<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION

                            WASHINGTON, D.C.  20549

    
                                   FORM 10-Q/A 


              Quarterly Report Pursuant to Section 13 or 15(d) of
                      The Securities Exchange Act of 1934



For the Quarter Ended March 31, 1998            Commission File Number 1-11903



                   AMERICAN GENERAL HOSPITALITY CORPORATION
            (Exact Name of Registrant as Specified in its Charter)


            Maryland                                            75-2648842
(State or Other Jurisdiction of                             (I.R.S. Employer
Incorporation or Organization)                               Identification No.)


                5605 MacArthur Blvd., Suite 1200, Irving, Texas        75038
             (Address of Registrant's Principal Executive Office)    (Zip Code)

                                (972) 550-6800
              (Registrant's Telephone Number Including Area Code)


     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.


                             X    Yes              No
                           -----            -----


    
    
     The number of shares of common stock, par value $0.01 per share of American
General Hospitality Corporation outstanding on May 22, 1998 was 24,315,832.     


                                       1
<PAGE>
 
                   AMERICAN GENERAL HOSPITALITY CORPORATION

    
This Quarterly Report on Form 10-Q/A contains historical information and 
forward-looking statements. Statements looking forward in time are included in
this Form 10-Q/A pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. They involve known and unknown risks
and uncertainties that may cause the Company's actual results in future periods
to be materially different from any future performance suggested herein. In the
context of forward-looking information provided in this Form 10-Q/A and in other
reports, please refer to the discussion of risk factors detailed in, as well as
the other information contained in, the Company's filings with the Securities
and Exchange Commission during the past 12 months.    

    
<TABLE>
<CAPTION>
                                                 INDEX
                                                                                                    PAGE
<S>        <C>                                                                                     <C>
PART I     FINANCIAL INFORMATION
           Item 1      Financial Statements
           AMERICAN GENERAL HOSPITALITY CORPORATION
                Consolidated Balance Sheets - March 31, 1998 (unaudited) and December                  
                    31, 1997.....................................................................     3   
                Consolidated Statements of Operations for the Three Months ended March                 
                    31, 1998 and 1997 (unaudited)................................................     4   
                Consolidated Statement of Shareholders' Equity for the Three Months                    
                    Ended March 31, 1998 (unaudited).............................................     5   
                Consolidated Statements of Cash Flows for the Three Months Ended March                 
                    31, 1998 and 1997 (unaudited)................................................     6   
                Notes to Consolidated Financial Statements.......................................     8
                Pro Forma Consolidated Balance Sheet - March 31, 1998 (unaudited)................    14
                Pro Forma Consolidated Statement of Operations for the Three Months                    
                    Ended March 31, 1998 (unaudited).............................................    17   
           AGH LEASING, L.P. ("AGH LEASING")                                                           
                Consolidated Balance Sheet - March 31, 1998 (unaudited) and December 31,               
                    1997.........................................................................    23  
                Consolidated Statements of Operations for the Three Months Ended March                 
                    31, 1998, and 1997 (unaudited)...............................................    24  
                Consolidated Statement of Partners' Capital for the Three Months Ended                 
                    March 31, 1998 (unaudited)...................................................    25  
                Consolidated Statement of Cash Flows for the Three Months Ended March                  
                    31, 1998 and 1997 (unaudited)................................................    26  
                Notes to Consolidated Financial Statements.......................................    27
                Pro Forma Consolidated Statement of Operations for the Three Months                  
                    Ended March 31, 1998 (unaudited).............................................    30  
           CLIFTON HOLDING CORP. ("PRIME LESSEE")                                                      
                Consolidated Balance Sheet - March 31, 1998 (unaudited)..........................    34
                Consolidated Statement of Operations for the period from January 8, 1998               
                    (inception of operations) through March 31, 1998 (unaudited).................    35  
                Consolidated Statement of Shareholders' Equity for the period from                     
                    January 8, 1998 (inception of operations) through March 31, 1998                     
                    (unaudited)..................................................................    36  
                Consolidated Statement of Cash Flows for the period from January 8, 1998               
                    (inception of operations) through   March 31, 1998 (unaudited)...............    37  
                Notes to Consolidated Financial Statements.......................................    38
                Pro Forma Consolidated Statement of Operations for the Three Months                    
                    ended March 31, 1998 (unaudited).............................................    41  
           Item 2      Management's Discussion and Analysis of Financial Condition and Results       
                           of Operations.........................................................    44
PART II    OTHER INFORMATION                                                                           
           Item 2      Changes in Securities and Use of Proceeds.................................    53
           Item 6      Exhibits and Reports on Form 8-K..........................................    54
SIGNATURE                                                                                            55

</TABLE> 
     

                                       2
<PAGE>
 
PART I.  FINANCIAL INFORMATION

         ITEM 1.  FINANCIAL STATEMENTS

                   AMERICAN GENERAL HOSPITALITY CORPORATION
                          CONSOLIDATED BALANCE SHEETS
                     MARCH 31, 1998 AND DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                                                                            MARCH 31, 1998 
                                                                                              (UNAUDITED)         DECEMBER 31, 1997
                                                                                           ---------------        -----------------
                                       ASSETS
<S>                                                                                        <C>                    <C>
Investment in hotel properties
  Land and land improvements.........................................................      $    91,294,896        $     46,352,820
  Buildings and building improvements................................................          865,894,477             449,575,286
  Furniture, fixtures and equipment..................................................           91,557,219              38,218,668 
  Construction in progress...........................................................           49,176,932              53,605,534
                                                                                           ---------------        ----------------
                                                                                             1,097,923,524             587,752,308
Less:  accumulated depreciation......................................................          (26,815,837)            (18,162,480)
                                                                                           ---------------        ---------------- 
Net investment in hotel properties...................................................        1,071,107,687             569,589,828
Cash and cash equivalents............................................................              972,619                 800,255
Restricted cash......................................................................            3,357,229                 765,048
Participating Lease receivable - Lessee..............................................           17,102,846               7,999,122
Investment in PSS I, Inc.............................................................            4,865,422
Mortgage note receivable - PSS I, Inc................................................           43,509,048
Deferred expenses, net...............................................................            5,154,896               4,037,825
Other assets.........................................................................            1,788,037               1,661,650
Note receivable - AGH Leasing L.P....................................................              220,136                 234,321
                                                                                           ---------------        ----------------
     Total assets....................................................................      $ 1,148,077,920        $    585,088,049
                                                                                           ===============        ================
 LIABILITIES AND SHAREHOLDERS' EQUITY
Debt.................................................................................      $    59,457,735        $     36,140,059
Debt, Credit Facilities..............................................................          442,112,177              41,312,177
Distributions payable................................................................           11,877,198               9,352,973
Accounts payable, trade, accrued expenses and other liabilities......................           18,912,038              11,676,685
Minority interest in Operating Partnership...........................................           85,104,033              43,356,608
                                                                                           ---------------        ----------------
     Total liabilities...............................................................          617,463,181             141,838,502
                                                                                            ---------------        ---------------
Commitments and contingencies (Note 5)
Shareholders' equity:
Common stock $0.01 par value per share, 100,000,000 shares authorized 24,315,832 and
 21,182,308 shares issued and outstanding at March 31, 1998 and December 31, 1997,                
 respectively........................................................................              243,158                 211,823
Additional paid-in capital...........................................................          537,361,152             447,573,312
Unearned officers' compensation......................................................             (878,527)               (724,792)
Distributions in excess of accumulated earnings......................................           (6,111,044)             (3,810,796)
                                                                                           ---------------        ----------------
     Total shareholders' equity......................................................          530,614,739             443,249,547
                                                                                           ---------------        ----------------
     Total liabilities and shareholders' equity......................................      $ 1,148,077,920        $    585,088,049
                                                                                           ===============        ================
</TABLE>

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

                                       3
<PAGE>
 
                   AMERICAN GENERAL HOSPITALITY CORPORATION
                     CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
                                  (UNAUDITED)

<TABLE>
<CAPTION>
 
                                                                                   MARCH 31, 1998                  MARCH 31, 1997
                                                                               ----------------------         ----------------------

<S>                                                                         <C>                                     <C>
Revenues

