##### 



Exhibit 13

INDEPENDENT AUDITORS REPORT

The Partners

MeriStar Hospitality Operating Partnership, L.P.:


We have audited the accompanying consolidated
financial statements of MeriStar Hospitality Operating
Partnership, L.P. and subsidiaries (the Partnership) as listed
in the accompanying index. In connection with our audits of the
consolidated financial statements, we have also audited the
financial statement schedule as listed in the accompanying
index. These consolidated financial statements and the financial
statement schedule are the responsibility of the
Partnerships management. Our responsibility is to express
an opinion on these consolidated financial statements and the
financial statement schedule based on our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of MeriStar Hospitality
Operating Partnership, L.P. and subsidiaries as of
December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United
States of America. Also, in our opinion, the financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

As discussed in note 2, the Partnership adopted
Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assetsin 2002 and SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Correctionsin 2003.



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

McLean, VA

February 12, 2004, except as to note 17,


which is as of March 8, 2004


42



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##### 



MERISTAR HOSPITALITY OPERATING PARTNERSHIP,
L.P.

CONSOLIDATED BALANCE SHEETS


DECEMBER 31, 2003 AND 2002


(Dollars and units in thousands)


|                                                                                   |  |      |           |      |  |   |           |  
|---------------------------------------------------------------------------------- |  | ---- | --------- | ---- |  | - | --------- | -
|                                                                                   |  | 2003 |           | 2002
|                                                                                   |  |      |           |     
|ASSETS                                                                             |  |      |           |      |  |   |           |  
|Property and equipment                                                             |  | $    | 2,481,752 |      |  | $ | 2,895,055 |  
|Accumulated depreciation                                                           |  |      | (446,032  | )    |  |   | (445,324  | )
|                                                                                   |  |      |           |      |  |   |           |  
|                                                                                   |  |      | 2,035,720 |      |  |   | 2,449,731 |  
|Assets held for sale                                                               |  |      | 51,169    |      |  |   | 110,206   |  
|Restricted cash                                                                    |  |      | 42,523    |      |  |   | 20,365    |  
|Investment in affiliate                                                            |  |      | 15,000    |      |  |   | 40,000    |  
|Note receivable from Interstate Hotels &
    Resorts                               |  |      |          |      |  |   | 42,052    |  
|Prepaid expenses and other assets                                                  |  |      | 47,033    |      |  |   | 40,911    |  
|Accounts receivable, net of allowance for
    doubtful accounts of $2,040 and $848 |  |      | 64,709    |      |  |   | 56,828    |  
|Cash and cash equivalents                                                          |  |      | 230,876   |      |  |   | 33,889    |  
|                                                                                   |  |      |           |      |  |   |           |  
|                                                                                   |  | $    | 2,487,030 |      |  | $ | 2,793,982 |  
|                                                                                   |  |      |           |      |  |   |           |  
|LIABILITIES AND PARTNERS
    CAPITAL                                              |  |      |           |      |  |   |           |  
|Long-term debt                                                                     |  | $    | 1,381,555 |      |  | $ | 1,296,597 |  
|Notes payable to MeriStar Hospitality Corporation                                  |  |      | 256,473   |      |  |   | 357,505   |  
|Accounts payable and accrued expenses                                              |  |      | 80,014    |      |  |   | 107,686   |  
|Accrued interest                                                                   |  |      | 46,813    |      |  |   | 49,898    |  
|Due to Interstate Hotels & Resorts                                                 |  |      | 16,411    |      |  |   | 10,500    |  
|Other liabilities                                                                  |  |      | 11,045    |      |  |   | 15,967    |  
|                                                                                   |  |      |           |      |  |   |           |  
|Total liabilities                                                                  |  |      | 1,792,311 |      |  |   | 1,838,153 |  
|                                                                                   |  |      |           |      |  |   |           |  
|Minority interests                                                                 |  |      | 2,496     |      |  |   | 2,624     |  
|Redeemable OP units at redemption value, 3,510
    and 4,195 outstanding           |  |      | 35,926    |      |  |   | 38,205    |  
|Partners capital  Common OP
    Units, 66,790 and 45,231 issued and outstanding  |  |      | 656,297   |      |  |   | 915,000   |  
|                                                                                   |  |      |           |      |  |   |           |  
|                                                                                   |  | $    | 2,487,030 |      |  | $ | 2,793,982 |  
|                                                                                   |  |      |           |      |  |   |           |  

See
accompanying notes to the consolidated financial statements.

43



---



##### 



MERISTAR HOSPITALITY OPERATING PARTNERSHIP,
L.P.

CONSOLIDATED STATEMENTS OF
OPERATIONS


YEARS ENDED DECEMBER 31, 2003, 2002 AND
2001


(Dollars in thousands, except per unit
amounts)


