, which will be funded by a portion of
hotel gross revenues. Routine capital expenditures will be administered by the management companies. However, we have approval rights over the capital expenditures as part of the annual budget process.

From time to time, certain of our hotel properties may be undergoing renovations as a result of our decision to upgrade portions of the hotels, such as
guestrooms, meeting space, and/or restaurants, in order to better compete with other hotels in our markets. In addition, often after we acquire a hotel property, we are required to complete a property improvement plan (PIP) in order to
bring the hotel property up to the respective franchisors standards. If permitted by the terms of the management agreement, funding for a renovation will first come from the property improvement fund. To the extent that the property
improvement fund is not adequate to cover the cost of the renovation, we will fund the remaining portion of the renovation with cash and cash equivalents on hand.

Contractual Obligations

The following table sets forth our contractual obligations as of March 31, 2007, and the
effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands). There were no other material off-balance sheet arrangements at March 31, 2007.



|                                                 |  |                        |         |                    |   |                    |  |                     |         |                      |   |         |  |   |        
|------------------------------------------------ |  | ---------------------- | ------- | ------------------ | - | ------------------ |  | ------------------- | ------- | -------------------- | - | ------- |  | - | -------
|                                                 |  | Payments Due by Period
|Contractual Obligations                          |  | Total                  |         | Less Than One Year |   | One to Three Years |  | Three to Five Years |         | More Than Five Years
|Ground and building leases(1)                    |  | $                      | 75,209  |                    | $ | 1,930              |  | $                   | 3,715   |                      | $ | 3,715   |  | $ | 65,849 
|Capital leases, including interest               |  |                        | 1,154   |                    |   | 261                |  |                     | 523     |                      |   | 370     |  |   |       
|Mortgage loans, including interest               |  |                        | 681,866 |                    |   | 39,418             |  |                     | 88,455  |                      |   | 274,872 |  |   | 279,121
|Mezzanine loan, including interest               |  |                        | 33,153  |                    |   | 2,411              |  |                     | 4,822   |                      |   | 25,920  |  |   |       
|Revolving credit facility, including interest(2) |  |                        | 169,485 |                    |   | 11,233             |  |                     | 158,252 |                      |   |        |  |   |       
|                                                 |  |                        |         |                    |   |                    |  |                     |         |                      |   |         |  |   |        
|                                                 |  | $                      | 960,867 |                    | $ | 55,253             |  | $                   | 255,767 |                      | $ | 304,877 |  | $ | 344,970
|                                                 |  |                        |         |                    |   |                    |  |                     |         |                      |   |         |  |   |        

---

|(1) | Included in the table are the base rent payments (i.e., minimum lease payments) due under our ground and building lease agreements. Additional and percentage rent payments are not
included in the table due to the uncertainty of the timing and amount of the payments in the future.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Assumes no additional borrowings under the revolving credit facility and interest payments based on the interest rate in effect as of March 31, 2007.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

Inflation

Operators of hotels, in general,
possess the ability to adjust room rates daily to reflect the effects of inflation. However, competitive pressures may limit the ability of our management companies to raise room rates.

Seasonality

Demand in the lodging industry is affected by recurring seasonal patterns. For
non-resort properties, demand is generally lower in the winter months due to decreased travel and higher in the spring and summer months during the peak travel season. For resort properties, demand is generally higher in the winter months. We expect
that our operations will generally reflect non-resort seasonality patterns. Accordingly, we expect that we will have lower revenue, operating income and cash flow in the first and fourth quarters and higher revenue, operating income and cash flow in
the second and third quarters. These general trends are, however, expected to be greatly influenced by overall economic cycles.



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Critical Accounting Policies

We believe that the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our financial statements:

Investment in Hotel PropertiesInvestments in hotel properties are stated at acquisition cost and allocated to land, property and equipment
and identifiable intangible assets at fair value in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. Property and equipment are recorded at fair value based on current replacement cost for
similar capacity and allocated to buildings, improvements, furniture, fixtures and equipment using cost segregation studies performed by management and independent third parties. Property and equipment are depreciated using the straight-line method
over an estimated useful life of 15 to 40 years for buildings and improvements and three to ten years for furniture and equipment. Identifiable intangible assets are typically contracts, including lease, management and franchise agreements, which
are recorded at fair value. Above-market and below-market contract values are based on the present value of the difference between contractual amounts to be paid pursuant to the contracts acquired and our estimate of the fair market contract rates
for corresponding contracts measured over a period equal to the remaining non-cancelable term of the contract. Contracts acquired which are at market do not have significant value. An existing management or franchise agreement is typically
terminated at the time of acquisition and a new agreement is entered into based on then current market terms. Intangible assets are amortized using the straight-line method over the remaining non-cancelable term of the related agreements. In making
estimates of fair values for purposes of allocating purchase price, we may utilize a number of sources that may be obtained in connection with the acquisition or financing of a property and other market data. Management also considers information
obtained about each property as a result of its pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired.