   Participating Lease revenue............................................         $    31,248,960                $     9,508,365
   Office building rental income                                                           817,693               
   Interest income........................................................                 710,874                        394,713
                                                                                   ---------------                ---------------
          Total revenue...................................................              32,777,527                      9,903,078
                                                                                   ---------------                ---------------
Expenses                                                                                                        
   Depreciation...........................................................               8,603,977                      1,931,390
   Amortization of deferred loan costs....................................                 342,078                        173,958
   Amortization of franchise fees.........................................                  44,036                         18,226
   Amortization of other deferred expenses................................                  56,139                          5,030
   Real estate and personal property taxes and property insurance.........               3,187,435                      1,250,117
   Office building operating expense......................................                 370,090               
   General and administrative.............................................                 757,246                        502,391
   Ground lease expense...................................................                 626,745                        314,462
   Amortization of unearned officers' compensation........................                  52,988                         22,187
   Merger expenses........................................................               2,100,000               
   Interest expense.......................................................               7,344,834                        942,000
                                                                                   ---------------                ---------------
          Total expenses..................................................              23,485,568                      5,159,761
                                                                                   ---------------                ---------------
Income before minority interest...........................................               9,291,959                      4,743,317
                                                                                                                
Minority interest                                                                        1,197,190                        689,836
                                                                                   ---------------                ---------------
Net income applicable to common stockholders..............................         $     8,094,769                $     4,053,481
                                                                                   ===============                ===============
                                                                                                                
Per common share data:                                                                                          
Net income per basic common share.........................................         $          0.35                $          0.34
                                                                                   ===============                ===============
Weighted average number of basic shares of Common Stock outstanding.......              22,807,034                     11,815,600
                                                                                   ===============                ===============
                                                                                                                
Net income per diluted share..............................................         $          0.35                $          0.34
                                                                                   ===============                ===============
Weighted average number of diluted shares of Common Stock outstanding.....              23,032,863                     11,916,503
                                                                                   ===============                ===============
</TABLE>

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

                                       4
<PAGE>
 
                   AMERICAN GENERAL HOSPITALITY CORPORATION
                CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                   FOR THE THREE MONTHS ENDED MARCH 31, 1998
                                  (UNAUDITED)

    
<TABLE>
<CAPTION>
 
 
                                                       COMMON STOCK         ADDITIONAL    UNEARNED     DISTRIBUTIONS
                                                                             PAID-IN      OFFICERS'    IN EXCESS OF       TOTAL
                                                                             CAPITAL     COMPENSATION    EARNINGS
                                                  ---------------------
                                                    SHARES      DOLLARS
                                                  ----------   --------   ------------   -----------   ------------   ------------
<S>                                               <C>          <C>        <C>            <C>           <C>            <C>
Balance at December 31, 1997....................  21,182,308   $211,823   $447,573,312   $(724,792)    $ (3,810,796)  $443,249,547
                                                                                                                    
Distributions declared March 13, 1998                                                                               
($0.4275 per share).............................                                                        (10,395,018)   (10,395,018)
                                                                                                                                  
Issuance of common shares.......................       7,500         75        206,648    (206,723)                             --
                                                                                                                                  
Issuance of common shares                                                                                                         
for ABKB/LaSalle offering, net of expenses                                                                                        
and allocation to minority interest                                                                                               
($173,161)......................................     614,672      6,146     15,320,261                                  15,326,408
                                                                                                                                  
Allocation of minority interest from the                                     
issuance of Prime Group I OP Units..............                             2,422,125                                   2,422,125
                                                                                                                                  
Allocation of minority interest from the                                                                                          
issuance of O'Hare OP Units.....................                             6,299,909                                   6,299,909
                                                                                                                                  
Issuance of common shares for Unit Investment                                                                                     
Trust offerings, net of expenses and                                                                                              
allocation to minority interest ($740,770)......   2,511,352     25,114     65,538,897                                  65,564,010
                                                                                                                                  
Amortization of unearned officers'                                                                                                
compensation....................................                                            52,988                          52,988
                                                                                                                                  
Net income......................................                                                          8,094,770      8,094,770
                                                  ----------   --------   ------------   ---------     ------------   ------------
Balance at March 31, 1998.......................  24,315,832   $243,158   $537,361,152   $(878,527)    $ (6,111,044)  $530,614,739
                                                  ==========   ========   ============   =========     ============   ============
</TABLE>
     

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

                                       5
<PAGE>
 
                   AMERICAN GENERAL HOSPITALITY CORPORATION
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                      MARCH 31, 1998             MARCH 31, 1997
                                                                                  ---------------------      ---------------------
<S>                                                                               <C>                        <C> 
Cash flow from operating activities:
     Net income.............................................................             $   8,094,769               $  4,053,481
     Adjustment to reconcile net income to net cash provided by
         operating activities, net of effects of acquisitions:
         Depreciation.......................................................                 8,603,977                  1,931,390
         Amortization.......................................................                   495,241                    219,401
         Minority interest..................................................                 1,197,190                    689,836
     Changes in assets and liabilities:
         Restricted cash....................................................                (2,592,181)                    81,258
         Participating Lease receivable - AGH Leasing, L.P..................                (9,103,724)                  (421,382)
         Organization costs and franchise agreements........................                  (884,946)                    42,688
         Other assets.......................................................                  (126,386)                  (166,838)
         Accounts payable, trade, accrued expenses and other liabilities....                 7,235,353                  4,413,957
                                                                                        --------------              -------------
 
     Net cash flow provided by operating activities.........................                12,919,293                 10,843,791
                                                                                        --------------              -------------
 
Cash flow from investing activities:
     Purchase of hotel properties...........................................              (410,169,647)               (66,391,502)
     Improvements and additions to hotel properties.........................               (18,169,736)               (13,364,717)
     Investment in PSS I, Inc...............................................                (4,865,422)
     Mortgage note receivable - PSS I, Inc..................................               (43,509,048)
     Payments received from loan to AGH Leasing, L.P........................                    14,185                     12,851
                                                                                        --------------              -------------
 
         Net cash flow used in investing activities.........................              (476,699,668)               (79,743,368)
                                                                                        --------------              -------------
 
Cash flow from financing activities:
     Proceeds from borrowings...............................................               461,500,000                 18,500,000
     Net proceeds from public offerings.....................................                66,304,598                161,729,151
     Net proceeds from private placement - ABKB.............................                15,499,569
     Principle payments on borrowings.......................................               (69,373,455)               (76,133,138)
     Distributions paid - common stockholders...............................                (8,470,533)                (3,377,703)
     Distributions paid - OP Unit holders...................................                  (882,440)                  (773,026)
     Payments for deferred loan costs.......................................                  (625,000)                  (700,000)
                                                                                        --------------              -------------
 
         Net cash flow provided by financing activities.....................               463,952,739                 99,245,284
                                                                                        --------------              -------------
 
Net change in cash and cash equivalents.....................................                   172,364                 30,345,707
 
Cash and cash equivalents as of beginning of period.........................                   800,255                  3,888,281
                                                                                        --------------              -------------
 
Supplemental disclosure of cash flow information: 
      Cash and cash equivalents as of end of period.........................             $     972,619               $ 34,233,988
                                                                                        ==============              =============
 
Supplemental disclosure of cash flow information:
  Cash paid during the period for interest..................................             $   6,747,783               $  1,185,586
                                                                                        ==============              =============

</TABLE>

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

                                       6
<PAGE>
 
                   AMERICAN GENERAL HOSPITALITY CORPORATION
               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
              FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
                                  (UNAUDITED)

Supplemental disclosures of noncash investing activities:

     On February 28, 1997, the Company assumed $8,218,755 of mortgage
indebtedness in connection with the acquisition of the Radisson Hotel Arlington
Heights.

     On March 18, 1997, the Company assumed $9,510,654 of mortgage indebtedness
in connection with the acquisition of the DoubleTree Guest Suites Hotel.

     On January 8, 1998, the Company assumed $4,928,286 of mortgage indebtedness
in connection with the acquisition of the Ramada Plaza Shelton.

     On January 8, 1998, the Company assumed $5,306,545 of mortgage indebtedness
in connection with the acquisition of the Crowne Plaza Portland.

     On February 3, 1998, the Company assumed $21,756,299 of mortgage
indebtedness in connection with the acquisition of the Holiday Inn O'Hare
International Airport.


Supplemental disclosure of noncash financing activities:

     On January 8, 1998, the Company privately issued 518,437 Class B units of
limited partnership interest in American General Hospitality Operating
Partnership, L.P. ("Class B OP Units"), as part of the purchase of the Prime
Group I Acquisition Hotels.  At the time of issuance, the Class B OP Units were
valued at $26.697 per unit.  On April 16, 1998, these Class B OP Units
automatically converted into standard OP Units.