|                                                                          |                                                                 |                                                                    |          |          |         |      |          |          |         |   |          |         |         | 
|------------------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------------------------------------------------ | -------- | -------- | ------- | ---- | -------- | -------- | ------- | - | -------- | ------- | ------- | 
|                                                                          |                                                                 | 2003                                                               |          | 2002     |         | 2001
|                                                                          |                                                                 |                                                                    |          |          |         |     
|Revenue:                                                                  |                                                                 |                                                                    |          |          |         |      |          |          |         |   |          |        
|                                                                          | Hotel operations:                                               |                                                                    |          |          |         |      |          |          |         |   |          |         |        
|                                                                          |                                                                 | Rooms                                                              |          | $        | 539,084 |      |          | $        | 559,634 |   |          | $       | 606,956 | 
|                                                                          |                                                                 | Food and beverage                                                  |          |          | 222,608 |      |          |          | 223,411 |   |          |         | 231,662 | 
|                                                                          |                                                                 | Other hotel operations                                             |          |          | 68,332  |      |          |          | 66,755  |   |          |         | 72,781  | 
|                                                                          | Office rental, parking and other revenue                        |                                                                    |          | 13,810   |         |      |          | 15,893   |         |   |          | 15,865  |        
|                                                                          | Participating lease revenue                                     |                                                                    |          |         |         |      |          |         |         |   |          | 2,057   |        
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |          |         |   |          |        
|Total revenue                                                             |                                                                 |                                                                    | 843,834  |          |         |      | 865,693  |          |         |   | 929,321  |        
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |          |         |   |          |        
|Hotel operating expenses:                                                 |                                                                 |                                                                    |          |          |         |      |          |          |         |   |          |        
|                                                                          |                                                                 | Rooms                                                              |          |          | 137,804 |      |          |          | 135,285 |   |          |         | 145,012 | 
|                                                                          |                                                                 | Food and beverage                                                  |          |          | 161,749 |      |          |          | 158,201 |   |          |         | 165,244 | 
|                                                                          |                                                                 | Other hotel operating expenses                                     |          |          | 41,089  |      |          |          | 37,928  |   |          |         | 38,382  | 
|Office rental, parking and other expenses                                 |                                                                 |                                                                    | 2,784    |          |         |      | 3,004    |          |         |   | 2,805    |        
|Other operating expenses:                                                 |                                                                 |                                                                    |          |          |         |      |          |          |         |   |          |        
|                                                                          |                                                                 | General and administrative                                         |          |          | 147,924 |      |          |          | 148,019 |   |          |         | 145,201 | 
|                                                                          |                                                                 | Property operating costs                                           |          |          | 129,270 |      |          |          | 127,017 |   |          |         | 133,906 | 
|                                                                          |                                                                 | Depreciation and amortization                                      |          |          | 102,761 |      |          |          | 107,963 |   |          |         | 99,829  | 
|                                                                          |                                                                 | Property taxes, insurance and other                                |          |          | 67,162  |      |          |          | 59,186  |   |          |         | 66,043  | 
|                                                                          |                                                                 | Loss on asset impairments                                          |          |          | 163,390 |      |          |          | 6,925   |   |          |         | 2,278   | 
|                                                                          |                                                                 | Impairment of investment in affiliate                              |          |          | 25,000  |      |          |          |        |   |          |         |        | 
|                                                                          |                                                                 | Write-down of note receivable with Interstate
    Hotels & Resorts |          |          |        |      |          |          | 14,517  |   |          |         |        | 
|                                                                          |                                                                 | Swap termination costs                                             |          |          |        |      |          |          |        |   |          |         | 9,297   | 
|                                                                          |                                                                 | Write-down of investment in STS Hotel Net                          |          |          |        |      |          |          |        |   |          |         | 2,112   | 
|                                                                          |                                                                 | FelCor merger costs                                                |          |          |        |      |          |          |        |   |          |         | 5,817   | 
|                                                                          |                                                                 | Costs to terminate leases with Prime Hospitality
    Corporation   |          |          |        |      |          |          |        |   |          |         | 1,315   | 
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |          |         |   |          |        
|Operating expenses                                                        |                                                                 |                                                                    | 978,933  |          |         |      | 798,045  |          |         |   | 817,241  |        
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |          |         |   |          |        
|Operating (loss) income                                                   |                                                                 |                                                                    | (135,099 | )        |         |      | 67,648   |          |         |   | 112,080  |        
|Gain on early extinguishments of debt                                     |                                                                 |                                                                    | 4,085    |          |         |      |         |          |         |   |         |        
|Change in fair value of non-hedging derivatives,
    net of swap payments |                                                                 |                                                                    |         |          |         |      | (4,446   | )        |         |   |         |        
|Loss on fair value of non-hedging derivatives                             |                                                                 |                                                                    |         |          |         |      | (4,735   | )        |         |   | (6,666   | )      
|Loss on sale of assets                                                    |                                                                 |                                                                    |         |          |         |      |         |          |         |   | (2,176   | )      
|Minority interest income, net                                             |                                                                 |                                                                    | 62       |          |         |      | 15       |          |         |   | 48       |        
|Interest expense, net                                                     |                                                                 |                                                                    | (141,443 | )        |         |      | (136,880 | )        |         |   | (122,655 | )      
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |          |         |   |          |        
|Loss before income taxes and discontinued
    operations                  |                                                                 |                                                                    | (272,395 | )        |         |      | (78,398  | )        |         |   | (19,369  | )      
|Income tax benefit                                                        |                                                                 |                                                                    | 3,094    |          |         |      | 1,157    |          |         |   | 491      |        
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |          |         |   |          |        
|Loss from continuing operations                                           |                                                                 |                                                                    | (269,301 | )        |         |      | (77,241  | )        |         |   | (18,878  | )      
|Discontinued operations:                                                  |                                                                 |                                                                    |          |          |         |      |          |          |         |   |          |        
|                                                                          | Loss from discontinued operations before income
    tax benefit |                                                                    |          | (135,798 | )       |      |          | (94,342  | )       |   |          | (26,249 | )      
|                                                                          | Income tax benefit                                              |                                                                    |          | 662      |         |      |          | 764      |         |   |          | 642     |        
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |          |         |   |          |        
|                                                                          | Loss from discontinued operations                               |                                                                    |          | (135,136 | )       |      |          | (93,578  | )       |   |          | (25,607 | )      
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |          |         |   |          |        
|Net loss                                                                  |                                                                 | $                                                                  | (404,437 | )        |         | $    | (170,819 | )        |         | $ | (44,485  | )      
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |          |         |   |          |        
|                                                                          | Net loss                                                        |                                                                    | $        | (404,437 | )       |      | $        | (170,819 | )       |   | $        | (44,485 | )      
|                                                                          | Preferred distributions                                         |                                                                    |          | (565     | )       |      |          | (565     | )       |   |          | (565    | )      
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |          |         |   |          |        
|                                                                          | Net loss applicable to common unitholders                       |                                                                    | $        | (405,002 | )       |      | $        | (171,384 | )       |   | $        | (45,050 | )      
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |          |         |   |          |        
|                                                                          | Net loss applicable to general partner unitholders              |                                                                    | $        | (381,922 | )       |      | $        | (157,718 | )       |   | $        | (41,487 | )      
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |          |         |   |          |        
|                                                                          | Net loss applicable to limited partner unitholders              |                                                                    | $        | (23,080  | )       |      | $        | (13,666  | )       |   | $        | (3,563  | )      
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |          |         |   |          |        

44



---



##### 



|               |                    |                                   |                                     |      |       |       |   |   |       |       |   |   |       |       |  
|-------------- | ------------------ | --------------------------------- | ----------------------------------- | ---- | ----- | ----- | - | - | ----- | ----- | - | - | ----- | ----- | -
|               |                    | 2003                              |                                     | 2002 |       | 2001 
|               |                    |                                   |                                     |      |       |      
|Loss per unit: |                    |                                   |                                     |      |       |       |   |   |       |       |   |  
|               | Basic and Diluted: |                                   |                                     |      |       |       |   |   |       |       |   |   |      
|               |                    | Loss from continuing operations   |                                     | $    | (5.01 | )     |   | $ | (1.59 | )     |   | $ | (0.41 | )    
|               |                    | Loss from discontinued operations |                                     |      | (2.51 | )     |   |   | (1.92 | )     |   |   | (0.53 | )    
|               |                    |                                   |                                     |      |       |       |   |   |       |       |   |  
|               |                    |                                   | Net loss per basic and diluted unit |      | $     | (7.52 | ) |   | $     | (3.51 | ) |   | $     | (0.94 | )
|               |                    |                                   |                                     |      |       |       |   |   |       |       |   |  

See
accompanying notes to the consolidated financial statements.

45



---



##### 



MERISTAR HOSPITALITY OPERATING PARTNERSHIP,
L.P.

CONSOLIDATED STATEMENTS OF PARTNERS
CAPITAL


YEARS ENDED DECEMBER 31, 2003, 2002 AND
2001


(Dollars in thousands)


|                                                                                                   |                    |       |            |   |  |   |           |          |  
|-------------------------------------------------------------------------------------------------- | ------------------ | ----- | ---------- | - |  | - | --------- | -------- | -
|                                                                                                   |                    | Units |            |  
|                                                                                                   |                    |       |            |  
|Balance at January 1, 2001                                                                         |                    |       | 44,379,806 |   |  | $ | 1,142,772 |         
|Comprehensive loss:                                                                                |                    |       |            |   |  |   |           |         
|Net loss                                                                                           |                    |       |           |   |  |   | (44,485   | )       
|Foreign currency translation adjustment                                                            |                    |       |           |   |  |   | (1,176    | )       
|Derivative instruments transition adjustment                                                       |                    |       |           |   |  |   | (2,842    | )       
|Change in valuation of hedging derivative
    instruments                                          |                    |       |           |   |  |   | (2,404    | )       
|                                                                                                   |                    |       |            |   |  |   |           |         
|                                                                                                   | Comprehensive loss |       |            |   |  |   |           | (50,907  | )
|Contributions                                                                                      |                    |       | 47,559     |   |  |   | 847       |         
|Contribution from general partner related to
    amortization of unearned stock-based compensation |                    |       |           |   |  |   | 2,263     |         
|Repurchase of units                                                                                |                    |       | (153,218   | ) |  |   | (4,514    | )       
|Redemption of OP Units                                                                             |                    |       | 250,000    |   |  |   | 5,428     |         
|Allocations from redeemable OP Units                                                               |                    |       |           |   |  |   | 24,201    |         
|Distributions                                                                                      |                    |       |           |   |  |   | (74,900   | )       
|                                                                                                   |                    |       |            |   |  |   |           |         
|Balance at December 31, 2001                                                                       |                    |       | 44,524,147 |   |  |   | 1,045,190 |         
|Comprehensive loss:                                                                                |                    |       |            |   |  |   |           |         
|Net loss                                                                                           |                    |       |           |   |  |   | (170,819  | )       
|Foreign currency translation adjustment                                                            |                    |       |           |   |  |   | 205       |         
|Reclassification of loss on derivatives due to
    repayment of hedged debt                        |                    |       |           |   |  |   | 4,735     |         
|Change in valuation of hedging derivative
    instruments                                          |                    |       |           |   |  |   | 511       |         
|                                                                                                   |                    |       |            |   |  |   |           |         
|                                                                                                   | Comprehensive loss |       |            |   |  |   |           | (165,368 | )
|                                                                                                   |                    |       |            |   |  |   |           |         
|Contributions                                                                                      |                    |       | 480,548    |   |  |   | 3,156     |         
|Contribution from general partner related to
    amortization of unearned stock-based compensation |                    |       |           |   |  |   | 1,649     |         
|Repurchase of units                                                                                |                    |       | (87,906    | ) |  |   | (1,318    | )       
|Redemption of OP Units                                                                             |                    |       | 313,930    |   |  |   | 6,502     |         
|Allocations from redeemable OP Units                                                               |                    |       |           |   |  |   | 26,533    |         
|Distributions                                                                                      |                    |       |           |   |  |   | (1,344    | )       
|                                                                                                   |                    |       |            |   |  |   |           |         
|Balance at December 31, 2002                                                                       |                    |       | 45,230,719 |   |  | $ | 915,000   |         
|Comprehensive loss:                                                                                |                    |       |            |   |  |   |           |         
|Net loss                                                                                           |                    |       |           |   |  |   | (404,437  | )       
|Foreign currency translation adjustment                                                            |                    |       |           |   |  |   | 6,075     |         
|                                                                                                   |                    |       |            |   |  |   |           |         
|                                                                                                   | Comprehensive loss |       |            |   |  |   |           | (398,362 | )
|                                                                                                   |                    |       |            |   |  |   |           |         
|Contributions                                                                                      |                    |       | 20,751,227 |   |  |   | 134,439   |         
|Contribution from general partner related to
    amortization of unearned stock-based compensation |                    |       |           |   |  |   | 1,349     |         
|Repurchase of units                                                                                |                    |       | (77,119    | ) |  |   | (376      | )       
|Redemption of OP Units                                                                             |                    |       | 884,797    |   |  |   | 21,761    |         
|Allocations to redeemable OP Units                                                                 |                    |       |           |   |  |   | (17,514   | )       
|                                                                                                   |                    |       |            |   |  |   |           |         
|Balance at December 31, 2003                                                                       |                    |       | 66,789,624 |   |  | $ | 656,297   |         
|                                                                                                   |                    |       |            |   |  |   |           |         

