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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K

|                                                |  |                                                                                             
|----------------------------------------------- |  | --------------------------------------------------------------------------------------------
|þ                                               |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31,
    2003
|OR                                             
|                                               
|o                                               |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
    from      to     
|Commission file number 1-11903                 

MeriStar Hospitality Corporation


(Exact name of registrant as specified in its
charter)


|                                                                                                        |  |                                                   
|------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------
|Maryland(State or other jurisdiction of
    incorporation or organization)                              |  | 75-2648842(I.R.S. Employer
    Identification No.)
|                                                                                                       
|4501 North Fairfax Drive, Suite 500
    Arlington, Virginia(Address of principal executive
    offices) |  | 22203(Zip Code)                                   

Registrants telephone number, including
area code: (703) 812-7200

Securities registered pursuant to
Section 12(b) of the Act:

|                                       |  |                                           
|-------------------------------------- |  | ------------------------------------------
|Title of each class                    |  | Name of each exchange on which registered:
|                                       |  |                                           
|Common Stock, par value $.01 per share |  | New York Stock Exchange                   

Securities registered pursuant to
Section 12(g) of the Act: None

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

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

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Act).  Yes þ     No o

The aggregate market value of the voting and
non-voting common equity held by non-affiliates of the
registrant was $226,993,250 as of June 30, 2003.

The number of shares of the registrants
common stock outstanding at March 8, 2004 was 69,087,799.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information from certain
portions of the registrants definitive proxy statement for
the 2004 annual meeting of stockholders to be filed with the
Securities and Exchange Commission within 120 days after the
close of the fiscal year.



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TABLE OF CONTENTS

|         |  |                                                                                           |  |      |    | 
|-------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                           |  | Page
|         |  |                                                                                           |  |     
|PART I  
|Item 1.  |  | Business                                                                                  |  |      | 1  | 
|Item 2.  |  | Properties                                                                                |  |      | 21 | 
|Item 3.  |  | Legal Proceedings                                                                         |  |      | 24 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                   |  |      | 24 | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |  |      | 25 | 
|Item 6.  |  | Selected Financial Data                                                                   |  |      | 27 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |      | 29 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |  |      | 42 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                               |  |      | 43 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  |      | 72 | 
|Item 9A. |  | Controls and Procedures                                                                   |  |      | 72 | 
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                        |  |      | 73 | 
|Item 11. |  | Executive Compensation                                                                    |  |      | 73 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management                        |  |      | 73 | 
|Item 13. |  | Certain Relationships and Related Transactions                                            |  |      | 73 | 
|Item 14. |  | Principal Accounting Fees and Services                                                    |  |      | 73 | 
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                      |  |      | 74 | 
|         |  | Signatures                                                                                |  |      | 80 | 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS

Information both included and incorporated by
reference in this Annual Report on Form 10-K may contain
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, and as
such may involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or
achievements to be materially different from future results,
performance or achievements expressed or implied by such
forward-looking statements. Forward-looking statements, which
are based on various assumptions and describe our future plans,
strategies and expectations, are generally identified by our use
of words such as intend, plan,
may, should, will,
project, estimate,
anticipate, believe, expect,
continue, potential,
opportunity, and similar expressions, whether in the
negative or affirmative. We cannot guarantee that we actually
will achieve these plans, intentions or expectations. All
statements regarding our expected financial position, business
and financing plans are forward-looking statements.

Factors which could have a material adverse
effect on our operations and future prospects include, but are
not limited to:



| |   |                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the continuing sluggishness of the national
    economy;                                                                                                                                           
|
| |  | economic conditions generally and the real estate
    market specifically;                                                                                                                         
|
| |  | the effect of threats of terrorism and increased
    security precautions on travel patterns and demand for hotels;                                                                                
|
| |  | the threatened or actual outbreak of hostilities
    and international political instability;                                                                                                      
|
| |  | governmental actions;                                                                                                                                                                              
|
| |  | legislative/regulatory changes, including changes
    to laws governing the taxation of real estate investment trusts;                                                                             
|
| |  | level of proceeds from asset sales;                                                                                                                                                                
|
| |  | cash available for capital expenditures;                                                                                                                                                           
|
| |  | availability of capital;                                                                                                                                                                           
|
| |  | ability to refinance debt;                                                                                                                                                                         
|
| |  | rising interest rates;                                                                                                                                                                             
|
| |  | rising insurance premiums;                                                                                                                                                                         
|
| |  | competition;                                                                                                                                                                                       
|
| |  | supply and demand for hotel rooms in our current
    and proposed market areas, including the existing and continuing
    weakness in business travel and lower-than-expected daily room
    rates;
|
| |  | other factors that may influence the travel
    industry, including health, safety and economic factors; and                                                                                       
|
| |  | generally accepted accounting principles,
    policies and guidelines applicable to real estate investment
    trusts.                                                                             

These risks and uncertainties, along with the
risk factors discussed under Risk Factors in this
Annual Report on Form 10-K, should be considered in
evaluating any forward-looking statements contained in this
report or incorporated by reference herein. All forward-looking
statements speak only as of the date of this report or, in the
case of any document incorporated by reference, the date of that
document. All subsequent written and oral forward-looking
statements attributable to us or any person acting on our behalf
are qualified by the cautionary statements in this section. We
undertake no obligation to update or publicly release any
revisions to forward-looking statements to reflect events,
circumstances or changes in expectations after the date of this
report.

ii



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PART I



|        |         
|------- | --------
|ITEM 1. | BUSINESS

Business Overview

MeriStar Hospitality Corporation is a real estate
investment trust, or REIT, and owns a portfolio of primarily
upscale, full-service hotels and resorts. 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. We have sold nine hotels with 2,197 rooms
since January 1, 2004. Ten of the remaining 83 hotels are
currently planned for disposition. Our hotels are located in
major metropolitan areas, rapidly growing secondary markets or
resort locations in the United States and one in Canada.
Substantially all of our hotels are operated under
internationally recognized brand names such as Hilton®,
Sheraton®, Marriott®, Westin®, Doubletree®,
Holiday Inn®, Embassy Suites® and Radisson®.

We believe the upscale, full-service segment of
the lodging industry offers attractive potential operating
results and investment opportunities in the long term. The real
estate market has experienced a significant slowdown in the
construction of upscale, full-service hotels. However, upscale,
full-service hotels have particular appeal to both business
executives and upscale leisure travelers. We believe the
combination of these factors offers good long-term potential
ownership opportunities for us in this sector of the lodging
industry.

We were created on August 3, 1998, when
American General Hospitality Corporation, a corporation
operating as a real estate investment trust, merged with CapStar
Hotel Company. In connection with this merger, we created
MeriStar Hotels & Resorts, Inc. (MeriStar
Hotels) to be the lessee and manager of nearly all of our
hotels. On July 31, 2002, MeriStar Hotels merged with
Interstate Hotels Corporation to form Interstate Hotels &
Resorts, Inc. (Interstate Hotels). Interstate Hotels
currently manages all of our hotels. We and Interstate Hotels
have entered into an intercompany agreement that governs a
number of aspects of our relationship (see The
Intercompany Agreement). In addition, our Chief Executive
Officer and Chairman of the Board, Paul W. Whetsell, is the
Chairman of the Board of Interstate Hotels.

Portfolio Strategy

Given the challenging operating environment that
has resulted from a sluggish economy coupled with the current
geopolitical situation, and disruptions caused by the threat of
further terrorist attacks, we continue to focus on maximizing
the profitability of our existing hotels by actively overseeing
their operation by Interstate Hotels. Our Asset Management
Group, which consists of senior level hotel operators, and
construction and engineering experts, concentrates on maximizing
all potential revenue management profitability options at our
hotels. One of the initiatives we have undertaken to focus on
the performance of our assets is the implementation of a
strategic energy program. This program began in late 2003 and is
designed to help us stabilize the increasingly volatile energy
costs at our hotels. Through this program, we are able to
achieve competitive pricing for our electric and natural gas
purchases throughout the country. During 2003, we also took
steps to strengthen our balance sheet and to maintain financial
flexibility and liquidity in order to enhance our capacity to
address the uncertain operating environment that currently
exists. We initiated an aggressive capital expenditure
reinvestment program for our core assets. We feel this program
is necessary to maintain asset values and to properly position
our hotels for any industry recovery. We expect to spend
approximately $225 million pursuant to our renovation
program over the next two years, with approximately
$125 million to be spent in 2004. The emphasis will be on
completing these projects on budget with minimal disruptions to
operations. We will focus on complete room and facility
renovations, eliminating to the degree possible, piecemeal work
where the typical consumer might not ascribe value to the
improvements. We believe we are timing this work appropriately
to take full advantage of the anticipated industry recovery. The
properties we are now marketing for sale typically have higher
per room capital expenditure requirements than our core assets.
Sales of these properties will allow us to focus our capital
spending dollars in the future on our core portfolio.

1



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| |                   
| | ------------------
| | Asset Dispositions

During 2003, we began executing one of our key
short-term strategies, which is to sell selected non-core assets
in order to begin repositioning our portfolio into one generally
consisting of larger assets with significant meeting space in
urban or high-end resort locations. Many of these non-core
assets were acquired as part of portfolios of assets. We have
focused on the disposition of non-core assets that generally
possess one or more of the following characteristics:



| |   |                                                                  
| | - | -----------------------------------------------------------------
| |  | limited future growth potential;                                 
|
| |  | secondary market location;                                       
|
| |  | secondary brand affiliation;                                     
|
| |  | higher than average capital expenditure
    requirements; or     
|
| |  | location in a market in which our portfolio is
    over-weighted.

As permitted under the indentures governing our
various outstanding debt securities, we intend to use a majority
of the proceeds from any asset sales, within a specified period
of time, to repurchase our senior debt, to reinvest in our core
assets and to fund acquisitions. Since January 1, 2003, we
have sold 24 hotels with 5,045 rooms for total gross proceeds of
$190.8 million in cash. We currently have 10 hotels planned
for disposition, from which we expect to generate proceeds of
approximately $75 million to $85 million. Contract
negotiations are in progress with potential purchasers for most
of the remaining hotels designated for sale. We expect to
complete the majority of these sales during the first quarter of
2004. We withdrew eight assets from our planned disposition
program because our liquidity has greatly improved, and we
expect to realize greater value by holding these assets as we
move into an expected economic recovery. We may reintroduce some
or all of these assets to the market at a later date if we
believe that adequate pricing levels can be achieved by doing
so. We recognized impairment losses totaling $295 million
($131.6 is included in discontinued operations) related to our
asset disposition program during the year ended
December 31, 2003, which included an additional impairment
charge in the fourth quarter of $9.4 million. These
impairment charges were based on our estimates of the fair value
of the properties included in our disposition program during the
year. 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. Our ability to realize the estimated proceeds from
the 10 remaining hotels we seek to sell is, however, dependent
upon finding qualified buyers willing to pay a purchase price
that we consider reasonable and other factors that could cause
the actual proceeds we realize to be different from our
estimates, including those discussed under Risk
Factors and Cautionary Statement Regarding Forward
Looking Statements.

In addition, we may from time to time receive
offers on other assets that we might consider selling. While we
always consider any opportunities that may improve our financial
condition or results of operations, we are not actively
marketing any assets other than the properties previously
discussed.

We are aided in our disposition program by the
fact that we can terminate the management agreement of any hotel
we sell, in most cases subject to the payment of a fee as
discussed below and in the section The Management
Agreements  Term and Termination, as well as
the fact that 55 of our current 83 assets (including all 10 of
the assets remaining in our disposition program) are
unencumbered and only 10 of those assets are subject to ground
leases. Excluding the 10 assets included in our disposition
program, we would have 43 unencumbered assets and nine subject
to ground leases.

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.

2



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| |                   
| | ------------------
| | Asset Acquisitions

One of our key strategies includes the
acquisition of high quality, upscale full-service hotels
strategically located in major urban markets or destination
resorts. Our target hotels would generally be branded, larger
hotels with significant meeting space and may involve management
contracts with hotel brand owners where our long-term investment
focus makes us a preferred owner. We intend to acquire assets
with strong existing cash flow and use little or no leverage in
the near term to finance these potential acquisitions, thereby
enabling us to improve our overall leverage and interest
coverage levels. In pursuing this strategy, we may be somewhat
limited by the terms of our senior note indentures, which limit
our ability to obtain financing beyond certain limited
exceptions (including up to $250 million of mortgage
indebtedness and $50 million of general indebtedness) to
acquire assets (as we are below the required fixed charge
coverage ratio of 2 to 1, at which level we would be
permitted to generally incur debt without restriction).

Recent Developments



| |                                   
| | ----------------------------------
| | New Senior Secured Credit Facility

On December 23, 2003, we entered into a new
$50 million senior credit facility, secured by six of our
hotels. The three-year facility carries an annual interest rate
of the London Interbank Offered Rate, or LIBOR, plus
450 basis points. We expect to use the facility for working
capital purposes, although we currently have no plans to draw on
the facility in the short term. Concurrent with entering into
our new facility, we terminated an existing $50 million senior
unsecured credit facility, which had no outstanding borrowings
and no availability, and wrote off approximately
$0.5 million of unamortized deferred financing costs.

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



| |                                                                  
| | -----------------------------------------------------------------
| | Debt for Equity Exchanges and Repurchases of
    Outstanding Debt

During the fourth quarter of 2003 and early 2004,
we issued an aggregate of approximately 6.2 million shares
of our common stock in exchange for $34.7 million aggregate
principal amount of our 8.75% senior subordinated notes due
2007. The notes were acquired on average at par. One debt for
equity exchange that we had previously announced on
December 23, 2003 did not close because of a failure by our
counterparty to deliver $4.5 million of senior subordinated
notes in accordance with the terms of the exchange agreement.

In addition, during the fourth quarter of 2003,
we repurchased $59.8 million in aggregate principal amount of
these notes using the proceeds of an offering of our common
stock.

During early 2004, we used available cash to
repurchase $61.5 million of our senior unsecured notes,
including $16.5 million of the 9% notes due 2008,
$30.8 million of the 9.125% notes due 2011 and
$14.2 million of the 10.5% notes due 2009.

Following these exchanges and the repurchases, we
had as of March 8, 2004, approximately $69.3 million
of outstanding senior subordinated notes due 2007 and
$884.0 million of outstanding senior unsecured notes. We
expect to retire the remaining senior subordinated notes due
2007 in 2004.



| |                                    
| | -----------------------------------
| | Relationship with Interstate Hotels

Since the July 2002 merger that formed Interstate
Hotels, we and Interstate Hotels have separated the senior
management teams of the two companies in order to allow each
senior management team to devote more attention to its
respective companys matters. In October 2003, Paul W.
Whetsell, who was the Chief

3



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Executive Officer and Chairman of the Board of
Directors of both Interstate Hotels and our company, resigned as
Chief Executive Officer of Interstate Hotels. Also in October
2003, Steven D. Jorns, who was the Vice Chairman of our Board of
Directors, resigned from that position and subsequently became
Chief Executive Officer of Interstate Hotels, and J. Taylor
Crandall, one of our directors who was also a director of
Interstate Hotels, resigned as a director of Interstate Hotels.
In December 2003, our Board of Directors and that of Interstate
Hotels each formed a special committee of independent directors
to explore further changes to the relationship between our
company and Interstate Hotels, including possible changes to the
terms, or complete elimination, of the intercompany agreement.
Discussions also include possible changes to the provisions of
the various management agreements relating to our hotels,
including the method of calculation for the incentive fee and
termination fees. Because discussions are ongoing, there can be
no assurance that any such changes will occur. See The
Management Agreements and The Intercompany
Agreement.




| |                                                                     
| | --------------------------------------------------------------------
| | Impairment Charge Relating to MeriStar
    Investment Partners, L.P.

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
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. 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.

REIT Modernization Act

Until January 1, 2001, in order to maintain
our tax status as a REIT, we were not permitted to engage in the
operations of our hotel properties. To comply with this
requirement, we leased all of our real property to
third-parties, including affiliates of Interstate Hotels and
Prime Hospitality Corporation. On January 1, 2001, changes
to the U.S. 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, which are subject to taxation similar to
subchapter C-corporations, to lease our real property. In
2000, a subcommittee of independent members of our Board of
Directors ratified the transfer of our leases with subsidiaries
of Interstate Hotels to our taxable subsidiaries. Accordingly,
effective January 1, 2001, our taxable subsidiaries
executed agreements with subsidiaries of Interstate Hotels.
These agreements assigned our existing leases to our taxable
subsidiaries. In connection with the assignment, the taxable
subsidiaries executed new management agreements with a
subsidiary of Interstate Hotels for each property they
previously leased. The management agreements were structured to
substantially mirror the economics of the former lease
agreements. We believe this structure provides us with the
ability to capture the economic interests of property ownership,
as well as more efficiently aligning such interests.

Although a taxable subsidiary may lease our real
property, it is restricted from being involved in certain
activities prohibited by the RMA. First, a taxable subsidiary is
not permitted to manage the property itself; it must enter into
an arms-length management agreement with an
independent third-party manager that is actively involved in the
trade or business of hotel management and manages properties on
behalf of other

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owners. Second, the taxable subsidiary is not
permitted to lease a property that contains gambling operations.
Third, the taxable subsidiary is restricted from owning a brand
or franchise.


The Management Agreements

As previously described, in December 2003, our
Board of Directors and that of Interstate Hotels each formed a
special committee of independent directors to explore further
changes to the relationship between our company and Interstate
Hotels, including possible changes to the provisions of the
various management agreements relating to our hotels, including
the method of calculation for the incentive fee and termination
fees. Negotiations are ongoing and we expect to complete any
modifications to these agreements in the first half of 2004.



| |                                              
| | ---------------------------------------------
| | Management Fees and Performance
    Standards

Each of our taxable subsidiaries pays Interstate
Hotels a hotel management fee equal to a specified percentage of
aggregate hotel operating revenues, increased or reduced, as the
case may be, by 20% of the positive or negative difference
between:



| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | The actual excess of total operating revenues
    over total operating expenses; and
|
| |  | A projected excess of total operating revenues
    over total operating expenses.   

The total management fee for a hotel in any
fiscal year will not be less than 2.5% or greater than 4.0% of
aggregate hotel operating revenues.



| |                     
| | --------------------
| | Term and Termination

The management agreements with Interstate Hotels
generally have initial terms of 10 years with three renewal
periods of five years each. A renewal will not go into effect if
a change in the federal tax laws permits us or one of our
subsidiaries to operate the hotel directly without adversely
affecting our ability to qualify as a REIT, or if Interstate
Hotels elects not to renew the agreement. We may elect not to
renew the management agreements only as provided below.

Our taxable subsidiaries have the right to
terminate a management agreement for a hotel upon the sale of
the hotel to a third party or if the hotel is not restored after
a significant casualty loss.Upon that termination, the
relevant taxable subsidiary will be required to pay Interstate
Hotels the fair market value of the management agreement. That
fair market value will be equal to the present value of the
total of the remaining payments (discounted using a 10% rate) of
the existing term under the agreement, based on the operating
results for the 12 months preceding the termination.

If a hotels gross operating profit is less
than 85% of the amount projected in the hotels budget in
any fiscal year and gross operating profit from that hotel is
less than 90% of the projected amount in the next fiscal year,
our taxable subsidiaries will have the right to terminate the
management agreement for the hotel, unless:



| |   |                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We did not materially comply with the capital
    expenditures contemplated by the budget for either or both of
    the applicable fiscal years; or                                                                                                                                 
|
| |  | Interstate Hotels cures the shortfall by agreeing
    to reduce its management fee for the next fiscal year by the
    amount of the shortfall between the actual operating profit for
    the second fiscal year and 90% of the projected gross operating
    profit for that year.

Interstate Hotels can only use the cure right
once during the term of each management agreement.



| |           
| | ----------
| | Assignment

Interstate Hotels does not have the right to
assign a management agreement without the prior written consent
of the relevant taxable subsidiary. A change in control of
Interstate Hotels will require the consent of the relevant
taxable subsidiary, and that subsidiary may grant or withhold
its consent in its sole discretion.

5



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The Intercompany Agreement

We are a party to an intercompany agreement with
Interstate Hotels. As previously described, in December 2003,
our Board of Directors and that of Interstate Hotels each formed
a special committee of independent directors to explore further
changes to the relationship between our company and Interstate
Hotels, including possible changes to the terms, or elimination,
of the intercompany agreement. Negotiations are ongoing and we
expect to complete any modifications to this agreement in the
first half of 2004.

So long as the existing intercompany agreement
remains in effect, Interstate Hotels is prohibited from making
real property investments, which we could make while still
remaining a REIT under the Internal Revenue Code of 1986, as
amended, unless:



| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We are first given the opportunity, but elect not
    to pursue the investment;                                                                          
|
| |  | The investment is on land already owned or leased
    by Interstate Hotels or is subject to a lease or purchase option
    in favor of Interstate Hotels;
|
| |  | Interstate Hotels will operate the property under
    an owned trade name; or                                                                            
|
| |  | The investment is a minority interest made as
    part of a lease or management agreement.                                                               

We have a right of first refusal with respect to
any real property investment to be sold by Interstate Hotels.

The intercompany agreement generally grants
Interstate Hotels the right of first refusal with respect to any
management opportunity at any of our properties we do not elect
to have managed by a hotel brand owner. We must make such an
opportunity available to Interstate Hotels only if we determine
that:



| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We are required to enter into a management
    agreement with an unaffiliated third party with respect to the
    property in order to maintain our status as a REIT;                                                 
|
| |  | Interstate Hotels is qualified to be the manager
    of that property;                                                                                                                                                
|
| |  | We decide not to have the property operated by
    the owner of a hospitality trade name under that trade name;                                                                                                       
|
| |  | The property is unencumbered by a management
    agreement, or if a management agreement exists, it can be freely
    terminated or terminated by the payment of a fee, which
    Interstate Hotels agrees to pay; and
|
| |  | The property is not subject to a leasehold estate
    held by an unaffiliated third party.                                                                                                                            

Because of the provisions of the intercompany
agreement, we are restricted in the nature of our business and
the opportunities we may pursue.



| |                      
| | ---------------------
| | Provision of Services

We may exchange services with Interstate Hotels
as may be reasonably requested from time to time. These may
include administrative, renovation supervision, corporate,
accounting, financial, risk management, legal, tax, information
technology, human resources, acquisition identification and due
diligence, and operational services. We believe we compensate
each other in an amount that would be charged by an unaffiliated
third party for comparable services.



| |     
| | ----
| | Term

The intercompany agreement will terminate upon
the earlier of August 3, 2008, or the date of a change in
ownership or control of Interstate Hotels unless we approve, in
our sole discretion, such change in ownership or control. We
consented to the merger between Interstate Hotels Corporation
and MeriStar Hotels.

6



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##### 





| |                          
| | -------------------------
| | Loan to Interstate Hotels

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.

Franchises

We employ a flexible strategy in selecting brand
names based on each particular hotels market environment
and other unique characteristics. Accordingly, we use various
well-known trade names under licensing arrangements with
prominent franchisors. From time to time, we have conducted
negotiations with franchisors to rebrand certain hotels to
improve their competitiveness and profitability in light of
changing circumstances in the lodging market. We make ongoing
capital expenditures in order to keep our hotels competitive and
to comply with franchise obligations, as described further in
Risk Factors  Operating Risks  We may be
adversely affected by the requirements contained in our
franchise and licensing agreements in Item 1 of this
Annual Report on Form 10-K. We have included a listing of
all of our properties, along with the affiliated brand names,
under Item 2 of this Form 10-K.

Competition

Competition in the U.S. lodging industry is based
on a number of factors, most notably convenience of location,
brand affiliation, price, range of services and guest amenities
offered, and quality of customer service and the overall
condition of the property. Our operations compete primarily in
the upscale sector of the full-service segment of the lodging
industry. Each geographic market where we own hotels has other
full- and limited-service hotels that compete with our hotels.
In addition, we compete with other lodging industry companies
for the acquisition of properties with the qualities that fit
our target product.

Seasonality

Demand in the lodging industry is affected by
recurring seasonal patterns. For most non-resort properties,
demand is lower in the winter months due to decreased business
travel and higher in the spring and fall months during the peak
business travel season. For our resort properties, demand is
generally higher in winter and early spring. Since the majority
of our hotels are non-resort properties, our operations
generally reflect non-resort seasonality patterns. These general
trends are, however, greatly influenced by overall economic
cycles.

Total revenue by quarter for 2003 and 2002 were
as follows:

|     |         |         |    |         |   |         |    |         |   |  |    |    |   |  |    |    |  
|---- | ------- | ------- | -- | ------- | - | ------- | -- | ------- | - |  | -- | -- | - |  | -- | -- | -
|     |         | First   |    | Second  |   | Third   |    | Fourth 
|     |         | Quarter |    | Quarter |   | Quarter |    | Quarter
|     |         |         |    |         |   |         |    |        
|2003 |         |         | 25 | %       |   |         | 27 | %       |   |  | 24 | %  |   |  | 24 | % 
|2002 |         |         | 25 | %       |   |         | 28 | %       |   |  | 23 | %  |   |  | 24 | % 
|     |         |         |    |         |   |         |    |         |   |  |    |    |   |  |    |   
|     | Average |         |    | 25      | % |         |    | 28      | % |  |    | 23 | % |  |    | 24 | %

Employees

As of December 31, 2003, we employed 41
persons, all of whom work at our corporate headquarters in
Arlington, Virginia. Employees at our hotel properties are
employees of Interstate Hotels.

7



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##### 



Governmental Regulation



| |                                
| | -------------------------------
| | Americans with Disabilities Act

Under the Americans with Disabilities Act, or
ADA, all public accommodations must meet federal requirements
related to access and use by disabled persons. These
requirements became effective in 1992. Although significant
amounts have been and continue to be invested in ADA-required
upgrades to our hotels, a determination that our hotels are not
in compliance with the ADA could result in a judicial order
requiring compliance, imposition of fines or an award of damages
to private litigants. We are likely to incur additional costs in
complying with the ADA; however, such costs are not expected to
have a material adverse effect on our results of operations or
financial condition.



| |                   
| | ------------------
| | Environmental Laws

Under various federal, state and local
environmental laws, ordinances and regulations, a current or
previous owner or operator of real property may be liable for
the costs of removal or remediation of hazardous or toxic
substances on, under or in property. Laws often impose liability
whether or not the owner or operator knew of, or was responsible
for, the presence of hazardous or toxic substances. In addition,
the presence of contamination from hazardous or toxic
substances, or the failure to properly remediate a contaminated
property, may adversely affect the owners ability to sell
or rent real property or to borrow funds using real property as
collateral. Persons who arrange for the disposal or treatment of
hazardous or toxic substances may also be liable for the costs
of removal or remediation of these substances at the disposal or
treatment facility, whether or not the facility is or ever was
owned or operated by those persons.

Federal and state laws also regulate the
operation and removal of underground storage tanks. In
connection with the ownership and operation of hotels, we could
be held liable for the costs of remedial action with respect to
the regulated substances and storage tanks and claims related
thereto. The use of underground storage tanks at our hotels has
been minimized. Activities have been undertaken to remove
underground storage tanks to the extent possible. Underground
storage tanks that could not be modified to be brought into full
compliance have been replaced or are operated under temporary
permits and scheduled for removal. All existing underground
storage tanks have been identified and proper permits obtained.

All of our hotels have undergone Phase I
environmental site assessments, which generally provide a
non-intrusive physical inspection and database search, but not
soil or groundwater analyses, by a qualified independent
environmental engineer. The purpose of a Phase I assessment is
to identify potential sources of contamination for which the
hotels may be responsible and to assess the status of
environmental regulatory compliance. The Phase I assessments
have not revealed any environmental liability or compliance
concerns that we believe would have a material adverse effect on
our results of operations or financial condition, nor are we
aware of any material environmental liability or concerns.
Nevertheless, it is possible that these environmental site
assessments did not reveal all environmental liabilities or
compliance concerns or that material environmental liabilities
or compliance concerns exist of which we are currently unaware.

In addition, our hotels have been inspected to
determine the presence of asbestos. Federal, state and local
environmental laws, ordinances and regulations also require
abatement or removal of asbestos-containing materials and govern
emissions of and exposure to asbestos fibers in the air.
Asbestos-containing materials are present in various building
materials such as sprayed-on ceiling treatments, roofing
materials or floor tiles at some of the hotels. Operations and
maintenance programs for maintaining asbestos-containing
materials have been or are in the process of being designed and
implemented, or the asbestos-containing materials have been
scheduled to be or have been abated, at these hotels. Any
liability resulting from non-compliance or other claims relating
to environmental matters could have a material adverse effect on
our results of operations or financial condition.

In recent years there has been a
widely-publicized proliferation of mold-related claims by
tenants, employees and other occupants of buildings against the
owners of those buildings. To date, a few such claims have been
filed against us by employees of hotels where mold has been
detected. Mold-related claims are not covered by our insurance
programs. These claims have not been material to our
consolidated results of

8



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##### 



operations, financial position or liquidity. In
every hotel where we have identified a measurable presence of
mold, whether or not a claim has been made, we have undertaken
remediation we believe to be appropriate for the circumstances
encountered. Unfortunately, there is little in the way of
government standards, insurance industry specifications or
otherwise generally accepted guidelines dealing with mold
propagation. Although considerable research into mold toxicity
and exposure levels is underway, it may be several years before
definitive standards are available to property owners against
which to evaluate risk and design remediation practices. We
cannot predict the outcome of any future regulatory requirements
to deal with mold-related matters. We also do not believe that,
currently, any potential mold-related liabilities, either
individually or in the aggregate, will have a material adverse
effect on our results of operations or financial condition.