     On February 3, 1998, the Company privately issued 1,308,406 Class C OP
Units as part of the purchase price of the Holiday Inn O'Hare International
Hotel.  At the time of issuance, the Class C OP Units were valued at $27.514 per
unit.  The Class C OP Units bear a preferred annual distribution rate of $1.89
per Class C OP Unit until such time the dividend distribution rate for the Class
C OP Units shall equal the distribution rate on the Common Stock.  In addition,
the holders of the Class C OP Units are entitled to receive additional OP Units
if the fair market value of the Common Stock (as reported on the New York Stock
Exchange, Inc.) is not at least $30 per share on the anniversary date of the
closing of the acquisition.

                                       7
<PAGE>
 
                   AMERICAN GENERAL HOSPITALITY CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   ORGANIZATION AND INITIAL PUBLIC OFFERING

     American General Hospitality Corporation (the "Company") was incorporated
and formed on April 12, 1996, as a Maryland corporation qualifying as a real
estate investment trust ("REIT").  The Company commenced operations and
completed an Initial Public Offering ("IPO") of 8,075,000 shares, after the
exercise of the underwriters' over-allotment option, of its common stock on July
31, 1996. The offering price of all shares sold in the IPO was $17.75 per share,
resulting in net proceeds of approximately $129.3 million after deducting IPO
expenses.

     The Company contributed all of the net proceeds of the IPO to AGH GP, Inc.
(the "General Partner"), and AGH LP, Inc. (the "Limited Partner"), which in turn
contributed such proceeds to American General Hospitality Operating Partnership,
L.P. (the "Operating Partnership"), in exchange for an approximate 81.3%
aggregate equity interest in the Operating Partnership. At March 31, 1998, the
General Partner, a wholly owned subsidiary of the Company, owns a 1.0% interest
in the Operating Partnership and the Limited Partner, also a wholly owned
subsidiary of the Company, owns an approximate 85.2% limited partnership
interest in the Operating Partnership.
    
     At March 31, 1998, the Company owned 53 interests in hotels in 21 states
consisting of the 13 IPO Hotels and the hotels acquired in the periods indicated
below (collectively the "Current Hotels").      

<TABLE>
<CAPTION>
                                                         
                                                         Number of Hotels                      Aggregate    
                Quarter Acquired                             Acquired                      Acquisition Price 
----------------------------------------------       ----------------------           -------------------------
                                                                                         (dollars in millions)
<S>                                                  <C>                              <C>
1996
----
     4/th/ Quarter                                                2                              $ 49.0
                                                     ----------------------           -------------------------
1997
----
     1/st/ Quarter                                                5                              $ 84.1
     2/nd/ Quarter                                                6                              $193.8
     4/th/ Quarter                                                1                              $ 11.8
                                                     ----------------------           ------------------------- 
 
Total 1997 Acquisitions                                          12                              $289.7
                                                     ----------------------           -------------------------
 
1998
----
     1/st/ Quarter                                               26                              $542.0
                                                      ----------------------           -------------------------
 
Acquisitions since IPO through March 31, 1998
                                                                 40                              $880.7
                                                     ======================           =========================
</TABLE>


     The Company has leased 45 of the Current Hotels to AGH Leasing, L.P. and
its subsidiary, Twin Towers Leasing, L.P. ("Twin Towers," and together with AGH
Leasing, L.P., "AGH Leasing") and eight of the Current Hotels to independent
lessees that are affiliates of Prime Hospitality Corp. ("Prime"), a NYSE listed
company (together, the "Prime Lessee" collectively with AGH Leasing, the
"Lessee"), each pursuant to separate participating leases (the "Participating
Leases"). The Participating Leases are designed to allow the Company to achieve
substantial participation in any future growth of revenues generated at the
Current Hotels. Each Participating Lease has a term of ten to twelve years from
the inception of the lease, subject to earlier termination upon the occurrence
of certain events. Under the Participating Leases, the Lessee is obligated to
pay the Company the greater of fixed base rent ("Base Rent") or participating
rent ("Participating Rent") based on a percentage of revenues at each of the
Current Hotels.

     In addition, AGH Leasing has entered into separate management agreements
with American General Hospitality, Inc. ("AGHI"), with respect to 44 of the
Current Hotels, and Wyndham Hotel Corporation ("Wyndham"), with respect to one
hotel, to manage the Current Hotels (the "Management Agreements").  AGH Leasing
and AGHI are owned, in part, by certain executive officers of the Company. The
Prime Lessee manages eight of the Current Hotels, which it leases from the
Company. Neither the Company nor the members of its management own an interest
in, or participate in the management of, the Prime Lessee.

                                       8
<PAGE>
 
     These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC") and
should be read in conjunction with the financial statements and notes thereto of
the Company and the Lessee included in the Company's Form 10-K/A for the fiscal
year ended December 31, 1997 ("the "10-K"). The notes to the financial
statements included herein highlight significant changes to the notes included
in the 10-K and present interim disclosures required by SEC. The accompanying
financial statements reflect, in the opinion of management, all adjustments
necessary for a fair presentation of the interim financial statements. All
adjustments are of a normal and recurring nature.

    
     Recent Accounting Pronouncements - In June of 1997, the Financial 
Accounting Standards Board ("FASB") issued Statement of Financial Accounting 
Standards ("SFAS") 130, "Reporting Comprehensive Income", which requires a 
statement of comprehensive income to be included in the financial statements for
fiscal years beginning after December 15, 1997.  The Company has determined that
it does not have any items which would require the inclusion of a statement of 
comprehensive income in the financial statements.     

2.   EARNINGS PER COMMON SHARE

     The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" (FAS 128), during the fourth quarter of
1997, as required.  The new standard specifies the computation, presentation,
and disclosure requirements for earnings per share.  The following table
presents the computation of basic and diluted earnings per common share as
required by SFAS 128.

<TABLE>
<CAPTION>
 
                                                                           Three Months                       Three Months
                                                                              Ended                              Ended
                                                                          March 31, 1998                     March 31, 1997
                                                                    -----------------------------     -----------------------------
<S>                                                                 <C>                               <C> 
BASIC EARNINGS PER SHARE COMPUTATION:

     Net income applicable to common stockholders                              $ 8,094,769                       $ 4,053,481
     Basic Earnings per Common Share                                           $      0.35                       $      0.34
                                                                               
     Weighted average number of basic shares of Common                         
         Stock outstanding                                                      22,807,034                        11,815,600
                                                                               
DILUTED EARNINGS PER SHARE COMPUTATION:                                        
                                                                               
     Net income applicable to common stockholders                              $ 8,094,769                       $ 4,053,481
     Diluted Earnings per Common Share                                         $      0.35                       $      0.34
                                                                               
     Weighted average number of shares of common stock                         
         outstanding                                                            22,807,034                        11,815,600
                                                                               
     Common Stock equivalents - Stock Options                                      225,829                           100,903
                                                                    ----------------------           -----------------------
     Total weighted average number of diluted shares of Common                                              
         Stock outstanding                                                      23,032,863                        11,916,503
                                                                                                            
                                                                    ======================           =======================
</TABLE>

     The outstanding OP Units have been excluded from the diluted earnings
per share calculation as there would be no effect on the amounts since the
minority interests' share of income would also be added back to net income.


3.   DISTRIBUTIONS PAYABLE

     On March 13, 1998, the Company declared a distribution of $0.4275 per
share and OP Unit for the first quarter payable on April 30, 1998 to
stockholders and OP Unitholders of record on April 15, 1998.
 
     On March 13, 1998, the Company declared a distribution of $0.2993 per
share (a pro-rated dividend from February 3, 1998 through the end of the
quarter) for the first quarter payable to the Class C OP Unitholders on April
30, 1998.  The Class C OP Units bear a preferred annual distribution rate of
$1.89 per Class C OP Unit until such time as the dividend distribution rate for
the Class C OP Units shall equal the distribution rate on the Common Stock.
 
 
4.   DEBT OBLIGATIONS

     Mortgage debt outstanding at December 31, 1997 remained outstanding
for the first quarter of 1998 with the exception of the mortgage indebtedness
associated with the Radisson Hotel Arlington Heights which was repaid on
February 28, 1998 with borrowings from the Company's Credit Facilities. The
following debt was assumed in 1998 in connection with the Crowne Plaza Portland,
the Ramada Plaza Shelton and the Holiday Inn O'Hare International Airport.