We review our investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the investments in hotel properties may not be recoverable. Events or
circumstances that may cause us to perform our review include, but are not limited to, adverse changes in the demand for lodging at our properties due to declining national or local economic conditions and/or new hotel construction in markets where
our hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of an investment in a hotel property
exceed the hotels carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying value to the estimated fair market value is recorded and an impairment loss
recognized.

Stock-Based CompensationFrom time-to-time, we grant restricted stock awards to employees. To-date, we have
granted three types of restricted stock awards: (1) awards that vest solely on continued employment (time-based awards); (2) awards that vest based on us achieving specified levels of funds from operations (FFO) and continued employment
(performance-based awards); and (3) awards that vest based on us achieving specified levels of relative total shareholder return and continued employment (market-based awards).

We measure stock-based compensation expense for the restricted stock awards based on the fair value of the awards on the date of grant. The fair value of
time-based awards and performance-based awards is determined based on the average trading price of our common stock on the measurement date, which is generally the date of grant. The fair value of market-based awards is determined using a Monte
Carlo simulation performed by a third-party valuation specialist. A Monte Carlo simulation requires the use of a number of assumptions, including historical volatility and correlation of our common stock and the common stock of our peer group, a
risk-free rate of return, and an expected term.

For time-based awards, stock-based compensation expense is recognized on a straight-line
basis over the life of the entire award. For market-based awards, stock-based compensation expense is recognized over the requisite service period for each award. For both time-based awards and market-based awards, once the total amount of
stock-based compensation expense is determined on the date of the grant, no adjustments are made to the amount recognized each period. Similar to market-based awards, stock-based compensation expense for



25



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performance-based awards is recognized over the requisite service period for each award. However, unlike time-based awards and market-based awards, the
amount of stock-based compensation expense, if any, recognized each period is based on whether the performance measure is expected to be met. For all three types of awards, no compensation cost is recognized for awards for which employees do not
render the requisite service.

Revenue RecognitionHotel revenues, including room, food and beverage, and other hotel revenues,
are recognized as the related services are provided.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and as such may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identified by our use of words, such
as intend, plan, may, should, will, project, estimate, anticipate, believe, expect, continue, potential,
opportunity, and similar expressions, whether in the negative or affirmative. We cannot guarantee that we actually will achieve these plans, intentions or expectations, including completing the mergers on the terms of the merger
agreement. All statements regarding our expected financial position, business and financing plans are forward-looking statements. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited
to:



| |  |  | the satisfaction of the conditions to consummate the proposed merger with affiliates of JER, including the receipt of the required stockholder approval;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the actual terms of certain financings that will be obtained for the proposed mergers;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the occurrence of any event, change or other circumstances that could give rise to the termination of the proposed merger agreement;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the failure of the proposed mergers to close for any other reason;
| | - |  | ------------------------------------------------------------------



| |  |  | the amount of the costs, fees, expenses and charges related to the proposed mergers;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | substantial indebtedness following the consummation of the proposed mergers;
| | - |  | ----------------------------------------------------------------------------



| |  |  | United States economic conditions generally and the real estate market and the lodging industry specifically;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | management and performance of our hotels;
| | - |  | -----------------------------------------



| |  |  | our plans for renovation of our hotels;
| | - |  | ---------------------------------------



| |  |  | our financing plans;
| | - |  | --------------------



| |  |  | supply and demand for hotel rooms in our current and proposed market areas;
| | - |  | ---------------------------------------------------------------------------



| |  |  | our ability to acquire additional properties and the risk that potential acquisitions may not perform in accordance with expectations;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | legislative/regulatory changes, including changes to laws governing taxation of real estate investment trusts; and
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | our competition.
| | - |  | ----------------

These risks and
uncertainties, together with the information contained in our Form 10-K filed with the Securities and Exchange Commission on February 28, 2007 under the caption Risk Factors, should be



26



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considered in evaluating any forward-looking statement contained in this report or incorporated by reference herein. All forward-looking statements speak
only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified
by the cautionary statements in this section. We undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

Interest Rate RiskWe are not significantly exposed to interest rate risk. As of March 31, 2007, $529.8 million or 76.9% of our $688.6 million of long-term debt was fixed. Another $61 million was
effectively fixed, as a result of interest rate swaps that fix the interest rates on our variable-rate mortgage loan and $50 million borrowed under our revolving credit facility. The remaining $98 million borrowed under our revolving credit facility
as of March 31, 2007 was variable.