The Operating Partnership

The following summary information is qualified
in its entirety by the provisions of the Second Amended and
Restated Agreement of Limited Partnership of MeriStar
Hospitality Operating Partnership, L.P., as amended, a copy of
which is incorporated by reference as Exhibit 10.1 to this
Form 10-K.

MeriStar Hospitality Operating Partnership, L.P.,
our subsidiary operating partnership, holds substantially all of
our assets. We are the sole general partner of our operating
partnership; we and approximately 100 other persons and entities
are limited partners of the operating partnership. The
partnership agreement of our operating partnership gives the
general partner full control over the business and affairs of
the operating partnership. The agreement also gives the general
partner the right, in connection with the contribution of
property to the operating partnership or otherwise, to issue
additional partnership interests in the operating partnership in
one or more classes or series. These issuances may have such
designations, preferences and participating or other special
rights and powers (including rights and powers senior to those
of the existing partners) as the general partner determines
appropriate.

Our operating partnerships partnership
agreement currently provides for five classes of partnership
interests: Common OP Units, Class B OP Units, Class C OP
Units, Class D OP Units and Profits-Only OP Units. As of
March 8, 2004, the partners of the operating partnership
owned the following aggregate numbers of OP Units:



| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We and our wholly-owned subsidiaries owned a
    number of Common OP Units equal to the number of issued and
    outstanding shares of our common stock (69,087,799 shares), par
    value $0.01;
|
| |  | Independent third parties owned 2,816,141 OP
    Units (consisting of 1,012,337 Common OP Units, 495,343
    Class B OP Units, 916,304 Class C OP Units and 392,157
    Class D OP Units); and   
|
| |  | Certain of our executive officers and former
    executive officers of Interstate Hotels owned an aggregate of
    687,500 Profits-Only OP Units and 5,758 Common OP units.                      

Holders of Common OP Units and Class B OP
Units receive distributions for each Common or Class B OP
Unit equivalent to the dividend paid on each of our common
shares. Holders of Class C OP Units receive a
non-cumulative, quarterly distribution equal to $0.5575 per
Class C OP Unit so long as the Common OP Units and
Class B OP Units receive a distribution for such quarter
and the dividend rate on our common stock has not exceeded
$0.5575. Class C OP Units automatically convert into Common
OP Units once that dividend rate is exceeded. Holders of
Class D OP Units receive a 6.5% cumulative annual preferred
return based on an assumed price per common share of $22.16; the
return is compounded quarterly to the extent not paid on a
current basis, and holders are entitled to a liquidation
preference of $22.16 per Class D OP Unit. All net income
and capital received by the operating partnership (after payment
of the annual preferred return and, if applicable, the
liquidation preference) will be shared by the holders of the
Common OP Units in proportion to the number of Common OP Units
in the relevant operating partnership owned by each such holder.

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

9



---



##### 



share for cash or, at our option, for shares of
common stock having a value equal to the redemption price. The
holders have the option to redeem the Class D OP Units at
any time after April 1, 2004 for cash or, at the option of
the holders, for shares of common stock having a value equal to
$22.16 per share. If we or the holders of the preferred
Class D OP Units chose to redeem these units for common
stock instead of cash, and if our common stock was valued at
that time at less than $22.16 per share, we would have to issue
more shares of our common stock than the number of preferred
Class D OP Units being redeemed. For example, at
December 31, 2003, our stock price was $6.51 per share. If
the Class D OP Units were redeemed for common stock at that
date, we would have issued 1,334,900 shares of our common stock,
which would have represented approximately 2% of our then
outstanding common stock.


Profits-Only OP Units are issued pursuant to our
Profits-Only Operating Partnership Units Plan, a copy of which
is incorporated by reference in Exhibit 10.6 to this
Form 10-K. Holders of Profits-Only OP Units receive
compensation equivalent to the dividend paid on our common stock
in accordance with our amended Incentive Plan, a copy of which
is incorporated by reference in Exhibit 10.4.1 to this
Form 10-K.

Access to Our Filings

You may request a copy, at no cost, of our annual
report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and any amendments to those
reports as soon as reasonably practicable after such material is
electronically filed with the Securities and Exchange
Commission, by contacting us in writing or by telephone at our
principal executive offices: MeriStar Hospitality Corporation,
4501 North Fairfax Drive, Suite 500, Arlington, Virginia
22203, telephone (703) 812-7200. We also make available all
of these filings on our website at www.meristar.com.

10



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##### 



RISK FACTORS

Financing Risks

We are highly leveraged; our significant
amount of debt could limit our operational flexibility or
otherwise adversely affect our financial condition.

As of December 31, 2003, we had
approximately $1.6 billion of total debt outstanding, or
71% of our total capitalization, and approximately
$230.9 million of unrestricted cash and cash equivalents.
The following details our debt outstanding as of
December 31, 2003:

|                                                 |  |       |            |          |  |          |        |  |  |        
|------------------------------------------------ |  | ----- | ---------- | -------- |  | -------- | ------ |  |  | -------
|                                                 |  |       |            | Interest |  |         
|                                                 |  | Total |            | Rate     |  | Maturity
|                                                 |  |       |            |          |  |         
|Convertible subordinated notes                   |  | $     | 3,705      |          |  |          | 4.75%  |  |  | 2004   
|Senior subordinated notes                        |  |       | 82,768     | (a)      |  |          | 8.75%  |  |  | 2007   
|Senior unsecured notes                           |  |       | 299,459    | (a)      |  |          | 9.00%  |  |  | 2008   
|Senior unsecured notes                           |  |       | 248,848    | (a)      |  |          | 10.50% |  |  | 2009   
|Collateralized mortgage-backed securities (CMBS) |  |       | 309,035    |          |  |          | 7.76%  |  |  | 2009   
|Convertible subordinated notes                   |  |       | 170,000    |          |  |          | 9.50%  |  |  | 2010   
|Senior unsecured notes                           |  |       | 396,437    | (a)      |  |          | 9.125% |  |  | 2011   
|Mortgage and other debt                          |  |       | 27,011     |          |  |          | 8.89%  |  |  | Various
|CMBS                                             |  |       | 100,765    |          |  |          | 6.88%  |  |  | 2013   
|                                                 |  |       |            |          |  |          |        |  |  |        
|                                                 |  | $     | 1,638,028  |          |  |          |        |  |  |        
|                                                 |  |       |            |          |  |          |        |  |  |        
|Average maturity                                 |  |       | 5.79 years |          |  |          |        |  |  |        
|Average interest rate                            |  |       | 8.9%       |          |  |          |        |  |  |        



---



|    |                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | As of March 8, 2004, we had redeemed
    $13.5 million of 8.75% senior subordinated notes,
    $16.5 million of 9% senior unsecured notes due 2008, $30.8
    million of 9.125% senior unsecured notes due 2011 and
    $14.2 million of 10.5% senior unsecured notes due 2009.

We are subject to the risks normally associated
with significant amounts of debt, including the risks that:



| |   |                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our vulnerability to downturns in our business,
    such as the one we are currently experiencing, is increased,
    requiring us to reduce our capital expenditures as described
    further in  Operating Risks and restrict
    our ability to make acquisitions;
|
| |  | our cash flow from operations may be insufficient
    to make required payments of principal and interest;                                                                                                                                                             
|
| |  | we may be unable to refinance existing
    indebtedness, including secured indebtedness;                                                                                                                                                                               
|
| |  | the terms of any refinancing may not be as
    favorable as the terms of existing indebtedness; and                                                                                                                                                                    
|
| |  | we currently are, and may in the future be,
    unable to pay dividends on our common stock (see Risk
    Factors  Risks Relating to Common Stock).                                                                                                                 

We may be required to refinance our
indebtedness, and the failure to refinance our indebtedness
would have an adverse effect on us.

As of December 31, 2003, we had
approximately $1.6 billion of total debt outstanding with
an average maturity of 5.79 years. In addition, we may
borrow up to $50 million under our new revolving senior
secured credit facility that matures in 2006. If we do not have
sufficient funds to repay our indebtedness at maturity, we may
have to refinance the indebtedness through additional debt
financing. This additional financing might include private or
public offerings of debt securities and additional non-recourse
or other collateralized indebtedness. If we are unable to
refinance our indebtedness on acceptable terms, we might be
forced to sell hotels or other assets on disadvantageous terms.
This could potentially result in losses and impairments and
adverse effects on cash flow from operating activities. If we
are unable to make required payments of principal and interest
on our indebtedness, our outstanding indebtedness could be
accelerated and our properties could

11



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##### 



be foreclosed upon by the secured lenders with a
consequent loss of income and asset value. Accordingly, the
inability to refinance our indebtedness could adversely impact
our ability to make payments on the notes.


Some of our debt instruments have restrictive
covenants that could affect our financial condition.

All of our senior unsecured notes and senior
subordinated notes, but none of our convertible subordinated
notes, have either been co-issued or guaranteed by MeriStar
Hospitality Operating Partnership, L.P., our principal operating
subsidiary, and have also been guaranteed by most of our other
subsidiaries. The CMBS and mortgage debt and our new senior
secured credit facility have been secured by specific properties.

The indentures relating to some of our
outstanding debt contain limitations on our ability to effect
mergers and change of control events, as well as other
limitations, including limitations on:



| |   |                                                                    
| | - | -------------------------------------------------------------------
| |  | incurring additional indebtedness and issuing
    capital stock;   
|
| |  | declaring and paying dividends;                                    
|
| |  | selling our assets and using the proceeds from
    sales of assets;
|
| |  | conducting transactions with our affiliates; and                   
|
| |  | incurring liens.                                                   

We currently have no outstanding borrowings under
our new senior credit facility. Our ability to borrow under this
facility is subject to financial covenants, including leverage,
fixed charge coverage and interest coverage ratios and minimum
net worth requirements. Our compliance with these covenants in
future periods will depend substantially upon the financial
results of our hotels. The agreement governing our new senior
credit facility limits our ability to effect mergers, asset
sales and change of control events and limits the payments of
dividends other than those required for us to maintain our
status as a REIT, and our ability to incur additional secured
and total indebtedness. The agreement also contains customary
events of default, including the loss of our REIT status and a
cross-default provision, which would be triggered by a
non-payment, a default or an acceleration of, $50 million or
more of non-recourse indebtedness secured by our assets or $5
million or more of any other indebtedness.

The indentures relating to our senior unsecured
notes and our senior subordinated notes significantly restrict
our ability to incur indebtedness and pay dividends, and our
ability to acquire or prepay certain of our debt if our fixed
charge coverage ratio (as defined in these indentures) is less
than 2 to 1 for our most recently ended four fiscal
quarters. This ratio has been less than 2 to 1 since
March 2002.

Debt instruments we issue in future offerings
will likely contain similar restrictive covenants. These
restrictions could limit our ability to finance our future
operations or capital needs, make acquisitions or pursue
available business opportunities. In addition, they may require
us to maintain specific financial ratios and to satisfy various
financial covenants. We may be required to take action to reduce
our debt or act in a manner contrary to our business objectives
to meet these ratios and satisfy these covenants.

One of our secured facilities is secured by a
portfolio of 19 hotels and contains standard provisions that
require the mortgage servicer to maintain in escrow cash
balances for certain items such as property taxes and funding of
capital expenditures. In addition, the facility contains a
provision that requires our mortgage servicer to retain in
escrow the excess cash from the encumbered hotels after payment
of debt service if certain financial tests relating to the
operation of the hotels are not met. 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 (approximately $18.4 million as
of December 31, 2003). Although the servicer will continue
to retain in escrow any excess cash from the encumbered hotels,
it 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.

12



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##### 



We may be able to incur substantially more
debt, which would increase the risks associated with our
substantial leverage.

Although the terms of our debt instruments
restrict our ability to incur additional indebtedness, neither
our organizational documents nor those debt instruments prohibit
the incurrence of additional indebtedness. If we add new debt to
our current debt, including CMBS or other debt that we may
issue, the related risks we now face could intensify and
increase the risk of default on our indebtedness.

Rising interest rates could have an adverse
effect on our cash flow and interest expense.

We may consider opportunities to convert fixed
rate debt to floating rate debt in order to take advantage of
current low rates for floating rate debt. In the future we may
also incur indebtedness, including that under our new senior
secured credit facility, bearing interest at a variable rate, or
we may be required to refinance our existing indebtedness at
higher interest rates. Accordingly, increases in interest rates
could increase our interest expense and adversely affect our
cash flow, reducing the amounts available to make payments on
our indebtedness, make acquisitions or pursue other business
opportunities.

Operating Risks

Acts of terrorism, the threat of terrorism,
the possibility of conflicts with other countries in addition to
Iraq, and the ongoing war against terrorism have had and will
continue to have a negative effect on our industry and our
results of operations.

The terrorist attacks of September 11, 2001
and the threat of additional similar events and the weak economy
have had a negative effect on our hotel operations from the
third quarter of 2001 to the present, causing lower than
expected performance in an already slowing economy. The events
of September 11 have caused a significant decrease in our
hotels occupancy and average daily rate due to disruptions
in business and leisure travel patterns, and concerns about
travel safety. Major metropolitan area and airport hotels have
been adversely affected by concerns about air travel safety and
a significant overall decrease in the amount of air travel.

The September 11 terrorist attacks were
unprecedented in scope, and in their immediate, dramatic impact
on travel patterns. We have not previously experienced such
events, and it is currently not possible to accurately predict
if and when travel patterns or preferences will be restored to
pre-September 11 levels. While we have had improvements in
our operating levels from the period immediately following the
attacks, we believe the uncertainty associated with subsequent
incidents, the possibility of conflicts with other countries in
addition to Iraq, threats and the possibility of future attacks
will continue to hamper business and leisure travel patterns.

The economic slowdown, the threat of further
terrorist attacks, the conflict in Iraq and the uncertainties of
conflicts with other countries have materially affected, and may
continue to adversely affect, our revenue per available room, or
RevPAR, performance and operating cash flows, and if they worsen
or continue, these effects could become materially more
adverse.

We have experienced the following declines in
RevPAR (calculated on a comparable hotel basis period over
period):



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | 7.9% decline during the full year 2002, as
    compared to the full year 2001; and
|
| |  | 3.6% decline during the full year 2003, as
    compared to the full year 2002.    

We used cash in our operations of
$17.1 million during the year ended December 31, 2003,
compared to generating cash from operations of
$57.9 million in 2002. We generated $147.2 million of
cash from operations during 2001. The decreases from 2001 are
due to the economic slowdown that began in 2001, as well as the
effects on travel of the terrorist attacks of September 11,
2001, the continuing threat of further terrorist attacks and the
uncertainty of international conflicts. The effects of the
attacks, the condition of the economy and continued uncertainty
with respect to the international geopolitical situation have
resulted in levels of business

13



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##### 



and leisure travel that remain significantly
lower than the levels we experienced prior to September 2001. If
the economy takes longer to recover than expected or the economy
begins to worsen again, further declines in occupancy could also
lead to declines in average daily room rates and could have a
further material adverse effect on our financial results.


In response to the decline in our cash flows
since September 11, 2001, we significantly curtailed our
capital expenditure program, which may have adversely affected
the competitive position of our hotels in their markets. At the
end of 2003, we initiated an aggressive capital expenditure
reinvestment program for our core assets. We feel this program
is necessary to maintain and improve asset values and to
properly position our hotels for any industry recovery. We
expect to spend approximately $225 million pursuant to our
renovation program over the next two years, with approximately
$125 million to be spent in 2004. However, if current
economic conditions worsen, we may again have to curtail our
capital expenditures. There is no guarantee that our capital
expenditure reinvestment program will lead to improved results.
We have also sold non-core assets to generate cash. Since
January 1, 2003, we have sold 24 hotels for aggregate gross
proceeds of approximately $190.8 million in cash, and
currently plan to dispose of, in the near future, a total of 10
additional non-core assets, from which we expect to generate
gross proceeds of approximately $75 million to
$85 million.

If our revenues are negatively affected by one
or more particular risks, our operating margins could
suffer.

We report operating revenues and expenses from
our hotels; therefore, we have sensitivity to changes in
operating revenues and are subject to the risk of fluctuating
hotel operating margins at those hotels. Hotel operating
expenses include, but are not limited to, wage and benefit
costs, supplies, repair and maintenance expenses, utilities,
insurance and other operating expenses. These operating expenses
are more difficult to predict and control than percentage lease
revenue, resulting in unpredictability in our operating margins.
Also, due to the level of fixed costs required to operate
full-service hotels, we generally cannot reduce significant
expenditures necessary for the operation of hotels when
circumstances cause a reduction in revenue.

Various factors could adversely affect our
operating margins, which are subject to all of the operating
risks inherent in the lodging industry. These risks include the
following:



| |   |                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | dependence on business and commercial travelers
    and tourism, which have been affected by the events of
    September 11, 2001 and threats of further terrorism, or
    other outbreaks of hostilities, and may otherwise fluctuate and
    be seasonal;
|
| |  | other factors that may influence travel,
    including health and safety concerns;                                                                                                                                                                         
|
| |  | changes in general and local economic conditions;                                                                                                                                                                                                          
|
| |  | cyclical overbuilding in the lodging industry;                                                                                                                                                                                                             
|
| |  | varying levels of demand for rooms and related
    services;                                                                                                                                                                                               
|
| |  | competition from other hotels, motels and
    recreational properties, some of which may be owned or operated
    by companies having greater marketing and financial resources
    than we do;                                                            
|
| |  | decreases in air travel;                                                                                                                                                                                                                                   
|
| |  | fluctuations in operating costs;                                                                                                                                                                                                                           
|
| |  | the recurring costs of necessary renovations,
    refurbishments and improvements of hotel properties;                                                                                                                                                     
|
| |  | changes in governmental regulations that
    influence or determine wages, prices and construction and
    maintenance costs; and                                                                                                                          
|
| |  | changes in interest rates and the availability of
    credit.                                                                                                                                                                                              

In addition, demographic, geographic or other
changes in one or more of the markets of our hotels could affect
the convenience or desirability of the sites of some hotels,
which would in turn affect their operations.

14



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The insurance market has been adversely
affected.

Since the September 11, 2001 terrorist
attacks, the insurance and reinsurance industries have been
dramatically affected. Companies in all industry segments
experienced increases in premiums and reductions in coverage
upon renewal of their insurance policies immediately following
the terrorist attacks. Some entities experienced an inability to
obtain insurance. If we are unable to maintain insurance that
meets the requirements of our lenders and franchisors, and if we
are unable to amend or waive those requirements, it could have a
material adverse effect on our business. Our total annual
property and casualty insurance premiums are approximately
$9.3 million under our current policies.

We have significant operational relationships
with Interstate Hotels, and Interstate Hotels operating or
financial difficulties could adversely affect our hotels
operations or our financial position.

Interstate Hotels currently manages all of our
hotels. As a result, we depend heavily on Interstate
Hotels ability to provide efficient, effective management
services to our hotels. Although we monitor the performance of
our properties on an ongoing basis, Interstate Hotels is
responsible for the day-to-day management of our properties.
According to Interstate Hotels public statements,
Interstate Hotels has incurred a net loss of $4.5 million
for the year ended December 31, 2003, and on a pro forma
basis giving effect to the merger that formed Interstate Hotels,
net losses of $9.7 million and $20.5 million for the years
ended December 31, 2002 and 2001, respectively. If
Interstate Hotels were unable to continue in business as a hotel
operator, we would have to find a new manager for our hotels.
This transition could significantly disrupt the operations of
our hotels and lead to lower operating results from our
properties.

Interstate Hotels is the managing general partner
in MeriStar Investment Partners, LP, which we refer to as MIP, a
joint venture established to acquire upscale, full-service
hotels. We have a 16% preferred partnership interest in MIP,
equal to an initial investment of $40 million. We also have
a receivable for $19.6 million in cumulative preferred
returns outstanding as of December 31, 2003 which MIP has been
unable to remit to us because of limited free cash flow and the
effect of restrictive covenants in certain of its debt
instruments. If Interstate Hotels is unable to continue as the
managing general partner of MIP, a liquidation of MIP could
occur. This liquidation could result in an additional impairment
of our investment. See Business  Recent
Developments  Impairment Charge Relating to MeriStar
Investment Partners, L.P.

We invest in a single industry.

Our current strategy is to acquire interests only
in hospitality and lodging. As a result, we are subject to the
risks inherent in investing in a single industry. The effects on
cash available for distribution resulting from a downturn in the
hotel industry may be more pronounced than if we had diversified
our investments.

We have a high concentration of hotels in the
upscale, full-service segment, which may increase our
susceptibility to an economic downturn.

As of December 31, 2003, 86% of our hotels
were in the upscale, full-service segment. This hotel segment
generally demands higher room rates. In an economic downturn,
hotels in this segment may be more susceptible to decreases in
revenues, as compared to hotels in other segments that have
lower room rates. This characteristic results from hotels in
this segment generally targeting business and high-end leisure
travelers. In periods of economic difficulties or political
instability, business and leisure travelers may seek to reduce
travel costs by limiting trips or seeking to reduce costs on
their trips. This characteristic has had, and could continue to
have, a material adverse effect on our revenues and results of
operations.

The lodging business is seasonal.

Generally, hotel revenues are greater in the
second and third calendar quarters than in the first and fourth
calendar quarters. This may not be true, however, for hotels in
major tourist destinations. Revenues for hotels in tourist areas
generally are substantially greater during tourist season than
other times of the year. Seasonal variations in revenue at our
hotels will cause quarterly fluctuations in our revenues. Events
beyond our control,

15



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such as extreme weather conditions, economic
factors and other considerations affecting travel, may also
adversely affect our earnings.


We may be adversely affected by the
requirements contained in our franchise and licensing
agreements.

As of December 31, 2003, approximately 89%
of our hotels were operated pursuant to existing franchise or
licensing agreements with nationally recognized hotel brands.
The franchise agreements generally contain specific standards
for, and restrictions and limitations on, the operation and
maintenance of a hotel in order to maintain uniformity within
the franchisor system. Those limitations may conflict with our
philosophy, shared with Interstate Hotels, of creating specific
business plans tailored to each hotel and to each market.
Standards are often subject to change over time, in some cases
at the discretion of the franchisor, and may restrict a
franchisees ability to make improvements or modifications
to a hotel without the consent of the franchisor. In addition,
compliance with standards could require us to incur significant
expenses or capital expenditures. Action or inaction on our part
or by our third-party operator could result in a breach of
standards or other terms and conditions of the franchise
agreements, and could result in the loss or cancellation of a
franchise license. Loss of franchise licenses without
replacement would likely have an adverse effect on our hotel
revenues.

In connection with terminating or changing the
franchise affiliation of a currently-owned hotel or a
subsequently-acquired hotel, we may be required to incur
significant expenses or capital expenditures. Moreover, the loss
of a franchise license could have a material adverse effect upon
the operations or the underlying value of the hotel covered by
the franchise due to the loss of associated name recognition,
marketing support and centralized reservation systems provided
by the franchisor. The franchise agreements covering the hotels
expire or terminate, without specified renewal rights, at
various times and have differing remaining terms. As a condition
to renewal, the franchise agreements frequently contemplate a
renewal application process, which may require substantial
capital improvements to be made to the hotel. We frequently
engage in discussions with franchisors regarding both necessary
capital as well as service improvements as a condition of
maintaining our franchise licenses. Generally, the resolution of
these issues requires us to commit to achieve or maintain
specified improvement milestones over time, which often require
additional capital expenditures. Unexpected capital expenditures
resulting from these discussions could adversely affect our
results of operations and our ability to make payments on our
indebtedness.

The lodging industry is highly
competitive.

We have no single competitor or small number of
competitors that are considered to be dominant in the industry.
We operate in areas that contain numerous competitors, some of
which may have substantially greater resources than us.
Competition in the lodging industry is based generally on
location, availability, room rates or accommodations, price,
range and quality of services and guest amenities offered. New
or existing competitors could significantly lower rates, offer
greater conveniences, services or amenities; or significantly
expand, improve or introduce new facilities in markets in which
we compete. Customers may use the Internet to make bookings for
some of our brands. However, the Internet sales channel, which
historically has been a discount sales channel, could be used to
wage a price war in a particular market. All of these factors
could adversely affect our operations and the number of suitable
business opportunities.

We rely on the knowledge and experience of
some key personnel, and the loss of these personnel may have a
material adverse effect on our operations.

We place substantial reliance on the lodging
industry knowledge and experience and the continued services of
our senior management, led by Paul W. Whetsell. While we believe
that, if necessary, we could find replacements for these key
personnel, the loss of their services could have a material
adverse effect on our operations.

16



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##### 



Costs of compliance with environmental laws
could adversely affect our operating results.

See Governmental Regulation 
Environmental Laws for a discussion of the risks related
to environmental compliance.

Aspects of our operations are subject to
government regulation, and changes in that regulation may have
significant effects on our business.

A number of states regulate the licensing of
hotels and restaurants, including liquor license grants, by
requiring registration, disclosure statements and compliance
with specific standards of conduct. Interstate Hotels believes
our hotels are substantially in compliance with these
requirements or, in the case of liquor licenses that they have
or will promptly obtain the appropriate licenses. Compliance
with, or changes in, these laws could reduce the revenue and
profitability of our hotels and could otherwise adversely affect
our revenues, results of operations and financial condition.

Under the Americans with Disabilities Act, or
ADA, all public accommodations must meet federal requirements
related to access and use by disabled persons. These
requirements became effective in 1992. Although significant
amounts have been and continue to be invested in ADA required
upgrades to our hotels, a determination that our hotels are not
in compliance with the ADA could result in a judicial order
requiring compliance, imposition of fines or an award of damages
to private litigants.

Corporate Structure Risks

We have some potential conflicts of interest
with Interstate Hotels.

Our Chief Executive Officer and Chairman of the
Board of Directors, Paul W. Whetsell, is also Chairman of the
Board of Directors of Interstate Hotels. Our relationship with
Interstate Hotels is governed by an intercompany agreement and
management agreements for each managed hotel. The intercompany
agreement restricts each party from taking advantage of certain
business opportunities without first presenting those
opportunities to the other party. We may have conflicting views
with Interstate Hotels on the operation and management of our
hotels and with respect to lease arrangements, acquisitions and
sales. Inherent potential conflicts of interest will be present
in all of the numerous transactions among Interstate Hotels and
us.

The terms of the intercompany agreement and our
management agreements with Interstate Hotels were not negotiated
on an arms-length basis. Furthermore, because of the
independent trading of the two companies, stockholders in each
company may develop divergent interests which could lead to
conflicts of interest. The divergence of interests could also
reduce the anticipated benefits of our agreements with
Interstate Hotels.

We have restrictions on our business and on
our future opportunities that could affect our
business.

We are a party to an intercompany agreement with
Interstate Hotels. The intercompany agreement generally grants
Interstate Hotels the right of first refusal with respect to any
management opportunity at any of our properties we do not elect
to have managed by a hotel brand owner. We must make such an
opportunity available to Interstate Hotels only if we determine
that:



| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we are required to enter into a management
    agreement with an unaffiliated third party with respect to the
    property in order to maintain our status as a REIT;
|
| |  | Interstate Hotels is qualified to be the manager
    of that property;                                                                                               
|
| |  | we decide not to have the property operated by
    the owner of a hospitality trade name under that trade name;                                                      

17



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| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the property is unencumbered by a management
    agreement, or if a management agreement exists, it can be freely
    terminated or terminated by the payment of a fee, which
    Interstate Hotels agrees to pay; and
|
| |  | the property is not subject to a leasehold estate
    held by an unaffiliated third party.                                                                                                                            

Because of the provisions of the intercompany
agreement, we are restricted in the nature of our business and
the opportunities we may pursue. Each of our Board of Directors
and the Board of Directors of Interstate Hotels has formed a
special committee of independent directors to explore further
changes to the relationship between our company and Interstate
Hotels, including possible changes to the terms, or complete
elimination, of the intercompany agreement. Discussions also
include possible changes to the provisions of the various
management agreements relating to our hotels, including the
method of calculation for the incentive fee and termination
fees. See Business  Recent
Developments  Relationship with Interstate
Hotels.

We may have conflicts relating to the sale of
hotels subject to management agreements.

Our management agreements with Interstate Hotels
may require us to pay a termination fee to Interstate Hotels if
we elect to sell a hotel or if we elect not to restore a hotel
after a casualty. We must pay this fee if we do not replace the
hotel with another hotel subject to a management agreement with
a fair market value equal to the fair market value of Interstate
Hotels remaining management fee due under the management
agreement to be terminated. Where applicable, the termination
fee is equal to the present value of the remaining payments
(discounted using a 10% rate) of the existing term under the
agreement, based on the operating results of the hotel for the
12 months preceding termination. Our decision to sell a
hotel may, therefore, have significantly different consequences
for Interstate Hotels and us. If 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. Therefore, the requirement to
pay a termination fee may make a sale transaction less desirable
economically.

We lack control over management and operations
of our hotels.