                                       9
<PAGE>
 
<TABLE>
<CAPTION>
                                                                                             Balance
                                                                                         March 31, 1998
                                                                                    -----------------------
<S>                                                                                 <C>
  First mortgage note payable in monthly installments including interest at the
   fixed rate of 8.75%;  maturing on February 1, 2011 at which time a balloon
   payment of approximately $6,120,000 will be due and payable; collateralized                  
   by the Holiday Inn Dallas DFW Airport South....................................         $ 13,622,049
 
  First mortgage note payable in monthly installments including interest at the
   fixed rate of 7.5%;  maturing on December 1, 2001 at which time a balloon
   payment of approximately $3,985,000 will be due and payable; collateralized                    
   by the Courtyard by Marriott Meadowlands.......................................            4,381,504
 
  Construction loan payable in monthly installments including interest at the
   fixed rate of 7.89%; maturing on January 1, 2001; collateralized by the                          
   Courtyard by Marriott Meadowlands..............................................              403,799
  
  First mortgage note payable in monthly installments at a fixed rate of 9.75%;
   maturing on July 1, 2002, at which time a balloon payment of approximately 
   $8,200,000 will be due and payable; collateralized by the DoubleTree Guest 
   Suites Atlanta.................................................................            9,312,061
 
  First mortgage note payable in monthly installments at a fixed rate of 10.5%;
   maturing in December 2004, at which time a balloon payment of approximately
   $4.1 million will be due and payable; collateralized by the Crowne Plaza                       
   Portland.......................................................................            5,277,645
 
  First mortgage note payable in monthly installments at a fixed rate of 10.5%;
   maturing in December 2004, at which time a balloon payment of approximately
   $3.9 million will be due and payable; collateralized by the Ramada Plaza                       
   Shelton........................................................................            4,901,446
 
  First mortgage note payable in monthly installments at a fixed rate of 9.0%;
   maturing on January 1, 2012; collateralized by the Holiday Inn O'Hare                         
   International Airport..........................................................           21,559,231
                                                                                     -----------------------
 
 Total mortgage indebtedness                                                               $ 59,457,735
                                                                                    =======================
</TABLE>

5.   COMMITMENTS AND CONTINGENCIES

     On February 13, 1998 the Company replaced its $300 million secured line of
credit with two new unsecured credit facilities in the aggregate principle
amount of $600 million (collectively, the "New Credit Facilities"). The New
Credit Facilities have a three-year term and bear interest based upon the 30-
day, 60-day or 90-day LIBOR (5.6875%, 5.6875% and 5.7109% as of March 31, 1998)
at the option of the Company, plus an applicable margin for all or part of the
Facilities (the "Margins"). The Margins, which are adjusted on a quarterly
basis, range from 1.40% per annum to 2.0% per annum, based upon certain leverage
ratios. As of March 31, 1998 the Margins were 1.875% per annum. The financial
covenants contained in the New Credit Facilities require the Company to maintain
a debt service coverage ratio of at least 2.0 to 1.0, and an interest coverage
ratio of not less than 2.15 to 1.0 through December 31, 1998 and not less than
2.5 to 1.0 thereafter and to maintain a minimum net worth of $450 million plus
75% of the net proceeds from stock offerings and offerings of partnership
interests in the Operating Partnership. In addition, the New Credit Facilities
contain limits on total indebtedness based on a multiple of EBITDA (earnings
before interest, taxes, depreciation and amortization) that adjust downward as
of December 31, 1998. As a result of the adjustment of certain financial
covenants that occur on December 31, 1998, the Company expects that it would be
required to repay or refinance a portion of the New Credit Facilities by that
time.

     The Company entered into an agreement for a license and an association
membership from one of the sellers of the Days Inn Lake Buena Vista, which the
Company immediately assigned to AGH Leasing.  Commencing in January 1998, in
connection with the license and the association membership, AGH Leasing is
required to pay recurring association fees including a base monthly fee equal to
1.0% of the prior month's gross room revenues generated at the hotel, and an
additional fee of 0.5% to 1.0% of gross monthly revenues if the trailing twelve
month's gross room revenues at the hotel exceed a threshold of approximately $13
million, (subject to increase based on the percentage increase in the CPI).  In
addition, AGH Leasing is obligated to pay a recurring royalty for the Safari
theme equal to an amount which ranges from 10% to 25% of net operating income in
excess of $6 million (subject to adjustment if the Company invests more than $40
million in the hotel).  AGH Leasing is also obligated to pay a marketing
assistance fee equal to .25% of gross room revenues.  The marketing and
association fees are not expected to exceed 2.25% of gross room revenues for any
twelve-month period. The association membership agreement terminates in October
2008; AGH Leasing is obligated to pay liquidated damages if the agreement is
terminated earlier.

                                       10
<PAGE>
 
Participating Leases

     The Lessee has future lease commitments to the Company under the
Participating Leases, which expire from July 2008 to February 2010.  Minimum
future base rents under these noncancellable Participating Leases at March 31,
1998 are as follows:


<TABLE>
<CAPTION>
                                    Year                                                   Amount
-----------------------------------------------------------------------------     -----------------------
 
<S>                                                                                 <C>
Remainder of 1998                                                                          $   67,962,124
1999........................................................................                   93,349,690
2000........................................................................                  100,758,305
2001........................................................................                  104,085,849
2002........................................................................                  107,355,323
2003 and thereafter.........................................................                  663,455,896
                                                                                  -----------------------
 
Minimum future base rents                                                                  $1,136,967,187
                                                                                  =======================
</TABLE>

     Under the Participating Leases, the Company is obligated to pay the costs
of real estate and personal property taxes, property insurance and maintaining
underground utilities and structural elements of the Current Hotels.
Additionally, the Company is required to establish annual minimum reserves equal
to 4.0% of total revenue for each of the Hotels which will be utilized by the
Lessee for the replacement and refurbishment of furniture, fixtures & equipment
("FF&E") and other capital expenditures to enhance the competitive position of
the Current Hotels. At March 31, 1998 and 1997, actual capital expenditures were
greater than the amount required to be reserved.

     In the event the Company enters into an agreement to sell or otherwise
transfer a hotel, the Company will have the right to terminate the Participating
Lease with respect to such hotel upon 30 days' prior written notice upon either
(i) paying the Lessee the fair market value of the Lessee's leasehold interest
in the remaining term of the Participating Lease to be terminated (which amount
will be determined by discounting to present value, for each year of the
remainder of the lease term, cash flow attributable to such lease after
deducting the cost component of the applicable management fees, at an annual
discount rate of 12% (for the purposes of such calculation, the annual cash flow
for each remaining year of the lease term shall be equal to the cash flow
attributable to such lease for the twelve months ended on the lease termination
date)) or (ii) offering to lease to the Lessee a substitute hotel on terms that
would create a leasehold interest in such hotel with a fair market value equal
to or exceeding the fair market value of the Lessee's remaining leasehold
interest under the Participating Lease to be terminated.


Ground Leases

     Eight of the Current Hotels are subject to ground leases with third parties
with respect to the land underlying each such Hotel and the Westin Resort Key
Largo has a ground lease related to the bay bottom area fronting the property.
The ground leases are triple net leases which require the tenant to pay all
expenses of owning and operating the hotel, including real estate taxes and
structural maintenance and repair.

     The Courtyard by Marriott Meadowlands is subject to a ground lease with
respect to approximately 0.37 acres.  The ground lease terminates in March 2036
with two ten-year options to renew.  The lease requires a fixed rent payment
equal to $150,000 per year, subject to a 25.0% increase every five years
thereafter beginning in 1997, and a percentage rent payment equal to 3.0% of
gross room revenues.

     The Wyndham Albuquerque Airport Hotel is subject to a ground lease with
respect to approximately 10 acres. The ground lease terminates in December 2013
with two five-year options to renew.  The lease requires a fixed rent payment
equal to $19,180 per year, subject to annual CPI adjustment, and a percentage
rent payment equal to 5.0% of gross room revenues, 3.0% of gross receipts from
the sale of alcoholic beverages, 2.0% of gross receipts from the sale of food
and non-alcoholic beverages and 1.0% of gross receipts from the sale of other
merchandise or services.  The lease also provides the landlord with the right,
subject to certain conditions, to require the Company, at its expense, to
construct 100 additional hotel rooms if the occupancy rate at the Hotel is 85.0%
or more for 24 consecutive months and to approve any significant renovations
scheduled at the Hotel.  The occupancy rate at the Wyndham Albuquerque Airport
Hotel for the three months ended March 31, 1998 and 1997, was 80.5% and 64.1%,
respectively.