See
accompanying notes to the consolidated financial statements.

46



---



##### 



MERISTAR HOSPITALITY OPERATING PARTNERSHIP,
L.P.

CONSOLIDATED STATEMENTS OF CASH
FLOWS


YEARS ENDED DECEMBER 31, 2003, 2002 AND
2001


(Dollars in thousands)


|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |          |         |        |  
|---------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ------------------------------------------------------------------------------ | -------- | ------- | ------- | ------- | -------- | ------- | ------ | ------- | -------- | ------- | ------ | -
|                                                                 |                                                                                               | 2003                                                               |                                                                                | 2002     |         | 2001   
|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |        
|Operating activities:                                            |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|                                                                 | Net loss                                                                                      |                                                                    | $                                                                              | (404,437 | )       |         | $       | (170,819 | )       |        | $       | (44,485  | )      
|                                                                 | Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities: |                                                                    |                                                                                |          |         |         |         |          |         |        |         |          |        
|                                                                 |                                                                                               | Depreciation and amortization                                      |                                                                                |          | 111,891 |         |         |          | 125,365 |        |         |          | 119,265 |       
|                                                                 |                                                                                               | Loss on asset impairments                                          |                                                                                |          | 320,037 |         |         |          | 78,732  |        |         |          | 43,582  |       
|                                                                 |                                                                                               | Loss on sale of assets, before tax effect                          |                                                                                |          | 2,356   |         |         |          | 21,197  |        |         |          | 2,176   |       
|                                                                 |                                                                                               | Gain on early extinguishments of debt                              |                                                                                |          | (4,085  | )       |         |          |        |        |         |          |        |       
|                                                                 |                                                                                               | Loss on fair value of non-hedging derivatives                      |                                                                                |          |        |         |         |          | 4,735   |        |         |          | 6,666   |       
|                                                                 |                                                                                               | Write-down of note receivable with Interstate
    Hotels & Resorts |                                                                                |          |        |         |         |          | 14,517  |        |         |          |        |       
|                                                                 |                                                                                               | Write-down of investment in STS Hotel Net                          |                                                                                |          |        |         |         |          |        |        |         |          | 2,112   |       
|                                                                 |                                                                                               | Minority interests                                                 |                                                                                |          | (62     | )       |         |          | (15     | )      |         |          | (48     | )     
|                                                                 |                                                                                               | Amortization of unearned stock-based compensation                  |                                                                                |          | 2,544   |         |         |          | 4,543   |        |         |          | 2,263   |       
|                                                                 |                                                                                               | Change in value of interest rate swaps                             |                                                                                |          | (3,977  | )       |         |          | (7,612  | )      |         |          |        |       
|                                                                 |                                                                                               | Deferred income taxes                                              |                                                                                |          | (3,923  | )       |         |          | (2,271  | )      |         |          | (1,543  | )     
|                                                                 |                                                                                               | Changes in operating assets and liabilities:                       |                                                                                |          |         |         |         |          |         |        |         |          |         |       
|                                                                 |                                                                                               |                                                                    | Accounts receivable                                                            |          |         | (7,881  | )       |          |         | (9,650 | )       |          |         | 2,855  |  
|                                                                 |                                                                                               |                                                                    | Prepaid expenses and other assets                                              |          |         | (345    | )       |          |         | (3,401 | )       |          |         | (2,039 | )
|                                                                 |                                                                                               |                                                                    | Due from/to Interstate Hotels & Resorts                                        |          |         | 5,911   |         |          |         | 6,757  |         |          |         | 13,344 |  
|                                                                 |                                                                                               |                                                                    | Accounts payable, accrued expenses, accrued
    interest and other liabilities |          |         | (35,166 | )       |          |         | (4,180 | )       |          |         | 3,020  |  
|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|Net cash (used in) provided by operating
    activities          |                                                                                               |                                                                    | (17,137                                                                        | )        |         |         | 57,898  |          |         |        | 147,168 |         
|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|Investing activities:                                            |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|                                                                 | Capital expenditures for property and equipment                                               |                                                                    |                                                                                | (36,190  | )       |         |         | (47,347  | )       |        |         | (44,476  | )      
|                                                                 | Proceeds from sales of assets                                                                 |                                                                    |                                                                                | 127,885  |         |         |         | 60,650   |         |        |         | 10,400   |        
|                                                                 | Purchases of marketable securities                                                            |                                                                    |                                                                                | 18,040   |         |         |         |         |         |        |         |         |        
|                                                                 | Sales of marketable securities                                                                |                                                                    |                                                                                | (18,040  | )       |         |         |         |         |        |         |         |        
|                                                                 | Hotel operating cash received in lease conversions                                            |                                                                    |                                                                                |         |         |         |         |         |         |        |         | 3,257    |        
|                                                                 | Net payments from (advances to) Interstate Hotels
    & Resorts                               |                                                                    |                                                                                | 42,052   |         |         |         | (7,500   | )       |        |         | (36,000  | )      
|                                                                 | Increase (decrease) in restricted cash                                                        |                                                                    |                                                                                | (22,158  | )       |         |         | 939      |         |        |         | (1,386   | )      
|                                                                 | Costs associated with disposition program and
    other, net                                  |                                                                    |                                                                                | (6,821   | )       |         |         | (2,476   | )       |        |         | (719     | )      
|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|Net cash provided by (used in) investing
    activities          |                                                                                               |                                                                    | 104,768                                                                        |          |         |         | 4,266   |          |         |        | (68,924 | )       
|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|Financing activities:                                            |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|                                                                 | Principal payments on long-term debt                                                          |                                                                    |                                                                                | (245,711 | )       |         |         | (352,466 | )       |        |         | (871,467 | )      
|                                                                 | Proceeds from issuance of long-term debt                                                      |                                                                    |                                                                                | 271,000  |         |         |         | 305,258  |         |        |         | 933,250  |        
|                                                                 | Deferred financing fees                                                                       |                                                                    |                                                                                | (10,532  | )       |         |         | (4,806   | )       |        |         | (18,927  | )      
|                                                                 | Contributions from partners                                                                   |                                                                    |                                                                                | 95,358   |         |         |         | 3,153    |         |        |         | 847      |        
|                                                                 | Distributions paid to partners                                                                |                                                                    |                                                                                | (565     | )       |         |         | (3,060   | )       |        |         | (97,539  | )      
|                                                                 | Purchase of limited partnership unit                                                          |                                                                    |                                                                                | (65      | )       |         |         |         |         |        |         |         |        
|                                                                 | Repurchase of units                                                                           |                                                                    |                                                                                |         |         |         |         |         |         |        |         | (1,513   | )      
|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|Net cash provided by (used in) financing
    activities          |                                                                                               |                                                                    | 109,485                                                                        |          |         |         | (51,921 | )        |         |        | (55,349 | )       
|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|Effect of exchange rate changes on cash and cash
    equivalents |                                                                                               |                                                                    | (129                                                                           | )        |         |         | 205     |          |         |        | 304     |         
|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|Net increase in cash and cash equivalents                        |                                                                                               |                                                                    | 196,987                                                                        |          |         |         | 10,448  |          |         |        | 23,199  |         
|Cash and cash equivalents, beginning of year                     |                                                                                               |                                                                    | 33,889                                                                         |          |         |         | 23,441  |          |         |        | 242     |         
|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         
|Cash and cash equivalents, end of year                           |                                                                                               | $                                                                  | 230,876                                                                        |          |         | $       | 33,889  |          |         | $      | 23,441  |         
|                                                                 |                                                                                               |                                                                    |                                                                                |          |         |         |         |          |         |        |         |         