We depend on the ability of Interstate Hotels to
operate and manage our hotels. In order for us to maintain our
REIT status, we cannot operate our hotels. As a result, we are
unable to directly implement strategic business decisions for
the operation and marketing of our hotels, such as decisions
with respect to the setting of room rates, food and beverage
operations and similar matters.

Our relationship with Interstate Hotels could
limit our acquisition opportunities in the future.

Our relationship with Interstate Hotels could
negatively impact our ability to acquire additional hotels
because hotel management companies, franchisees and others who
would have approached us with acquisition opportunities in hopes
of establishing lessee or management relationships may not do so
believing that we may rely primarily on Interstate Hotels to
manage the acquired properties or that Interstate Hotels might
have a right of first refusal to manage some or all of the
acquired properties under the terms of the intercompany
agreement. These persons may instead provide acquisition
opportunities to companies free to choose their managers or to
hotel management companies who choose to own and manage the
properties following the sale. This could limit our acquisition
opportunities in the future.

18



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Federal Income Tax Risks

Requirements imposed on us relating to our
REIT status could cause us to operate in a manner that might be
disadvantageous to noteholders.

We have operated and intend to continue to
operate in a manner designed to permit us to qualify as a real
estate investment trust, or REIT, for federal income tax
purposes.

To obtain the favorable tax treatment accorded to
REITs under the Internal Revenue Code, we normally will be
required each year to distribute to our stockholders at least
90% of our real estate investment trust taxable income,
determined without regard to the deduction for dividends paid
and by excluding net capital gain. We will be subject to income
tax on undistributed real estate investment trust taxable income
and net capital gain, and to a 4% nondeductible excise tax on
the amount, if any, by which distributions we pay with respect
to any calendar year are less than the sum of:



| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | 85% of our ordinary income for the calendar year;                                                                     
|
| |  | 95% of our capital gain net income for that year,
    unless we elect to retain and pay income tax on those gains; and
|
| |  | 100% of our undistributed income from prior years.                                                                    

We intend to make distributions to our
stockholders to comply with the 90% distribution requirements
described above and generally to avoid federal income taxes and
the nondeductible 4% excise tax. Our income will consist
primarily of our share of income of our operating partnership
and our cash flow will consist primarily of our share of
distributions from the operating partnership. It is possible
that differences in timing between the receipt of income and the
payment of expenses in arriving at our taxable income and the
effect of nondeductible capital expenditures, the creation of
reserves or required debt amortization payments could in the
future require us to borrow funds on a short-or long-term basis
to enable us to continue to qualify as a REIT and avoid federal
income taxes and the 4% nondeductible excise tax. In these
circumstances, we might need to borrow funds in order to avoid
adverse tax consequences even if we believe that the then
prevailing market conditions generally are not favorable for
those borrowings or that those borrowings are not advisable in
the absence of these tax considerations.

We determine our operating partnerships
distributions. The amount of these distributions is dependent on
a number of factors, including:



| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | the amount of cash available for distribution;                                                  
|
| |  | our financial condition;                                                                        
|
| |  | our decision to reinvest funds rather than to
    distribute the funds;                         
|
| |  | restrictions in our debt agreements;                                                            
|
| |  | our capital expenditure requirements;                                                           
|
| |  | the annual distribution requirements under the
    Internal Revenue Code as described above; and
|
| |  | other factors as we deem relevant.                                                              

Although we intend to satisfy the annual
distribution requirement to avoid corporate income taxation on
the earnings that we distribute, we may not be able to do so.

If we fail to qualify as a REIT, we will be
subject to federal income tax at corporate rates which could
adversely affect our operations and our ability to satisfy our
obligations.

Qualification as a REIT involves the application
of highly technical and complex provisions of the Internal
Revenue Code for which there are only limited judicial and
administrative interpretations. The determination of various
factual matters and circumstances not entirely within our
control may affect our ability to continue to qualify as a REIT.
The complexity of these provisions and of the applicable income
tax

19



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##### 



regulations that have been promulgated under the
Internal Revenue Code is greater in the case of a REIT that
holds its assets through a partnership, such as we do. Moreover,
legislation, new regulations, administrative interpretations or
court decisions might change the tax laws with respect to
qualification as a REIT or the federal income tax consequences
of that qualification.


If we fail to qualify as a REIT in any taxable
year, we will not be allowed a deduction for distributions to
our stockholders in computing our taxable income and we will be
subject to federal income tax, including any applicable
alternative minimum tax, on our taxable income at the applicable
corporate rate. In addition, unless we were entitled to relief
under statutory provisions, we would be disqualified from
treatment as a REIT for the four taxable years following the
year during which qualification is lost. This disqualification
might reduce the funds available to us to satisfy our
obligations or make distributions to our stockholders because of
the additional tax liability for the year or years involved.

We would cease to qualify as a REIT if the
Internal Revenue Service were successfully to determine that our
operating partnership should properly be treated as a
corporation for federal income tax purposes and we also might
cease to qualify as a REIT if the Internal Revenue Service were
successfully to determine that any of the other partnerships or
the joint ventures or limited liability companies in which we or
the operating partnership holds an interest is properly treated
as a corporation for federal income tax purposes.

The imposition of a corporate tax on any of these
entities, and any accompanying loss of our real estate
investment trust status, could substantially reduce the amount
of cash available for payment on our indebtedness.

If we were to fail to qualify as a REIT, we no
longer would be subject to the distribution requirements of the
Internal Revenue Code. To the extent that distributions to
stockholders would have been made in anticipation of our
qualifying as a REIT, we might be required to borrow funds or to
liquidate assets to pay the applicable corporate income tax.
Although we currently operate in a manner designed to qualify as
a REIT, it is possible that future economic, market, legal, tax
or other considerations may cause us to decide to revoke the
REIT election.

Risks Relating to Common Stock

Our ability to pay dividends on our common
stock is limited, and we expect this prohibition to continue for
the foreseeable future. Furthermore, we are also required to pay
dividends in order to maintain REIT status, and the amount of
those dividends may exceed our available cash.

Under the indentures governing our senior
unsecured notes, we are currently prohibited from paying any
dividends other than those that are necessary to maintain our
status as a REIT, and we expect this prohibition to continue for
the foreseeable future. The restricted payments covenant in the
indenture governing our outstanding senior subordinated notes
does not permit us to pay any dividends, including those
required for us to maintain our REIT status, until we meet a 2.0
to 1.0 fixed charge coverage test. We are currently unable to
meet that test and are likely to be unable to meet that test for
the foreseeable future. Also, our new senior credit facility
contains limitations on our ability to declare and pay
dividends, although it will permit us to pay the dividends we
are required to pay to maintain our REIT status. In order to
maintain our qualification as a REIT, we normally are required
to make annual distributions to our stockholders of at least 90%
of our taxable income, determined without regard to the
deduction for dividends paid and by excluding net capital gains.
Under certain circumstances, we may be required to make
distributions in excess of cash available for distribution in
order to meet these distribution requirements. In that event, we
would seek to borrow funds, or sell assets for cash, to the
extent necessary to obtain cash sufficient to make the
distributions required to retain our qualification as a REIT for
federal income tax purposes.

Any future distributions will be at the
discretion of our Board of Directors and will be determined by
factors including our operating results, capital expenditure
requirements, the economic outlook, the distribution
requirements for REITs under the Internal Revenue Code and such
other factors as our Board of Directors deems relevant.
Therefore, we can give no assurance that we will make any such
distributions in the future.

20



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ITEM
2.          PROPERTIES

Our principal executive offices are located in
Arlington, Virginia. All of our hotels are currently leased to
our taxable subsidiaries and are owned directly by our operating
partnership or its subsidiaries. No one hotel property is
material to our operations. A typical hotel has meeting and
banquet facilities, food and beverage facilities, and guest
rooms and suites. Our hotels generally feature comfortable,
modern guest rooms, extensive meeting and convention facilities
and full-service restaurant and catering facilities. Our hotels
are designed to attract meeting, convention, and banquet/
reception functions from groups and associations, upscale
business and vacation travelers, and the local community.

The following table sets forth certain
information with respect to our 92 hotels owned as of
December 31, 2003. We have sold nine hotels with
2,197 rooms since January 1, 2004. Ten of the
remaining 83 hotels are currently planned for disposition.

|            |                                              |          |                  |       |  |     | 
|----------- | -------------------------------------------- | -------- | ---------------- | ----- |  | --- | 
|            |                                              |          |                  | Guest
|Hotel       |                                              | Location |                  | Rooms
|            |                                              |          |                  |      
|Arizona     |                                              |          |                  |       |  |    
|            | Crowne Plaza Phoenix(4)                      |          | Phoenix          |       |  | 250 | 
|            | Embassy Suites Tucson                        |          | Tucson           |       |  | 204 | 
|California  |                                              |          |                  |       |  |    
|            | Courtyard by Marriott Century City           |          | Century City     |       |  | 134 | 
|            | Courtyard by Marriott Marina del Ray         |          | Marina Del Rey   |       |  | 276 | 
|            | Crowne Plaza San Jose                        |          | San Jose         |       |  | 239 | 
|            | Doral Palm Springs(1)                        |          | Palm Springs     |       |  | 285 | 
|            | Hilton Irvine                                |          | Irvine           |       |  | 289 | 
|            | Hilton Monterey                              |          | Monterey         |       |  | 204 | 
|            | Hilton Sacramento                            |          | Sacramento       |       |  | 331 | 
|            | Marina Hotel San Pedro(2)                    |          | San Pedro        |       |  | 226 | 
|            | LA Marriott Downtown                         |          | Los Angeles      |       |  | 469 | 
|            | Sheraton Fishermans Wharf                   |          | San Francisco    |       |  | 525 | 
|            | Wyndham San Jose Hotel(2)                    |          | San Jose         |       |  | 355 | 
|Colorado    |                                              |          |                  |       |  |    
|            | Embassy Suites Denver                        |          | Englewood        |       |  | 236 | 
|            | Holiday Inn Garden of the Gods               |          | Colorado Springs |       |  | 200 | 
|            | Sheraton Colorado Springs                    |          | Colorado Springs |       |  | 500 | 
|Connecticut |                                              |          |                  |       |  |    
|            | Hartford Hotel(2)(3)(4)                      |          | Hartford         |       |  | 388 | 
|            | Ramada Plaza Meriden(3)(4)                   |          | Meriden          |       |  | 150 | 
|            | Ramada Plaza Shelton(4)                      |          | Shelton          |       |  | 155 | 
|            | Doubletree Windsor Locks                     |          | Windsor Locks    |       |  | 200 | 
|Florida     |                                              |          |                  |       |  |    
|            | Best Western Sanibel Island Resort           |          | Sanibel Island   |       |  | 46  | 
|            | Holiday Inn Walt Disney World
    Village(2) |          | Lake Buena Vista |       |  | 314 | 
|            | Doubletree Hotel Westshore                   |          | Tampa            |       |  | 496 | 
|            | Hilton Clearwater(2)                         |          | Clearwater       |       |  | 426 | 
|            | Hilton Hotel Cocoa Beach                     |          | Cocoa Beach      |       |  | 296 | 
|            | Holiday Inn Fort Lauderdale Beach            |          | Ft. Lauderdale   |       |  | 240 | 
|            | Howard Johnson Resort Key Largo              |          | Key Largo        |       |  | 100 | 

21



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|           |                                                  |          |                   |       |  |     | 
|---------- | ------------------------------------------------ | -------- | ----------------- | ----- |  | --- | 
|           |                                                  |          |                   | Guest
|Hotel      |                                                  | Location |                   | Rooms
|           |                                                  |          |                   |      
|           | Radisson Twin Towers of Orlando                  |          | Orlando           |       |  | 742 | 
|           | Safety Harbor Resort and Spa                     |          | Safety Harbor     |       |  | 193 | 
|           | Sanibel Inn                                      |          | Sanibel Island    |       |  | 96  | 
|           | Seaside Inn                                      |          | Sanibel Island    |       |  | 32  | 
|           | Sheraton Safari Lake Buena Vista                 |          | Lake Buena Vista  |       |  | 489 | 
|           | Song of the Sea                                  |          | Sanibel Island    |       |  | 30  | 
|           | South Seas Plantation Resort & Yacht
    Harbor  |          | Captiva           |       |  | 579 | 
|           | Sundial Beach Resort                             |          | Sanibel Island    |       |  | 243 | 
|           | Westin Resort Key Largo(1)                       |          | Key Largo         |       |  | 200 | 
|Georgia    |                                                  |          |                   |       |  |    
|           | Doubletree Atlanta                               |          | Atlanta           |       |  | 155 | 
|           | Westin Atlanta                                   |          | Atlanta           |       |  | 495 | 
|           | Wyndham Marietta                                 |          | Marietta          |       |  | 218 | 
|Illinois   |                                                  |          |                   |       |  |    
|           | Holiday Inn Chicago O-Hare International Airport |          | Rosemont          |       |  | 507 | 
|           | Radisson Chicago                                 |          | Chicago           |       |  | 350 | 
|           | Park Plaza Arlington Heights                     |          | Arlington Heights |       |  | 247 | 
|Indiana    |                                                  |          |                   |       |  |    
|           | Doubletree Indianapolis                          |          | Indianapolis      |       |  | 137 | 
|Kentucky   |                                                  |          |                   |       |  |    
|           | Hilton Seelbach                                  |          | Louisville        |       |  | 321 | 
|           | Radisson Lexington                               |          | Lexington         |       |  | 367 | 
|Louisiana  |                                                  |          |                   |       |  |    
|           | Hilton Lafayette                                 |          | Lafayette         |       |  | 327 | 
|           | Holiday Inn Select New Orleans                   |          | Kenner            |       |  | 303 | 
|           | Hotel Maison de Ville(2)                         |          | New Orleans       |       |  | 23  | 
|Maryland   |                                                  |          |                   |       |  |    
|           | Radisson Annapolis                               |          | Annapolis         |       |  | 219 | 
|           | Radisson Cross Keys                              |          | Baltimore         |       |  | 148 | 
|           | Sheraton Columbia                                |          | Columbia          |       |  | 287 | 
|Michigan   |                                                  |          |                   |       |  |    
|           | Hilton Detroit                                   |          | Detroit           |       |  | 151 | 
|           | Hilton Hotel Grand Rapids                        |          | Grand Rapids      |       |  | 224 | 
|New Jersey |                                                  |          |                   |       |  |    
|           | Courtyard by Marriott Secaucus(2)                |          | Secaucus          |       |  | 165 | 
|           | Doral Forrestal(2)                               |          | Princeton         |       |  | 290 | 
|           | Marriott Somerset                                |          | Somerset          |       |  | 440 | 
|           | Sheraton Crossroads Hotel Mahwah                 |          | Mahwah            |       |  | 225 | 
|           | Westin Governor Morris(1)(3)(4)                  |          | Morristown        |       |  | 199 | 
|New Mexico |                                                  |          |                   |       |  |    
|           | Doubletree Albuquerque                           |          | Albuquerque       |       |  | 295 | 
|           | Wyndham Albuquerque Airport Hotel(2)             |          | Albuquerque       |       |  | 276 | 

22



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##### 



|                 |                                          |          |                    |       |  |     | 
|---------------- | ---------------------------------------- | -------- | ------------------ | ----- |  | --- | 
|                 |                                          |          |                    | Guest
|Hotel            |                                          | Location |                    | Rooms
|                 |                                          |          |                    |      
|North Carolina   |                                          |          |                    |       |  |    
|                 | Courtyard by Marriott Durham             |          | Durham             |       |  | 146 | 
|                 | Hilton Hotel Durham                      |          | Durham             |       |  | 194 | 
|                 | Sheraton Charlotte Airport               |          | Charlotte          |       |  | 222 | 
|Ohio             |                                          |          |                    |       |  |    
|                 | Hilton Hotel Toledo(2)                   |          | Toledo             |       |  | 213 | 
|                 | Park Plaza Cleveland                     |          | Middleburg Heights |       |  | 237 | 
|Oklahoma         |                                          |          |                    |       |  |    
|                 | Westin Oklahoma City                     |          | Oklahoma City      |       |  | 395 | 
|Pennsylvania     |                                          |          |                    |       |  |    
|                 | Embassy Suites Philadelphia              |          | Philadelphia       |       |  | 288 | 
|                 | Holiday Inn Select Bucks County(3)(4)    |          | Trevose            |       |  | 215 | 
|                 | Sheraton Great Valley                    |          | Frazer             |       |  | 198 | 
|Texas            |                                          |          |                    |       |  |    
|                 | Doubletree Austin                        |          | Austin             |       |  | 350 | 
|                 | Hilton Arlington                         |          | Arlington          |       |  | 309 | 
|                 | Hilton Austin                            |          | Austin             |       |  | 320 | 
|                 | Hilton Houston Westchase                 |          | Houston            |       |  | 295 | 
|                 | Hilton Midland(4)                        |          | Midland            |       |  | 249 | 
|                 | Holiday Inn DFW West(3)(4)               |          | Bedford            |       |  | 243 | 
|                 | Holiday Inn Select DFW South             |          | Irving             |       |  | 409 | 
|                 | Marriott West Loop Houston               |          | Houston            |       |  | 302 | 
|                 | Renaissance Dallas Marriott              |          | Dallas             |       |  | 289 | 
|                 | Sheraton Dallas(3)(4)                    |          | Dallas             |       |  | 348 | 
|                 | Sheraton Houston                         |          | Houston            |       |  | 382 | 
|Utah             |                                          |          |                    |       |  |    
|                 | Hilton Salt Lake Airport                 |          | Salt Lake City     |       |  | 287 | 
|Virginia         |                                          |          |                    |       |  |    
|                 | Hilton Arlington                         |          | Arlington          |       |  | 209 | 
|                 | Hilton Crystal City                      |          | Arlington          |       |  | 386 | 
|                 | Holiday Inn Historic District Alexandria |          | Alexandria         |       |  | 178 | 
|                 | Radisson Old Town Alexandria             |          | Alexandria         |       |  | 253 | 
|Washington       |                                          |          |                    |       |  |    
|                 | Hilton Bellevue                          |          | Bellevue           |       |  | 179 | 
|Washington, D.C. |                                          |          |                    |       |  |    
|                 | Georgetown Inn                           |          | Washington, D.C.   |       |  | 96  | 
|                 | Hilton Embassy Row (2)                   |          | Washington, D.C.   |       |  | 193 | 
|                 | Latham Georgetown                        |          | Washington, D.C.   |       |  | 143 | 
|Wisconsin        |                                          |          |                    |       |  |    
|                 | Crowne Plaza Madison                     |          | Madison            |       |  | 226 | 
|                 | Holiday Inn Madison                      |          | Madison            |       |  | 194 | 

23



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##### 



|            |                        |          |                 |       |        |     | 
|----------- | ---------------------- | -------- | --------------- | ----- | ------ | --- | 
|            |                        |          |                 | Guest
|Hotel       |                        | Location |                 | Rooms
|            |                        |          |                 |      
|Canada      |                        |          |                 |       |        |    
|            | Sheraton Guildford (3) |          | Guildford, B.C. |       |        | 278 | 
|            |                        |          |                 |       |        |    
|Total Rooms |                        |          |                 |       | 24,733 |    
|            |                        |          |                 |       |        |    



---



|    |                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------
|(1) | We lease part of the land on which this hotel was
    built under one or more long-term lease agreements.
|   
|(2) | We lease the land on which this hotel was built
    under one or more long-term lease agreements.        
|   
|(3) | This property was classified as held for sale as
    of December 31, 2003.                               
|   
|(4) | We have sold these properties since
    January 1, 2004.                                                 

ITEM
3.          LEGAL
PROCEEDINGS

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 pending or
asserted will not have a material adverse effect on our
consolidated financial position, results of operations or
liquidity.

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

We did not submit any matters to a vote of
security holders during the fourth quarter of 2003.

24



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##### 



PART II



|        |                                                                                  
|------- | ---------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY AND
    RELATED STOCK- 
     HOLDER MATTERS

Our common stock is listed on the New York Stock
Exchange (NYSE) under the symbol MHX. The
following table sets forth on a per share basis the high and low
sale prices for our common stock for the periods indicated as
reported on the NYSE, and the cash dividends paid per share.

|                                          |                                       |                    |  |       |  |           |  |       |  |  |  |     |    
|----------------------------------------- | ------------------------------------- | ------------------ |  | ----- |  | --------- |  | ----- |  |  |  | --- | ---
|                                          |                                       |                    |  |      
|                                          |                                       | Market Price Range |  |      
|                                          |                                       |                    |  | Cash 
|                                          |                                       | High               |  | Low   |  | Dividends
|                                          |                                       |                    |  |       |  |          
|Fiscal Year Ending December 31,
    2004: |                                       |                    |  |       |  |           |  |       |  |  |  |    
|                                          | First Quarter (through March 8, 2004) |                    |  | 7.18  |  |           |  | 5.73  |  |  |  |     | (1)
|Fiscal Year Ended December 31,
    2003:  |                                       |                    |  |       |  |           |  |       |  |  |  |    
|                                          | Fourth Quarter                        |                    |  | 7.37  |  |           |  | 5.76  |  |  |  |     | (1)
|                                          | Third Quarter                         |                    |  | 7.81  |  |           |  | 5.14  |  |  |  |     | (1)
|                                          | Second Quarter                        |                    |  | 5.90  |  |           |  | 3.41  |  |  |  |     | (1)
|                                          | First Quarter                         |                    |  | 7.00  |  |           |  | 2.23  |  |  |  |     | (1)
|Fiscal Year Ended December 31,
    2002:  |                                       |                    |  |       |  |           |  |       |  |  |  |    
|                                          | Fourth Quarter                        |                    |  | 8.65  |  |           |  | 6.60  |  |  |  |     | (1)
|                                          | Third Quarter                         |                    |  | 15.40 |  |           |  | 8.25  |  |  |  | .01 |    
|                                          | Second Quarter                        |                    |  | 18.50 |  |           |  | 14.80 |  |  |  | .01 |    
|                                          | First Quarter                         |                    |  | 18.25 |  |           |  | 13.64 |  |  |  | .01 |    



---



|    |                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We suspended our quarterly dividend payment in the fourth
    quarter of 2002. At current operating levels, we do not
    anticipate paying a dividend in 2004.

The last reported sales price of our common stock
on the NYSE on March 8, 2004 was $6.81. As of March 8,
2004, there were 523 holders of record of our common stock.

Based on our current operating levels, we do not
expect to pay a dividend in 2004. Any future distributions will
be at the discretion of our Board of Directors and will be
determined by factors including our operating results, capital
expenditure requirements, the economic outlook, the distribution
requirements for REITs under the Internal Revenue Code and such
other factors as our Board of Directors deems relevant. Also,
our new $50 million credit facility and the indentures
related to our senior unsecured notes and senior subordinated
notes contain limitations on our ability to declare and pay
dividends. Therefore, we can give no assurance that we will make
any such distributions in the future.

To obtain the favorable tax treatment accorded to
REITs under the Internal Revenue code, we normally are required
each year to distribute to our stockholders at least 90% of our
REIT taxable income, determined without regard to the deduction
for dividends paid and by excluding net capital gains. Under
certain circumstances, we may be required to make distributions
in excess of available cash in order to meet these distribution
requirements. In that event, we would seek to borrow additional
funds or sell additional non-core assets, or both, to the extent
necessary to obtain cash sufficient to make the dividends
required to retain our qualification as a REIT. The restricted
payments covenant in the indenture governing our outstanding
senior subordinated notes does not permit us to pay any
dividends, including those required for us to maintain our REIT
status, until we meet a 2.0 to 1.0 fixed charge coverage test.
We are currently unable to meet that test and are likely to be
unable to meet that test for the foreseeable future.

25



---



##### 



Recent Sales of Unregistered
Securities

Our operating partnership granted the following
Profits-Only Operating Partnership Units, or POPs, to certain of
our employees pursuant to our POPs Plan, which is incorporated
by reference in Exhibit 10.9 of this Annual Report on
Form 10-K.

|               |  |              |         |                   |  |                |         |  |  |  |         | 
|-------------- |  | ------------ | ------- | ----------------- |  | -------------- | ------- |  |  |  | ------- | 
|               |  |              |         | Number of POPs    |  | Number of POPs
|               |  | Number of    |         | Outstanding as of |  | Vested as of  
|Date of Grant  |  | POPs Granted |         | March 8, 2004     |  | March 8, 2004 
|               |  |              |         |                   |  |               
|May 1, 2002    |  |              | 162,500 |                   |  |                | 162,500 |  |  |  | 99,306  | 
|April 1, 2002  |  |              | 25,000  |                   |  |                | 25,000  |  |  |  | 15,972  | 
|April 16, 2001 |  |              | 350,000 |                   |  |                | 200,000 |  |  |  | 186,112 | 
|March 29, 2000 |  |              | 462,500 |                   |  |                | 300,000 |  |  |  | 300,000 | 

The POPs were generally granted as fixed awards,
and vest ratably over periods ranging from three to five years.

Securities Authorized for Issuance Pursuant to
Our Equity Compensation Plans

We had the following aggregated compensation
plans under which our securities were authorized for issuance as
of December 31, 2003:

|                                                               |       |                      |           |                   |  |                      |       |       |  |  |           |           | 
|-------------------------------------------------------------- | ----- | -------------------- | --------- | ----------------- |  | -------------------- | ----- | ----- |  |  | --------- | --------- | 
|                                                               |       | Number of Securities |           | Weighted-Average  |  | Number of Securities
|                                                               |       | to be Issued Upon    |           | Exercise Price of |  | Remaining Available 
|                                                               |       | Exercise of          |           | Outstanding       |  | for Future Issuance 
|                                                               |       | Outstanding Options, |           | Options, Warrants |  | Under Equity        
|Plan Category                                                  |       | Warrants and Rights  |           | and Rights        |  | Compensation Plans  
|                                                               |       |                      |           |                   |  |                     
|Equity compensation plans approved by security
    holders     |       |                      | 8,848,703 |                   |  | $                    | 15.88 |       |  |  | 4,262,957 |          
|Equity compensation plans not approved by
    security holders |       |                      |          |                   |  |                      |      |       |  |  |          |          
|                                                               |       |                      |           |                   |  |                      |       |       |  |  |           |          
|                                                               | Total |                      |           | 8,848,703         |  |                      | $     | 15.88 |  |  |           | 4,262,957 | 
|                                                               |       |                      |           |                   |  |                      |       |       |  |  |           |          

26



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##### 



ITEM
6.          SELECTED
FINANCIAL DATA

The following table sets forth summary selected
historical consolidated financial data derived from our audited
consolidated financial statements and other information as of
and for each of the five years presented. The following
information should be read in conjunction with our audited
consolidated financial statements and related notes and
Managements Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere in this Annual
Report on Form 10-K.

|                                                                 |  |                                                             |           |      |  |      |           |      |  |      |           |     |  |   |           |   |  |   |           |  
|---------------------------------------------------------------- |  | ----------------------------------------------------------- | --------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- | --- |  | - | --------- | - |  | - | --------- | -
|                                                                 |  | 2003                                                        |           | 2002 |  | 2001 |           | 2000 |  | 1999
|                                                                 |  |                                                             |           |      |  |      |           |      |  |     
|                                                                 |  |                                                            
|                                                                 |  | (in thousands, except per share amounts and operating data)
|Summary of Operations, year ended
    December 31:               |  |                                                             |           |      |  |      |           |      |  |      |           |     |  |   |           |   |  |   |           |  
|Total revenue                                                    |  | $                                                           | 843,834   |      |  | $    | 865,693   |      |  | $    | 929,321   | (A) |  | $ | 341,635   |   |  | $ | 316,439   |  
|Interest expense, net                                            |  |                                                             | (141,443  | )    |  |      | (136,880  | )    |  |      | (122,655  | )   |  |   | (118,221  | ) |  |   | (101,687  | )
|Minority interest income (expense)                               |  |                                                             | 17,877    |      |  |      | 10,574    |      |  |      | 2,958     |     |  |   | (10,240   | ) |  |   | (11,069   | )
|(Loss) gain on sale of assets(B)                                 |  |                                                             |          |      |  |      |          |      |  |      | (2,176    | )   |  |   | 3,495     |   |  |   |          |  
|(Loss) income from continuing operations
    (C)                 |  |                                                             | (253,977  | )    |  |      | (67,674   | )    |  |      | (17,235   | )   |  |   | 72,914    |   |  |   | 65,724    |  
|(Loss) income from discontinued
    operations(D)                |  |                                                             | (134,887  | )    |  |      | (93,574   | )    |  |      | (25,527   | )   |  |   | 32,947    |   |  |   | 33,240    |  
|Net (loss) income                                                |  |                                                             | (388,864  | )    |  |      | (161,248  | )    |  |      | (42,762   | )   |  |   | 105,861   |   |  |   | 98,964    |  
|Basic (loss) earnings per share from
    continuing operations   |  |                                                             | (5.00     | )    |  |      | (1.51     | )    |  |      | (0.40     | )   |  |   | 1.56      |   |  |   | 1.39      |  
|Diluted (loss) earnings per share from
    continuing operations |  |                                                             | (5.00     | )    |  |      | (1.51     | )    |  |      | (0.40     | )   |  |   | 1.55      |   |  |   | 1.46      |  
|Dividends per common share                                       |  |                                                             |          |      |  |      | 0.03      |      |  |      | 1.525     |     |  |   | 2.02      |   |  |   | 2.02      |  
|                                                                
|Financial Position as of
    December 31:                        |  |                                                             |           |      |  |      |           |      |  |      |           |     |  |   |           |   |  |   |           |  
|Property and equipment, net                                      |  | $                                                           | 2,086,889 | (E)  |  | $    | 2,559,937 | (E)  |  | $    | 2,786,297 |     |  | $ | 2,906,501 |   |  | $ | 2,936,293 |  
|Cash and cash equivalents                                        |  |                                                             | 230,884   |      |  |      | 33,896    |      |  |      | 23,448    |     |  |   | 250       |   |  |   | 2,556     |  
|Total assets                                                     |  |                                                             | 2,487,939 |      |  |      | 2,798,020 |      |  |      | 3,009,860 |     |  |   | 3,013,008 |   |  |   | 3,094,201 |  
|Long-term debt                                                   |  |                                                             | 1,638,028 |      |  |      | 1,654,102 |      |  |      | 1,700,134 |     |  |   | 1,638,319 |   |  |   | 1,676,771 |  
|Number of shares of common stock outstanding                     |  |                                                             | 66,790    |      |  |      | 45,231    |      |  |      | 44,524    |     |  |   | 44,380    |   |  |   | 47,257    |  
|                                                                
|Operating Data for Owned Hotels and
    Properties:              |  |                                                             |           |      |  |      |           |      |  |      |           |     |  |   |           |   |  |   |           |  
|Number of hotels as of December 31                               |  |                                                             | 92        |      |  |      | 107       |      |  |      | 112       |     |  |   | 114       |   |  |   | 116       |  
|Number of guest rooms as of December 31                          |  |                                                             | 24,733    |      |  |      | 27,581    |      |  |      | 28,653    |     |  |   | 29,090    |   |  |   | 29,348    |  
|Average occupancy(F)                                             |  |                                                             | 66.3      | %    |  |      | 66.0      | %    |  |      | 67.2      | %   |  |   | 73.1      | % |  |   | 72.7      | %
|ADR(G)                                                           |  | $                                                           | 97.74     |      |  | $    | 101.84    |      |  | $    | 108.74    |     |  | $ | 111.52    |   |  | $ | 105.37    |  
|RevPAR(H)                                                        |  | $                                                           | 64.83     |      |  | $    | 67.26     |      |  | $    | 73.03     |     |  | $ | 81.52     |   |  | $ | 76.56     |  
|                                                                