                                       11
<PAGE>
 
     The Hilton Hotel Toledo is subject to a ground lease with respect to
approximately 8.8 acres.  The ground lease terminates in June 2026 with four
successive renewal options, each for a ten-year term.  The lease requires annual
rent payments equal to $25,000, increasing to $50,000 or $75,000 if annual gross
room revenues exceed $3.5 million or $4.5 million, respectively.

     The Wyndham Airport Hotel San Jose is subject to a ground sublease with
respect to approximately 5.3 acres, which in turn is subject to a ground lease
covering a larger tract of land.  The sublease terminates in 2022 with one 30-
year option to renew.  The sublease requires the greater of a fixed minimum
annual rent of $75,945 (increasing to an annual minimum rent of $100,000 if the
option is exercised) or, in the aggregate, 4.0% of gross room revenues, 2.0% of
gross food receipts and 3.0% of gross bar and miscellaneous operations receipts.
The sublease also provides the sublessor with the right to approve any
significant renovations scheduled at the Hotel.

     The Westin Resort Key Largo is subject to a ground lease with respect to
42,500 square feet of off-shore bay bottom land in the Florida Bay on which a
commercial marina is operated pursuant to a lease from the Board of Trustees of
the Internal Improvement Trust Fund of the State of Florida, as Lessor.  The
lease terminates in May 2021 and requires an annual lease fee of approximately
$3,100.

     The Sheraton Four Point Hotel Mt. Arlington is encumbered by a lease on the
building and underlying land. The lease expires in August 1998 and has 99 one-
year renewal options. Renewals will be automatic unless the lessor is notified
in writing, at least 60 days before the end of the initial term or any renewal
term, of the lessee's election not to renew. In the event the lessee notifies
the lessor of its election not to renew the lease, the lessor shall have the
option to convert the lease to a management agreement between the lessor, as
owner, and the lessee as managing agent. Management fee payments would equal 5%
of gross receipts from the operation of the hotel and would expire five years
after its commencement. Minimum annual lease payments are based on i) an amount
equal to the required monthly bond payments due from the lessor to the New
Jersey Economic Development authority, ii) monthly installments due to the
lessor payable annually, in the amount of 5% of gross room receipts in excess of
$20,000 multiplied by the number of guest rooms, less applicable use and
occupancy taxes.

     The Double Tree Resort Surfside Clearwater Beach is encumbered by a ground
lease expiring in February 2079. Annual lease payments are based upon the
greater of $283,970 base rent or a percentage rent equal to 3% of gross room
revenues and 1% of gross receipts from the sale of food and beverage. The annual
base rent shall be adjusted every 10 years to equal the average rental payments
for the preceding 10-year period.

     The Courtyard by Marriott Disney Village is encumbered by a ground lease
expiring on September 30, 2046. Annual lease payments are based upon the greater
of a $500,000 base rent or a percentage rent equal to 8.5% of gross room
revenues, 4% of gross receipts from the sale of food, 6% of gross receipts from
the sale of beverages, 25% of gross receipts from subleases, concessionaires and
rent of exhibition  and meeting and conference facilities and 7% of gross
receipts from all other sources, including sale of merchandise, service charges
and vending machines. The annual base rent shall be adjusted every five years to
the greater of the minimum annual rent during the prior five years or 75% of the
average total rent paid during such five-year period.

     The  Radisson Inn Rochester is encumbered by a ground lease expiring on
December 31, 2021 with two 25-year renewal options. The lease requires minimum
annual rent payments of $ 60,000 through 1999 and thereafter an annual rent of
$60,000 plus a percentage rent payment equal to 1% of gross receipts in excess
of minimum annual rent.

     Minimum future rental payments for the ground leases to be paid by Company
at March 31, 1998 are as follows:

<TABLE>
<CAPTION>
Year                                                                                       Amount
-----------------------------------------------------------------------------     -----------------------
 
<S>                                                                                 <C>
Remainder of 1998............................................................                 $   890,394
1999.........................................................................                   1,187,191
2000.........................................................................                   1,187,191
2001.........................................................................                   1,187,191
2002.........................................................................                   1,224,691
2003 and thereafter..........................................................                  75,815,042
                                                                                  -----------------------
Minimum future rental payments                                                                $81,491,700
                                                                                  =======================
</TABLE>

                                       12
<PAGE>
 
6.   SUBSEQUENT EVENTS

Proposed Merger

     On March 15, 1998 the Company and CapStar Hotel Company ("CapStar") entered
into a definitive agreement (the "Merger Agreement") pursuant to which the
parties agreed, subject to stockholder approval and other conditions and
covenants, to merge as equals (the "Proposed Merger").  Accordingly, no
assurance can be given that the Proposed Merger will be consummated.  Pursuant
to the Merger Agreement, CapStar will spin off (the "Spin-Off") in a taxable
transaction, its hotel operations and management business to its current
stockholders as a new C-Corporation to be called MeriStar Hotels & Resorts, Inc.
("MeriStar Resorts").  CapStar will subsequently merge with and into the
Company, in a reorganization, which will qualify under Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code").  The Company will be
renamed MeriStar Hospitality Corporation after the Proposed Merger.  In a
separate transaction, which will close immediately after the closing of the
Proposed Merger, MeriStar Resorts will acquire AGH Leasing and AGHI which
acquisition is a condition to closing the Proposed Merger.  If the Proposed
Merger is consummated, MeriStar Resorts will become the lessee and manager of
all the Current Hotels currently leased by AGH Leasing and will have a right of
first refusal to become the lessee of hotels acquired by the Company in the
future except for the Prime Group II Acquisition (as defined below) hotels.

     The Merger Agreement defines the exchange ratios for both the Company's and
CapStar's stockholders.  CapStar stockholders will receive one share each of
MeriStar Hospitality Corporation and MeriStar Resorts for each CapStar share
owned.  The Company's stockholders will receive 0.8475 shares of MeriStar
Hospitality Corporation for each share of Common Stock owned.  Both exchange
ratios are fixed, with no adjustment mechanism.

     The Company expects the Proposed Merger to close in July 1998.  The
Proposed Merger will be submitted for approval at separate meetings of the
stockholders of the Company and CapStar. The Company filed a registration
statement with the SEC registering under the Securities Act of 1933, as amended,
the shares of MeriStar Hospitality Corporation to be issued in the Proposed
Merger.

Pending Acquisitions
    
     Prime Group II - The Company has entered into agreements to acquire from
Prime 11 full-service hotels (the "Prime Group II Acquisition"). The closing of
the purchase can occur at the Company's option at any time between September 30,
1998 and March 31, 1999. The aggregate purchase price is payable entirely in
cash. Currently the Company does not have a firm commitment for financing the
transaction. Management anticipates, assuming market conditions remain
favorable, that it will obtain financing to complete the acquisition. In 1998,
Prime is obligated to complete an $18 million improvement program on the Prime
Group II Acquisition hotels and the closing of the Prime Group II Acquisition
will follow the completion of the renovation program. Each of the Prime Group II
Acquisition hotels is expected to be leased and managed by the Prime Lessee or
other affiliates of Prime. The Prime Group II Acquisition hotels are operated
under franchise affiliations with Crowne Plaza, Holiday Inn, Radisson, Sheraton
and Ramada.      

     Madison Hotel - The Company has entered into an agreement to acquire a
full-service 202 room Holiday Inn in Madison, Wisconsin.  The acquisition of the
hotel is conditioned upon the seller's renovation of the hotel, which is
currently owned by a private partnership, which consists primarily of AGHI
shareholders and includes certain executive officers of the Company.  The hotel
will be purchased with a combination of cash and OP Units.  The Company expects
that the hotel will be leased to AGH Leasing and continue to be managed by AGHI.
The purchase of the Madison hotel is expected to close during the second quarter
of 1998.

        
 
                                       13
<PAGE>
 
                   AMERICAN GENERAL HOSPITALITY CORPORATION

                     PRO FORMA CONSOLIDATED BALANCE SHEET

                                MARCH 31, 1998
    
     The following unaudited Pro Forma Consolidated Balance Sheet is presented
as if the Company had completed the acquisition of the 2 pending hotel
acquisitions (the "Proposed Acquisition Hotels", together with the hotels owned
at March 31, 1998, the "Hotels") including the Madison Hotel Acquisition and the
Select Inn Bloomington as of March 31, 1998.  The Pro Forma Consolidated Balance
Sheet does not include the effects of the Proposed Merger with CapStar or the 
acquisition of the Prime Group II Acquisition Hotels.      