Due to the fact that our portfolio of long-term debt is substantially comprised of fixed-rate
instruments, the fair value of the portfolio is relatively sensitive to effects of interest rate fluctuations. Assuming a hypothetical 10% decrease in interest rates, the fair value of our portfolio of long-term debt would increase by approximately
$16 million. Although a change in market interest rates impacts the fair value of our fixed-rate debt, it has no impact on interest expense incurred or cash flows.

With respect to our variable rate long-term debt, if market rates of interest on our variable long-term debt increase by 1%, the increase in interest expense on our variable long-term debt would decrease future
earnings and cash flows by approximately $1.0 million annually. On the other hand, if market rates of interest on our variable rate long-term debt decrease by 1%, the decrease in interest expense on our variable rate long-term debt would increase
future earnings and cash flows by approximately $1.0 million annually. This assumes that the amount outstanding under our revolving credit facility remains at $148 million, the balance at March 31, 2007, and we continue to fix the interest rate
on $50 million of the $148 million through the use of an interest rate swap.



|Item 4. | Controls and Procedures
|------- | -----------------------

The Chief
Executive Officer and Chief Financial Officer of Highland Hospitality Corporation have evaluated the effectiveness of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the Exchange Act)), as required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act, and have concluded that as of the end of the period covered by this report, Highland Hospitality Corporations
disclosure controls and procedures were effective.

There was no change in Highland Hospitality Corporations internal control over
financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act during Highland Hospitality Corporations most recent fiscal quarter that materially affected, or
is reasonably likely to materially affect, Highland Hospitality Corporations internal control over financial reporting.



27



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PART II



|Item 1. | Legal Proceedings
|------- | -----------------

We are not
involved in any material litigation nor, to our knowledge, is any material litigation threatened against us.



|Item 1A. | Risk Factors
|-------- | ------------

There have been no
material changes from the risk factors disclosed under the caption Risk Factors in the Companys Form 10-K for the year ended December 31, 2006.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

Issuer Purchases of Equity Securities

The following table provides information about our purchases of our common stock
within the first quarter of the year ending December 31, 2007:



|                                   |  |                                 |  |                             |       |                                                                             |     |                                                                                         |    
|---------------------------------- |  | ------------------------------- |  | --------------------------- | ----- | --------------------------------------------------------------------------- | --- | --------------------------------------------------------------------------------------- | ---
|Period                             |  | Total Number of SharesPurchased |  | Average PricePaid Per Share |       | Total Number ofShares Purchasedas Part ofPubliclyAnnounced Plansor
Programs |     | Approximate Dollar Value of Shares that May
Yet Be Purchased Under the Plans orPrograms
|January 1, 2007January 31, 2007   |  | 1,920                           |  | $                           | 15.52 |                                                                             | n/a |                                                                                         | n/a
|February 1, 2007February 28, 2007 |  | 51,952                          |  | $                           | 16.92 |                                                                             |    |                                                                                         |   
|March 1, 2007March 31, 2007       |  |                                |  |                             |      |                                                                             | n/a |                                                                                         | n/a
|                                   |  |                                 |  |                             |       |                                                                             |     |                                                                                         |    
|Total                              |  | 53,872                          |  | $                           | 16.87 |                                                                             | n/a |                                                                                         | n/a
|                                   |  |                                 |  |                             |       |                                                                             |     |                                                                                         |    

We do not currently have a repurchase plan or program in place. However, we do provide employees
who have been granted shares of restricted common stock the option of selling shares to us to satisfy the minimum statutory tax withholding requirements on the date their shares vest. The shares of common stock purchased in the first quarter 2007
related to such repurchases.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Not
applicable.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

None.



|Item 5. | Other Information
|------- | -----------------

None.