27



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##### 





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | Until January 1, 2001, Interstate Hotels leased
    substantially all of our hotels from us, and we received
    participating lease revenue from Interstate Hotels, which
    represented a specified percentage of each hotels revenue.
    Under the leases, Interstate Hotels recorded all of the
    operating revenues and expenses of the hotels in its statements
    of operations, and we recorded lease revenue earned under the
    lease agreements in our statement of operations. Effective
    January 1, 2001, in connection with changes permitted by
    the REIT Modernization Act, Interstate Hotels assigned the hotel
    leases to our newly created, wholly-owned, taxable REIT
    subsidiaries, and our taxable REIT subsidiaries entered into
    management arrangements with Interstate Hotels to manage the
    hotels. As a result of this change, our wholly-owned taxable
    REIT subsidiaries have assumed the operating risks and rewards
    of the hotels and now pay Interstate Hotels a management fee to
    manage the hotels for us. Effective January 1, 2001, we
    began recording all of the revenues and expenses of the hotels
    in our statements of operations, including the management fee
    paid to Interstate Hotels. As a result, our operating results
    for the years ended after December 31, 2000 are not
    directly comparable to those for the years ended prior to
    December 31, 2001.



|    |                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(B) | During 2001, we sold two hotels for a loss. During 2000, we
    sold three limited-service hotels for a gain.                                                                                                                                                                                                                                                                                              
|   
|(C) | Continuing operations included losses on asset impairments
    related to our hotel portfolio of $163.4 million,
    $6.9 million, and $2.3 million for the years ended
    December 31, 2003, 2002 and 2001, respectively. For the
    year ended December 31, 2003, continuing operations also
    included an impairment loss of $25 million on our
    investment in MeriStar Investment Partners, L.P.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We adopted the provisions of Statement of
    Financial Accounting Standards (SFAS) No. 145 on
    January 1, 2003. Certain provisions require that all gains
    and losses from extinguishments of debt be classified as
    extraordinary only if the gains and losses are from unusual or
    infrequent transactions. Prior period amounts that do not meet
    this definition are required to be reclassified. Our prior
    period extraordinary items were reclassified, and in the future
    we expect any gains and losses from the extinguishment of our
    debt to be classified as a component of continuing operations.
    Prior period amounts reclassified to continuing operations were
    as follows:



| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | during 2001, we repaid term loans under our
    previous credit facility and wrote off deferred financing costs
    associated with this facility totaling $2.7 million, net of
    tax;
|
| |  | during 2000, we repurchased some of our 4.75%
    convertible notes at a discount, resulting in a
    $3.1 million gain, net of tax, on the repurchase; and                             
|
| |  | during 1999, we refinanced some of our loan
    facilities and wrote off deferred financing costs associated
    with these facilities totaling $4.5 million, net of tax.               



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(D) | We adopted the provisions of SFAS No. 144,
    Accounting for the Impairment or Disposal of Long-Lived
    Assets, on January 1, 2002. SFAS 144 requires that
    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, including any gain or loss
    recognized, to be recorded as discontinued operations. During
    2003, we sold 15 hotels in separate transactions for an
    aggregate of $127.9 million in cash. As of
    December 31, 2003, we had seven hotels classified as held
    for sale, six of which were sold in early 2004 for an aggregate
    of $44.5 million in cash. During 2002, we sold five hotels
    in separate transactions for an aggregate of $60.7 million
    in cash. Discontinued operations included losses on asset
    impairments of $131.7 million, $71.8 million, and
    $41.3 million for the years ended December 31, 2003,
    2002, and 2001, respectively.
|   
|(E) | Includes $51 million and $110 million of assets held
    for sale as of December 31, 2003 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(F) | Total number of rooms occupied by hotel guests on a paid basis,
    divided by total available rooms. Prior periods have been
    restated to reflect occupancy data for the 85 hotels included in
    continuing operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(G) | Average Daily Rate, or ADR, represents total room revenue
    divided by total number of rooms occupied by hotel guests on a
    paid basis. Prior periods have been restated to reflect ADR for
    the 85 hotels included in continuing operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(H) | Revenue Per Available Room, or RevPAR, represents total room
    revenue divided by total available rooms. Prior periods have
    been restated to reflect RevPAR for the 85 hotels included in
    continuing operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

28



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##### 





|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BUSINESS SUMMARY

We are a real estate investment trust, or REIT,
and own a portfolio of primarily upscale, full-service hotels
and resorts. 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. We have sold nine
hotels with 2,197 rooms since January 1, 2004. Ten of the
remaining 83 hotels are currently planned for disposition. Our
hotels are located in major metropolitan areas, rapidly growing
secondary markets or resort locations in the United States and
one in Canada. All of our hotels are leased by our taxable
subsidiaries and all are currently managed by Interstate Hotels
& Resorts (Interstate Hotels), which was created
on July 31, 2002 through the merger of MeriStar
Hotels & Resorts, Inc. and Interstate Hotels
Corporation.

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 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.

Since the July 2002 merger that formed Interstate
Hotels, we and Interstate Hotels have been separating the senior
management teams of the two companies in order to allow each
senior management team to devote more attention to its
respective companys matters. In December 2003, our Board
of Directors and that of Interstate Hotels each formed a special
committee of independent directors to explore further changes to
the relationship between our company and Interstate Hotels,
including possible changes to the terms, or complete
elimination, of the intercompany agreement. Discussions also
include possible changes to the provisions of the various
management agreements relating to our hotels, including the
method of calculation for the incentive fee and termination fees.

RESULTS OVERVIEW

At the beginning of 2003, we set out a strategy
to position our company to best take advantage of an expected
economic and industry recovery. Our strategy included the
following key initiatives: reshape the portfolio through asset
sales; enhance liquidity; reduce our leverage and extend our
debt maturities; begin an aggressive renovation program of our
core product offering; and focus on asset performance through
aggressive asset management.

We have made significant progress in reshaping
our portfolio with our asset disposition program, completing the
sale of 24 non-core assets through March 8, 2004. We have
generated $190.8 million in gross cash proceeds, which has
significantly enhanced our liquidity. Through the issuance of
$170 million of 9.5% convertible subordinated notes due
2010 in July of this year, we were able to nearly completely
refinance the borrowings under our 4.75% convertible notes due
2004 to below $4 million and extend this nearest maturing
debt security to 2010. Our issuance of common stock for cash in
September 2003, the debt for equity exchange transactions, as
well as the completion of our $101 million, 10-year, 6.88%
commercial mortgage-backed securities financing, and the
$50 million senior credit facility have also significantly
enhanced our liquidity, reduced our leverage and aided in
extending our debt maturities.

We have begun an aggressive renovation program
for our core assets. We expect to invest approximately
$225 million in capital expenditures over the next two
years to upgrade our core product to meet or exceed the
standards of our primary brands  Hilton, Marriott,
and Starwood  to improve the competitiveness of these
assets in their markets and enable them to more fully
participate in any economic recovery.

Our operating results were negatively affected by
the continued sluggish economy in the first half of 2003, as
well as geopolitical events, war and the continued threat of
domestic terrorism. Although the general

29



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economic indicators began to show positive signs
of recovery in the second half of the year, as of year end, this
general economic growth had not yet translated into meaningful
growth in lodging demand and consequently RevPAR. However, it
has not been unusual for demand growth in the hospitality
industry historically to lag an economic recovery by at least
six to nine months. We continue to face the challenge of
decreased corporate travel, changing channels of distribution
including increased internet bookings, pressure on room rates
and margin erosion. See Results of Operations
section below for a more detailed discussion.


RESULTS OF OPERATIONS

Our revenues are derived from the operations of
our hospitality properties, including room, food and beverage
revenues, as well as from our leases of office, retail and
parking rentals. Included in our operating results is our 16%
cumulative preferred return on our partnership interest in MIP.
Operating costs include direct costs to run our hotels,
management fees to Interstate Hotels for the management of our
properties, depreciation of our properties, impairment charges,
property tax and insurance, as well as sales, marketing and
general and administrative costs. Our expenses also include
interest on our debt, amortization of related debt-issuance
costs and minority interest allocations, which represent the
allocation of income and losses to outside investors for
properties that are not wholly owned.

The provisions of Statement of Financial
Accounting Standards (SFAS) No. 144 require that 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, including any gain or loss recognized on
the sale, be recorded as discontinued operations. Accordingly,
we have reclassified all prior periods presented to conform to
this requirement. See Footnote 14, Dispositions and
Acquisitions, included in Item 8 of this Annual
Report on Form 10-K for further information regarding the
amounts reclassified.

Summary data for the years ended December 31
were as follows (dollars in thousands, except operating data
statistics):

|                       |                                       |      |   |          |   |      |   |                |   |         |   |          |   |  |  |        |    |  |  |        |   
|---------------------- | ------------------------------------- | ---- | - | -------- | - | ---- | - | -------------- | - | ------- | - | -------- | - |  |  | ------ | -- |  |  | ------ | --
|                       |                                       |      |   |          |   |      |   |               
|                       |                                       |      |   |          |   |      |   | Percent Change
|                       |                                       |      |   |          |   |      |   |               
|                       |                                       |      |   |          |   |      |   | 2003 vs        |   | 2002 vs
|                       |                                       | 2003 |   | 2002     |   | 2001 |   | 2002           |   | 2001   
|                       |                                       |      |   |          |   |      |   |                |   |        
|Summary of Operations: |                                       |      |   |          |   |      |   |                |   |         |   |          |   |  |  |        |    |  |  |       
|                       | Total revenue                         |      | $ | 843,834  |   |      | $ | 865,693        |   |         | $ | 929,321  |   |  |  | (2.5   | )% |  |  | (6.8   | )%
|                       |                                       |      |   |          |   |      |   |                |   |         |   |          |   |  |  |        |    |  |  |       
|                       | Hotel operating expenses              |      |   | 340,642  |   |      |   | 331,414        |   |         |   | 348,638  |   |  |  | 2.8    |    |  |  | (4.9   | ) 
|                       | Other operating expenses              |      |   | 452,591  |   |      |   | 460,939        |   |         |   | 467,658  |   |  |  | (1.8   | )  |  |  | (1.4   | ) 
|                       | Loss on asset impairments             |      |   | 163,390  |   |      |   | 6,925          |   |         |   | 2,278    |   |  |  | >100.0 |    |  |  | >100.0 |   
|                       | Impairment of investment in affiliate |      |   | 25,000   |   |      |   |               |   |         |   |         |   |  |  | >100.0 |    |  |  |       |   
|                       |                                       |      |   |          |   |      |   |                |   |         |   |          |   |  |  |        |    |  |  |       
|                       | Total operating expenses              |      |   | 981,623  |   |      |   | 799,278        |   |         |   | 818,574  |   |  |  | 22.8   |    |  |  | (2.4   | ) 
|                       |                                       |      |   |          |   |      |   |                |   |         |   |          |   |  |  |        |    |  |  |       
|                       | Operating (loss) income               |      |   | (137,789 | ) |      |   | 66,415         |   |         |   | 110,747  |   |  |  | (307.5 | )  |  |  | (40.0  | ) 
|                       | Minority interest income              |      |   | 17,877   |   |      |   | 10,574         |   |         |   | 2,958    |   |  |  | 69.1   |    |  |  | 257.5  |   
|                       | Other significant items, net          |      |   | 4,085    |   |      |   | (9,181         | ) |         |   | (8,842   | ) |  |  | >100.0 |    |  |  | 3.8    |   
|                       | Interest expense, net                 |      |   | (141,443 | ) |      |   | (136,880       | ) |         |   | (122,655 | ) |  |  | 3.3    |    |  |  | 11.6   |   
|                       | Loss from continuing operations       |      |   | (253,977 | ) |      |   | (67,674        | ) |         |   | (17,235  | ) |  |  | 275.3  |    |  |  | 292.7  |   
|                       | Loss from discontinued operations(a)  |      |   | (134,887 | ) |      |   | (93,574        | ) |         |   | (25,527  | ) |  |  | 44.2   |    |  |  | 266.6  |   
|                       |                                       |      |   |          |   |      |   |                |   |         |   |          |   |  |  |        |    |  |  |       
|                       | Net loss                              |      | $ | (388,864 | ) |      | $ | (161,248       | ) |         | $ | (42,762  | ) |  |  | 141.2  | %  |  |  | 277.1  | % 
|                       |                                       |      |   |          |   |      |   |                |   |         |   |          |   |  |  |        |    |  |  |       

30



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|                |                                     |      |   |       |  |      |   |                |  |         |   |        |  |  |  |      |    |  |  |      |   
|--------------- | ----------------------------------- | ---- | - | ----- |  | ---- | - | -------------- |  | ------- | - | ------ |  |  |  | ---- | -- |  |  | ---- | --
|                |                                     |      |   |       |  |      |   |               
|                |                                     |      |   |       |  |      |   | Percent Change
|                |                                     |      |   |       |  |      |   |               
|                |                                     |      |   |       |  |      |   | 2003 vs        |  | 2002 vs
|                |                                     | 2003 |   | 2002  |  | 2001 |   | 2002           |  | 2001   
|                |                                     |      |   |       |  |      |   |                |  |        
|Operating Data: |                                     |      |   |       |  |      |   |                |  |         |   |        |  |  |  |      |    |  |  |     
|                | Average Daily Rate                  |      | $ | 97.74 |  |      | $ | 101.84         |  |         | $ | 108.74 |  |  |  | (4.0 | )% |  |  | (6.3 | )%
|                | Occupancy                           |      |   | 66.3% |  |      |   | 66.0%          |  |         |   | 67.2%  |  |  |  | 0.5  |    |  |  | (1.8 | ) 
|                | Revenue Per Available Room (RevPAR) |      | $ | 64.83 |  |      | $ | 67.26          |  |         | $ | 73.03  |  |  |  | (3.6 | )  |  |  | (7.9 | ) 



---



|    |                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Includes loss on asset impairments of
    $131.6 million, $71.8 million and $41.3 million
    for the years ended December 31, 2003, 2002, and 2001,
    respectively. Also includes loss on disposal of
    $2.4 million and $21.2 million for the years ended
    December 31, 2003 and 2002, respectively.

Year ended December 31, 2003 compared
with the year ended December 31, 2002

Total revenue.Total
revenue decreased in 2003 compared to 2002, primarily due to a
$20.6 million decrease in room revenue directly
attributable to a decrease in average daily rate. The average
daily rate declined 4.0% for the year ended December 31,
2003 when compared with the same period in 2002 due to the
downward pressures on our rates as a result of soft corporate
transient and leisure demand throughout the year, coupled with
an increase in sales through lower rated group, contract, and
internet sales channels. The slight increase in occupancy over
the same period did not significantly offset the rate decline.

Hotel operating expenses.Hotel operating expenses increased
from 2002 to 2003 due primarily to increases in food and
beverage expenses and other hotel operating costs. These
expenses increased mainly due to our focus on improving guest
satisfaction, as well as an increase in occupancy in 2003 over
2002.

Other operating expenses.Other operating expenses include
general and administrative expenses, property operating costs,
depreciation and amortization, and property taxes, insurance and
other. The decrease from 2002 to 2003 was due primarily to a
$14.5 million charge incurred related to the settlement of
a $42.1 million term loan due from Interstate Hotels during
late 2002. Excluding that charge, other variations in these
expenses were as follows:

General and administrative expenses at the hotel
level increased by approximately $3 million, offset by a
reduction in corporate costs from 2002 whereby costs of
$3.2 million were incurred related to the formal separation
of management functions from Interstate Hotels. Property
operating costs, which consist of repairs and maintenance,
energy, franchise and management costs, increased
$2.3 million during 2003 to $129.3 million. Increases
in repairs and maintenance expense of $3.1 million and
energy costs due to the civil disruptions in Venezuela and the
war in Iraq of $1.9 million were partially offset by
decreases in franchise and management fees totaling
$2.1 million. We began implementing a strategic energy plan
across our portfolio during the fourth quarter of 2003, which is
designed to aid in the control of volatile energy costs.
Depreciation and amortization decreased $3.7 million in
2003 to $105.5 million from $109.2 million in 2002 due
to the reduction in the book value of our property and equipment
stemming from the substantial asset impairment charge in the
first half of 2003. Also contributing to the decline were the
early extinguishments of debt, thereby reducing on-going
amortization of related deferred financing costs. Property tax
refunds and favorable resolution of property tax liabilities
totaling approximately $7.6 million during 2002 contributed
to the $8.0 million increase in property taxes, insurance
and other expenses for the 2003 comparative period. We expect to
continue to face pressure from local jurisdictions as we try to
minimize these costs.

Loss on asset impairments.We recognized losses on asset
impairments totaling $295 million and $78.7 million
related to our asset disposition program during the years ended
December 31, 2003 and 2002, respectively. Of these total
asset impairment losses, $131.6 million and
$71.8 million for the years ended 2003 and 2002,
respectively, are included in discontinued operations. As of
December 31, 2003, we had 19 assets planned for
disposition, nine of which have been sold since January 1,
2004.

The value of our $40 million investment in
MeriStar Investment Partners, L.P. (MIP), which owns
10 hotels and is accounted for on a cost basis, has declined due
to the continued decline in MIPs cash flow,

31



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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 likely 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 on this
investment during the fourth quarter of 2003.


Other significant items,
net.We recognized gains totaling
$4.1 million during 2003 related to the early
extinguishments of debt. On July 1, 2003, we completed an
offering of $170 million aggregate principal amount of 9.5%
convertible subordinated notes due 2010. The proceeds from the
new issuance were used to repurchase $150.6 million of the
$154.3 million of outstanding 4.75% convertible notes due
2004, at varying prices, resulting in a $1.4 million gain.

The proceeds from the issuance were also used to
repurchase $22.6 million of outstanding 8.75% senior
subordinated notes due 2007, at varying prices, resulting in a
$1.5 million gain. During 2003, we also repurchased a
further $59.8 million of these notes, at varying prices,
resulting in an aggregate loss of $0.3 million. In
addition, we redeemed $39.2 million of the senior
subordinated notes in exchange for 6,669,506 shares of our
common stock, resulting in a gain of $1.5 million.

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. Prior year
results included a net expense of $4.4 million related to
the swap agreements in place during that time. Current year
results were not materially affected by marking to market the
swap agreements that expired during 2003. Prior year results
also included a $4.7 million loss on the fair value of
derivatives due to the repayment of debt that was originally
hedged.

Interest expense, net.Interest expense increased
$4.6 million due primarily to the July 2003 issuance of
9.5% convertible subordinated notes due 2010 to substantially
repurchase our 4.75% convertible notes (see Note 6 to our
Consolidated Financial Statements included in Item 8 of
this Annual Report on Form 10-K).

Discontinued operations.During 2003, we completed the sale of
15 hotels in separate transactions for an aggregate of
$127.9 million in cash, resulting in loss on disposal of
$2.4 million. As of December 31, 2003, we had seven
hotels classified as held for sale, six of which we sold through
March 8, 2004 for $44.5 million in cash. Discontinued
operations for the year ended December 31, 2003 included
impairment charges totaling $131.6 million related to the
assets included in our disposition program. Discontinued
operations for the year ended December 31, 2002 included
impairment charges totaling $71.8 million, and a
$21.2 million loss on disposal related to five hotels we
sold during that year.

Year ended December 31, 2002 compared
with the year ended December 31, 2001

The slowing United States economy had a
significant negative effect on our hotel operations in 2002,
evidenced by a sharp reduction in transient business travel.
This is reflected in the 6.3% reduction in average daily rate
and the 1.8% reduction in occupancy in 2002 compared to 2001. We
shifted our marketing efforts towards lower-rated group and
contract business in most markets in order to maintain a base
level of occupancy in our properties.

Total revenue.Total
revenue decreased in 2002 from 2001, primarily due to a
$47.3 million decrease in room revenue attributable to
decreases in average daily rate and occupancy. The decrease in
occupancy also contributed to an $8.3 million decrease in
food and beverage revenue and a $6.0 million decrease in
telephone and conference service revenues.

Hotel operating expenses.Hotel operating expenses decreased for
the year ended December 31, 2002 from the same period in
2001 due primarily to reductions in room expense of
$9.7 million as a result of lower occupancy in the year,
coupled with a reduction in food and beverage costs of
$7 million.

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Other operating expenses.Other operating expenses include
general and administrative expenses, property operating costs,
depreciation and amortization, and property taxes, insurance and
other.

General and administrative expenses increased
$2.8 million during the year, due primarily to the
recognition of corporate reorganization costs and an increase in
our marketing personnel in order to focus our efforts on group
and contract business. In each year, we recognized corporate
reorganization costs, $3.2 million in 2002 related to the
formal separation of management functions from Interstate Hotels
and $1.1 million in 2001 related to a restructuring at the
corporate headquarters. Property operating costs decreased
$6.9 million from $133.9 million in 2001 to
$127 million in 2002 due mainly to a $2.9 million
decrease in franchise fees, a $1.6 million decrease in
management fees directly resulting from our decrease in
revenues, and a $1.8 million decrease in energy costs
primarily due to reduced occupancy. Property taxes, insurance
and other costs decreased $6.9 million due primarily to a
$7 million reduction in property taxes due to favorable
resolution of certain appeals, as well as a reduction in
tax-assessed values of certain properties. Depreciation and
amortization increased $8 million due to the purchase of
replacement computer equipment for our corporate office and
amortization of deferred financing fees related to the December
2001 and February 2002 issuances of our senior unsecured notes.

Other operating expenses for the year ended 2002
included a $14.5 million charge related to the early
settlement of our note receivable with Interstate Hotels.
Charges totaling $18.5 million were incurred specific to
2001 activities and included $9.3 million in swap
termination fees, $5.8 million of transaction costs,
expensed immediately when our proposed merger with FelCor
Lodging Trust Inc. was terminated by both parties, a
$2.1 million write-down of our investment in STS Hotel Net,
and $1.3 million of costs to terminate our leases with
Prime Hospitality Corporation.

Loss on asset impairments.We recognized losses on asset
impairments related to our asset disposition program during the
years ended December 31, 2002 and 2001. Of total asset
impairment losses, $71.8 million and $41.3 million for
the years ended 2002 and 2001, respectively, are included in
discontinued operations.

Other significant items,
net.Results for 2002 included a net
expense of $4.4 million related to swap agreements in place
during that time and also included a $4.7 million loss on the
fair value of derivatives due to the repayment of debt that was
originally hedged. During 2001, we recognized $6.7 million
in expense when three of our swap agreements were converted to
non-hedging instruments because the debt being hedged was
repaid. During 2001, we sold two hotels in separate transactions
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 in
discontinued operations applies only to assets classified as
held for sale or disposed of on or after January 1, 2002.

Interest expense, net.Interest expense increased in 2002 due
primarily to higher interest rates. We issued $250 million
of senior unsecured notes in December 2001 and $200 million
in February 2002 at fixed rates of interest greater than the
variable rate on the debt that was repaid from the proceeds of
the issuance.

Discontinued operations.During 2002, we sold five hotels in
separate transactions and received $60.7 million in cash,
resulting in a loss on disposal of $21.2 million.
Discontinued operations included impairment charges totaling
$71.8 million and $41.3 million for the years ended
December 31, 2002 and 2001, respectively.

FUNDS FROM OPERATIONS

Substantially all of our non-current assets
consist of real estate, and in accordance with accounting
principles generally accepted in the United States, or GAAP,
those assets are subject to straight-line depreciation, which
reflects the assumption that the value of real estate assets,
other than land, will decline ratably over time. That assumption
is often not true with respect to the actual market values of
real estate assets (and, in particular, hotels), which fluctuate
based on economic, market and other conditions. As a result,
management and many industry investors believe the presentation
of GAAP operating measures for real estate companies to be more
informative and useful when other measures, adjusted for
depreciation and

33



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##### 



amortization, are also presented. In an effort to
address these concerns, the National Association of Real Estate
Investment Trusts, or NAREIT, adopted a definition of Funds From
Operations, or FFO, which we have also adopted.


NAREIT defines FFO as net income (computed in
accordance with GAAP), excluding gains (or losses) from sales of
real estate, real estate-related depreciation and amortization,
and after comparable adjustments for our portion of these items
related to unconsolidated partnerships and joint ventures.
Extraordinary items and cumulative effect of changes in
accounting principle as defined by GAAP are also excluded from
the calculation of FFO. As defined by NAREIT, FFO also does not
include reductions from asset impairment charges. The Securities
and Exchange Commission, however, has expressed a position that
FFO be reduced by asset impairment charges, which presentation
we have adopted. Due to the significance of our hotel real
estate assets, we believe FFO is an indicative measure of our
operating performance and can be used to measure our ability to
service debt, fund capital expenditures, and expand our
business. We also use FFO in our annual budget process.

FFO should not be considered as an alternative to
any other performance measures prescribed by GAAP. Although FFO
is considered a standard benchmark utilized by the investment
community, our FFO may not be comparable to a similarly titled
measure reported by other companies.

FFO

We use FFO as a measure of our performance. The
following reconciles our GAAP net loss to FFO on a diluted basis
(amounts in thousands, except per share amounts):

|                                                                                             |                                             |      |          |          |   |      |         |          |   |   |        |         |  
|-------------------------------------------------------------------------------------------- | ------------------------------------------- | ---- | -------- | -------- | - | ---- | ------- | -------- | - | - | ------ | ------- | -
|                                                                                             |                                             | 2003 |          | 2002     |   | 2001
|                                                                                             |                                             |      |          |          |   |     
|                                                                                             | Net loss                                    |      | $        | (388,864 | ) |      | $       | (161,248 | ) |   | $      | (42,762 | )
|                                                                                             | Loss on disposal of assets                  |      |          | 2,356    |   |      |         | 21,197   |   |   |        | 2,176   |  
|                                                                                             | Hotel depreciation and amortization         |      |          | 105,902  |   |      |         | 115,786  |   |   |        | 113,167 |  
|                                                                                             |                                             |      |          |          |   |      |         |          |   |   |        |        
|                                                                                             | Minority interest to common OP unit holders |      |          | (17,177  | ) |      |         | (11,139  | ) |   |        | (3,523  | )
|FFO                                                                                          |                                             |      | (297,783 | ) (A)    |   |      | (35,404 | ) (B)    |   |   | 69,058 | (C)    
|                                                                                             | Interest on convertible debt                |      |          |         |   |      |         |         |   |   |        | 7,329   |  
|                                                                                             |                                             |      |          |          |   |      |         |          |   |   |        |        
|FFO, assuming dilutive conversions                                                           |                                             |      | (297,783 | )        |   |      | (35,404 | )        |   |   | 76,387 |        
|                                                                                             |                                             |      |          |          |   |      |         |          |   |   |        |        
|FFO per diluted share                                                                        |                                             | $    | (5.55    | )        |   | $    | (0.72   | )        |   | $ | 1.44   |        
|                                                                                             |                                             |      |          |          |   |      |         |          |   |   |        |        
|Weighted average number of diluted shares of
    common stock outstanding for loss per share |                                             |      | 50,807   |          |   |      | 44,931  |          |   |   | 44,507 |        
|Common stock equivalents:                                                                    |                                             |      |          |          |   |      |         |          |   |   |        |        
|                                                                                             | Operating partnership units                 |      |          | 2,783    |   |      |         | 3,952    |   |   |        | 3,857   |  
|                                                                                             | Stock options                               |      |          | 40       |   |      |         | 17       |   |   |        | 161     |  
|                                                                                             | Convertible debt shares                     |      |          |         |   |      |         |         |   |   |        | 4,538   |  
|                                                                                             |                                             |      |          |          |   |      |         |          |   |   |        |        
|Weighted average number of diluted shares of
    common stock outstanding for FFO            |                                             |      | 53,630   |          |   |      | 48,900  |          |   |   | 53,063 |        
|                                                                                             |                                             |      |          |          |   |      |         |          |   |   |        |        



---



|    |                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) | Funds from operations included the effect of
    asset impairment charges, net of additional tax benefits
    realized during 2003, totaling $315.5 million, or $(5.88)
    per diluted share.
|   
|(B) | Funds from operations included the effect of
    asset impairment charges of $78.7 million, or $(1.61) per
    diluted share.                                                                 
|   
|(C) | Funds from operations included the effect of
    asset impairment charges of $43.6 million, or $(0.82) per
    diluted share.                                                                 

FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL
RESOURCES

Our principal sources of liquidity are cash
generated from operations, funds from borrowings, funds from the
sales of assets and existing cash on hand. Our principal uses of
cash include the funding of working capital

34



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##### 



obligations, debt service, debt repurchases, and
investments in hotels (including capital projects and
acquisitions). We did not pay a dividend on our common stock
during 2003, nor do we expect to pay one in 2004. We believe we
have sufficient cash flow currently, and we expect to have
adequate cash flow during the next twelve months in order to
fund our operations, capital commitments and debt service
obligations. Our current and future liquidity is, however,
greatly dependent upon our operating results, which are driven
largely by overall economic conditions, and since
September 11, 2001 have been heavily affected by
geopolitical concerns and other factors affecting business and
leisure travel. If general economic conditions are significantly
worse than we expect for an extended period, this will likely
have a negative effect on our projections of available cash flow
and liquidity.