     In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.

     The following unaudited Pro Forma Consolidated Balance Sheet is derived
from the Company's Consolidated Balance Sheet as of March 31, 1998 and should be
read in conjunction with the financial statements filed with American General
Hospitality Corporation's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.

     The following Pro Forma Consolidated Balance Sheet is not necessarily
indicative of what the actual financial position would have been assuming such
transactions had been completed as of March 31, 1998, nor does it purport to
represent the future financial position of American General Hospitality
Corporation.

                                       14
<PAGE>
 
                   AMERICAN GENERAL HOSPITALITY CORPORATION
                     PRO FORMA CONSOLIDATED BALANCE SHEET
                                MARCH 31, 1998
                                  (UNAUDITED)
                                        
<TABLE>    
<CAPTION>
                                                                                 PROPOSED
                                                          COMPANY              ACQUISITION
                                                         HISTORICAL               HOTELs              PRO FORMA
                                                            (A)                    (B)              BALANCE SHEET
                                                       --------------           -----------         --------------
<S>                                                    <C>                      <C>                 <C>
               ASSETS

Investment in hotel properties, net.................   $1,071,107,687           $15,741,000 (C)     $1,086,848,687
Cash and cash equivalents...........................          972,619                                      972,619
Restricted cash.....................................        3,357,229                                    3,357,229
Participating Lease receivable  - Lessee............       17,102,846                                   17,102,846
Investment in PSS I, Inc............................        4,865,422                                    4,865,422
Mortgage note receivable  PSS I, Inc................       43,509,048                                   43,509,048
Deferred expenses, net..............................        5,154,896                                    5,154,896
Other assets........................................        1,788,037                                    1,788,037
Notes receivable  AGH Leasing L.P...................          220,136                                      220,136
                                                       --------------           -----------         --------------
     Total assets...................................   $1,148,077,920           $15,741,000         $1,163,818,920
                                                       ==============           ===========         ==============
     LIABILITIES AND SHAREHOLDERS' EQUITY

Debt................................................   $   59,457,735 (D)                           $   59,457,735
Debt, Credit Facilities.............................      442,112,177           $15,741,000 (E)        457,853,177
Distributions payable...............................       11,877,198                                   11,877,198
Accounts payable, trade, accrued
  expenses and other liabilities....................       18,912,038                                   18,912,038
Minority interest in Operating Partnership..........       85,104,033                                   85,104,033
                                                       --------------           -----------         --------------
     Total liabilities..............................      617,463,181            15,741,000            633,204,181
                                                       --------------           -----------         --------------
Shareholders' Equity

Common stock........................................          243,158                                      243,158
Additional paid-in capital..........................      537,361,152                                  537,361,152
Unearned officers' compensation.....................         (878,527)                                    (878,527)
Distributions in excess of earnings.................       (6,111,044)                                  (6,111,044)
                                                       --------------           -----------         --------------
     Total shareholders' equity.....................      530,614,739                                  530,614,739
                                                       --------------           -----------         --------------
     Total liabilities and shareholders'
       equity.......................................   $1,148,077,920           $15,741,000         $1,163,818,920
                                                       ==============           ===========         ==============
</TABLE>      


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

                                       15
<PAGE>
 
                   AMERICAN GENERAL HOSPITALITY CORPORATION
                                        
                 NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
                                        
(A)  Represents the historical balance sheet of the Company as of March 31,
     1998.
    
(B)  Proposed Acquisition Hotels represent the acquisition of the hotels,
     including closing costs, to be acquired by the Company, which are currently
     under contract.  The acquisitions are to be financed through borrowings
     under the Company's Credit Facilities.  The Proposed Acquisition Hotels
     include the Madison Hotel and the Select Inn Bloomington.      

(C)  Represents the increase resulting from the purchase of the following
     Proposed Acquisition Hotels, including estimated closing costs (the
     purchase includes only the land, building and improvements and furniture,
     fixtures and equipment):

<TABLE> 
     <S>                                                                     <C>   
     Purchase of the Proposed Acquisition Hotels, including closing costs:
          Madison Hotel                                                       $12,161,000
          Select Inn Bloomington                                                3,580,000
                                                                             ------------
 
        Total increase                                                        $15,741,000
                                                                             ============
</TABLE>

     The allocation of the Proposed Acquisition Hotels' purchase price to the
     assets acquired consists of the following:

<TABLE>
<CAPTION>
                                                   Proposed Acquisition
                                                          Hotels
                                               --------------------------
          <S>                                  <C>
          Land                                             $ 1,574,100
          Building and improvements                         12,739,020
          Furniture, fixtures and equipment                  1,427,880
                                               --------------------------
                                               
                                                           $15,741,000
                                               ==========================
</TABLE>
    
(D)  Aggregate annual principal payments for the Company's pro forma mortgage
     indebtedness at March 31, 1998 are as follows.      

<TABLE>
<CAPTION>
                              Year                                              Amount
          -----------------------------------------------              ------------------------                          
          <S>                                                          <C>                                             
          Remainder of 1998..............................                           $ 1,371,459                          
          1999...........................................                             1,995,513                          
          2000...........................................                             2,184,148                          
          2001...........................................                             6,124,457                          
          2002...........................................                            10,343,014                          
          2003 and thereafter............................                            37,439,144                          
                                                                       ------------------------                          
                                                                                                                         
          Aggregate annual principal payments............                           $59,457,735                          
                                                                       ========================                          
</TABLE>
    
(E)  The Company intends to finance the acquisition of the Proposed Acquisition
     Hotels with borrowings under its current Credit Facilities.     

<TABLE> 
     <S>                                                                                    <C>
     Borrowings to purchase the Proposed Acquisition Hotels          
          Madison Hotel                                                                                       $12,161,000
          Select Inn Bloomington                                                                                3,580,000
                                                                                            -----------------------------
                                                                     
          Total borrowings to purchase the Proposed Acquisition Hotels                                        $15,741,000
                                                                                            =============================        
</TABLE>

         

                                       16
<PAGE>
 
                   AMERICAN GENERAL HOSPITALITY CORPORATION
                                        
                PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS

                     FOR THE QUARTER ENDED MARCH 31, 1998
                                        
    
     The following unaudited Pro Forma Consolidated Statement of Operations is
presented as if the Company had completed (i) the follow-on primary public
offering of 6,368,300 shares of Common Stock (the "1997 Public Offering") on
February 7, 1997, (ii) the sale of 2,671,705 shares of Common Stock to certain
investment funds and separate accounts advised by ABKB/LaSalle Securities
Limited Partnership and LaSalle Advisors Limited Partnership (the "ABKB
Offering") between November 1, 1997 and February 15, 1998, (iii)the follow-on
primary offering of 4,250,000 shares of Common Stock (the "Second 1997
Offering") on November 13, 1997, (iv) the sale of 1,052,650, 1,095,890 and
362,812 shares of Common Stock on February 18, 1998, February 23, 1998 and
February 27, 1998, respectively, issued through three separate public offerings
pursuant to the Shelf Registration (the "UIT Offerings") and (v) the
acquisitions of the interests in 26 hotels acquired in the first quarter of
1998, 12 hotels and office building acquired during 1997 and 15 hotels acquired
during 1996 all owned as of March 31, 1998 (the "March 31 Hotels") and the
acquisition of the 2 pending hotel acquisitions (the "Proposed Acquisition
Hotels", together with the March 31 Hotels, the "Hotels") including the Madison
Hotel Acquisition and the Select Inn Bloomington as of January 1, 1997. The Pro
Forma Consolidated Statement of Operations does not include the effects of the
Proposed Merger with CapStar or the acquisition of the Prime Group II
Acquisition Hotels.     

     In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.

     The following unaudited Pro Forma Consolidated Statement of Operations is
derived from the Company's Consolidated Statements of Operations for the quarter
ended March 31, 1998 and should be read in conjunction with the financial
statements filed with American General Hospitality Corporation's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998.

     The following Pro Forma Consolidated Statement of Operations is not
necessarily indicative of what the actual results of operations would have been
assuming such transactions had been completed as of January 1, 1997.