28



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|Item 6. | Exhibits
|------- | --------

The following exhibits are
filed as part of this Form 10-Q:



|               |  |                                                                                                                                                                                                                                                                                                                              
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                                                                                       
|2.1            |  | Agreement and Plan of Merger, dated as of April 24, 2007, by and among Highland Hospitality Corporation, Highland Hospitality, L.P., Blackjack Holdings, LLC, Blackjack Merger Corporation
and Blackjack Merger Partnership, LP (incorporated by reference to Exhibit 2.1. to the registrants Form 8-K dated April 27, 2007)
|               | 
|3.1            |  | Amended and Restated Articles of Incorporation of Highland Hospitality Corporation (incorporated by reference to Exhibit 3.1 to the registrants Form 10-K for the year ended
December 31, 2003)                                                                                                                             
|               | 
|3.2            |  | Amended and Restated Bylaws of Highland Hospitality Corporation (incorporated by reference to Exhibit 3.2 to the registrants Form 10-K for the year ended December 31,
2003)                                                                                                                                                
|               | 
|3.3            |  | Second Amended and Restated Agreement of Limited Partnership of Highland Hospitality, L.P. (as amended through September 30, 2004) (incorporated by reference to Exhibit 3.3.1 to the
registrants Form 10-Q for the quarter ended September 30, 2004)                                                                       
|               | 
|3.3.1          |  | First Amendment to the Second Amended and Restated Agreement of Limited Partnership of Highland Hospitality, L.P. (incorporated by reference to Exhibit 3.3.1 to the registrants Form 10-Q
for the quarter ended June 30, 2006)                                                                                             
|               | 
|3.3.2          |  | Second Amendment to the Second Amended and Restated Agreement of Limited Partnership of Highland Hospitality, L.P. (incorporated by reference to Exhibit 3.3.2 to the registrants Form 10-Q
for the quarter ended June 30, 2006)                                                                                            
|               | 
|3.3.3          |  | Third Amendment to the Second Amended and Restated Agreement of Limited Partnership of Highland Hospitality, L.P. (incorporated by reference to Exhibit 3.3 to the registrants Form 10-Q for
the quarter ended September 30, 2005)                                                                                          
|               | 
|3.3.4          |  | Fourth Amendment to the Second Amended and Restated Agreement of Limited Partnership of Highland Hospitality, L.P. (incorporated by reference to Exhibit 3.3.4 to the registrants Form 10-Q
for the quarter ended June 30, 2006)                                                                                            
|               | 
|10.1*          |  | Third Amendment to Employment Agreement between Highland Hospitality Corporation and James L. Francis, dated as of April 24, 2007                                                                                                                                                                                            
|               | 
|10.2*          |  | Third Amendment to Employment Agreement between Highland Hospitality Corporation and Patrick W. Campbell, dated as of April 24, 2007                                                                                                                                                                                         
|               | 
|10.3*          |  | Third Amendment to Employment Agreement between Highland Hospitality Corporation and Tracy M.J. Colden, dated as of April 24, 2007                                                                                                                                                                                           
|               | 
|10.4*          |  | Third Amendment to Employment Agreement between Highland Hospitality Corporation and Douglas W. Vicari, dated as of April 24, 2007                                                                                                                                                                                           
|               | 
|12.1           |  | Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends                                                                                                                                                                                                                                     
|               | 
|31.1           |  | Rule 13a-14(a)/15d-14(a) Certification of President and Chief Executive Officer                                                                                                                                                                                                                                              
|               | 
|31.2           |  | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer                                                                                                                                                                                                                                                            
|               | 
|32.1           |  | Section 1350 Certification of President and Chief Executive Officer                                                                                                                                                                                                                                                          
|               | 
|32.2           |  | Section 1350 Certification of Chief Financial Officer                                                                                                                                                                                                                                                                        

---

|* | Denotes management contract or other compensatory plan or arrangement.
|- | ----------------------------------------------------------------------



29



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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                  |  |                                  |  |                                                                                                  
|----------------- |  | -------------------------------- |  | -------------------------------------------------------------------------------------------------
|                  |  | HIGHLAND HOSPITALITY CORPORATION
|                  |  |                                 
|Date: May 9, 2007 |  | By:                              |  | /s/    DOUGLAS W.
VICARI                                                                         
|                  |  |                                  |  | Douglas W. Vicari                                                                                
|                  |  |                                  |  | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)



30