See
accompanying notes to the consolidated financial statements.

47



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##### 



|                                                                                                                                          |                                                                                     |                                 |   |         |  |      |   |         |  |  |   |         |        | 
|----------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------- | - | ------- |  | ---- | - | ------- |  |  | - | ------- | ------ | 
|                                                                                                                                          |                                                                                     | 2003                            |   | 2002    |  | 2001
|                                                                                                                                          |                                                                                     |                                 |   |         |  |     
|Supplemental Cash Flow Information                                                                                                        |                                                                                     |                                 |   |         |  |      |   |         |  |  |   |        
|Cash paid for interest and income taxes:                                                                                                  |                                                                                     |                                 |   |         |  |      |   |         |  |  |   |        
|                                                                                                                                          | Interest, net of capitalized interest                                               |                                 | $ | 144,856 |  |      | $ | 132,977 |  |  | $ | 105,732 |       
|                                                                                                                                          | Income taxes                                                                        |                                 |   | 2,131   |  |      |   | 827     |  |  |   | 698     |       
|Non Cash investing and financing activities:                                                                                              |                                                                                     |                                 |   |         |  |      |   |         |  |  |   |        
|                                                                                                                                          | Notes payable to MeriStar Hospitality redeemed in
    exchange for Common OP units  |                                 | $ | 38,078  |  |      | $ |        |  |  | $ |        |       
|                                                                                                                                          | Redemption of OP units                                                              |                                 |   | 21,761  |  |      |   | 6,502   |  |  |   | 5,428   |       
|                                                                                                                                          | Issuance of POPs                                                                    |                                 |   |        |  |      |   | 2,894   |  |  |   | 1,243   |       
|                                                                                                                                          | POPs converted to OP units                                                          |                                 |   | 921     |  |      |   | 2,915   |  |  |   |        |       
|                                                                                                                                          | Issuance of Common OP units for restricted stock
    issued by MeriStar Hospitality |                                 |   | 1,153   |  |      |   |        |  |  |   |        |       
|We received the following operating assets and
    assumed the following liabilities in connection with our lease
    conversion in 2001: |                                                                                     |                                 |   |         |  |      |   |         |  |  |   |        
|                                                                                                                                          | Accounts receivable                                                                 |                                 |   |         |  |      |   |         |  |  | $ | 47,200  |       
|                                                                                                                                          | Prepaid expense and other                                                           |                                 |   |         |  |      |   |         |  |  |   | 13,500  |       
|                                                                                                                                          | Furniture and fixtures, net of accumulated
    depreciation of $163                 |                                 |   |         |  |      |   |         |  |  |   | 152     |       
|                                                                                                                                          | Investment in affiliates, net                                                       |                                 |   |         |  |      |   |         |  |  |   | 1,629   |       
|                                                                                                                                          |                                                                                     |                                 |   |         |  |      |   |         |  |  |   |        
|                                                                                                                                          |                                                                                     | Total operating assets received |   |         |  |      |   |         |  |  |   | $       | 62,481 | 
|                                                                                                                                          |                                                                                     |                                 |   |         |  |      |   |         |  |  |   |        
|                                                                                                                                          | Accounts payable and accrued expenses                                               |                                 |   |         |  |      |   |         |  |  | $ | 65,706  |       
|                                                                                                                                          | Long-term debt                                                                      |                                 |   |         |  |      |   |         |  |  |   | 32      |       
|                                                                                                                                          |                                                                                     |                                 |   |         |  |      |   |         |  |  |   |        
|                                                                                                                                          |                                                                                     | Total liabilities assumed       |   |         |  |      |   |         |  |  |   | $       | 65,738 | 
|                                                                                                                                          |                                                                                     |                                 |   |         |  |      |   |         |  |  |   |        

See
accompanying notes to the consolidated financial statements.

48



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##### 



MERISTAR HOSPITALITY OPERATING PARTNERSHIP,
L.P.

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


DECEMBER 31, 2003, 2002 AND 2001


1.          Organization

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

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



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

Our taxable subsidiaries are parties to
management agreements with a subsidiary of Interstate Hotels to
manage all of our hotels. Under these management agreements, the
taxable subsidiaries pay a management fee for each property to a
subsidiary of Interstate Hotels. The taxable subsidiaries in
turn make rental payments to our subsidiary operating
partnership under the participating leases. Under the management
agreements, the base management fee is 2.5% of total hotel
revenue, plus incentive payments based on meeting performance
thresholds that could total up to an additional 1.5% of total
hotel revenue. All of the agreements expire in 2010 and have
three renewal periods of five years each at the option of
Interstate Hotels, subject to some exceptions.



|   |                                               
|-- | ----------------------------------------------
|2. | Summary of Significant Accounting
    Policies

Principles of Consolidation.Our consolidated financial statements
include the accounts of all wholly-owned and majority-owned
subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation. In December 2003, the Financial
Accounting Standards Board (FASB) revised its
Interpretation No. (FIN) 46, Consolidation of
Variable Interest Entities, previously issued in January
2003, to eliminate from its scope entities that are deemed to be
a business (as defined in the interpretation) unless they meet
certain conditions therein specified. The application of this
revised interpretation had no effect on our results of
operations or financial condition as we do not have an interest
in any such variable interest entity.

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

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

49



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##### 



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



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

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

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

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

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

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

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

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

Gains and Losses From Extinguishments of Debt.We adopted the provisions of SFAS
No. 145, Rescission of FASB Statements No. 4,
No. 44 and No. 64, Amendment of SFAS No. 13, and
Technical Corrections, on January 1, 2003. The
rescission of SFAS No. 4 and No. 64 requires that all
gains and losses from extinguishments of debt be classified as
extraordinary only if the gains and losses are from unusual or

50



---



##### 



infrequent transactions. It also requires prior
period gains or losses that are not from unusual and infrequent
transactions to be reclassified. See Note 6 for details on the
early extinguishment of substantially all of our 4.75% notes
payable to MeriStar Hospitality due 2004 and a significant
portion of our 8.75% notes payable to MeriStar Hospitality due
2007 during the year ended December 31, 2003.