                                       17
<PAGE>
 
                    AMERICAN GENERAL HOSPITALITY CORPORATION
                 PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
                   FOR THE THREE MONTHS ENDED MARCH 31, 1998
                                  (UNAUDITED)

                                        
<TABLE>     
<CAPTION>
                                              HISTORICAL       ACQUIRED
                                             THREE MONTHS       HOTELS        PROPOSED      ABKB OFFERING
                                                 ENDED         PRO FORMA     ACQUISITION       AND UIT
                                            MARCH 31, 1998    ADJUSTMENTS      HOTELS         OFFERINGS       COMBINED 
                                                   (A)           (B)            (C)              (D)          PRO FORMA
                                            --------------    -----------    -----------    -------------    ------------
<S>                                         <C>               <C>            <C>            <C>              <C>
Revenues

   Participating Lease revenue (E).........  $31,248,960      $4,903,130      $ 338,258                      $36,490,348
   Office building rental income (F).......      817,693                                                         817,693
   Interest income (G).....................      710,874         560,593                                       1,271,467
                                             -----------      ----------      ---------      ----------      -----------
          Total revenue....................   32,777,527       5,463,723        338,258                       38,579,508
                                             -----------      ----------      ---------      ----------      -----------
Expenses

   Depreciation (H)........................    8,603,977       1,122,304        153,054                        9,879,335
   Amortization (I)........................      442,253          16,347                                         458,600
   Real estate and personal property
     taxes and property insurance (J)......    3,187,435         672,212         86,416                        3,946,063
   Office building operating expense (F)...      370,090                                                         370,090
   General and administrative..............      757,246                                                         757,246
   Ground lease expense (K)................      626,745         672,577                                       1,299,322
   Amortization of unearned
      officers' compensation...............       52,988                                                          52,988
   Merger expenses (L).....................    2,100,000                                                       2,100,000
   Interest expense (M)....................    7,344,834       2,665,844        295,144        (722,659)       9,583,163
                                             -----------      ----------      ---------      ----------      -----------
          Total expenses...................   23,485,568       5,149,284        534,614        (722,659)      28,446,807
                                             -----------      ----------      ---------      ----------      -----------

   Income before minority interest.........    9,291,959         314,439       (196,356)        722,659       10,132,701

   Minority interest (N)...................    1,197,190                                                       1,400,524
                                             -----------                                                     -----------
   Net income applicable to common
      stockholders.........................  $ 8,094,769                                                     $ 8,732,177
                                             ===========                                                     ===========

   Net income per basic common share.......  $      0.35                                                     $      0.36
                                             ===========                                                     ===========
   Weighted average number of
      basic shares of Common Stock
      outstanding..........................   22,807,034                                                      24,270,320
                                             ===========                                                     ===========

   Net income per diluted common share.....  $      0.35                                                     $      0.36
                                             ===========                                                     ===========
   Weighted average number of
      diluted shares of Common Stock
      outstanding..........................   23,032,863                                                      24,496,149
                                             ===========                                                     ===========
</TABLE>      


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

                                      18
<PAGE>
 
                   AMERICAN GENERAL HOSPITALITY CORPORATION

            NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
                                        
(A)  Represents the Company's historical statement of operations for the year
     ended March 31, 1998.

(B)  Represents the adjustment necessary to present a statement of operations of
     the 26 hotels purchased during the first quarter of 1998 prior to the
     ownership by the Company based on historical balances of the previous
     owners.  The combination of the historical statement of operations
     presented in (A) and the pro forma statements of operations presented in
     (B) would be the results of the 53 hotels owned by the Company as if the
     Company owned the hotels as of January 1, 1997.

(C)  Proposed Acquisition Hotels represent the acquisition of the hotels,
     including closing costs, to be acquired by the Company, which are currently
     under contract.  The acquisitions are to be financed through borrowings
     under the Company's Credit Facilities.  The Proposed Acquisition Hotels
     include the Madison Hotel and the Select Inn Bloomington.

(D)  Represents the adjustment to interest expense for the quarter as a result
     of the repayment of borrowings under the Company's Credit Facilities with
     the net proceeds from the ABKB Offering and the UIT Offerings.  The
     adjustment made are for the time prior to the consummation of the equity
     transaction only.

<TABLE>
<CAPTION>
                                                                                                               Reduction in         
                                                                                                             interest expense       
                                                                                                             for time prior to      
                                                          Net proceeds               Interest Rate             consummation         
                                                    ----------------------     ----------------------      -------------------------
     <S>                                            <C>                        <C>                         <C>                      
     ABKB Offering                                            $ 67,576,019                       7.5 %                      $ 25,833
     UIT Offerings                                              66,304,598                       7.5 %                       696,826
                                                    ----------------------                                 -------------------------
     Total                                                    $133,880,617                                                  $722,659
                                                    ======================                                 =========================
</TABLE>
    
(E)  Represents lease payments from the Lessee to the Operating Partnership
     pursuant to the Participating Leases calculated on a pro forma basis by
     applying the rent provisions for the Participating Leases to the revenues
     of the Hotels.  The departmental revenue thresholds in the Participating
     Leases are seasonally adjusted for interim periods.  The Participating
     Lease payments for the Proposed Acquisition Hotels are calculated by
     applying the rent provisions applicable in the first year of the respective
     leases to the historical operating revenues of the hotels prior to the
     acquisition by the Company.      

<TABLE>
<CAPTION>
                                                                                            Excess of                            
                                                                                          Participating              Total       
                                                                                          Rent over Base         Participating   
                                                                     Base Rent                 Rent                  Rent        
                                                                --------------------   --------------------   -------------------
     <S>                                                        <C>                    <C>                    <C>                
     March 31 Hotels                                                    $22,755,423            $13,396,667           $36,152,090 
                                                                --------------------   --------------------   -------------------
                                                                                                                                 
     Base and Participating Lease payments for the Proposed                                                                      
      Acquisition Hotels                                                                                                         
          Madison Hotel                                                     238,997                      0               238,997 
          Select Inn Bloomington                                             99,261                      0                99,261 
                                                                --------------------   --------------------   -------------------
                                                                                                                                 
          Total for the Proposed Acquisition Hotels                         338,258                      0               338,258 
                                                                --------------------   --------------------   -------------------
                                                                                                                                 
                                                                        $23,093,681            $13,396,667           $36,490,348 
                                                                ====================   ====================   =================== 
</TABLE>

(F)  Represents the rental income and operating expenses associated with the
     Houston Office Building, which was acquired by the Company in a portfolio
     transaction on June 25, 1997.
    
(G)  The adjustment represents the interest income earned on the mortgage notes
     receivable the Company has from PSS I, Inc. The notes bear interest at a
     rate of 12% per annum, payable in monthly installments of interest only.
     PSS I, Inc. is a preferred stock subsidiary which owns four properties 
     acquired in the FSA Portfolio Acquisition which are slated for sale.     

                                       19
<PAGE>
 
(H)  Represents pro forma depreciation on the Operating Partnership's investment
     in the Hotels.  Pro forma depreciation is computed based upon estimated
     useful lives of 39 years for buildings and improvements and 5 years for
     furniture, fixtures and equipment.  The allocation of the cost of the 
     Hotels is as follows:

<TABLE>     
<CAPTION>
                                                                                 Proposed 
                                                  March 31 Hotels           Acquisition Hotels                 Total
                                              ------------------------    -----------------------    -------------------------
     <S>                                      <C>                         <C>                        <C>
     Land                                               $   91,294,896                $ 1,574,100               $   92,868,996
     Building and improvements                             865,894,477                 12,739,020                  878,633,497
     Furniture, fixtures and 
          equipment                                         91,557,219                  1,427,880                   92,985,099
                                              ------------------------    -----------------------    -------------------------
 
                                                        $1,048,746,592                $15,741,000               $1,064,487,592
                                              ========================    =======================
     Construction in progress                                                                                       49,176,932
     Accumulated depreciation as of 
          March 31, 1998                                                                                           (26,815,837)
                                                                                                     -------------------------
                                                                                                                $1,086,848,687
                                                                                                     =========================
</TABLE>      

(I)  Represents amortization of deferred loan costs related to the Company's
     Credit Facilities, amortization of franchise transfer costs and
     amortization of organizational costs and other deferred expenses.  Deferred
     loan costs are amortized utilizing a method which approximates the interest
     method over the remaining term of the Credit Facilities.  Franchise
     transfer costs are amortized over the term of the related franchise
     agreements which approximates 10 years.  Organizational costs and other
     deferred expenses are amortized over terms ranging from 5 to 12 years.

(J)  Represents amounts to be paid by the Operating Partnership for real estate
     and personal property taxes and property insurance.  The amounts included
     were derived from the historical amounts paid with respect to the Hotels
     adjusted for estimated probable real estate and personal property tax
     increases.