Factors that may influence our liquidity include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Factors that affect our results of operations,
    including general economic conditions, demand for business and
    leisure travel, public concerns about travel safety related
    primarily to terrorism and related concerns, capital investments
    required to maintain our propertys competitive position
    and other operating risks described under the caption,
    Risk Factors  Operating Risks in
    Item 1 of this Annual Report on Form 10-K;
|
| |  | Factors that affect our access to bank financing
    and the capital markets, including operational risks, high
    leverage, covenant compliance, interest rate fluctuations, and
    other risks described under the caption Risk
    Factors  Financing Risks in Item 1 of this
    Annual Report on Form 10-K; and                                                                                                                                            
|
| |  | Other factors described previously under the
    caption, Cautionary Statement Regarding Forward-Looking
    Statements in this Annual Report on Form 10-K.                                                                                                                                                                                                                                                                                                        

We continue to take steps to strengthen our
balance sheet, build liquidity, reduce our leverage and extend
our debt maturities. We have been committed to hold cash
balances generally in excess of $60 million in our
operating accounts as a hedge against economic and geopolitical
uncertainties, as well as to provide for our recurring cash
requirements. We established a new $50 million secured
revolving bank line in December 2003, which will add flexibility
to managing our liquidity.

As part of our strategy to reduce our leverage
and extend our debt maturities, on July 1, 2003, we
completed an offering of $170 million of 9.5% convertible
subordinated notes due 2010, which rank pari passuwith
our 4.75% convertible subordinated notes due 2004. The proceeds
from the issuance were mainly used to repurchase substantially
all of the 4.75% convertible notes, which were our next
significant maturity due in 2004, and $22.6 million of our
8.75% senior subordinated notes due 2007. As a result of this
transaction, we now have no material debt maturities until the
senior subordinated notes mature in 2007. During 2003, we also
issued 6,669,506 shares of common stock in exchange for
$39.2 million of the senior subordinated notes, and we
repurchased an additional $59.8 million of these notes. As
of December 31, 2003, we had a little less than
$4 million of the 4.75% convertible notes outstanding and
had reduced the balance outstanding on the senior subordinated
notes due 2007 to $83.4 million. Subsequent to year end, we
acquired an additional $13.5 million of senior subordinated
notes through the issuance of 2,291,150 shares of common stock.
In addition, as of March 8, 2004, we had purchased from
available cash $61.5 million of our senior unsecured notes,
including $16.5 million of the 9% notes, $30.8 million
of the 9.125% notes and $14.2 million of the 10.5% notes.
Following these exchanges and the repurchases, we had as of
March 8, 2004, approximately $69.3 million of
outstanding senior subordinated notes due 2007 and
$884.0 million of outstanding senior unsecured notes. We
expect to retire the remaining senior subordinated notes due
2007 in 2004.

At the end of September 2003, we completed a
$101 million, 10-year, 6.88% commercial mortgage-backed
securities financing, secured by a portfolio of four hotels. We
also issued in a public offering 13,800,000 shares of common
stock at a price of $7.20 per share for net proceeds totaling
$95.4 million in the second half of 2003. Since
January 1, 2003, we have raised to-date approximately
$190.8 million from the sale of 24 properties in our
disposition program, including the sales of nine hotels for
$62.9 million since January 1, 2004. We ended 2003
with cash balances of $273.4 million, of which $230.9
million was unrestricted.

We currently have 10 hotels (after the sales in
2004 through March 8, 2004) planned for disposition. We
expect to generate gross proceeds of approximately
$75 million to $85 million from the sales of these
hotels.

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Our ability to realize these estimated proceeds
is, however, dependent upon finding qualified buyers willing to
pay a purchase price that we consider reasonable. We intend to
use a majority of the proceeds from any asset sales to
repurchase our senior debt, reinvest in our core assets and to
fund acquisitions. Our target acquisitions include those hotels
strategically located in major urban markets or destination
resorts, and larger, branded hotels with significant meeting
space, and may involve management contracts with hotel brand
owners where our long-term investment focus makes us a preferred
owner.


Sources and Uses of Cash

The following table shows our consolidated cash
flows, generated by (used in) our various activities, for the
years ended December 31 (in thousands):

|                     |  |      |         |      |  |      |         |         |  |         |         |   |  |   |         |   |  |   |         |  
|-------------------- |  | ---- | ------- | ---- |  | ---- | ------- | ------- |  | ------- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                     |  |      |         |      |  |      |         | 2003 vs |  | 2002 vs
|                     |  | 2003 |         | 2002 |  | 2001 |         | 2002    |  | 2001   
|                     |  |      |         |      |  |      |         |         |  |        
|Operating activities |  | $    | (17,136 | )    |  | $    | 57,898  |         |  | $       | 147,167 |   |  | $ | (75,034 | ) |  | $ | (89,269 | )
|Investing activities |  |      | 104,768 |      |  |      | 4,266   |         |  |         | (68,924 | ) |  |   | 100,502 |   |  |   | 73,190  |  
|Financing activities |  |      | 109,485 |      |  |      | (51,921 | )       |  |         | (55,349 | ) |  |   | 161,406 |   |  |   | 3,428   |  

Our operating results and the amount of cash
generated by our hotel operations were adversely affected
beginning in late 2001 by the events of September 11, 2001
and have continued to be negatively affected by the reduction in
travel resulting from geopolitical events, economic conditions,
war, the continued threat of domestic terrorism, possible
long-term changes in travel preferences, and other factors
affecting business and leisure travel. Cash flow from operations
decreased also in 2003 due to higher interest rates on our
senior unsecured notes issued in February 2002 as well as the
higher rate on our new convertible notes issuance in July of
this year. Partially offsetting these increases in interest were
savings of approximately $3.3 million in interest on our
previous revolving credit facility, which was repaid with the
net proceeds from the February 2002 senior unsecured notes
issuance, as well as interest savings on the early
extinguishments of debt related to our repurchases of senior
subordinated notes and 4.75% convertible subordinated notes.

Our investing activities provided a net
$104.8 million of cash during the year ended
December 31, 2003, resulting primarily from:



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | $127.9 million in proceeds from the sale of
    15 non-core hotel assets; and                         
|
| |  | $42.1 million from Interstate Hotels for the
    repayment of its note receivable; partially offset by
|
| |  | $36.2 million in capital expenditures
    (including $3.1 million of capitalized interest);           
|
| |  | $22.2 million increase in cash restricted
    for mortgage escrows; and                               
|
| |  | $6.8 million in costs associated with our
    disposition program.                                    

Our investing activities provided a net
$4.3 million of cash during 2002, resulting primarily from:



| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | $60.7 million of proceeds from the sale of
    five hotels; partially offset by                    
|
| |  | $47.3 million of hotel capital expenditures
    (including $4 million of capitalized interest), and
|
| |  | $7.5 million of advances to Interstate
    Hotels.                                                 

We generated a net $109.5 million of cash
from financing activities during the year ended
December 31, 2003 due mainly to:



| |   |                                                                         
| | - | ------------------------------------------------------------------------
| |  | $271.0 million from the issuance of new debt;                           
|
| |  | $95.4 million from the issuance of common
    stock; partially offset by
|
| |  | $245.7 million in repayments and repurchases
    of debt.               

36



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We used $51.9 million of cash in financing
activities during 2002, primarily for the net repayment of
$46 million of our long-term debt obligations and
$4.8 million in additional deferred financing costs related
to our new debt facilities.

We must distribute to stockholders at least 90%
of our REIT taxable income, excluding net capital gains, to
preserve the favorable tax treatment accorded to REITs under the
Internal Revenue Code. Under certain circumstances, we may be
required to make distributions in excess of cash available for
distribution in order to meet the Internal Revenue Code
requirements. In that event, we would seek to borrow additional
funds or sell additional non-core assets for cash, or both, to
the extent necessary to obtain cash sufficient to make the
distributions required to retain our qualification as a REIT.
Any future distributions will be at the discretion of our board
of directors and will be determined by factors including our
operating results, restrictions imposed by our borrowing
agreements, capital expenditure requirements, the economic
outlook, the distribution requirements for REITs under the
Internal Revenue Code and such other factors as our board of
directors deems relevant. Our senior unsecured notes indenture
permits the payment of dividends in order to maintain REIT
qualification if we fall below a 2 to 1 fixed charge coverage
ratio. However, our senior subordinated notes indenture is more
restrictive in that it permits the payment of dividends only if
we exceed the 2 to 1 fixed charge coverage ratio. The timing and
amount of any future distributions is dependent upon these
factors, and we cannot provide assurance that any such
distributions will be made in the future.

Long-Term Debt

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

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

New credit facility.In December 2003, we entered into a
new $50 million senior credit facility, secured by six of
our hotels, and terminated our previous credit facility. The
three-year facility carries an annual interest rate of the
London Interbank Offered Rate, or LIBOR, plus 450 basis points.
We currently have, and as of December 31, 2003, had no
outstanding borrowings under this facility. We expect to use
this facility for working capital purposes and have no plans to
draw on the facility in the short term. We incurred
approximately $2.7 million in debt issuance costs related
to the issuance.

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

Senior unsecured
notes.As of December 31, 2003,
we had $950 million of aggregate principal of these notes
outstanding. 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 pro forma
fixed charge coverage ratio (as defined in the indentures, fixed
charges only

37



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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 to enter into certain transactions, including the
repurchase of our stock, the issuance of any preferred stock,
the payment of dividends, the incurrence of any additional debt,
or the repayment of outstanding debt before it comes due, except
as noted below.


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

As of March 8, 2004, we had repurchased from
available cash $61.5 million of our senior unsecured notes,
including $16.5 million of the 9% notes due 2008,
$30.8 million of the 9.125% notes due 2011, and
$14.2 million of the 10.5% notes due 2009.

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

We completed a $330 million non-recourse
financing secured by a portfolio of 19 hotels in 1999. The loan
bears a fixed annual interest rate of 8.01% and matures in 2009.
The secured facility contains standard provisions that require
the servicer to maintain in escrow cash balances for certain
items such as property taxes and insurance. In addition, the
facility contains a provision that requires our mortgage
servicer to retain in escrow the excess cash from the encumbered
hotels after payment of debt service (Excess Cash),
if net hotel operating income (NOI) for the trailing
twelve months declines below $57 million. This provision
was triggered in October 2002 and will be effective until the
hotels generate the minimum cash flow required for two
consecutive quarters, at which time the cash being held in
escrow will be released to us. Approximately $27.2 million
of cash was held in escrow under this provision as of
December 31, 2003. In July 2003, we signed an amendment to
the loan agreement that permits the release of cash placed in
escrow for all capital expenditures incurred on the 19
encumbered properties on or after April 1, 2003. Although
the servicer will continue to retain in escrow any excess cash
from the encumbered hotels, they will release cash for all
capital expenditures we have incurred from April 1, 2003
through the date of the amendment and future capital
expenditures we incur on the 19 properties. Escrowed funds
totaling approximately $18.4 million were available to fund
capital expenditures under this provision as of
December 31, 2003.

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

The proceeds from the new issuance were used to
repurchase $150.6 million of our $154.3 million 4.75%
convertible notes, at varying prices, resulting in an aggregate
discount of approximately $1.4 million. During the third
quarter, we recognized this gain and wrote off approximately
$0.6 million of deferred financing costs related to the
repurchase. The remaining proceeds from the issuance were also
used to repurchase a portion of our senior subordinated notes
(see discussion below).

Senior subordinated notes.As of December 31, 2003, we had
outstanding $83.4 million aggregate principal amount of
8.75% senior subordinated notes due 2007. The notes are
unsecured obligations and

38



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##### 



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% convertible notes discussed above were used to
repurchase $22.6 million principal amount of our senior
subordinated notes, at varying prices, resulting in an aggregate
discount of approximately $1.5 million. Also during 2003,
we exchanged 6,669,506 shares of our common stock for
$39.2 million of these notes, resulting in a gain of
$1.5 million. In connection with the repurchases of these
notes, we wrote off deferred financing costs totaling
approximately $0.5 million.

In 2003, we also repurchased $59.8 million
of these notes for cash, at varying prices, resulting in an
aggregate premium of approximately $0.3 million. We
recognized this loss and wrote off approximately
$1.0 million of deferred financing costs related to the
repurchases.

Subsequent to year end, we acquired an additional
$13.5 million of senior subordinated notes through the
issuance of 2,291,150 shares of common stock. We expect to
retire the remaining senior subordinated notes due 2007 in 2004.

Asset Dispositions

As discussed elsewhere, one of our key short-term
strategies is to sell selected non-core assets, many of which
were acquired as part of a portfolio. We believe that these
asset sale transactions will have the following benefits:



| |   |                                                                                       
| | - | --------------------------------------------------------------------------------------
| |  | improve the overall quality of the hotel assets
    remaining in our portfolio;       
|
| |  | enhance the ability of our portfolio to perform
    well in all cycles of the economy;
|
| |  | enhance future growth prospects when strength
    returns to the economy;             
|
| |  | reduce future capital requirements on a relative
    basis; and                       
|
| |  | reduce our leverage and requirements on our
    liquidity resources.                  

We are aided in our disposition program by the
fact that we can terminate the management agreement of any hotel
we sell, in most cases subject to the payment of a fee as
discussed below, as well as the fact that 55 of our current 83
assets (including all 10 of the assets remaining in our
disposition program) are unencumbered and only 10 of those
assets are subject to ground leases. Excluding the 10 assets
included in our disposition program, we would have 43
unencumbered assets and nine subject to ground leases.

We recognized an impairment loss in 2002 on
certain non-core assets we were then actively marketing. We sold
one hotel in January 2003 for $12.7 million. Late in the first
quarter of 2003, we expanded our asset disposition program to
include a total of 16 non-core assets and recorded an impairment
charge in the first quarter of $56.7 million. In April
2003, we sold one of these hotels for $3.1 million. During
the second quarter of 2003, we made the determination to dispose
of an additional 19 non-core assets. Also, due to the market
interest in certain of our other hotel assets, we decided to add
an additional six assets to our disposition program. We
recognized an additional impairment loss of $208 million
related to our asset disposition program during the second
quarter of 2003. In the third quarter of 2003, we sold four more
of these hotels for $59 million. 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 sales prices on certain other
assets included in our disposition program and recognized an
additional impairment loss of $21 million during the third
quarter of 2003. During the fourth quarter of 2003, we made the
determination to retain eight of our assets previously included
in our disposition program. We also revised our estimated sales
prices on certain assets in our disposition program and
recognized an additional impairment loss of $9.4 million.
In the fourth quarter of 2003, we sold nine hotels included in
our disposition program for gross proceeds of $53.5 million.

The impairment charges are based on our estimates
of the fair value of the disposition properties. 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,

39



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the market for comparable properties, and quotes
from brokers, among other information. Actual results could
differ materially from these estimates.


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. Any such obligation would affect the
calculation of the final gain or loss on the sale of a
particular asset, since in accordance with current accounting
guidance, the obligation is not recognized until such time as
the asset disposition is complete and a termination notice is
provided to Interstate Hotels. At that time, the recognition of
any termination obligation will be included in discontinued
operations. 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.

In addition, we may from time to time receive
offers on other assets that we might consider selling. Any
additional sales of these assets may result in additional
impairment charges in future periods, if and when such
transactions might be undertaken. While we always consider any
opportunities that may improve our financial condition or
results of operations, we are not actively marketing any assets
other than the properties previously discussed in our
disposition program. 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.

Capital Expenditures

We make ongoing capital expenditures in order to
keep our hotels competitive in their markets and to comply with
franchise obligations, as described further in Operating
Risks (the potential adverse impact of our failure to meet
the requirements contained in our franchise and licensing
agreements) included in Item 1  Risk Factors of
this Annual Report on Form 10-K. We fund our capital
expenditures primarily from cash generated from operations and
existing cash on hand, and intend to use a portion of the
proceeds from the sales of non-core assets to provide capital
for renovation work. We invested $36.2 million for ongoing
capital expenditures during the year ended December 31,
2003. We have initiated an aggressive renovation program for our
core assets and anticipate investing a total of
$125 million on capital expenditures in 2004. The emphasis
will be on completing these projects on budget with minimal
disruptions to operations. We will focus on complete room and
facility renovations, eliminating to the degree possible,
piecemeal work where the typical consumer might not ascribe
value to the improvements. We believe we are timing this work
appropriately to take full advantage of the anticipated industry
recovery. The properties we are now marketing for sale typically
have higher per room capital expenditure requirements than our
core assets. Sales of these properties will allow us to focus
our capital spending dollars in the future on our core portfolio.

OTHER FINANCIAL INFORMATION

Critical Accounting Policies

Our consolidated financial statements include the
accounts of all wholly-owned and majority-owned subsidiaries.
Preparing financial statements in conformity with accounting
principles generally accepted in the United States requires us
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. On an ongoing basis, we evaluate our estimates
and judgments, including those related to the impairment of
long-lived assets and the recording of certain accrued
liabilities. Some of our estimates are material to the financial
statements. These estimates are therefore particularly sensitive
as future events could cause the actual results to be
significantly different from our estimates.

40



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Our critical accounting policies include the
accounting for the impairment or disposal of long-lived assets
and the classification of properties as held for sale. Our hotel
properties generally fall into two categories, held for use and
held for sale. Our held for use properties may include those
that we are actively marketing. Until such time as our criteria
for held for sale are met, as described below in further detail,
we maintain classification as an operational asset. At the time
we determine an asset to meet the criteria noted below, we
reclassify the asset and its operations to discontinued
operations. All of our properties are subject to an impairment
analysis whenever events or changes in circumstances indicate
that the carrying value may be impaired.

Accounting for the impairment or disposal of
long-lived assets

We adopted the provisions of 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 had been
disposed of on or after January 1, 2002 and where we have
no continuing involvement, including any gain or loss
recognized, to be recorded as discontinued operations.

The provisions of SFAS No. 144 also require
that whenever events or changes in circumstances indicate that
the carrying value of a long-lived asset 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. Based on current economic
conditions and our continuing forecast and outlooks for future
periods, we may be required in future periods to recognize
additional impairment charges if circumstances indicate at that
time that the carrying value of the assets may be impaired.

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
and will be included in discontinued operations.

Classification of properties as held for
sale

Held-for-sale classification requires that the
sale be probable and that the transfer of the asset is expected
to be completed within one year, among other criteria. Assessing
the probability of the sale requires significant judgment due to
the uncertainty surrounding completing the transaction. As a
result, we have the following policy in aiding in assessing
probability. We classify the properties we are actively
marketing as held for sale once all of these 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. If our estimates are incorrect, the carrying values may
not be accurately reflected. 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. We also reclassify the operating results of
properties held for sale as discontinued operations for all
periods presented.

41



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Off-Balance Sheet Arrangements and Aggregate
Contractual Obligations

We have future long-term debt and ground lease
obligations related to our consolidated entities and properties.
As of December 31, 2003, we were not involved in any
off-balance sheet arrangements with MIP.

The following table summarizes our aggregate
contractual obligations as of December 31, 2003 (in
thousands):

|                                                    |                                |                           |           |           |         |             |        |            |       |            |        |        |       |   |         |         |       |   |         |         |        | 
|--------------------------------------------------- | ------------------------------ | ------------------------- | --------- | --------- | ------- | ----------- | ------ | ---------- | ----- | ---------- | ------ | ------ | ----- | - | ------- | ------- | ----- | - | ------- | ------- | ------ | 
|                                                    |                                |                           |           | Less than |         | One to      |        | Three to   |       |           
|                                                    |                                | Total                     |           | One Year  |         | Three Years |        | Five Years |       | Thereafter
|                                                    |                                |                           |           |           |         |             |        |            |       |           
|Long-term debt, net of unamortized
    discount(a): |                                |                           |           |           |         |             |        |            |       |            |        |        |       |   |         |         |       |   |         |        
|                                                    | Senior unsecured notes(b)      |                           | $         | 944,744   |         |             | $      |           |       |            | $      |       |       |   | $       | 548,307 |       |   | $       | 396,437 |       
|                                                    | Secured facility due 2009      |                           |           | 309,035   |         |             |        | 5,532      |       |            |        | 14,186 |       |   |         | 289,317 |       |   |         |        |       
|                                                    |                                | Secured facility due 2013 |           |           | 100,765 |             |        |            | 1,336 |            |        |        | 3,448 |   |         |         | 5,896 |   |         |         | 90,085 | 
|                                                    | Senior subordinated notes(b)   |                           |           | 82,768    |         |             |        |           |       |            |        |       |       |   |         | 82,768  |       |   |         |        |       
|                                                    | Convertible subordinated notes |                           |           | 173,705   |         |             |        | 3,705      |       |            |        |       |       |   |         |        |       |   |         | 170,000 |       
|                                                    | Mortgage debt and other        |                           |           | 27,011    |         |             |        | 1,760      |       |            |        | 4,591  |       |   |         | 8,294   |       |   |         | 12,366  |       
|                                                    |                                |                           |           |           |         |             |        |            |       |            |        |        |       |   |         |         |       |   |         |        
|                                                    | Total long-term debt           |                           |           | 1,638,028 |         |             |        | 12,333     |       |            |        | 22,225 |       |   |         | 934,582 |       |   |         | 668,888 |       
|Ground lease obligations                            |                                |                           | 60,819    |           |         |             | 1,636  |            |       |            | 3,543  |        |       |   | 5,016   |         |       |   | 50,624  |        
|                                                    |                                |                           |           |           |         |             |        |            |       |            |        |        |       |   |         |         |       |   |         |        
|Aggregate contractual obligations                   |                                | $                         | 1,698,847 |           |         | $           | 13,969 |            |       | $          | 25,768 |        |       | $ | 939,598 |         |       | $ | 719,512 |        
|                                                    |                                |                           |           |           |         |             |        |            |       |            |        |        |       |   |         |         |       |   |         |        



---



|    |                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | For a description of the material terms of our
    long-term debt, see Financial Condition, Liquidity and
    Capital Resources  Long-Term Debt section above.
|   
|(b) | Subsequent to year end, we repurchased
    $61.5 million of senior unsecured notes and
    $13.5 million of senior subordinated notes.                           

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. Any such obligation would affect the
calculation of the final gain or loss on the sale of a
particular asset, since in accordance with current accounting
guidance, the obligation is not recognized until such time as
the asset disposition is complete and a termination notice is
provided to Interstate Hotels. 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.

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 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.



|         |                                                               
|-------- | --------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK

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. To achieve our
objectives, we may borrow at a combination of fixed and variable
rates, and may enter into derivative financial instruments such
as interest rate swaps, caps and treasury locks in order to
mitigate our interest rate risk on a related financial
instrument.

42



---



##### 



We only enter into derivative or interest rate
transactions for cash flow hedging purposes. We do not engage in
speculative transactions.


As of December 31, 2003, all of our
outstanding debt carried fixed rates of interest, as follows (in
thousands):

|                       |  |            |           |               |  |  |      |  
|---------------------- |  | ---------- | --------- | ------------- |  |  | ---- | -
|                       |  |            |           | Average      
|Expected Maturity      |  | Fixed Rate |           | Interest Rate
|                       |  |            |           |              
|2004                   |  | $          | 13,164    |               |  |  | 6.98 | %
|2005                   |  |            | 10,268    |               |  |  | 7.86 |  
|2006                   |  |            | 11,125    |               |  |  | 7.86 |  
|2007                   |  |            | 94,822    |               |  |  | 8.58 |  
|2008                   |  |            | 310,255   |               |  |  | 8.96 |  
|Thereafter             |  |            | 1,198,394 |               |  |  | 8.97 |  
|                       |  |            |           |               |  |  |      |  
|Total                  |  | $          | 1,638,028 |               |  |  | 8.92 | %
|                       |  |            |           |               |  |  |      |  
|Fair Value at 12/31/03 |  | $          | 1,730,717 |               |  |  |      |  
|                       |  |            |           |               |  |  |      |  

Our Canadian operations were not material to our
consolidated financial position as of December 31, 2003 and
2002, or our consolidated results of operations and cash flows
for each of the years in the three-year period ended
December 31, 2003. Accordingly, we were not subject to
material foreign currency exchange rate risk from the effects
that exchange rate movements of foreign currencies would have on
our future costs or on our future cash flows we would receive
from our foreign subsidiaries. Foreign currency transaction
gains and losses were not material to our results of operations
for the same periods. To date, we have not entered into any
significant foreign currency forward exchange contracts or other
derivative financial instruments to hedge the effects of adverse
fluctuations in foreign currency exchange rates.

ITEM
8.          FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

The following Consolidated Financial Statements,
Supplementary Data and Financial Statement Schedules are filed
as part of this Annual Report on Form 10-K:

|                                                                                                         |  |  |    | 
|-------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Independent Auditors Report                                                                             |  |  | 44 | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                         |  |  | 45 | 
|Consolidated Statements of Operations for the
    years ended December 31, 2003, 2002 and 2001           |  |  | 46 | 
|Consolidated Statements of Stockholders
    Equity for the years ended December 31, 2003, 2002 and 2001 |  |  | 48 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, 2002 and 2001           |  |  | 49 | 
|Notes to the Consolidated Financial Statements                                                           |  |  | 51 | 
|Schedule III  Real Estate and
    Accumulated Depreciation as of December 31, 2003                      |  |  | 69 | 

All other schedules are omitted because they are
not applicable or the required information is included in the
Consolidated Financial Statements or the Notes thereto.

43



---



##### 



INDEPENDENT AUDITORS REPORT

The Board of Directors

MeriStar Hospitality Corporation:


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

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

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

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



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

McLean, VA

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


44



---



##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED BALANCE SHEETS


DECEMBER 31, 2003 AND 2002


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


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

See
accompanying notes to the consolidated financial statements.