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

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

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

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

|                                                                                                                                                    |                                |                         |          |       |   |      |          |       |   |   |         |       |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------ | ----------------------- | -------- | ----- | - | ---- | -------- | ----- | - | - | ------- | ----- | -
|                                                                                                                                                    |                                |                        
|                                                                                                                                                    |                                | Year Ended December 31,
|                                                                                                                                                    |                                | 2003                    |          | 2002  |   | 2001
|                                                                                                                                                    |                                |                         |          |       |   |     
|Net loss, as reported                                                                                                                               |                                | $                       | (404,437 | )     |   | $    | (170,819 | )     |   | $ | (44,485 | )    
|Add: Stock-based employee compensation expense
    included in reported net loss, net of related tax effect                                         |                                |                         | 3,090    |       |   |      | 4,692    |       |   |   | 4,434   |      
|Deduct: Total stock-based employee compensation
    expense determined under fair value-based method for all awards,
    net of related tax effects |                                |                         | (3,617   | )     |   |      | (5,526   | )     |   |   | (9,098  | )    
|                                                                                                                                                    |                                |                         |          |       |   |      |          |       |   |   |         |      
|Net loss, pro forma                                                                                                                                 |                                | $                       | (404,964 | )     |   | $    | (171,653 | )     |   | $ | (49,149 | )    
|                                                                                                                                                    |                                |                         |          |       |   |      |          |       |   |   |         |      
|Loss per unit:                                                                                                                                      |                                |                         |          |       |   |      |          |       |   |   |         |      
|                                                                                                                                                    | Basic and diluted, as reported |                         | $        | (7.52 | ) |      | $        | (3.51 | ) |   | $       | (0.95 | )
|                                                                                                                                                    | Basic and diluted, pro forma   |                         | $        | (7.52 | ) |      | $        | (3.52 | ) |   | $       | (1.04 | )
|Weighted average fair value of options granted                                                                                                      |                                | $                       | 0.23     |       |   | $    | 0.72     |       |   | $ | 6.59    |      

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

Income Taxes.We
account for income taxes in accordance with the provisions of
SFAS No. 109, Accounting for Income Taxes.
Deferred income taxes reflect the tax consequences on future
years of differences between the tax and financial reporting
bases of assets and liabilities. As a partnership, we are not
subject to federal income tax. We are subject to state and local
taxes in certain jurisdictions.

51



---



##### 



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

Accounting for Guarantees.FASB FIN 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57, and 107 and
rescission of FASB Interpretation No. 34, became effective
on January 1, 2003. The interpretation requires recognition of
liabilities at their fair value for newly-issued guarantees. We
have no guarantees which require recognition under the
provisions of this interpretation.

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

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

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

3.          Property
and Equipment

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

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

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

52



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##### 



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

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

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

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

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

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

4.          Assets
Held for Sale

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

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

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

53



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5.          Investment
in Affiliate

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

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

6.          Long-Term
Debt and Notes Payable to MeriStar Hospitality

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

|                                                                   |                                       |                |           |         |           |   |           |         |           | 
|------------------------------------------------------------------ | ------------------------------------- | -------------- | --------- | ------- | --------- | - | --------- | ------- | --------- | 
|                                                                   |                                       |               
|                                                                   |                                       | December 31,  
|                                                                   |                                       | 2003           |           | 2002   
|                                                                   |                                       |                |           |        
|Senior unsecured notes                                             |                                       | $              | 950,000   |         |           | $ | 950,000   |        
|Secured facility, due 2009                                         |                                       |                | 309,035   |         |           |   | 314,626   |        
|Secured facility, due 2013                                         |                                       |                | 100,765   |         |           |   |          |        
|Mortgage and other debt                                            |                                       |                | 27,011    |         |           |   | 38,030    |        
|Unamortized issue discount                                         |                                       |                | (5,256    | )       |           |   | (6,059    | )      
|                                                                   |                                       |                |           |         |           |   |           |        
|                                                                   |                                       | Long-term debt |           | $       | 1,381,555 |   |           | $       | 1,296,597 | 
|                                                                   |                                       |                |           |         |           |   |           |        
|Notes payable to MeriStar Hospitality                              |                                       | $              | 257,143   |         |           | $ | 359,300   |        
|Unamortized issue discount                                         |                                       |                | (670      | )       |           |   | (1,795    | )      
|                                                                   |                                       |                |           |         |           |   |           |        
|                                                                   | Notes payable to MeriStar Hospitality |                | $         | 256,473 |           |   | $         | 357,505 |          
|                                                                   |                                       |                |           |         |           |   |           |        
|Total long-term debt and notes payable to
    MeriStar Hospitality |                                       | $              | 1,638,028 |         |           | $ | 1,654,102 |        
|                                                                   |                                       |                |           |         |           |   |           |        

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

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

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

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

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

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

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

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

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

We completed a $330 million non-recourse
financing secured by a portfolio of 19 hotels in 1999. The loan
bears a fixed annual interest rate of 8.01% and matures in 2009.
The secured facility contains standard provisions that require
the servicer to maintain in escrow cash balances for certain
items such as property taxes and insurance. In addition, the
facility contains a provision that requires our mortgage
servicer to retain in

55



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##### 



escrow the excess cash from the encumbered hotels
after payment of debt service (Excess Cash), if net
hotel operating income (NOI) for the trailing twelve
months declines below $57 million. This provision was
triggered in October 2002 and will be effective until the hotels
generate the minimum cash flow required for two consecutive
quarters, at which time the cash being held in escrow will be
released to us. Approximately $27.2 million of cash was
held in escrow under this provision as of December 31,
2003. In July 2003, we signed an amendment to the loan agreement
that permits the release of cash placed in escrow for all
capital expenditures incurred on the 19 encumbered properties on
or after April 1, 2003. Although the servicer will continue
to retain in escrow any excess cash from the encumbered hotels,
they will release cash for all capital expenditures we have
incurred from April 1, 2003 through the date of the
amendment and future capital expenditures we incur on the 19
properties. Escrowed funds totaling approximately
$18.4 million were available to fund capital expenditures
under this provision as of December 31, 2003.


Mortgage and other debt.In connection with the merger between
CapStar Hotel Company and American General Hospitality
Corporation in 1998, we assumed mortgage debt secured by seven
hotels. We repaid two of the mortgages in 2003 totaling
$8.5 million, two of the mortgages in 2002 totaling
$11.9 million, and one of the mortgages in 2001 totaling
$4.0 million. The remaining two mortgages mature in 2011
and 2012 with interest rates of 8.8% and 9.0%, respectively.

Notes payable to MeriStar Hospitality.On July 1, 2003, MeriStar
Hospitality completed an offering of $170 million aggregate
principal amount of 9.5% convertible subordinated notes due
2010. In conjunction with this transaction, we borrowed
$170 million from MeriStar Hospitality under terms matching
those of the 9.5% convertible subordinated notes. We incurred
approximately $6.5 million in debt issuance costs related
to the issuance.

The proceeds from the new borrowing were used to
repurchase $150.6 million of our $154.3 million 4.75%
notes payable to MeriStar Hospitality due 2004, at varying
prices, resulting in an aggregate discount of approximately
$1.4 million. We recognized this gain during the third
quarter of 2003. The remaining proceeds from the issuance were
also used to repurchase a portion of our 8.75% notes payable to
MeriStar Hospitality due 2007, which are described in more
detail below.

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

A portion of the proceeds from the July 2003
issuance of 9.5% notes payable to MeriStar Hospitality due 2010
discussed above were used to repurchase $22.6 million
principal amount of our 8.75% notes payable to MeriStar
Hospitality due 2007, at varying prices, resulting in an
aggregate discount of approximately $1.5 million. We also
repurchased a further $59.8 million of these notes, at varying
prices, resulting in an aggregate loss of approximately
$0.3 million. Also during 2003, we redeemed
$39.2 million of these notes in exchange for 6,669,506
common OP units, resulting in a gain of $1.5 million. In
connection with the exchanges, we wrote off deferred financing
costs totaling $0.5 million. See Note 17 for further
redemption activity subsequent to year end.

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

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

During the year ended December 31, 2002, we
recognized $7.6 million of income related to the decrease
in fair value of the liability recorded for the interest rate
swaps in place in that time period. For the year ended December
31, 2002, we made cash payments on those swaps of
$12.1 million. The change in fair value and the swap
payments are netted together on our statement of operations.
During the year ended December 31, 2002,

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we also recognized a $4.7 million loss on
the fair value of derivatives no longer providing a hedge due to
the repayment of the hedged debt.


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

7.          Income
Taxes

We file as a partnership for federal income tax
purposes. As a partnership, we are not subject to federal income
tax but are responsible for certain state and local income
taxes. When the RMA became effective on January 1, 2001, we
formed taxable subsidiaries to lease certain of our properties.
These subsidiaries are subject to taxation similar to subchapter
C-corporations. The income of these taxable subsidiaries is
subject to federal and state income taxes.