45



---



##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS


YEARS ENDED DECEMBER 31, 2003, 2002 AND
2001


(Dollars in thousands, except per share
amounts)


|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |         |         | 
|------------------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------------------------------------------------ | -------- | -------- | ------- | ---- | -------- | ------- | ------- | - | -------- | ------- | ------- | 
|                                                                          |                                                                 | 2003                                                               |          | 2002     |         | 2001
|                                                                          |                                                                 |                                                                    |          |          |         |     
|Revenue:                                                                  |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|                                                                          | Hotel operations:                                               |                                                                    |          |          |         |      |          |         |         |   |          |         |        
|                                                                          |                                                                 | Rooms                                                              |          | $        | 539,084 |      |          | $       | 559,634 |   |          | $       | 606,956 | 
|                                                                          |                                                                 | Food and beverage                                                  |          |          | 222,608 |      |          |         | 223,411 |   |          |         | 231,662 | 
|                                                                          |                                                                 | Other hotel operations                                             |          |          | 68,332  |      |          |         | 66,755  |   |          |         | 72,781  | 
|                                                                          | Office rental, parking and other revenue                        |                                                                    |          | 13,810   |         |      |          | 15,893  |         |   |          | 15,865  |        
|                                                                          | Participating lease revenue                                     |                                                                    |          |         |         |      |          |        |         |   |          | 2,057   |        
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|Total revenue                                                             |                                                                 |                                                                    | 843,834  |          |         |      | 865,693  |         |         |   | 929,321  |        
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|Hotel operating expenses:                                                 |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|                                                                          |                                                                 | Rooms                                                              |          |          | 137,804 |      |          |         | 135,285 |   |          |         | 145,012 | 
|                                                                          |                                                                 | Food and beverage                                                  |          |          | 161,749 |      |          |         | 158,201 |   |          |         | 165,244 | 
|                                                                          |                                                                 | Other hotel operating expenses                                     |          |          | 41,089  |      |          |         | 37,928  |   |          |         | 38,382  | 
|Office rental, parking and other expenses                                 |                                                                 |                                                                    | 2,784    |          |         |      | 3,004    |         |         |   | 2,805    |        
|Other operating expenses:                                                 |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|                                                                          |                                                                 | General and administrative                                         |          |          | 147,924 |      |          |         | 148,019 |   |          |         | 145,201 | 
|                                                                          |                                                                 | Property operating costs                                           |          |          | 129,270 |      |          |         | 127,017 |   |          |         | 133,906 | 
|                                                                          |                                                                 | Depreciation and amortization                                      |          |          | 105,451 |      |          |         | 109,196 |   |          |         | 101,162 | 
|                                                                          |                                                                 | Property taxes, insurance and other                                |          |          | 67,162  |      |          |         | 59,186  |   |          |         | 66,043  | 
|                                                                          |                                                                 | Loss on asset impairments                                          |          |          | 163,390 |      |          |         | 6,925   |   |          |         | 2,278   | 
|                                                                          |                                                                 | Impairment of investment in affiliate                              |          |          | 25,000  |      |          |         |        |   |          |         |        | 
|                                                                          |                                                                 | Write-down of note receivable with Interstate
    Hotels & Resorts |          |          |        |      |          |         | 14,517  |   |          |         |        | 
|                                                                          |                                                                 | Swap termination costs                                             |          |          |        |      |          |         |        |   |          |         | 9,297   | 
|                                                                          |                                                                 | Write-down of investment in STS Hotel Net                          |          |          |        |      |          |         |        |   |          |         | 2,112   | 
|                                                                          |                                                                 | FelCor merger costs                                                |          |          |        |      |          |         |        |   |          |         | 5,817   | 
|                                                                          |                                                                 | Costs to terminate leases with Prime Hospitality
    Corporation   |          |          |        |      |          |         |        |   |          |         | 1,315   | 
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|Operating expenses                                                        |                                                                 |                                                                    | 981,623  |          |         |      | 799,278  |         |         |   | 818,574  |        
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|Operating (loss) income                                                   |                                                                 |                                                                    | (137,789 | )        |         |      | 66,415   |         |         |   | 110,747  |        
|Gain on early extinguishments of debt                                     |                                                                 |                                                                    | 4,085    |          |         |      |         |         |         |   |         |        
|Change in fair value of non-hedging derivatives,
    net of swap payments |                                                                 |                                                                    |         |          |         |      | (4,446   | )       |         |   |         |        
|Loss on fair value of non-hedging derivatives                             |                                                                 |                                                                    |         |          |         |      | (4,735   | )       |         |   | (6,666   | )      
|Loss on sale of assets                                                    |                                                                 |                                                                    |         |          |         |      |         |         |         |   | (2,176   | )      
|Minority interest income, net                                             |                                                                 |                                                                    | 17,877   |          |         |      | 10,574   |         |         |   | 2,958    |        
|Interest expense, net                                                     |                                                                 |                                                                    | (141,443 | )        |         |      | (136,880 | )       |         |   | (122,655 | )      
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|Loss before income taxes and discontinued
    operations                  |                                                                 |                                                                    | (257,270 | )        |         |      | (69,072  | )       |         |   | (17,792  | )      
|Income tax benefit                                                        |                                                                 |                                                                    | 3,293    |          |         |      | 1,398    |         |         |   | 557      |        
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|Loss from continuing operations                                           |                                                                 |                                                                    | (253,977 | )        |         |      | (67,674  | )       |         |   | (17,235  | )      
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|Discontinued operations:                                                  |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|                                                                          | Loss from discontinued operations before income
    tax benefit |                                                                    |          | (135,798 | )       |      |          | (94,342 | )       |   |          | (26,249 | )      
|                                                                          | Income tax benefit                                              |                                                                    |          | 911      |         |      |          | 768     |         |   |          | 722     |        
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|Loss from discontinued operations                                         |                                                                 |                                                                    | (134,887 | )        |         |      | (93,574  | )       |         |   | (25,527  | )      
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        
|Net loss                                                                  |                                                                 | $                                                                  | (388,864 | )        |         | $    | (161,248 | )       |         | $ | (42,762  | )      
|                                                                          |                                                                 |                                                                    |          |          |         |      |          |         |         |   |          |        

46



---



##### 



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

See
accompanying notes to the consolidated financial statements.

47



---



##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY


YEARS ENDED DECEMBER 31, 2003, 2002 AND
2001


(Dollars and shares in thousands)


|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |          |  
|--------------------------------------------------------------------------- | ------------------ | ------------ | ------ | -------- |  | ---------- | --- | ----------- |  | --------------- | ------ | --------- |  | ------ | ------- | ----- |  | - | --------- | - |  | - | -------- | - |  | - | ------- | - |  | - | --------- | -------- | -
|                                                                            |                    |              |        |          |  |            |     |             |  |                
|                                                                            |                    | Common Stock |        |          |  |            |     |             |  |                
|                                                                            |                    |              |        |          |  |            |     | Accumulated |  |                
|                                                                            |                    |              |        |          |  |            |     |             |  | Other           |        |          
|                                                                            |                    | Issued       |        | Treasury |  |            |     | Retained    |  | Comprehen-      |        |          
|                                                                            |                    |              |        |          |  | Additional |     | Earnings    |  | sive Income     |        |          
|                                                                            |                    | Shares       |        | Amount   |  | Shares     |     | Amount      |  | Paid In Capital |        | (Deficit) |  | (Loss) |         | Total
|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |      
|Balance, January 1, 2001                                                    |                    |              | 48,463 |          |  | $          | 485 |             |  |                 | (4,083 | )         |  | $      | (72,354 | )     |  | $ | 1,169,668 |   |  | $ | 42,837   |   |  | $ | (6,081  | ) |  | $ | 1,134,555 |         
|Comprehensive loss:                                                         |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         
|Net loss                                                                    |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   |          |   |  |   | (42,762  | ) |  |   |        |   |  |   | (42,762   | )       
|Foreign currency translation Adjustment                                     |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   |          |   |  |   |         |   |  |   | (1,176  | ) |  |   | (1,176    | )       
|Derivative instruments translation adjustment                               |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   |          |   |  |   |         |   |  |   | (2,842  | ) |  |   | (2,842    | )       
|Change in valuation of hedging derivative
    instruments                   |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   |          |   |  |   |         |   |  |   | (2,404  | ) |  |   | (2,404    | )       
|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         
|                                                                            | Comprehensive loss |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           | (49,184  | )
|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         
|Options exercised                                                           |                    |              | 48     |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   | 847       |   |  |   |         |   |  |   |        |   |  |   | 847       |         
|Forfeiture of restricted stock                                              |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   | (28       | ) |  |   |         |   |  |   |        |   |  |   | (28       | )       
|Amortization of unearned stock-based compensation                           |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   | 2,263     |   |  |   |         |   |  |   |        |   |  |   | 2,263     |         
|Shares repurchased                                                          |                    |              |       |          |  |            |    |             |  |                 | (154   | )         |  |        | (3,002  | )     |  |   |          |   |  |   |         |   |  |   |        |   |  |   | (3,002    | )       
|Redemption of OP Units                                                      |                    |              | 250    |          |  |            | 2   |             |  |                 |       |           |  |        |        |       |  |   | 5,426     |   |  |   |         |   |  |   |        |   |  |   | 5,428     |         
|Dividends declared                                                          |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   |          |   |  |   | (68,316  | ) |  |   |        |   |  |   | (68,316   | )       
|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         
|Balance, December 31, 2001                                                  |                    |              | 48,761 |          |  |            | 487 |             |  |                 | (4,237 | )         |  |        | (75,356 | )     |  |   | 1,178,176 |   |  |   | (68,241  | ) |  |   | (12,503 | ) |  |   | 1,022,563 |         
|Comprehensive loss:                                                         |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         
|Net loss                                                                    |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   |          |   |  |   | (161,248 | ) |  |   |        |   |  |   | (161,248  | )       
|Foreign currency translation adjustment                                     |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   |          |   |  |   |         |   |  |   | 205     |   |  |   | 205       |         
|Change in valuation of hedging derivative
    instruments                   |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   |          |   |  |   |         |   |  |   | 511     |   |  |   | 511       |         
|Reclassification of loss on derivatives due to
    repayment of hedged debt |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   |          |   |  |   |         |   |  |   | 4,735   |   |  |   | 4,735     |         
|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         
|                                                                            | Comprehensive loss |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           | (155,797 | )
|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         
|Options exercised                                                           |                    |              | 192    |          |  |            | 2   |             |  |                 |       |           |  |        |        |       |  |   | 3,151     |   |  |   |         |   |  |   |        |   |  |   | 3,153     |         
|Conversion of POPs to common stock                                          |                    |              | 188    |          |  |            | 2   |             |  |                 |       |           |  |        |        |       |  |   | 2,913     |   |  |   |         |   |  |   |        |   |  |   | 2,915     |         
|Amortization of unearned stock-based compensation                           |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   | 1,649     |   |  |   |         |   |  |   |        |   |  |   | 1,649     |         
|Shares repurchased                                                          |                    |              |       |          |  |            |    |             |  |                 | (87    | )         |  |        | (1,318  | )     |  |   |          |   |  |   |         |   |  |   |        |   |  |   | (1,318    | )       
|Redemption of OP Units                                                      |                    |              | 414    |          |  |            | 4   |             |  |                 |       |           |  |        |        |       |  |   | 6,498     |   |  |   |         |   |  |   |        |   |  |   | 6,502     |         
|Dividends declared                                                          |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   |          |   |  |   | (1,381   | ) |  |   |        |   |  |   | (1,381    | )       
|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         
|Balance, December 31, 2002                                                  |                    |              | 49,555 |          |  |            | 495 |             |  |                 | (4,324 | )         |  |        | (76,674 | )     |  |   | 1,192,387 |   |  |   | (230,870 | ) |  |   | (7,052  | ) |  |   | 878,286   |         
|Comprehensive loss:                                                         |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         
|Net loss                                                                    |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   |          |   |  |   | (388,864 | ) |  |   |        |   |  |   | (388,864  | )       
|Foreign currency translation adjustment                                     |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   |          |   |  |   |         |   |  |   | 6,075   |   |  |   | 6,075     |         
|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         
|                                                                            | Comprehensive loss |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           | (382,789 | )
|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         
|Issuances of common stock                                                   |                    |              | 13,800 |          |  |            | 138 |             |  |                 |       |           |  |        |        |       |  |   | 95,070    |   |  |   |         |   |  |   |        |   |  |   | 95,208    |         
|Issuance of restricted stock                                                |                    |              | 232    |          |  |            | 2   |             |  |                 |       |           |  |        |        |       |  |   | 1,151     |   |  |   |         |   |  |   |        |   |  |   | 1,153     |         
|Debt for equity exchanges                                                   |                    |              | 4,613  |          |  |            | 46  |             |  |                 | 2,056  |           |  |        | 34,084  |       |  |   | 26,308    |   |  |   | (22,360  | ) |  |   |        |   |  |   | 38,078    |         
|Conversion of POPs to common stock                                          |                    |              | 50     |          |  |            | 1   |             |  |                 |       |           |  |        |        |       |  |   | 920       |   |  |   |         |   |  |   |        |   |  |   | 921       |         
|Amortization of unearned stock-based compensation                           |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   | 1,349     |   |  |   |         |   |  |   |        |   |  |   | 1,349     |         
|Stock option expense                                                        |                    |              |       |          |  |            |    |             |  |                 |       |           |  |        |        |       |  |   | 22        |   |  |   |         |   |  |   |        |   |  |   | 22        |         
|Shares repurchased                                                          |                    |              |       |          |  |            |    |             |  |                 | (77    | )         |  |        | (376    | )     |  |   |          |   |  |   |         |   |  |   |        |   |  |   | (376      | )       
|Redemption of OP Units                                                      |                    |              | 885    |          |  |            | 9   |             |  |                 |       |           |  |        |        |       |  |   | 21,752    |   |  |   |         |   |  |   |        |   |  |   | 21,761    |         
|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         
|Balance, December 31, 2003                                                  |                    |              | 69,135 |          |  | $          | 691 |             |  |                 | (2,345 | )         |  | $      | (42,966 | )     |  | $ | 1,338,959 |   |  | $ | (642,094 | ) |  | $ | (977    | ) |  | $ | 653,613   |         
|                                                                            |                    |              |        |          |  |            |     |             |  |                 |        |           |  |        |         |       |  |   |           |   |  |   |          |   |  |   |         |   |  |   |           |         

See
accompanying notes to the consolidated financial statements.

48



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##### 



MERISTAR HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS


YEARS ENDED DECEMBER 31, 2003, 2002 AND
2001


(Dollars in thousands)


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

49



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##### 



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

See accompanying notes to the consolidated
financial statements.

50



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##### 



MERISTAR HOSPITALITY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS


DECEMBER 31, 2003, 2002 AND 2001




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

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

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



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

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



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

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

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

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

51



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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

52



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##### 



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


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

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

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

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

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

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

Income Taxes.We
account for income taxes in accordance with the provisions of
SFAS No. 109, Accounting for Income Taxes.
Deferred income taxes reflect the tax consequences on future
years of

53



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##### 



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


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

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

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

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

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

54



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##### 





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

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

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

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

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

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

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

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

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

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

4.          Assets
Held for Sale

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

55



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##### 



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

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



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

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

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

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

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

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

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

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

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

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

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

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

57



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

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

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

We completed a $330 million non-recourse
financing secured by a portfolio of 19 hotels in 1999. The loan
bears a fixed annual interest rate of 8.01% and matures in 2009.
The secured facility contains standard provisions that require
the servicer to maintain in escrow cash balances for certain
items such as property taxes and insurance. In addition, the
facility contains a provision that requires our mortgage
servicer to retain in escrow the excess cash from the encumbered
hotels after payment of debt service (Excess Cash),
if net hotel operating income (NOI) for the trailing
twelve months declines below $57 million. This provision
was triggered in October 2002 and will be effective until the
hotels generate the minimum cash flow required for two
consecutive quarters, at which time the cash being held in
escrow will be released to us. Approximately $27.2 million
of cash was held in escrow under this provision as of
December 31, 2003. In July 2003, we signed an amendment to
the loan agreement that permits the release of cash placed in
escrow for all capital expenditures incurred on the 19
encumbered properties on or after April 1, 2003. Although
the servicer will continue to retain in escrow any excess cash
from the encumbered hotels, they will release cash for all
capital expenditures we have incurred from April 1, 2003
through the date of the amendment and future capital
expenditures we incur on the 19 properties. Escrowed funds
totaling approximately $18.4 million were available to fund
capital expenditures under this provision as of
December 31, 2003.

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

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

58



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

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

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

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

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

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

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



|   |             
|-- | ------------
|7. | Income Taxes

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

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

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

59



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##### 



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

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

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

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

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

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

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

The most significant component of our deferred
tax liability continues to be the basis difference in our fixed
assets. At the time of the merger between CapStar Hotel Company
and American General Hospitality Corporation in 1998, we
established a new basis for the acquired assets and assumed
liabilities based on their fair values at the time of the
merger. We established a net deferred income tax liability for
the estimated

60



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


REITs are subject to federal income taxes in
certain instances involving the disposition of hotel assets. For
a period of 10 years, beginning with the first year the
corporation elected REIT status, if the REIT disposes of an
asset that had appreciated in value at the time of the REIT
election, a corporate-level income tax may be incurred. The
amount of income subject to this corporate-level tax is limited
to the amount of built-in-gain established at the time of our
initial REIT election. As a result of our asset disposition
program, certain assets that were subject to the built-in-gains
tax were disposed of during 2003 and 2002. The disposition of
these assets resulted in a net built-in-loss of
$11.3 million. This built-in-loss is available to offset
any income from future sales of assets that are subject to the
built-in-gains tax. We do not anticipate our future dispositions
to result in the recognition of a net built-in-gain. As a
result, we have recorded a full valuation allowance against the
built-in-loss carryover.

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



|   |                                                
|-- | -----------------------------------------------
|8. | Stockholders Equity and Minority
    Interests

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

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

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

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

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

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

OP Units.Substantially all of our assets are held indirectly by and
operated through MeriStar Hospitality Operating Partnership,
L.P., our subsidiary operating partnership, (Commission file
number 333-63768). Our operating partnerships partnership
agreement provides for five classes of partnership interests:
Common OP Units, Class B OP Units, Class C OP Units,
Class D OP Units and POPs.

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

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

61



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

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

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



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

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

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

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



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

Due to/ from Interstate Hotels &
Resorts

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

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

62



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##### 



Note Receivable From Interstate Hotels &
Resorts

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

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

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

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

Other Related-Party Transactions

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

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

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

11.          Incentive
Compensation

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

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

Stock Options

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

63



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

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

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

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

64



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##### 



Other Stock-Based Compensation

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

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



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

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



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

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

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

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

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

65



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##### 



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

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

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



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

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

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

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

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

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

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

On May 9, 2001, we and our operating
partnership entered into an Agreement and Plan of Merger with
FelCor Lodging Trust Incorporated and its operating partnership.
On September 21, 2001, we mutually agreed

66



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##### 



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




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

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

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

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



---



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



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

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

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



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

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

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

67



---



##### 



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




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

We and certain subsidiaries of MeriStar
Hospitality Operating Partnership, L.P. (MHOP), our subsidiary
operating partnership, are guarantors of senior unsecured notes
issued by MHOP. MHOP and certain of its subsidiaries are
guarantors of our unsecured subordinated notes. We own a one
percent general partner interest in MHOP, and MeriStar LP, Inc.,
our wholly-owned subsidiary, owns approximately a
93 percent limited partner interest in MHOP. All guarantees
are full and unconditional, and joint and several.
Exhibit 99.1 to this Annual Report on Form 10-K
presents supplementary consolidating financial statements for
MHOP, including each of the guarantor subsidiaries. This exhibit
presents MHOPs consolidating balance sheets as of
December 31, 2003 and 2002, consolidating statements of
operations for the years ended December 31, 2003, 2002, and
2001, and consolidating statements of cash flows for the years
ended December 31, 2003, 2002, and 2001.

68



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##### 



MERISTAR HOSPITALITY CORPORATION

SCHEDULE III  REAL ESTATE AND
ACCUMULATED DEPRECIATION


DECEMBER 31, 2003


(Dollars in thousands)