Our income taxes were allocated as follows (in
thousands):

|                                               |  |      |        |      |  |      |        |   |  |   |        |  
|---------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                               |  | 2003 |        | 2002 |  | 2001
|                                               |  |      |        |      |  |     
|Tax benefit on loss from continuing operations |  | $    | (3,094 | )    |  | $    | (1,157 | ) |  | $ | (491   | )
|Tax benefit on discontinued operations         |  |      | (662   | )    |  |      | (764   | ) |  |   | (642   | )
|                                               |  |      |        |      |  |      |        |   |  |   |        |  
|Total income tax benefit                       |  | $    | (3,756 | )    |  | $    | (1,921 | ) |  | $ | (1,133 | )
|                                               |  |      |        |      |  |      |        |   |  |   |        |  

Our effective income tax rate is as follows:

|                                                         |  |      |     |      |  |      |     |   |  |  |     |  
|-------------------------------------------------------- |  | ---- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                                                         |  | 2003 |     | 2002 |  | 2001
|                                                         |  |      |     |      |  |     
|State and local taxes (weighted average rate)            |  |      | 0.9 | %    |  |      | 1.0 | % |  |  | 1.5 | %
|Difference in effective rate on foreign
    subsidiaries |  |      |    |      |  |      | 0.1 |   |  |  | 1.0 |  
|                                                         |  |      |     |      |  |      |     |   |  |  |     |  
|                                                         |  |      | 0.9 | %    |  |      | 1.1 | % |  |  | 2.5 | %
|                                                         |  |      |     |      |  |      |     |   |  |  |     |  

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

|          |         |      |        |        |   |      |        |        |   |   |        |        |  
|--------- | ------- | ---- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | -
|          |         | 2003 |        | 2002   |   | 2001
|          |         |      |        |        |   |     
|Current:  |         |      |        |        |   |      |        |        |   |   |        |       
|          | State   |      | $      | 167    |   |      | $      | 350    |   |   | $      | 320    |  
|          | Foreign |      |        |       |   |      |        |       |   |   |        | 90     |  
|          |         |      |        |        |   |      |        |        |   |   |        |       
|          |         |      | 167    |        |   |      | 350    |        |   |   | 410    |       
|Deferred: |         |      |        |        |   |      |        |        |   |   |        |       
|          | Federal |      |        |       |   |      |        | 337    |   |   |        | (337   | )
|          | State   |      |        | (3,835 | ) |      |        | (2,520 | ) |   |        | (1,118 | )
|          | Foreign |      |        | (88    | ) |      |        | (88    | ) |   |        | (88    | )
|          |         |      |        |        |   |      |        |        |   |   |        |       
|          |         |      | (3,923 | )      |   |      | (2,271 | )      |   |   | (1,543 | )     
|          |         |      |        |        |   |      |        |        |   |   |        |       
|          |         | $    | (3,756 | )      |   | $    | (1,921 | )      |   | $ | (1,133 | )     
|          |         |      |        |        |   |      |        |        |   |   |        |       

57



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

|                                 |  |              |        |      |  |   |       |  
|-------------------------------- |  | ------------ | ------ | ---- |  | - | ----- | -
|                                 |  |             
|                                 |  | December 31,
|                                 |  | 2003         |        | 2002
|                                 |  |              |        |     
|Basis difference in fixed assets |  | $            | 3,505  |      |  | $ | 5,428 |  
|Amortization                     |  |              | (526   | )    |  |   | (605  | )
|Accrued expenses                 |  |              | 353    |      |  |   | 374   |  
|Net operating loss carryforwards |  |              | (2,343 | )    |  |   |      |  
|Other                            |  |              | (53    | )    |  |   | (338  | )
|                                 |  |              |        |      |  |   |       |  
|Net deferred tax liability       |  | $            | 936    |      |  | $ | 4,859 |  
|                                 |  |              |        |      |  |   |       |  

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

The most significant component of our deferred
tax liability continues to be the basis difference in our fixed
assets. At the time of the merger between CapStar Hotel Company
and American General Hospitality Corporation in 1998, we
established a new basis for the acquired assets and assumed
liabilities based on their fair values at the time of the
merger. We established a net deferred income tax liability for
the estimated future state and local income tax effect for
differences between the accounting and tax bases of these assets
and liabilities. As of December 31, 2003, this component of
the deferred tax liability was $3.5 million.

For federal income tax purposes, the NOL
carryforward for our taxable subsidiaries was $63.7 million
and $25.6 million as of December 31, 2003 and 2002,
respectively. Based on our projections of the taxable
subsidiaries ability to utilize the NOL carryforward, we
have recorded a valuation allowance to reduce the carrying value
of the NOL carryforward deferred tax asset to zero at both
December 31, 2003 and 2002.



|   |                                             
|-- | --------------------------------------------
|8. | Partnership Units and Minority
    Interests

OP Units.Third
parties hold outstanding units of limited partnership interest
in us. These units are redeemable at the option of the holder
for a like number of the shares of common stock of MeriStar
Hospitality, or cash, or a combination thereof, at the election
of MeriStar Hospitality. Due to the redemption rights of these
units held by third parties, the units have been excluded from
partners capital and classified as redeemable OP Units on
the accompanying balance sheet and measured at redemption value
as of the end of the periods presented. At December 31,
2003 and 2002, there were 3,117,971 and 3,802,768, respectively,
redeemable units outstanding. Excluding outstanding Profits-Only
OP Units at the end of each year, the value of the other
redeemable units was based on the closing market price of
MeriStar Hospitalitys common stock at December 31,
2003 and 2002, which was $6.51 and $6.60, respectively.
Profits-Only OP Units are based on their fair value at date of
grant. In addition, there were 392,157 Class D Preferred OP
Units outstanding at December 31, 2003 and 2002, with a
redemption value of $22.16 per unit.

Our partnership agreement provides for five
classes of partnership interests: Common OP Units, Class B
OP Units, Class C OP Units, Class D OP Units and
Profits-Only OP Units. Holders of Common OP Units and
Class B OP Units receive distributions per OP unit
equivalent to the dividend paid on each of MeriStar
Hospitalitys common shares. Holders of Class C OP
Units receive a non-cumulative, quarterly distribution equal to
$0.5575 per Class C OP Unit so long as the Common OP Units
and Class B OP Units receive a distribution for such
quarter and the dividend rate on MeriStar Hospitalitys
common stock has not exceeded $0.5575. Class C OP Units
automatically convert into Common OP Units once that dividend
rate is exceeded.

58



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Holders of Class D OP Units receive a 6.5%
cumulative annual preferred return based on an assumed price per
common share of $22.16; the return is compounded quarterly to
the extent not paid on a current basis, and holders are entitled
to a liquidation preference of $22.16 per Class D OP Unit.
All of our net income and capital received (after payment of the
annual preferred return and, if applicable, the liquidation
preference) will be shared by the holders of the Common OP Units
in proportion to the number of Common OP Units in us owned by
each such holder. As of December 31, 2003 and 2002,
outstanding OP units were 70,299,752 and 49,425,644,
respectively.


Each Common OP Unit, Class B OP Unit, and
Class C OP Unit held by third-parties is redeemable by the
holder for cash in an amount equal to the market value of a
share of MeriStar Hospitalitys common stock or, at our
option, for one share of MeriStar Hospitalitys common
stock, determined in accordance with the terms of our
partnership agreement. We have the option to redeem the
Class D OP Units at any time after April 1, 2000, at a
price of $22.16 per share for cash or, at our option, for shares
of MeriStar Hospitalitys common stock having a value equal
to the redemption price. The holders have the option to redeem
the Class D OP Units at any time for cash or, at the option
of the holders, for shares of MeriStar Hospitalitys common
stock having a value equal to $22.16 per share.

In September 2003, MeriStar Hospitality issued
13,800,000 shares of its common stock at a price of $7.20 per
share ($95.3 million of net proceeds). In connection with
this issuance, MeriStar LP, Inc., a wholly-owned subsidiary of
MeriStar Hospitality, contributed the net proceeds to us in
exchange for the same number of Common OP Units, thereby
increasing their limited partner interest from 90 percent
to approximately 93 percent.

During 2003, we issued 6,669,506 Common OP Units
in exchange for the redemption of $39.2 million of our
8.75% notes payable to MeriStar Hospitality due 2007. See Note
17 for exchange activity subsequent to year end.

Also during 2003, MeriStar Hospitality issued
231,721 shares of restricted stock to employees pursuant to
employment agreements, with an aggregate value of
$1.2 million.

POPs totaling 50,000 were relinquished in
connection with the formal separation of management functions
with Interstate Hotels during the first quarter of 2003.
MeriStar Hospitality also issued 50,000 shares of its common
stock to a former executive officer and director in connection
with the separation.

OP Unit holders converted 885,000, 414,000 and
250,000 of OP Units into MeriStar Hospitalitys common
stock during the years ended December 31, 2003, 2002, and
2001, respectively. There were no conversions for cash during
these years.

Distributions.We
did not declare or pay any distributions in 2003.

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

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

59



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##### 





|   |              
|-- | -------------
|9. | Loss Per Unit

The following table presents the computation of
basic and diluted loss per unit:

|                                 |                                                                      |                         |   |          |   |      |    |         |   |  |   |         |  
|-------------------------------- | -------------------------------------------------------------------- | ----------------------- | - | -------- | - | ---- | -- | ------- | - |  | - | ------- | -
|                                 |                                                                      |                        
|                                 |                                                                      | Year Ended December 31,
|                                 |                                                                      |                        
|                                 |                                                                      | 2003                    |   | 2002     |   | 2001
|                                 |                                                                      |                         |   |          |   |     
|Basic and Diluted Loss Per Unit: |                                                                      |                         |   |          |   |      |    |         |   |  |   |        
|                                 | Loss from continuing operations                                      |                         | $ | (269,301 | ) |      | $  | (77,241 | ) |  | $ | (18,878 | )
|                                 | Dividends paid on unvested MeriStar Hospitality
    restricted stock |                         |   |         |   |      |    | (4      | ) |  |   | (505    | )
|                                 | Preferred distributions                                              |                         |   | (565     | ) |      |    | (565    | ) |  |   | (565    | )
|                                 |                                                                      |                         |   |          |   |      |    |         |   |  |   |        
|                                 | Loss available to common unitholders                                 |                         |   | (269,866 | ) |      |    | (77,810 | ) |  |   | (19,948 | )
|                                 | Weighted average number of OP Units outstanding                      |                         |   | 53,877   |   |      |    | 48,883  |   |  |   | 48,364  |  
|                                 |                                                                      |                         |   |          |   |      |    |         |   |  |   |        
|                                 | Basic and diluted loss per unit from continuing
    operations       |                         | $ | (5.01    | ) |      | ($ | 1.59    | ) |  | $ | (0.41   | )
|                                 |                                                                      |                         |   |          |   |      |    |         |   |  |   |        



|    |                           
|--- | --------------------------
|10. | Related-Party Transactions

Due to/from Interstate Hotels &
Resorts

In the normal course of managing our hotel
properties, Interstate Hotels incurs day-to-day operating costs
which are reimbursed by us. The balance due to Interstate Hotels
of $16.4 million at December 31, 2003 included
management fees due for each hotel, and reimbursements due for
insurance, employee benefits, sales and marketing expenses, and
other miscellaneous operating expenses. These amounts are
normally paid within 30 days. The balance also included
accrued termination obligations related to our asset
dispositions.

Pursuant to an intercompany agreement, we and
Interstate Hotels provide each other with, among other things,
reciprocal rights to participate in certain transactions entered
into by each party. In particular, Interstate Hotels has a right
of first refusal, under certain circumstances, to become the
manager of any real property we acquire. We also may provide
each other with certain services. These may include
administrative, renovation supervision, corporate, accounting,
finance, risk management, legal, tax, information technology,
human resources, acquisition identification and due diligence,
and operational services, for which Interstate Hotels is
compensated in an amount that we would be charged by a third
party for comparable services. During the years ended
December 31, 2003, 2002 and 2001, we paid Interstate Hotels
a net amount of $0.07 million, $0.5 million, and
$0.1 million, respectively, for such services.

Note Receivable From Interstate Hotels &
Resorts

Under a revolving credit agreement with
Interstate Hotels through July 31, 2002, we had the ability
to lend Interstate Hotels up to $50 million for general
corporate purposes. As of December 31, 2001, Interstate
Hotels owed us $36 million under this agreement. Effective
January 1, 2002, Interstate Hotels issued us a term note
for $13.1 million, which refinanced outstanding accounts
payable owed to us.

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

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

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

60



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##### 



Other Related-Party Transactions

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

Of the $200 million aggregate principal
amount of 9.125% senior unsecured notes due in 2011 we issued in
January 2001, $20 million principal amount was issued at a
price of 99.603% to an affiliate of Oak Hill Capital Partners.
The terms and conditions of the notes purchased were identical
to those purchased by third parties.

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



|    |                       
|--- | ----------------------
|11. | Incentive Compensation

MeriStar Hospitality sponsors an incentive
compensation plan in which employees of the operating
partnership participate. Under the plan, MeriStar Hospitality is
authorized to award up to a maximum of 12.5% of its outstanding
shares of common stock to officers or other key employees. These
awards may be granted in cash, restricted shares of common stock
or options to purchase common stock. Upon issuance of any
restricted stock or stock options under the plan, MeriStar
Hospitality is obligated to contribute the proceeds to us in
exchange for an equal number of OP units. As of
December 31, 2003, 8,348,703 shares of common stock were
authorized to be awarded, of which 4,052,975 shares remain
available for award.

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

Stock Options

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

61



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##### 



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

|                                   |           |                |           |                 |           |           |       |          |       |  |         |        |         |   |       |       |       | 
|---------------------------------- | --------- | -------------- | --------- | --------------- | --------- | --------- | ----- | -------- | ----- |  | ------- | ------ | ------- | - | ----- | ----- | ----- | 
|                                   |           |                |           |                
|                                   |           | Incentive Plan |           | Directors Plan
|                                   |           |                |           |                
|                                   |           |                |           | Weighted        |           |           |       | Weighted
|                                   |           |                |           | Average         |           |           |       | Average 
|                                   |           | Number         |           | Exercise        |           | Number    |       | Exercise
|                                   |           | of Shares      |           | Price           |           | of Shares |       | Price   
|                                   |           |                |           |                 |           |           |       |         
|Outstanding at January 1, 2001     |           |                | 4,785,334 |                 |           | $         | 22.68 |          |       |  | 115,000 |        |         | $ | 21.34 |      
|                                   | Granted   |                |           | 88,500          |           |           |       | 13.33    |       |  |         | 47,500 |         |   |       | 23.00 |      
|                                   | Exercised |                |           | (41,839         | )         |           |       | 16.12    |       |  |         |       |         |   |       |      |      
|                                   | Canceled  |                |           | (2,194,165      | )         |           |       | 26.87    |       |  |         |       |         |   |       |      |      
|                                   |           |                |           |                 |           |           |       |          |       |  |         |        |         |   |       |      
|Outstanding at December 31, 2001   |           |                | 2,637,830 |                 |           |           | 19.47 |          |       |  | 162,500 |        |         |   | 21.83 |      
|                                   | Granted   |                |           | 707,500         |           |           |       | 11.03    |       |  |         | 92,500 |         |   |       | 11.09 |      
|                                   | Exercised |                |           | (201,296        | )         |           |       | 15.45    |       |  |         |       |         |   |       |      |      
|                                   | Canceled  |                |           | (164,829        | )         |           |       | 20.10    |       |  |         |       |         |   |       |      |      
|                                   |           |                |           |                 |           |           |       |          |       |  |         |        |         |   |       |      
|Outstanding at December 31, 2002   |           |                | 2,979,205 |                 |           |           | 17.59 |          |       |  | 255,000 |        |         |   | 17.93 |      
|                                   | Granted   |                |           | 200,000         |           |           |       | 4.39     |       |  |         | 35,000 |         |   |       | 5.90  |      
|                                   | Canceled  |                |           | (405,322        | )         |           |       | 23.26    |       |  |         |       |         |   |       |      |      
|                                   |           |                |           |                 |           |           |       |          |       |  |         |        |         |   |       |      
|Outstanding at December 31, 2003   |           |                | 2,773,883 |                 |           | $         | 15.82 |          |       |  | 290,000 |        |         | $ | 16.48 |      
|                                   |           |                |           |                 |           |           |       |          |       |  |         |        |         |   |       |      
|Shares exercisable at December 31: |           |                |           |                 |           |           |       |          |       |  |         |        |         |   |       |      
|                                   |           | 2001           |           |                 | 2,020,759 |           |       | $        | 20.09 |  |         |        | 80,000  |   |       | $     | 21.69 | 
|                                   |           |                |           |                 |           |           |       |          |       |  |         |        |         |   |       |      
|                                   |           | 2002           |           |                 | 2,191,049 |           |       | $        | 19.81 |  |         |        | 119,167 |   |       | $     | 21.79 | 
|                                   |           |                |           |                 |           |           |       |          |       |  |         |        |         |   |       |      
|                                   |           | 2003           |           |                 | 2,074,402 |           |       | $        | 17.99 |  |         |        | 177,500 |   |       | $     | 20.52 | 
|                                   |           |                |           |                 |           |           |       |          |       |  |         |        |         |   |       |      