|                                                             |  |         |        |                 |  |                  |        |                |  |          |        |      |  |          |        |              |  |           |         |          |  |              |        |  |  |   |        |  |  |   |       |  |  |  |      |  |  |  |          |  |  |  |    | 
|------------------------------------------------------------ |  | ------- | ------ | --------------- |  | ---------------- | ------ | -------------- |  | -------- | ------ | ---- |  | -------- | ------ | ------------ |  | --------- | ------- | -------- |  | ------------ | ------ |  |  | - | ------ |  |  | - | ----- |  |  |  | ---- |  |  |  | -------- |  |  |  | -- | 
|                                                             |  |         |        |                 |  |                  |        |                |  |          |        |      |  |          |        |             
|                                                             |  |         |        | Initial Cost to |  | Costs Subsequent |        | Gross Amount   |  |          |        |      |  |          |        | Life on     
|                                                             |  |         |        | Company         |  | to Acquisition   |        | at End of Year |  |          |        |      |  |          |        | which       
|                                                             |  |         |        |                 |  |                  |        |                |  |          |        |      |  |          |        | depreciation
|                                                             |  |         |        |                 |  | Building         |        |                |  | Building |        |      |  | Building |        | Accum-       |  |           |         |          |  | in latest   
|                                                             |  |         |        |                 |  | and              |        |                |  | and      |        |      |  | and      |        | ulated       |  | Year of   |         |          |  | income      
|                                                             |  | Encum-  |        |                 |  | Improve-         |        |                |  | Improve- |        |      |  | Improve- |        | Deprecia-    |  | Construc- |         | Date     |  | statement is
|Description                                                  |  | brances |        | Land            |  | ments            |        | Land           |  | ments    |        | Land |  | ments    |        | tion         |  | tion      |         | Acquired |  | computed    
|                                                             |  |         |        |                 |  |                  |        |                |  |          |        |      |  |          |        |              |  |           |         |          |  |             
|Hotel Assets:                                                |  |         |        |                 |  |                  |        |                |  |          |        |      |  |          |        |              |  |           |         |          |  |              |        |  |  |   |        |  |  |   |       |  |  |  |      |  |  |  |          |  |  |  |    | 
|Salt Lake Airport Hilton, UT                                 |  | $       |       |                 |  | $                | 770    |                |  | $        | 12,828 |      |  | $        |       |              |  | $         | 4,668   |          |  | $            | 770    |  |  | $ | 17,496 |  |  | $ | 3,431 |  |  |  | 1980 |  |  |  | 3/3/95   |  |  |  | 40 | 
|Sheraton Hotel, Colorado Springs, CO                         |  |         | (1)    |                 |  |                  | 1,071  |                |  |          | 14,592 |      |  |          |       |              |  |           | 6,486   |          |  |              | 1,071  |  |  |   | 21,078 |  |  |   | 4,020 |  |  |  | 1974 |  |  |  | 6/30/95  |  |  |  | 40 | 
|Hilton Hotel, Bellevue, WA                                   |  |         | 33     |                 |  |                  | 5,211  |                |  |          | 6,766  |      |  |          | (522   | )            |  |           | 4,078   |          |  |              | 4,689  |  |  |   | 10,844 |  |  |   | 1,922 |  |  |  | 1979 |  |  |  | 8/4/95   |  |  |  | 40 | 
|Marriott Hotel, Somerset, NJ                                 |  |         | (1)    |                 |  |                  | 1,978  |                |  |          | 23,001 |      |  |          |       |              |  |           | 5,796   |          |  |              | 1,978  |  |  |   | 28,797 |  |  |   | 5,733 |  |  |  | 1978 |  |  |  | 10/3/95  |  |  |  | 40 | 
|Westin Atlanta Airport, Atlanta, GA                          |  |         |       |                 |  |                  | 2,650  |                |  |          | 15,926 |      |  |          | (300   | )            |  |           | 9,833   |          |  |              | 2,350  |  |  |   | 25,759 |  |  |   | 5,046 |  |  |  | 1982 |  |  |  | 11/15/95 |  |  |  | 40 | 
|Sheraton Hotel, Charlotte, NC                                |  |         | (1)    |                 |  |                  | 4,700  |                |  |          | 11,057 |      |  |          |       |              |  |           | 5,204   |          |  |              | 4,700  |  |  |   | 16,261 |  |  |   | 2,935 |  |  |  | 1985 |  |  |  | 2/2/96   |  |  |  | 40 | 
|Park Plaza, Cleveland, OH                                    |  |         |       |                 |  |                  | 1,330  |                |  |          | 6,353  |      |  |          | (1,124 | )            |  |           | (4,774  | )        |  |              | 206    |  |  |   | 1,579  |  |  |   |      |  |  |  | 1978 |  |  |  | 2/16/96  |  |  |  | 40 | 
|Orange County Airport Hilton, Irvine, CA                     |  |         | (1)    |                 |  |                  | 9,990  |                |  |          | 7,993  |      |  |          |       |              |  |           | 4,110   |          |  |              | 9,990  |  |  |   | 12,103 |  |  |   | 2,165 |  |  |  | 1976 |  |  |  | 2/22/96  |  |  |  | 40 | 
|The Latham Hotel, Washington, DC                             |  |         |       |                 |  |                  | 6,500  |                |  |          | 5,320  |      |  |          |       |              |  |           | 4,632   |          |  |              | 6,500  |  |  |   | 9,952  |  |  |   | 1,647 |  |  |  | 1981 |  |  |  | 3/8/96   |  |  |  | 40 | 
|Hilton Hotel, Arlington, TX                                  |  |         | (1)    |                 |  |                  | 1,836  |                |  |          | 14,689 |      |  |          | 79     |              |  |           | 4,016   |          |  |              | 1,915  |  |  |   | 18,705 |  |  |   | 3,545 |  |  |  | 1983 |  |  |  | 4/17/96  |  |  |  | 40 | 
|Hilton Hotel, Arlington, VA                                  |  |         |       |                 |  |                  | 4,000  |                |  |          | 15,069 |      |  |          |       |              |  |           | 1,300   |          |  |              | 4,000  |  |  |   | 16,369 |  |  |   | 2,924 |  |  |  | 1990 |  |  |  | 8/23/96  |  |  |  | 40 | 
|Embassy Suites, Denver, CO                                   |  |         | (1)    |                 |  |                  | 2,500  |                |  |          | 20,700 |      |  |          |       |              |  |           | 4,169   |          |  |              | 2,500  |  |  |   | 24,869 |  |  |   | 4,190 |  |  |  | 1986 |  |  |  | 12/12/96 |  |  |  | 40 | 
|Holiday Inn, Colorado Springs, CO                            |  |         |       |                 |  |                  | 1,600  |                |  |          | 4,232  |      |  |          | (902   | )            |  |           | (1,863  | )        |  |              | 698    |  |  |   | 2,369  |  |  |   | 24    |  |  |  | 1974 |  |  |  | 12/17/96 |  |  |  | 40 | 
|Embassy Row Hilton, Washington, DC                           |  |         |       |                 |  |                  | 2,200  |                |  |          | 13,247 |      |  |          |       |              |  |           | 3,851   |          |  |              | 2,200  |  |  |   | 17,098 |  |  |   | 2,732 |  |  |  | 1969 |  |  |  | 12/17/96 |  |  |  | 40 | 
|Hilton Hotel & Towers, Lafayette, LA                         |  |         | (1)    |                 |  |                  | 1,700  |                |  |          | 16,062 |      |  |          |       |              |  |           | 2,550   |          |  |              | 1,700  |  |  |   | 18,612 |  |  |   | 3,093 |  |  |  | 1981 |  |  |  | 12/17/96 |  |  |  | 40 | 
|Hilton Hotel, Sacramento, CA                                 |  |         | (1)    |                 |  |                  | 4,000  |                |  |          | 16,013 |      |  |          |       |              |  |           | 3,747   |          |  |              | 4,000  |  |  |   | 19,760 |  |  |   | 3,197 |  |  |  | 1983 |  |  |  | 12/17/96 |  |  |  | 40 | 
|Marina Hotel, San Pedro, CA                                  |  |         |       |                 |  |                  | 640    |                |  |          | 6,047  |      |  |          |       |              |  |           | 2,718   |          |  |              | 640    |  |  |   | 8,765  |  |  |   | 1,419 |  |  |  | 1989 |  |  |  | 1/28/97  |  |  |  | 40 | 
|Doubletree, Albuquerque, NM                                  |  |         | (1)    |                 |  |                  | 2,700  |                |  |          | 15,075 |      |  |          |       |              |  |           | 2,516   |          |  |              | 2,700  |  |  |   | 17,591 |  |  |   | 2,843 |  |  |  | 1975 |  |  |  | 1/31/97  |  |  |  | 40 | 
|Westchase Hilton & Towers, Houston, TX                       |  |         | (1)    |                 |  |                  | 3,000  |                |  |          | 23,991 |      |  |          |       |              |  |           | 1,846   |          |  |              | 3,000  |  |  |   | 25,837 |  |  |   | 4,475 |  |  |  | 1980 |  |  |  | 1/31/97  |  |  |  | 40 | 
|Sheraton Great Valley Inn, Frazer, PA                        |  |         | (2)    |                 |  |                  | 2,150  |                |  |          | 11,653 |      |  |          | 11     |              |  |           | 4,075   |          |  |              | 2,161  |  |  |   | 15,728 |  |  |   | 2,372 |  |  |  | 1971 |  |  |  | 3/27/97  |  |  |  | 40 | 
|Sheraton Hotel Dallas, Dallas, TX(3)(4)                      |  |         |       |                 |  |                  | 1,300  |                |  |          | 17,268 |      |  |          | (868   | )            |  |           | (10,484 | )        |  |              | 432    |  |  |   | 6,784  |  |  |   | 67    |  |  |  | 1974 |  |  |  | 4/1/97   |  |  |  | 40 | 
|Sheraton Hotel Guildford, Surrey, BC, Canada
    (3)         |  |         |       |                 |  |                  | 2,366  |                |  |          | 24,008 |      |  |          | (1,448 | )            |  |           | (15,759 | )        |  |              | 918    |  |  |   | 8,249  |  |  |   |      |  |  |  | 1992 |  |  |  | 4/1/97   |  |  |  | 40 | 
|Doubletree, Indianapolis, IN                                 |  |         |       |                 |  |                  | 1,000  |                |  |          | 8,242  |      |  |          | (218   | )            |  |           | (2,034  | )        |  |              | 782    |  |  |   | 6,208  |  |  |   | 52    |  |  |  | 1987 |  |  |  | 4/1/97   |  |  |  | 40 | 
|Hilton Crystal City, Arlington, VA                           |  |         | (2)    |                 |  |                  | 5,800  |                |  |          | 29,879 |      |  |          |       |              |  |           | 2,664   |          |  |              | 5,800  |  |  |   | 32,543 |  |  |   | 5,087 |  |  |  | 1974 |  |  |  | 7/1/97   |  |  |  | 40 | 
|Doral Palm Springs, Cathedral City, CA                       |  |         |       |                 |  |                  | 1,604  |                |  |          | 16,141 |      |  |          |       |              |  |           | 3,895   |          |  |              | 1,604  |  |  |   | 20,036 |  |  |   | 3,162 |  |  |  | 1985 |  |  |  | 7/1/97   |  |  |  | 40 | 
|Radisson, Chicago, IL                                        |  |         |       |                 |  |                  | 4,870  |                |  |          | 39,175 |      |  |          |       |              |  |           | 4,148   |          |  |              | 4,870  |  |  |   | 43,323 |  |  |   | 6,731 |  |  |  | 1971 |  |  |  | 7/15/97  |  |  |  | 40 | 
|Georgetown Inn, Washington, DC                               |  |         |       |                 |  |                  | 6,100  |                |  |          | 7,103  |      |  |          |       |              |  |           | 1,890   |          |  |              | 6,100  |  |  |   | 8,993  |  |  |   | 1,324 |  |  |  | 1962 |  |  |  | 7/15/97  |  |  |  | 40 | 
|Embassy Suites Center City, Philadelphia, PA                 |  |         | (1)    |                 |  |                  | 5,500  |                |  |          | 26,763 |      |  |          |       |              |  |           | 4,138   |          |  |              | 5,500  |  |  |   | 30,901 |  |  |   | 4,614 |  |  |  | 1963 |  |  |  | 8/12/97  |  |  |  | 40 | 
|Doubletree, Austin, TX                                       |  |         | (1)    |                 |  |                  | 2,975  |                |  |          | 25,678 |      |  |          |       |              |  |           | 3,640   |          |  |              | 2,975  |  |  |   | 29,318 |  |  |   | 4,477 |  |  |  | 1984 |  |  |  | 8/14/97  |  |  |  | 40 | 
|Radisson, Lexington, KY                                      |  |         |       |                 |  |                  | 1,100  |                |  |          | 30,375 |      |  |          |       |              |  |           | 7,238   |          |  |              | 1,100  |  |  |   | 37,613 |  |  |   | 5,704 |  |  |  | 1982 |  |  |  | 8/14/97  |  |  |  | 40 | 
|Embassy Suites International Airport, Tucson, AZ             |  |         |       |                 |  |                  | 1,640  |                |  |          | 10,444 |      |  |          |       |              |  |           | 2,622   |          |  |              | 1,640  |  |  |   | 13,066 |  |  |   | 1,877 |  |  |  | 1982 |  |  |  | 10/23/97 |  |  |  | 40 | 
|Westin Morristown, NJ(3)(4)                                  |  |         |       |                 |  |                  | 2,500  |                |  |          | 19,128 |      |  |          | (1,609 | )            |  |           | (12,087 | )        |  |              | 891    |  |  |   | 7,041  |  |  |   | 210   |  |  |  | 1962 |  |  |  | 11/20/97 |  |  |  | 40 | 
|Doubletree, Windsor Locks, CT                                |  |         |       |                 |  |                  | 1,013  |                |  |          | 10,228 |      |  |          | 87     |              |  |           | 1,949   |          |  |              | 1,100  |  |  |   | 12,177 |  |  |   | 1,761 |  |  |  | 1985 |  |  |  | 11/24/97 |  |  |  | 40 | 
|Metro Airport Hilton & Suites, Detroit, MI                   |  |         |       |                 |  |                  | 1,750  |                |  |          | 12,639 |      |  |          |       |              |  |           | 1,681   |          |  |              | 1,750  |  |  |   | 14,320 |  |  |   | 2,126 |  |  |  | 1989 |  |  |  | 12/16/97 |  |  |  | 40 | 
|Marriott Hotel, Los Angeles, CA                              |  |         |       |                 |  |                  | 5,900  |                |  |          | 48,250 |      |  |          |       |              |  |           | 8,179   |          |  |              | 5,900  |  |  |   | 56,429 |  |  |   | 8,147 |  |  |  | 1983 |  |  |  | 12/18/97 |  |  |  | 40 | 
|Hilton Austin, Austin TX                                     |  |         |       |                 |  |                  | 2,700  |                |  |          | 15,852 |      |  |          | (2,052 | )            |  |           | (11,807 | )        |  |              | 648    |  |  |   | 4,045  |  |  |   | 48    |  |  |  | 1974 |  |  |  | 1/6/98   |  |  |  | 40 | 
|Renaissance Dallas Marriott, Dallas TX                       |  |         |       |                 |  |                  | 3,400  |                |  |          | 20,813 |      |  |          |       |              |  |           | 4,545   |          |  |              | 3,400  |  |  |   | 25,358 |  |  |   | 3,609 |  |  |  | 1979 |  |  |  | 1/6/98   |  |  |  | 40 | 
|Houston Sheraton Brookhollow Hotel, TX                       |  |         |       |                 |  |                  | 2,500  |                |  |          | 17,609 |      |  |          | (1,412 | )            |  |           | (10,007 | )        |  |              | 1,088  |  |  |   | 7,602  |  |  |   |      |  |  |  | 1980 |  |  |  | 1/6/98   |  |  |  | 40 | 
|Seelbach Hilton, Louisville, KY                              |  |         | (2)    |                 |  |                  | 1,400  |                |  |          | 38,462 |      |  |          |       |              |  |           | 7,428   |          |  |              | 1,400  |  |  |   | 45,890 |  |  |   | 6,407 |  |  |  | 1905 |  |  |  | 1/6/98   |  |  |  | 40 | 
|Midland Hilton & Towers, TX(4)                               |  |         |       |                 |  |                  | 150    |                |  |          | 8,487  |      |  |          | (79    | )            |  |           | (4,149  | )        |  |              | 71     |  |  |   | 4,338  |  |  |   | 89    |  |  |  | 1976 |  |  |  | 1/6/98   |  |  |  | 40 | 
|Westin Oklahoma, OK                                          |  |         |       |                 |  |                  | 3,500  |                |  |          | 27,588 |      |  |          |       |              |  |           | 3,289   |          |  |              | 3,500  |  |  |   | 30,877 |  |  |   | 4,444 |  |  |  | 1977 |  |  |  | 1/6/98   |  |  |  | 40 | 
|Sheraton Hotel, Columbia, MD                                 |  |         | (2)    |                 |  |                  | 3,600  |                |  |          | 21,393 |      |  |          |       |              |  |           | 4,192   |          |  |              | 3,600  |  |  |   | 25,585 |  |  |   | 3,450 |  |  |  | 1972 |  |  |  | 3/27/98  |  |  |  | 40 | 
|Radisson Cross Keys, Baltimore, MD                           |  |         |       |                 |  |                  | 1,500  |                |  |          | 5,615  |      |  |          |       |              |  |           | 1,746   |          |  |              | 1,500  |  |  |   | 7,361  |  |  |   | 961   |  |  |  | 1973 |  |  |  | 3/27/98  |  |  |  | 40 | 
|Sheraton Fishermans Wharf, San Francisco, CA                |  |         | (1),   |                 |  |                  | 19,708 |                |  |          | 61,751 |      |  |          | 4      |              |  |           | 5,841   |          |  |              | 19,712 |  |  |   | 67,592 |  |  |   | 9,316 |  |  |  | 1975 |  |  |  | 4/2/98   |  |  |  | 40 | 
|Hartford Hotel, CT(3)(4)                                     |  |         |       |                 |  |                  | 4,073  |                |  |          | 24,458 |      |  |          | (3,293 | )            |  |           | (19,795 | )        |  |              | 780    |  |  |   | 4,663  |  |  |   | 91    |  |  |  | 1975 |  |  |  | 5/21/98  |  |  |  | 40 | 
|Holiday Inn Dallas DFW Airport South, TX                     |  |         | 11,291 |                 |  |                  | 3,388  |                |  |          | 28,847 |      |  |          | (2,244 | )            |  |           | (19,640 | )        |  |              | 1,144  |  |  |   | 9,207  |  |  |   |      |  |  |  | 1974 |  |  |  | 8/3/98   |  |  |  | 40 | 
|Courtyard by Marriott Meadowlands, NJ                        |  |         |       |                 |  |                  |       |                |  |          | 9,649  |      |  |          |       |              |  |           | 325     |          |  |              |       |  |  |   | 9,974  |  |  |   | 1,445 |  |  |  | 1993 |  |  |  | 8/3/98   |  |  |  | 20 | 
|Hotel Maison de Ville, New Orleans, LA                       |  |         |       |                 |  |                  | 292    |                |  |          | 3,015  |      |  |          |       |              |  |           | 122     |          |  |              | 292    |  |  |   | 3,137  |  |  |   | 414   |  |  |  | 1778 |  |  |  | 8/3/98   |  |  |  | 40 | 
|Hilton Hotel Toledo, OH                                      |  |         |       |                 |  |                  |       |                |  |          | 11,708 |      |  |          |       |              |  |           | (6,180  | )        |  |              |       |  |  |   | 5,528  |  |  |   | 102   |  |  |  | 1987 |  |  |  | 8/3/98   |  |  |  | 40 | 
|Holiday Inn Select Dallas DFW Airport West,
    TX(3)(4)     |  |         |       |                 |  |                  | 947    |                |  |          | 8,346  |      |  |          | (675   | )            |  |           | (5,967  | )        |  |              | 272    |  |  |   | 2,379  |  |  |   | 139   |  |  |  | 1974 |  |  |  | 8/3/98   |  |  |  | 40 | 
|Holiday Inn Select New Orleans International
    Airport, LA |  |         | (1)    |                 |  |                  | 3,040  |                |  |          | 25,616 |      |  |          |       |              |  |           | 3,046   |          |  |              | 3,040  |  |  |   | 28,662 |  |  |   | 3,734 |  |  |  | 1973 |  |  |  | 8/3/98   |  |  |  | 40 | 
|Crowne Plaza Madison, WI                                     |  |         | (1)    |                 |  |                  | 2,629  |                |  |          | 21,634 |      |  |          |       |              |  |           | 836     |          |  |              | 2,629  |  |  |   | 22,470 |  |  |   | 2,992 |  |  |  | 1987 |  |  |  | 8/3/98   |  |  |  | 40 | 
|Wyndham Albuquerque Airport Hotel, NM                        |  |         |       |                 |  |                  |       |                |  |          | 18,889 |      |  |          |       |              |  |           | 592     |          |  |              |       |  |  |   | 19,481 |  |  |   | 2,603 |  |  |  | 1972 |  |  |  | 8/3/98   |  |  |  | 40 | 
|Wyndham San Jose Airport Hotel, TX                           |  |         |       |                 |  |                  |       |                |  |          | 35,743 |      |  |          |       |              |  |           | (23,464 | )        |  |              |       |  |  |   | 12,279 |  |  |   |      |  |  |  | 1974 |  |  |  | 8/3/98   |  |  |  | 40 | 
|Sheraton Safari Resort, Lake Buena Vista, FL                 |  |         |       |                 |  |                  | 4,103  |                |  |          | 35,263 |      |  |          |       |              |  |           | 9,487   |          |  |              | 4,103  |  |  |   | 44,750 |  |  |   | 5,854 |  |  |  | 1985 |  |  |  | 8/3/98   |  |  |  | 40 | 

69



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##### 



|                                                     |  |         |        |                 |  |                  |         |                |  |          |           |      |  |          |         |              |  |           |         |          |  |              |         |  |  |   |           |  |  |   |         |  |  |  |      |  |  |  |         |  |  |  |    | 
|---------------------------------------------------- |  | ------- | ------ | --------------- |  | ---------------- | ------- | -------------- |  | -------- | --------- | ---- |  | -------- | ------- | ------------ |  | --------- | ------- | -------- |  | ------------ | ------- |  |  | - | --------- |  |  | - | ------- |  |  |  | ---- |  |  |  | ------- |  |  |  | -- | 
|                                                     |  |         |        |                 |  |                  |         |                |  |          |           |      |  |          |         |             
|                                                     |  |         |        | Initial Cost to |  | Costs Subsequent |         | Gross Amount   |  |          |           |      |  |          |         | Life on     
|                                                     |  |         |        | Company         |  | to Acquisition   |         | at End of Year |  |          |           |      |  |          |         | which       
|                                                     |  |         |        |                 |  |                  |         |                |  |          |           |      |  |          |         | depreciation
|                                                     |  |         |        |                 |  | Building         |         |                |  | Building |           |      |  | Building |         | Accum-       |  |           |         |          |  | in latest   
|                                                     |  |         |        |                 |  | and              |         |                |  | and      |           |      |  | and      |         | ulated       |  | Year of   |         |          |  | income      
|                                                     |  | Encum-  |        |                 |  | Improve-         |         |                |  | Improve- |           |      |  | Improve- |         | Deprecia-    |  | Construc- |         | Date     |  | statement is
|Description                                          |  | brances |        | Land            |  | ments            |         | Land           |  | ments    |           | Land |  | ments    |         | tion         |  | tion      |         | Acquired |  | computed    
|                                                     |  |         |        |                 |  |                  |         |                |  |          |           |      |  |          |         |              |  |           |         |          |  |             
|Hilton Monterey, CA                                  |  |         |       |                 |  |                  | 2,141   |                |  |          | 17,666    |      |  |          |        |              |  |           | 5,473   |          |  |              | 2,141   |  |  |   | 23,139    |  |  |   | 2,951   |  |  |  | 1971 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Hilton Hotel Durham, NC                              |  |         |       |                 |  |                  | 1,586   |                |  |          | 15,577    |      |  |          |        |              |  |           | 4,243   |          |  |              | 1,586   |  |  |   | 19,820    |  |  |   | 2,424   |  |  |  | 1987 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Wyndham Garden Hotel Marietta, GA                    |  |         |       |                 |  |                  | 1,900   |                |  |          | 17,077    |      |  |          | (1,141  | )            |  |           | (10,877 | )        |  |              | 759     |  |  |   | 6,200     |  |  |   |        |  |  |  | 1985 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Westin Resort Key Largo, FL                          |  |         |       |                 |  |                  | 3,167   |                |  |          | 29,190    |      |  |          |        |              |  |           | 951     |          |  |              | 3,167   |  |  |   | 30,141    |  |  |   | 4,031   |  |  |  | 1985 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Doubletree, Atlanta, GA                              |  |         |       |                 |  |                  | 2,236   |                |  |          | 18,514    |      |  |          |        |              |  |           | 4,043   |          |  |              | 2,236   |  |  |   | 22,557    |  |  |   | 2,999   |  |  |  | 1985 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Park Plaza Arlington Heights, IL                     |  |         |       |                 |  |                  | 1,540   |                |  |          | 12,645    |      |  |          | (1,207  | )            |  |           | (8,515  | )        |  |              | 333     |  |  |   | 4,130     |  |  |   | 61      |  |  |  | 1981 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Holiday Inn Select Bucks County,
    PA(3)(4)        |  |         |       |                 |  |                  | 2,610   |                |  |          | 21,744    |      |  |          | (1,356  | )            |  |           | (10,895 | )        |  |              | 1,254   |  |  |   | 10,849    |  |  |   | 173     |  |  |  | 1987 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Hilton Hotel Cocoa Beach, FL                         |  |         |       |                 |  |                  | 2,783   |                |  |          | 23,076    |      |  |          | (982    | )            |  |           | (8,327  | )        |  |              | 1,801   |  |  |   | 14,749    |  |  |   | 143     |  |  |  | 1986 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Radisson Twin Towers of Orlando, FL                  |  |         |       |                 |  |                  | 9,555   |                |  |          | 73,486    |      |  |          |        |              |  |           | 9,969   |          |  |              | 9,555   |  |  |   | 83,455    |  |  |   | 10,890  |  |  |  | 1972 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Crowne Plaza Phoenix, AZ(4)                          |  |         |       |                 |  |                  | 1,852   |                |  |          | 15,957    |      |  |          | (1,374  | )            |  |           | (11,443 | )        |  |              | 478     |  |  |   | 4,514     |  |  |   | 92      |  |  |  | 1981 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Hilton Airport Hotel Grand Rapids, MI                |  |         | (1)    |                 |  |                  | 2,049   |                |  |          | 16,657    |      |  |          |        |              |  |           | 1,606   |          |  |              | 2,049   |  |  |   | 18,263    |  |  |   | 2,411   |  |  |  | 1979 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Marriott West Loop Houston, TX                       |  |         | (1)    |                 |  |                  | 2,943   |                |  |          | 23,934    |      |  |          |        |              |  |           | 5,021   |          |  |              | 2,943   |  |  |   | 28,955    |  |  |   | 3,692   |  |  |  | 1976 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Courtyard by Marriott Durham, NC                     |  |         |       |                 |  |                  | 1,406   |                |  |          | 11,001    |      |  |          | (62     | )            |  |           | (1,810  | )        |  |              | 1,344   |  |  |   | 9,191     |  |  |   | 119     |  |  |  | 1996 |  |  |  | 8/3/98  |  |  |  | 20 | 
|Courtyard by Marriott, Marina Del Rey, CA            |  |         |       |                 |  |                  | 3,450   |                |  |          | 24,534    |      |  |          |        |              |  |           | 3,051   |          |  |              | 3,450   |  |  |   | 27,585    |  |  |   | 3,937   |  |  |  | 1976 |  |  |  | 8/3/98  |  |  |  | 20 | 
|Courtyard by Marriott, Century City, CA              |  |         |       |                 |  |                  | 2,165   |                |  |          | 16,465    |      |  |          | (385    | )            |  |           | (3,837  | )        |  |              | 1,780   |  |  |   | 12,628    |  |  |   | 162     |  |  |  | 1986 |  |  |  | 8/3/98  |  |  |  | 20 | 
|Holiday Inn Walt Disney World Village, Orlando, FL   |  |         |       |                 |  |                  |        |                |  |          | 41,267    |      |  |          |        |              |  |           | 4,903   |          |  |              |        |  |  |   | 46,170    |  |  |   | 6,463   |  |  |  | 1972 |  |  |  | 8/3/98  |  |  |  | 20 | 
|Crowne Plaza, San Jose, CA                           |  |         | (1)    |                 |  |                  | 2,130   |                |  |          | 23,404    |      |  |          | (24     | )            |  |           | 1,956   |          |  |              | 2,106   |  |  |   | 25,360    |  |  |   | 3,376   |  |  |  | 1975 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Doubletree Hotel Westshore, Tampa, FL                |  |         |       |                 |  |                  | 2,904   |                |  |          | 23,476    |      |  |          |        |              |  |           | 10,338  |          |  |              | 2,904   |  |  |   | 33,814    |  |  |   | 4,064   |  |  |  | 1972 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Howard Johnson Resort Key Largo, FL                  |  |         |       |                 |  |                  | 1,784   |                |  |          | 12,419    |      |  |          | (806    | )            |  |           | (5,862  | )        |  |              | 978     |  |  |   | 6,557     |  |  |   |        |  |  |  | 1971 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Radisson Annapolis, MD                               |  |         |       |                 |  |                  | 1,711   |                |  |          | 13,671    |      |  |          | (229    | )            |  |           | (1,241  | )        |  |              | 1,482   |  |  |   | 12,430    |  |  |   | 185     |  |  |  | 1975 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Holiday Inn Fort Lauderdale, FL                      |  |         |       |                 |  |                  | 2,381   |                |  |          | 19,419    |      |  |          |        |              |  |           | 2,370   |          |  |              | 2,381   |  |  |   | 21,789    |  |  |   | 2,848   |  |  |  | 1969 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Holiday Inn Chicago OHare, IL                       |  |         | 15,688 |                 |  |                  | 4,290   |                |  |          | 72,631    |      |  |          |        |              |  |           | 16,322  |          |  |              | 4,290   |  |  |   | 88,953    |  |  |   | 11,356  |  |  |  | 1975 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Holiday Inn & Suites Alexandria, VA                  |  |         |       |                 |  |                  | 1,769   |                |  |          | 14,064    |      |  |          | (1      | )            |  |           | 1,813   |          |  |              | 1,768   |  |  |   | 15,877    |  |  |   | 2,023   |  |  |  | 1985 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Hilton Clearwater, FL                                |  |         |       |                 |  |                  |        |                |  |          | 69,285    |      |  |          |        |              |  |           | 5,114   |          |  |              |        |  |  |   | 74,399    |  |  |   | 9,852   |  |  |  | 1980 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Radisson Old Towne Alexandria, VA                    |  |         |       |                 |  |                  | 2,241   |                |  |          | 17,796    |      |  |          | (205    | )            |  |           | (53     | )        |  |              | 2,036   |  |  |   | 17,743    |  |  |   | 256     |  |  |  | 1975 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Ramada Plaza Meriden(3)(4)                           |  |         |       |                 |  |                  | 1,247   |                |  |          | 10,057    |      |  |          | (734    | )            |  |           | (6,422  | )        |  |              | 513     |  |  |   | 3,635     |  |  |   | 66      |  |  |  | 1985 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Ramada Plaza Shelton(4)                              |  |         |       |                 |  |                  | 2,040   |                |  |          | 16,235    |      |  |          | (1,129  | )            |  |           | (9,808  | )        |  |              | 911     |  |  |   | 6,427     |  |  |   | 73      |  |  |  | 1989 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Sheraton Crossroads Mahwah, NJ                       |  |         |       |                 |  |                  | 3,258   |                |  |          | 26,185    |      |  |          |        |              |  |           | 1,423   |          |  |              | 3,258   |  |  |   | 27,608    |  |  |   | 3,648   |  |  |  | 1986 |  |  |  | 8/3/98  |  |  |  | 40 | 
|Doral Forrestal, Princeton, NJ                       |  |         |       |                 |  |                  | 9,578   |                |  |          | 57,555    |      |  |          |        |              |  |           | 9,871   |          |  |              | 9,578   |  |  |   | 67,426    |  |  |   | 8,869   |  |  |  | 1981 |  |  |  | 8/11/98 |  |  |  | 40 | 
|South Seas Resort, Captiva, FL                       |  |         |       |                 |  |                  | 3,084   |                |  |          | 83,573    |      |  |          |        |              |  |           | 13,019  |          |  |              | 3,084   |  |  |   | 96,592    |  |  |   | 11,943  |  |  |  | 1975 |  |  |  | 10/1/98 |  |  |  | 40 | 
|Best Western Sanibel Island, FL                      |  |         |       |                 |  |                  | 3,868   |                |  |          | 3,984     |      |  |          | 17      |              |  |           | 662     |          |  |              | 3,885   |  |  |   | 4,646     |  |  |   | 567     |  |  |  | 1967 |  |  |  | 10/1/98 |  |  |  | 40 | 
|The Dunes Golf & Tennis Club, Sanibel Island,
    FL |  |         |       |                 |  |                  | 7,705   |                |  |          | 3,043     |      |  |          | 9       |              |  |           | 404     |          |  |              | 7,714   |  |  |   | 3,447     |  |  |   | 438     |  |  |  | 1964 |  |  |  | 10/1/98 |  |  |  | 40 | 
|Sanibel Inn, Sanibel Island, FL                      |  |         |       |                 |  |                  | 8,482   |                |  |          | 12,045    |      |  |          |        |              |  |           | 358     |          |  |              | 8,482   |  |  |   | 12,403    |  |  |   | 1,584   |  |  |  | 1964 |  |  |  | 10/1/98 |  |  |  | 40 | 
|Seaside Inn, Sanibel Island, FL                      |  |         |       |                 |  |                  | 1,702   |                |  |          | 6,416     |      |  |          | 23      |              |  |           | 121     |          |  |              | 1,725   |  |  |   | 6,537     |  |  |   | 852     |  |  |  | 1964 |  |  |  | 10/1/98 |  |  |  | 40 | 
|Song of the Sea, Sanibel Island, FL                  |  |         |       |                 |  |                  | 339     |                |  |          | 3,223     |      |  |          | 19      |              |  |           | 162     |          |  |              | 358     |  |  |   | 3,385     |  |  |   | 431     |  |  |  | 1964 |  |  |  | 10/1/98 |  |  |  | 40 | 
|Sundial Beach Resort, Sanibel Island, FL             |  |         |       |                 |  |                  | 320     |                |  |          | 12,009    |      |  |          |        |              |  |           | 2,820   |          |  |              | 320     |  |  |   | 14,829    |  |  |   | 1,735   |  |  |  | 1975 |  |  |  | 10/1/98 |  |  |  | 40 | 
|Holiday Inn Madison, WI                              |  |         |       |                 |  |                  | 4,143   |                |  |          | 6,692     |      |  |          |        |              |  |           | 565     |          |  |              | 4,143   |  |  |   | 7,257     |  |  |   | 874     |  |  |  | 1965 |  |  |  | 1/11/99 |  |  |  | 40 | 
|Safety Harbor Resort and Spa                         |  |         |       |                 |  |                  | 732     |                |  |          | 19,618    |      |  |          |        |              |  |           | 2,717   |          |  |              | 732     |  |  |   | 22,335    |  |  |   | 2,016   |  |  |  | 1926 |  |  |  | 5/31/00 |  |  |  | 40 | 
|                                                     |  |         |        |                 |  |                  |         |                |  |          |           |      |  |          |         |              |  |           |         |          |  |              |         |  |  |   |           |  |  |   |         |  |  |  |      |  |  |  |         |  |  |  |    | 
|                                                     |  |         |        |                 |  | $                | 269,965 |                |  | $        | 1,932,263 |      |  | $        | (26,132 | )            |  | $         | 41,283  |          |  | $            | 243,833 |  |  | $ | 1,973,546 |  |  | $ | 256,354 |  |  |  |      |  |  |  |         |  |  |  |    | 
|                                                     |  |         |        |                 |  |                  |         |                |  |          |           |      |  |          |         |              |  |           |         |          |  |              |         |  |  |   |           |  |  |   |         |  |  |  |      |  |  |  |         |  |  |  |    | 



---



|    |                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------
|(1) | These properties secure the Secured Facility, due 2009, which,
    as of December 31, 2003, had an outstanding balance of
    $309,035.
|   
|(2) | These properties secure the Secured Facility, due 2013, which,
    as of December 31, 2003, had an outstanding balance of
    $100,765.
|   
|(3) | These properties were classified as held for sale as of
    December 31, 2003.                                                         
|   
|(4) | We have sold these properties since January 1, 2004.                                                                                   

70



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##### 



MERISTAR HOSPITALITY CORPORATION

SCHEDULE III  REAL ESTATE AND
ACCUMULATED DEPRECIATION


DECEMBER 31, 2003


(in thousands)


The components of our property and equipment are
as follows:

|                                  |                        |              |           |              |  |   |         |         | 
|--------------------------------- | ---------------------- | ------------ | --------- | ------------ |  | - | ------- | ------- | 
|                                  |                        | Property and |           | Accumulated 
|                                  |                        | Equipment    |           | Depreciation
|                                  |                        |              |           |             
|Land                              |                        | $            | 243,833   |              |  | $ |        |        
|Building and improvements         |                        |              | 1,973,546 |              |  |   | 256,354 |        
|Furniture, fixtures and equipment |                        |              | 287,361   |              |  |   | 190,834 |        
|Construction-in-progress          |                        |              | 29,337    |              |  |   |        |        
|                                  |                        |              |           |              |  |   |         |        
|Total property and equipment      |                        | $            | 2,534,077 |              |  | $ | 447,188 |        
|                                  |                        |              |           |              |  |   |         |        
|Classification on balance sheet:  |                        |              |           |              |  |   |         |        
|                                  | Property and equipment |              | $         | 2,481,752    |  |   | $       | 446,032 | 
|                                  | Assets held for sale   |              |           | 52,325       |  |   |         | 1,156   | 
|                                  |                        |              |           |              |  |   |         |        
|                                  |                        | $            | 2,534,077 |              |  | $ | 447,188 |        
|                                  |                        |              |           |              |  |   |         |        

A reconciliation of our property and equipment
and related accumulated depreciation is as follows:

|                                          |                              |                                                                   |           |           |          |      |           |           |         |   |           |           |         |  
|----------------------------------------- | ---------------------------- | ----------------------------------------------------------------- | --------- | --------- | -------- | ---- | --------- | --------- | ------- | - | --------- | --------- | ------- | -
|                                          |                              | 2003                                                              |           | 2002      |          | 2001
|                                          |                              |                                                                   |           |           |          |     
|Property and equipment                    |                              |                                                                   |           |           |          |      |           |           |         |   |           |          
|                                          | Balance, beginning of period |                                                                   | $         | 3,020,909 |          |      | $         | 3,163,324 |         |   | $         | 3,193,730 |        
|                                          |                              | Improvements and construction-in-progress                         |           |           | 36,190   |      |           |           | 47,347  |   |           |           | 44,476  |  
|                                          |                              | Effect of exchange rate differences                               |           |           | 8,520    |      |           |           |        |   |           |           |        |  
|                                          |                              | Loss on asset impairments                                         |           |           | (295,037 | )    |           |           | (78,732 | ) |           |           | (43,582 | )
|                                          |                              | Accumulated depreciation reclass related to asset
    impairments |           |           | (117,394 | )    |           |           | (16,395 | ) |           |           | (20,353 | )
|Cost of property and equipment sold       |                              |                                                                   | (119,111  | )         |          |      | (94,635   | )         |         |   | (10,947   | )        
|                                          |                              |                                                                   |           |           |          |      |           |           |         |   |           |          
|                                          | Balance, end of period       |                                                                   |           | 2,534,077 |          |      |           | 3,020,909 |         |   |           | 3,163,324 |        
|                                          |                              |                                                                   |           |           |          |      |           |           |         |   |           |          
|Accumulated depreciation                  |                              |                                                                   |           |           |          |      |           |           |         |   |           |          
|                                          | Balance, beginning of period |                                                                   |           | 460,972   |          |      |           | 377,027   |         |   |           | 287,229   |        
|                                          |                              | Additions-depreciation expense                                    |           |           | 105,657  |      |           |           | 115,404 |   |           |           | 112,465 |  
|                                          |                              | Effect of exchange rate differences                               |           |           | 3,354    |      |           |           | (171    | ) |           |           |        |  
|                                          |                              | Cost of property and equipment sold                               |           |           | (5,401   | )    |           |           | (14,893 | ) |           |           | (2,314  | )
|                                          |                              | Accumulated depreciation reclass related to asset
    impairments |           |           | (117,394 | )    |           |           | (16,395 | ) |           |           | (20,353 | )
|                                          |                              |                                                                   |           |           |          |      |           |           |         |   |           |          
|                                          | Balance, end of period       |                                                                   |           | 447,188   |          |      |           | 460,972   |         |   |           | 377,027   |        
|                                          |                              |                                                                   |           |           |          |      |           |           |         |   |           |          
|Net property and equipment, end of period |                              | $                                                                 | 2,086,889 |           |          | $    | 2,559,937 |           |         | $ | 2,786,297 |          
|                                          |                              |                                                                   |           |           |          |      |           |           |         |   |           |          

71



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##### 





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

None.



|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures
that are designed to ensure that information required to be
disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and regulations,
and that the information is accumulated and communicated to our
management, including our chief executive officer and chief
financial and chief accounting officer, as appropriate, to allow
timely decisions regarding required disclosures based closely on
the definition of disclosure controls and procedures
in Rule 13a-1(c) of the Securities Exchange Act of 1934. In
designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no
matter how well designed and operated, can provide only
reasonable assurance of achieving the desired objectives, and
management was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Also, we have investments in certain unconsolidated entities. As
we do not control or manage these entities, our disclosure
controls and procedures with respect to these entities are
substantially more limited than those we maintain with respect
to our consolidated subsidiaries.