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

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

62



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##### 



Other Stock-Based Compensation

As of December 31, 2003, Meristar
Hospitality has granted 853,221 shares of restricted stock to
our employees or to those of an affiliate. This restricted stock
vests ratably over three- or five-year periods.

On March 29, 2000, we granted 462,500
Profits-Only OP Units, or POPs, to some of our employees
pursuant to our POPs Plan. These POPs were originally eligible
for vesting based on our achievement of certain financial
performance criteria. During 2001, we converted the 387,500 of
outstanding POPs to fixed awards and extended the vesting period
to 2004. On April 16, 2001, we granted 350,000 POPs to some
of our employees pursuant to our POPs Plan. These POPs are fixed
awards and vest ratably over three years. On April 1, 2002,
we granted 25,000 POPs to some of our employees pursuant to our
POPs Plan. These POPs are fixed awards and vest ratably over
five years. On May 1, 2002, we granted 162,500 POPs to one
of our employees pursuant to our POPs Plan. These POPs are fixed
awards and vest ratably over three years. There were 687,500
POPs outstanding and 588,195 POPs vested as of December 31,
2003.



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

In 2002, we incurred $3.2 million of costs
related to the formal separation of management functions from
Interstate Hotels. In 2001, we incurred a restructuring charge
of $1.1 million in connection with operational changes at
our corporate headquarters. The costs for both years are
included in administrative and general expenses on our income
statement.



|    |                              
|--- | -----------------------------
|13. | Commitments and Contingencies

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

Minimum Lease Payments.We lease the land at certain of our
hotels under long-term arrangements from third parties. Certain
leases contain contingent rent features based on gross revenues
at the respective property. Future minimum lease payments
required under these operating leases as of December 31,
2003 were as follows (in thousands):

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

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

63



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##### 



We lease certain office, retail and parking space
to outside parties under non-cancelable operating leases with
initial or remaining terms in excess of one year. Future minimum
rental receipts under these leases as of December 31, 2003
were as follows (in thousands):

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

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



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

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

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

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

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

During 2001, we sold two hotels and received
proceeds of $9.7 million. The sales resulted in a loss of
$2.2 million. The loss recognized on these sales, as well
as the operating results of these hotels, were included in
continuing operations, as the provisions of SFAS No. 144
requiring the presentation of such results as discontinued
operations applies to only those assets classified as held for
sale or disposed of on or after January 1, 2002.

During 2001, we terminated the leases of eight of
our hotels from affiliates of Prime Hospitality Corporation for
a total cost of $1.3 million. Concurrently, we signed
long-term management agreements with Interstate Hotels (formerly
MeriStar Hotels) for four of these properties.

64



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##### 



On May 9, 2001, we and Meristar Hospitality
entered into an Agreement and Plan of Merger with FelCor Lodging
Trust Incorporated and its operating partnership. On
September 21, 2001, we mutually agreed with FelCor to
terminate the merger agreement due to unfavorable market
conditions. We incurred $5.8 million of costs related to
this potential merger. The costs are reflected in our statement
of operations.



|    |                    
|--- | -------------------
|15. | Segment Information

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

The following summarizes certain geographic
information required under the standard (in thousands):

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



---



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



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

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

|                                         |  |         |         |         |  |         |          |         |  |         |         |         |  |         |         |         |  |   |         |   |  |   |         |  |  |   |         |   |  |   |          |  
|---------------------------------------- |  | ------- | ------- | ------- |  | ------- | -------- | ------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- |  | - | ------- | - |  | - | ------- |  |  | - | ------- | - |  | - | -------- | -
|                                         |  |         |         |        
|                                         |  | 2003    |         | 2002   
|                                         |  |         |         |        
|                                         |  | First   |         | Second  |  | Third   |          | Fourth  |  | First   |         | Second  |  | Third   |         | Fourth 
|                                         |  | Quarter |         | Quarter |  | Quarter |          | Quarter |  | Quarter |         | Quarter |  | Quarter |         | Quarter
|                                         |  |         |         |         |  |         |          |         |  |         |         |         |  |         |         |        
|Total revenue                            |  | $       | 214,123 |         |  | $       | 230,307  |         |  | $       | 199,902 |         |  | $       | 199,502 |         |  | $ | 219,621 |   |  | $ | 240,415 |  |  | $ | 201,992 |   |  | $ | 203,665  |  
|Loss on asset impairments                |  |         | 14,443  |         |  |         | 120,160  |         |  |         | 20,626  |         |  |         | 8,161   |         |  |   |        |   |  |   |        |  |  |   |        |   |  |   | 6,925    |  
|Total operating expenses                 |  |         | 209,601 |         |  |         | 325,263  |         |  |         | 216,242 |         |  |         | 227,827 |         |  |   | 191,804 |   |  |   | 202,153 |  |  |   | 190,513 |   |  |   | 213,575  |  
|Operating income (loss)                  |  |         | 4,522   |         |  |         | (94,956  | )       |  |         | (16,340 | )       |  |         | (28,325 | )       |  |   | 27,817  |   |  |   | 38,262  |  |  |   | 11,479  |   |  |   | (9,910   | )
|(Loss) income from continuing operations |  |         | (30,148 | )       |  |         | (129,636 | )       |  |         | (47,786 | )       |  |         | (61,731 | )       |  |   | (11,365 | ) |  |   | 959     |  |  |   | (23,090 | ) |  |   | (43,745  | )
|Net (loss) income                        |  |         | (73,198 | )       |  |         | (216,659 | )       |  |         | (51,041 | )       |  |         | (63,539 | )       |  |   | (10,324 | ) |  |   | 3,503   |  |  |   | (30,739 | ) |  |   | (133,259 | )
|Diluted (loss) earnings per unit         |  | $       | (1.50   | )       |  | $       | (4.42    | )       |  | $       | (1.01   | )       |  | $       | (0.95   | )       |  | $ | (0.22   | ) |  | $ | 0.07    |  |  | $ | (0.63   | ) |  | $ | (2.74    | )



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

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

65



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##### 



In addition, subsequent to December 31,
2003, we repurchased from available cash $61.5 million of
senior unsecured notes, including $16.5 million of the 9%
notes due in 2008, $30.8 million of the 9.125% notes due in
2011 and $14.2 million of the 10.5% notes due in 2009. We
also acquired an additional $13.5 million of 8.75% notes
payable to MeriStar Hospitality due 2007 through the issuance of
2,291,150 common OP units.



|    |                                   
|--- | ----------------------------------
|18. | Consolidating Financial Statements

Certain of our subsidiaries and MeriStar
Hospitality are guarantors of our senior unsecured notes.
Certain of our subsidiaries are guarantors of MeriStar
Hospitalitys unsecured subordinated notes. All guarantees
are full and unconditional, and joint and several.
Exhibit 99.1 to this Annual Report on Form 10-K
presents supplementary consolidating financial statements for
us, including each of our guarantor subsidiaries. This exhibit
presents our consolidating balance sheets as of
December 31, 2003 and 2002, consolidating statements of
operations for the years ended December 31, 2003, 2002, and
2001, and consolidating statements of cash flows for the years
ended December 31, 2003, 2002 and 2001.

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