As of December 31, 2003, we carried out an
evaluation, under the supervision and with the participation of
our management, including our chief executive officer and our
chief financial and chief accounting officer of the
effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, we concluded
that our disclosure controls and procedures were effective.

Internal Control Over Financial
Reporting

There has been no change in our internal control
over financial reporting in the last quarter of 2003 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.

72



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##### 



PART III



|         |                                                       
|-------- | ------------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE
    REGISTRANT

The information required by this Item is
incorporated herein by reference to our 2004 Annual Stockholder
Meeting proxy statement.



|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION

The information required by this item is
incorporated herein by reference to our 2004 Annual Stockholder
Meeting proxy statement.



|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
    OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is
incorporated herein by reference to our 2004 Annual Stockholder
Meeting proxy statement.



|         |                                                   
|-------- | --------------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED
    TRANSACTIONS

The information required by this item is
incorporated herein by reference to our 2004 Annual Stockholder
Meeting proxy statement.



|         |                                           
|-------- | ------------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND
    SERVICES

The information required by this item is
incorporated herein by reference to our 2004 Annual Stockholder
Meeting proxy statement.

73



---



##### 



PART IV



|         |                                                                     
|-------- | --------------------------------------------------------------------
|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
    REPORTS ON FORM 8-K

(a.) The following documents are filed as a part
of this Annual Report on Form 10-K:



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

The Independent Auditors Report and
Consolidated Financial Statements are provided under Item 8.



| |    |                              
| | -- | -----------------------------
| | 2. | Financial Statement Schedules

Schedule III, Real Estate and Accumulated
Depreciation as of December 31, 2003 is provided under
Item 8. No other schedules are submitted because they are
either not applicable or not required, or because the required
information is included in the Consolidated Financial Statements
or the Notes thereto, which are provided in Item 8 of this
Annual Report on Form 10-K.



| |    |         
| | -- | --------
| | 3. | Exhibits

See Index on pages 75 through 79 of this
Annual Report on Form 10-K.



| |      |                    
| | ---- | -------------------
| | (b.) | Reports on Form 8-K

On December 23, 2003, we filed a current
report on Form 8-K (Items 5 and 7) announcing we had
closed on a new $50 million senior credit facility.

On October 20, 2003, we filed a current
report on Form 8-K (Items 7 and 9), announcing the
closing of our offering of an additional 1,800,000 shares
of common stock.

On October 14, 2003, we filed a current
report on Form 8-K (Item 5) announcing the sale of the
71-room Santa Barbara Inn in California for
$16.5 million.

On October 1, 2003, we filed a current
report on Form 8-K (Items 7 and 9) announcing the
offering of 12,000,000 shares of our common stock.

74



---



##### 



INDEX TO EXHIBITS 

MERISTAR HOSPITALITY CORPORATION


COMMISSION FILE NO. 1-11903


Exhibits listed below, which have been filed with
the Commission pursuant to the Securities Act of 1933 or the
Securities Exchange Act of 1934, and which were filed as noted
below, are hereby incorporated by reference and made a part of
this report with the same effect as if filed herewith.

|        |       |                         |  |                                                                                                                                                                                                                                                                                                                                                                              
|------- | ----- | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                        
|No.     |       | Description of Document
|        |       |                        
|        | 1.1   |                         |  | Underwriting Agreement, dated September 24,
    2003, by and among Meristar Hospitality, Lehman Brothers Inc.
    and Citigroup Global Markets, Inc. (incorporated by
    reference to Exhibit 1.1 to our current report on Form 8-K,
    and filed with the Commission on October 1, 2003).                                                                                 
|        | 3.1   |                         |  | Second Articles of Amendment and Restatement of
    Incorporation of the Registrant (incorporated by reference to
    Exhibit 3.4 to our Registration Statement on Form S-11
    (No. 333-4568), and filed with the Commission on July 24,
    1996).                                                                                                                        
|        | 3.1.1 |                         |  | Articles of Amendment of Second Articles of
    Amendment and Restatement of Incorporation dated August 11,
    2000 (incorporated by reference to Exhibit 3.1.1 to our
    annual report on Form 10-K for the year ended December 31,
    2001, and filed with the Commission on March 6, 2002).                                                                            
|        | 3.1.2 |                         |  | Articles of Amendment of Second Articles of
    Amendment and Restatement of Incorporation dated June 30,
    2001 (incorporated by reference to Exhibit 3.1.2 to our
    annual report on Form 10-K for the year ended December 31,
    2001, and filed with the Commission on March 6, 2002).                                                                              
|        | 3.2   |                         |  | Amended and Restated By-laws of the Registrant
    (incorporated by reference to Exhibit 3.2 to our
    Registration Statement No. 333-66229, and filed with the
    Commission on October 28, 1998).                                                                                                                                                                        
|        | 3.2.1 |                         |  | Amended and Restated By-laws of the Registrant
    dated and effective April 22, 2003 (incorporated by
    reference to Exhibit 3.2.1 to our quarterly report on Form
    10-Q for the quarter ended March 31, 2003, and filed with
    the Commission on May 14, 2003).                                                                                                     
|        | 4.1   |                         |  | Form of Share Certificate (incorporated by
    reference to Exhibit 4.1 to our Registration Statement on
    Form S-11 (No. 333-4568), and filed with the Commission on
    July 3, 1996).                                                                                                                                                                                   
|        | 4.1.2 |                         |  | Indenture; dated as of July 1, 2003; by and
    among the registrant, MeriStar Hospitality Operating
    Partnership, L.P., the guarantors party thereto and
    U.S. Bank Trust National Association; as trustee
    (incorporated by reference to Exhibit 4.1 to our current
    report on Form 8-K dated July 3, 2003, and filed with the
    Commission on July 3, 2003).
|        | 4.2   |                         |  | Indenture, dated as of August 19, 1997 (the
    August 1997 Indenture), between CapStar Hotel
    Company and IBJ Schroder Bank & Trust Company, as
    Trustee (incorporated by reference to Exhibit 4.4 to our
    annual report on Form 10-K for the year ended December 31,
    1999, and filed with the Commission on March 15, 2000).                                
|        | 4.2.1 |                         |  | Specimen Subordinated Note to August 1997
    Indenture (incorporated by reference to Exhibit 4.2 to our
    annual report on Form 10-K for the year ended December 31,
    1999, and filed with the Commission on March 15, 2000).                                                                                                                                          
|        | 4.2.2 |                         |  | First Supplemental Indenture to the August 1997
    Indenture (incorporated by reference to Exhibit 4.2.2 to
    our annual report on Form 10-K for the year ended
    December 31, 2001, and filed with the Commission on
    March 6, 2002).                                                                                                                               
|        | 4.2.3 |                         |  | Second Supplemental Indenture to the August 1997
    Indenture (incorporated by reference to Exhibit 4.5 to our
    annual report on Form 10-K for the year ended December 31,
    1999, and filed with the Commission on March 15, 2000).                                                                                                                                   
|        | 4.2.4 |                         |  | Third Supplemental Indenture to the August 1997
    Indenture (incorporated by reference to Exhibit 4.15 to our
    annual report on Form 10-K for the year ended December 31,
    2000, and filed with the Commission on March 6, 2001).                                                                                                                                    
|        | 4.2.5 |                         |  | Fourth Supplemental Indenture to the August 1997
    Indenture (incorporated by reference to Exhibit 4.2.5 to
    our annual report on Form 10-K for the year ended
    December 31, 2001, and filed with the Commission on
    March 6, 2002).                                                                                                                              
|        | 4.2.6 |                         |  | Fifth Supplemental Indenture to the August 1997
    Indenture (incorporated by reference to Exhibit 4.2.6 to
    our annual report on Form 10-K for the year ended
    December 31, 2001, and filed with the Commission on
    March 6, 2002).                                                                                                                               

75



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##### 



|        |        |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------- | ------ | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |                        
|No.     |        | Description of Document
|        |        |                        
|        | 4.2.7  |                         |  | Officers Certificate establishing the terms
    of the registrants 9.50% Convertible Subordinated
    Notes due 2010 (incorporated by reference to Exhibit 4.2 to
    our current report on Form 8-K dated July 3, 2003, and
    filed with the Commission on July 3, 2003).                                                                                                                                                             
|        | 4.3    |                         |  | Indenture (the Convertible
    Notes Indenture), dated as of October 16, 1997,
    between CapStar Hotel Company and First Trust, National
    Association, as Trustee (incorporated by reference to
    Exhibit 4.6 to our annual report on Form 10-K for the year
    ended December 31, 1999, and filed with the Commission on
    March 15, 2000).                                                                                   
|        | 4.3.1  |                         |  | Specimen Convertible Note to the Convertible
    Notes Indenture (incorporated by reference to
    Exhibit 4.7 to our annual report on Form 10-K for the
    year ended December 31, 1999, and filed with the Commission
    on March 15, 2000).                                                                                                                                                                                           
|        | 4.3.2  |                         |  | First Supplemental Indenture to the Convertible
    Notes Indenture (incorporated by reference to
    Exhibit 4.8 to our annual report on Form 10-K for the
    year ended December 31, 1999, and filed with the Commission
    on March 15, 2000).                                                                                                                                                                                        
|        | 4.4    |                         |  | Indenture (the March 1999 Indenture),
    dated as of March 18, 1999, between MeriStar Hospitality
    Corporation and IBJ Whitehall Bank & Trust Company, as
    Trustee (incorporated by reference to Exhibit B to our
    Registration Statement No. 333-78163, and filed with the
    Commission on May 10, 1999).                                                                                                                   
|        | 4.4.1  |                         |  | Specimen Subordinated Note to March 1999
    Indenture (incorporated by reference to Exhibit A to our
    Registration Statement No. 333-78163, and filed with the
    Commission on May 10, 1999).                                                                                                                                                                                                                                        
|        | 4.4.1a |                         |  | First Supplemental Indenture to the March 1999
    Indenture (incorporated by reference to Exhibit 4.13 to our
    annual report on Form 10-K for the year ended December 31,
    2000, and filed with the Commission on March 6, 2001).                                                                                                                                                                                                   
|        | 4.4.2  |                         |  | Second Supplemental Indenture to the March 1999
    Indenture (incorporated by reference to Exhibit 4.4.2 to
    our annual report on Form 10-K for the year ended
    December 31, 2001, and filed with the Commission on
    March 6, 2002).                                                                                                                                                                                             
|        | 4.4.3  |                         |  | Third Supplemental Indenture to the March 1999
    Indenture (incorporated by reference to Exhibit 4.4.3 to
    our annual report on Form 10-K for the year ended
    December 31, 2001, and filed with the Commission on
    March 6, 2002).                                                                                                                                                                                              
|        | 4.5    |                         |  | Indenture (the January 2001
    Indenture), dated January 26, 2001, between MeriStar
    Hospitality Operating Partnership, L.P., MeriStar Hospitality
    Finance Corp., MeriStar Hospitality Corporation, and
    U.S. Bank Trust National Association (incorporated by
    reference to Exhibit 4.14 to our annual report on Form 10-K
    for the year ended December 31, 2000, and filed with the
    Commission on March 6, 2001). 
|        | 4.5.1  |                         |  | Specimen Senior Note to the January 2001
    Indenture (incorporated by reference to Exhibit 4.5.1 to
    our annual report on Form 10-K for the year ended
    December 31, 2001, and filed with the Commission on
    March 6, 2002).                                                                                                                                                                                                    
|        | 4.5.2  |                         |  | First Supplemental Indenture to the January 2001
    Indenture (incorporated by reference to Exhibit 4.5.2 to
    our annual report on Form 10-K for the year ended
    December 31, 2001, and filed with the Commission on
    March 6, 2002).                                                                                                                                                                                            
|        | 4.5.3  |                         |  | Second Supplemental Indenture to the January 2001
    Indenture (incorporated by reference to Exhibit 4.5.3 to
    our annual report Form 10-K for the year ended December 31,
    2001, and filed with the Commission on March 6, 2002).                                                                                                                                                                                                  
|        | 4.6    |                         |  | Indenture (the December 2001
    Indenture), dated December 19, 2001, between MeriStar
    Hospitality Operating Partnership, L.P., MeriStar Hospitality
    Finance Corp., MeriStar Hospitality Corporation, and
    U.S. Bank Trust National Association (incorporated by
    reference to Exhibit 4.6 to our annual report on Form 10-K
    for the year ended December 31, 2001, and filed with the
    Commission on March 6, 2002).
|        | 4.6.1  |                         |  | Specimen Senior Note to the December 2001
    Indenture (incorporated by reference to Exhibit 4.6.1 to
    our annual report on Form 10-K for the year ended
    December 31, 2001, and filed with the Commission on
    March 6, 2002).                                                                                                                                                                                                   

76



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##### 



|        |         |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | ------- | ----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |                        
|No.     |         | Description of Document
|        |         |                        
|        | 4.6.2   |                         |  | Registration Rights Agreement, dated
    December 19, 2001, between MeriStar Hospitality Operating
    Partnership, L.P., MeriStar Hospitality Finance Corp. II,
    MeriStar Hospitality Corporation, and certain subsidiaries of
    MeriStar Hospitality Operating Partnership, L.P. and Lehman
    Brothers Inc., SG Cowen Securities Corporation and certain other
    parties (incorporated by reference to Exhibit 4.6.2 to our
    annual report on Form 10-K for the year ended December 31,
    2001, and filed with the Commission on March 6, 2002).
|        | 4.6.3   |                         |  | First Supplemental Indenture to the December 2001
    Indenture (incorporated by reference to Exhibit 4.6.3 to
    our annual report on Form 10-K for the year ended
    December 31, 2001, and filed with the Commission on
    March 6, 2002).                                                                                                                                                                                                                                                                                                                
|        | 4.7     |                         |  | Indenture (the February 2002
    Indenture), dated February 7, 2002, between MeriStar
    Hospitality Operating Partnership, L.P., MeriStar Hospitality
    Finance Corp., MeriStar Hospitality Corporation, and
    U.S. Bank Trust National Association (incorporated by
    reference to Exhibit 4.7 to our annual report on Form 10-K
    for the year ended December 31, 2001, and filed with the
    Commission on March 6, 2002).                                                                                                                      
|        | 4.7.1   |                         |  | Specimen Senior Note to the February 2002
    Indenture (incorporated by reference to Exhibit 4.7.1 to
    our annual report on Form 10-K for the year ended
    December 31, 2001, and filed with the Commission on
    March 6, 2002).                                                                                                                                                                                                                                                                                                                        
|        | 4.7.2   |                         |  | Registration Rights Agreement, dated
    February 7, 2002, between MeriStar Hospitality Operating
    Partnership, L.P., MeriStar Hospitality Finance Corp. II,
    MeriStar Hospitality Corporation, and certain subsidiaries of
    MeriStar Hospitality Operating Partnership, L.P. and Lehman
    Brothers Inc., SG Cowen Securities Corporation and certain other
    parties (incorporated by reference to Exhibit 4.7.2 to our
    annual report on Form 10-K for the year ended December 31,
    2001, and filed with the Commission on March 6, 2002). 
|        | 4.8     |                         |  | Letter agreement dated November 11, 2003
    relating to exhibits (incorporated by reference to
    Exhibit 4.8 to our quarterly report on Form 10-Q for
    the quarter ended September 30, 2003, and filed with the
    Commission on November 12, 2003).                                                                                                                                                                                                                                                                                                     
|        | 4.9     |                         |  | Letter agreement dated December 23, 2003
    relating to exhibits (incorporated by reference to
    Exhibit 4.9 to our current report on Form 8-K, and
    filed with the Commission on December 23, 2003).                                                                                                                                                                                                                                                                                                                                                     
|        | 10.1    |                         |  | Second Amended and Restated Agreement of Limited
    Partnership of MeriStar Hospitality Operating Partnership, L.P.
    dated as of August 3, 1998 (incorporated by reference to
    Exhibit 10.3 to our annual report on Form 10-K for the
    year ended December 31, 1998, and filed with the Commission
    on March 2, 1999).                                                                                                                                                                                                                             
|        | 10.2    |                         |  | Loan Agreement, dated as of August 12, 1999,
    between MeriStar Hospitality Operating Partnership, L.P. and
    Lehman Brothers Holdings Inc. D/B/A Lehman Capital, a division
    of Lehman Brothers Holdings Inc. (incorporated by reference to
    Exhibit 10.13 to our annual report on Form 10-K for the
    year ended December 31, 1999, and filed with the Commission
    on March 15, 2000).                                                                                                                                                         
|        | 10.3    |                         |  | Intercompany Agreement between MeriStar
    Hospitality Corporation, MeriStar Hospitality Operating
    Partnership, L.P., MeriStar Hotels & Resorts, Inc.
    and MeriStar H&R Operating Company L.P. (Intercompany
    Agreement) (incorporated by reference to Exhibit 10.4
    to our annual report on Form 10-K for the year ended
    December 31, 2001, and filed with the Commission on
    March 6, 2002).                                                                                                                                           
|        | 10.3.1  |                         |  | Amendment to the Intercompany Agreement
    (incorporated by reference to Exhibit 10.15 to our annual
    report on Form 10-K for the year ended December 31, 2000,
    and filed with the Commission on March 6, 2001).                                                                                                                                                                                                                                                                                                                                        
|        | 10.3.2  |                         |  | Second Amendment, dated as of April 1, 2003,
    to Intercompany Agreement.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 10.4*   |                         |  | MeriStar Hospitality Corporation Incentive Plan
    (the Incentive Plan) (incorporated by reference to
    Exhibit 10.1 to our Registration Statement
    No. 333-49611, and filed with the Commission on
    June 22, 1998).                                                                                                                                                                                                                                                                                                                                 
|        | 10.4.1* |                         |  | Amendment to the Incentive Plan (incorporated by
    reference to Exhibit 10.7.1 to our annual report on Form
    10-K for the year ended December 31, 2001, and filed with
    the Commission on March 6, 2002).                                                                                                                                                                                                                                                                                                                                               

77



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##### 



|        |         |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                        
|------- | ------- | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |                        
|No.     |         | Description of Document
|        |         |                        
|        | 10.5*   |                         |  | MeriStar Hospitality Corporation Non-Employee
    Directors Incentive Plan (the Directors
    Plan) (incorporated by reference to Exhibit 10.2 to
    our Registration Statement No. 333-49611, and filed with
    the Commission on June 22, 1998).                                                                                                                                                                               
|        | 10.5.1* |                         |  | Amendment to the Directors Plan
    (incorporated by reference to Exhibit 10.8.1 to our annual
    report on Form 10-K for the year ended December 31, 2001,
    and filed with the Commission on March 6, 2002).                                                                                                                                                                                                                     
|        | 10.6*   |                         |  | Profits-Only Operating Partnership Units Plan
    (incorporated by reference to Exhibit 10.14 to our
    quarterly report on Form 10-Q for the quarter ended
    March 31, 2000, and filed with the Commission on
    May 12, 2000).                                                                                                                                                                                                   
|        | 10.7*   |                         |  | Amended and Restated MeriStar Hospitality
    Corporation Employee Stock Purchase Plan.**                                                                                                                                                                                                                                                                                                                                              
|        | 10.8*   |                         |  | Employment Agreement between MeriStar Hospitality
    Corporation and Paul W. Whetsell (incorporated by reference to
    Exhibit 10.6 to our quarterly report on Form 10-Q for the
    quarter ended September 30, 2000, and filed with the
    Commission on November 13, 2000).                                                                                                                                                      
|        | 10.9*   |                         |  | Employment Agreement between MeriStar Hospitality
    Corporation and Steven D. Jorns (incorporated by reference to
    Exhibit 10.4 to our Registration Statement
    No. 333-49611, and filed with the Commission on
    June 22, 1998).                                                                                                                                                                                             
|        | 10.10*  |                         |  | Employment Agreement between MeriStar Hospitality
    Corporation and Bruce G. Wiles (incorporated by reference to
    Exhibit 10.10 to our annual report on Form 10-K for the
    year ended December 31, 1998, and filed with the Commission
    on March 2, 1999).                                                                                                                                                                  
|        | 10.11*  |                         |  | Employment Agreement between MeriStar Hospitality
    Corporation and John Emery (incorporated by reference to
    Exhibit 10.9 to our quarterly report on Form 10-Q for the
    quarter ended September 30, 2000, and filed with the
    Commission on November 13, 2000).                                                                                                                                                            
|        | 10.12   |                         |  | Senior Secured Credit Agreement, dated
    October 28, 2002, between MeriStar Hospitality Operating
    Partnership, L.P. and SG Cowen Securities Corporation
    (incorporated by reference to Exhibit 10.7 to our quarterly
    report on Form 10-Q for the period ended September 30,
    2002, and filed with the Commission on November 14, 2002).                                                                                
|        | 10.13*  |                         |  | Separation Agreement, effective November 1,
    2002, between MeriStar Hospitality Corporation (including
    MeriStar Hospitality Operating Partnership, L.P.) and John Emery
    (incorporated by reference to Exhibit 10.16 to our annual
    report on Form 10-K for the year ended December 31, 2002,
    and filed with the Commission on March 31, 2003).                                                                       
|        | 10.14*  |                         |  | Employment Agreement, effective December 2,
    2002, between MeriStar Hospitality Corporation, MeriStar
    Hospitality Operating Partnership, L.P., and Donald D. Olinger
    (incorporated by reference to Exhibit 10.17 to our annual
    report on Form 10-K for the year ended December 31, 2002,
    and filed with the Commission on March 31, 2003).                                                                          
|        | 10.15*  |                         |  | Amendment to the Executive Employment Agreement
    effective as of November 1, 2001, between MeriStar
    Hospitality Corporation and MeriStar Hospitality Operating
    Partnership, L.P. and Paul W. Whetsell, effective
    November 20, 2002 (incorporated by reference to
    Exhibit 10.18 to our quarterly report on Form 10-Q for the
    period ended March 31, 2003, and filed with the Commission
    on May 14, 2003).    
|        | 10.16*  |                         |  | Second Amendment to the Executive Employment
    Agreement effective as of November 1, 2001, between
    MeriStar Hospitality Corporation and MeriStar Hospitality
    Operating Partnership, L.P. and Paul W. Whetsell, effective
    April 22, 2003 (incorporated by reference to
    Exhibit 10.19 to our quarterly report on Form 10-Q for the
    period ended March 31, 2003, and filed with the Commission
    on May 14, 2003).
|        | 10.17*  |                         |  | Executive Employment Agreement, effective
    February 17, 2003, between MeriStar Hospitality
    Corporation, MeriStar Hospitality Operating Partnership, L.P.
    and Jerome J. Kraisinger (incorporated by reference to
    Exhibit 10.20 to our quarterly report on Form 10-Q for the
    period ended March 31, 2003, and filed with the Commission
    on May 14, 2003).                                                         
|        | 12      |                         |  | Ratio of Earnings to Fixed Charges.**                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 13      |                         |  | Financial Statements of MeriStar Hospitality
    Operating Partnership, L.P. as of December 31, 2003, 2002
    and 2001.**                                                                                                                                                                                                                                                                                                             
|        | 21      |                         |  | Subsidiaries of MeriStar Hospitality
    Corporation.**                                                                                                                                                                                                                                                                                                                                                                                
|        | 23      |                         |  | Consent of KPMG LLP.**                                                                                                                                                                                                                                                                                                                                                                                                                 

78



---



##### 



|        |      |                         |  |                                                                                              
|------- | ---- | ----------------------- |  | ---------------------------------------------------------------------------------------------
|Exhibit |      |                        
|No.     |      | Description of Document
|        |      |                        
|        | 24   |                         |  | Power of Attorney (see Signatures pages).**                                                  
|        | 31.1 |                         |  | Sarbanes-Oxley Act Section 302 Certification
    of Chief Executive Officer.**               
|        | 31.2 |                         |  | Sarbanes-Oxley Act Section 302 Certification
    of Chief Financial Officer.**               
|        | 32.1 |                         |  | Sarbanes-Oxley Act Section 906 Certification
    of Chief Executive Officer. **              
|        | 32.2 |                         |  | Sarbanes-Oxley Act Section 906 Certification
    of Chief Financial Officer.**               
|        | 99.1 |                         |  | Consolidating Financial Information of MeriStar
    Hospitality Operating Partnership, L.P.**



---



|  |                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------
|* | Indicates a management contract or compensatory
    plan or arrangement required to be filed pursuant to
    Item 14(c) of Form 10-K.



|   |                
|-- | ---------------
|** | Filed herewith.

79



---



##### 



SIGNATURES

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



| |                                 
| | --------------------------------
| | MERISTAR HOSPITALITY CORPORATION



| |     |                     
| | --- | --------------------
| | By: | /s/ PAUL W. WHETSELL

| |                            
| | ---------------------------
| |                            
| | Paul W. Whetsell           
| | Chief Executive Officer and
| | Chairman of the Board      

Dated: March 15, 2004

KNOW ALL MEN BY THESE PRESENT,that each person whose signature
appears below constitutes and appoints Paul W. Whetsell, Bruce
G. Wiles, Donald D. Olinger and Jerome J. Kraisinger, such
persons true and lawful attorneys-in-fact and agents, with
full power of substitution and revocation, for such person and
in such persons name, place and stead, in any and all
capacities to sign any and all amendments to this report filed
pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, and to file the same with all
exhibits thereto, and the other documents in connection
therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and
things requisite and necessary to be done, as fully to all
intents and purposes as such person might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue
hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report and the foregoing Power of
Attorney have been signed by the following persons in the
capacities and on the dates indicated.

|                                           |  |                                                                                                      |  |                |  | 
|------------------------------------------ |  | ---------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                           |  |                                                                                                      |  |               
|Signature                                  |  | Title                                                                                                |  | Date          
|                                           |  |                                                                                                      |  |               
|                                          
|/s/ PAUL W. WHETSELLPaul W. Whetsell       |  | Chief Executive Officer and Chairman of the Board
    of Directors
    (Principal Executive Officer) |  | March 15, 2004
|                                          
|/s/ BRUCE G. WILESBruce G. Wiles           |  | Chief Operating Officer and Director                                                                 |  | March 15, 2004
|                                          
|/s/ DONALD D. OLINGERDonald D. Olinger     |  | Chief Financial Officer                                                                              |  | March 15, 2004
|                                          
|/s/ J. TAYLOR CRANDALLJ. Taylor Crandall   |  | Director                                                                                             |  | March 12, 2004
|                                          
|/s/ JAMES F. DANNHAUSERJames F. Dannhauser |  | Director                                                                                             |  | March 12, 2004
|                                          
|/s/ WILLIAM S. JANESWilliam S. Janes       |  | Director                                                                                             |  | March 12, 2004

80



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##### 



|                                         |  |          |  |                |  | 
|---------------------------------------- |  | -------- |  | -------------- |  | 
|                                         |  |          |  |               
|Signature                                |  | Title    |  | Date          
|                                         |  |          |  |               
|                                        
|/s/ H. CABOT LODGE IIIH. Cabot Lodge III |  | Director |  | March 12, 2004
|                                        
|/s/ D. ELLEN SHUMAND. Ellen Shuman       |  | Director |  | March 15, 2004
|                                        
|/s/ JAMES R. WORMSJames R. Worms         |  | Director |  | March 12, 2004

81