<TABLE>
<CAPTION>
                                                                                  Real estate and personal
                                                                                      property taxes and 
                                                                                      property insurance
                                                                                  --------------------------
     <S>                                                                          <C> 
     Real estate and personal property taxes and property insurance for the        
     Proposed Acquisition Hotels                                                   $               86,416
                                                                                   =========================
</TABLE>
    
(K)  Represents the amounts to be paid by the Operating Partnership for ground
     leases underlying the properties. Eight of the Hotels are subject to
     ground leases with third parties with respect to the land underlying each
     such hotel.  The ground leases are triple net leases which required the
     tenant to pay all expenses of owning and operating the hotel, including
     real estate taxes and structural maintenance and repair.  The Westin Key 
     Largo is subject to a ground lease related to the bay bottom area fronting 
     the property.      

     Minimum future rental payments for all the ground leases to be paid by
     Company at March 31, 1998 are as follows:

<TABLE>     
<CAPTION>
          Year                                                    Amount         
          -----------------------------------------------    ---------------------
          <S>                                                <C>                     
          1998...........................................              $   890,394
          1999...........................................                1,187,191
          2000...........................................                1,187,191
          2001...........................................                1,187,191
          2002...........................................                1,224,691
          2003 and thereafter............................               75,815,042
                                                             ---------------------
                                                                                                                     
          Minimum future rental payments                               $81,491,700
                                                             =====================
</TABLE>      

(L)  Represents the merger expenses recorded in the first quarter of 1998
     relating to the Proposed Merger with CapStar Hotel Company.  The merger
     expenses include costs for:  Underwriters, legal expenses, accounting and
     auditing expenses and other miscellaneous costs.

                                       20
<PAGE>
 
(M)  Represents pro forma interest expense on the following debt for the quarter
     ended March 31, 1998:

<TABLE>     
<CAPTION>
                                                                                    Pro Forma          Combined Pro     
                                                              Historical            Adjustment             Forma        
                                                          ------------------   -------------------    ---------------
     <S>                                                  <C>                  <C>                    <C> 
     March 31 Hotels                                                                                                 
          Holiday Inn Select DFW Airport South (1)                $  298,573                              $   298,573
          Courtyard by Marriott Meadowlands (2)                       90,616                                   90,616
          DoubleTree Guest Suites Atlanta (3)                        227,820                                  227,820
          Radisson Hotel Arlington Heights (4)                       203,757                                  203,757
          Crowne Plaza Portland (5)                                  128,211            $   12,382            140,593
          Ramada Plaza Shelton (6)                                   119,072                11,499            130,571
          Holiday Inn O'Hare International Airport (7)               324,877               183,720            508,597
          Credit Facilities                                        5,951,908             2,458,243          8,410,151
                                                          ------------------   -------------------    ---------------
                                                                   7,344,834             2,665,844         10,010,678
                                                          ------------------   -------------------    ---------------
     Proposed Acquisition Hotels                                                                                     
          Credit Facilities - Madison Hotel                                                228,019            228,019
          Credit Facilities - Select Inn Bloomington                                        67,125             67,125
                                                                               -------------------    --------------- 
                                                                                           295,144            295,144
                                                                               -------------------    --------------- 
     Equity offerings                                                                                                
          ABKB Offering                                                                    (25,832)           (25,832)
          UIT Offerings                                                                   (696,827)          (696,827)
                                                                               -------------------    --------------- 
                                                                                          (722,659)          (722,659)
                                                                               -------------------    ---------------
                                                                                                                     
     Total interest expense                                       $7,344,834            $2,238,329        $ 9,583,163
                                                          ==================   ===================    =============== 
</TABLE>      

     (1)  First mortgage note payable in monthly installments including interest
          at the fixed rate of 8.75%; maturing on February 1, 2011 at which time
          a balloon payment of approximately $6,120,000 will be due and payable;
          collateralized by the Holiday Inn Select Dallas DFW Airport South

     (2)  First mortgage note payable in monthly installments including interest
          at the fixed rate of 7.5%; maturing on December 1, 2001 at which time
          a balloon payment of approximately $3,985,000 will be due and payable;
          collateralized by the Courtyard by Marriott Meadowlands

     (2)  Construction loan payable in monthly installments including interest
          at the fixed rate of 7.89%; maturing on January 1, 2001;
          collateralized by the Courtyard by Marriott Meadowlands

     (3)  First mortgage note payable in monthly installments at a fixed rate of
          9.75%; maturing on July 1, 2002, at which time a balloon payment of
          approximately $8,200,000 will be due and payable; collateralized by
          the DoubleTree Guest Suites Atlanta
 
     (4)  One year first mortgage note payable in monthly installments of
          interest only at a fixed rate of 7.5%; collateralized by the Radisson
          Hotel Arlington Heights; matured on February 28, 1998, at which time
          the balance of $8,218,755 was paid

     (5)  First mortgage note payable in monthly installments at a fixed rate of
          10.5%; maturing in December 2004, at which time a balloon payment of
          approximately $4.1 million will be due and payable; collateralized by
          the Crowne Plaza Portland
 
     (6)  First mortgage note payable in monthly installments at a fixed rate of
          10.5%; maturing in December 2004, at which time a balloon payment of
          approximately $3.9 million will be due and payable; collateralized by
          the Ramada Plaza Shelton

     (7)  First mortgage note payable in monthly installments at a fixed rate of
          9.0%; maturing on January 1, 2012; collateralized by the Holiday Inn
          O'Hare International Airport 

                                       21
<PAGE>
 
          On February 13, 1998 the Company replaced its $300 million secured
     line of credit with two new unsecured credit facilities in the aggregate
     principle amount of $600 million (collectively, the "Credit Facilities").
     The Credit Facilities have a three-year term and bear interest based upon
     the 30-day, 60-day or 90-day LIBOR (5.6875%, 5.6875% and 5.7109% as of
     March 31, 1998) at the option of the Company, plus an applicable margin for
     all or part of the Facilities (the "Margins"). The Margins, which are
     adjusted on a quarterly basis, range from 1.40% per annum to 2.0% per
     annum, based upon certain leverage ratios. As of March 31, 1998 the Margins
     were 1.875% per annum.

    
(N)  Calculated at 12.9% for the historical period ended March 31, 1998 and at
     13.8% for the pro forma periods presented.     

                                      22
<PAGE>
 
                               AGH LEASING, L.P.
                          CONSOLIDATED BALANCE SHEET
                     MARCH 31, 1998 AND DECEMBER 31, 1997


<TABLE>    
<CAPTION>
                                                                              MARCH 31, 1997             DECEMBER 31, 1997
                                                                                (UNAUDITED)
                                                                        ------------------------      ---------------------
<S>                                                                     <C>                           <C>
                              ASSETS

Investments in hotel properties, at cost
   Furniture, fixtures and equipment................................                 $   315,000                $   315,000
   Less accumulated depreciation....................................                    (105,000)                   (89,250)
                                                                        ------------------------      ---------------------
Net investment in hotel properties..................................                     210,000                    225,750
Cash and cash equivalents...........................................                  24,644,714                  8,781,329
Accounts receivable, net of allowance for doubtful accounts of
   $80,987 and $73,915 as of March 31, 1998 and December 31,
   1997, respectively...............................................                  12,594,508                  6,247,083
Inventories.........................................................                   1,508,406                  1,007,296
Prepaid expenses....................................................                   1,165,999                  1,067,384
Deferred expenses...................................................                     148,859                    159,207
Other assets........................................................                     457,900                    283,997
                                                                        ------------------------      ---------------------
          Total assets..............................................                 $40,730,386                $17,772,046
                                                                        ========================      =====================

           LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)

Accounts payable, trade.............................................                 $ 5,309,072                $ 2,642,639
Participating Lease payable, American General Hospitality
   Operating Partnership, L.P.......................................                  17,371,456                  7,999,122
Note payable to American General Hospitality Operating                                   
   Partnership, L.P.................................................                     220,136                    234,321
Accrued expenses and other liabilities..............................                  13,227,644                  5,327,522
Deferred income.....................................................                   2,047,500                  2,100,000
Minority interest in Twin Towers Leasing, L.P.......................                   1,197,442                  1,197,442
                                                                        ------------------------      ---------------------
          Total liabilities.........................................                  39,373,250                 19,501,046

                                                                        ------------------------      ---------------------
Partners' capital (deficit)
Commitments and contingencies (Notes 1 and 2)
Partner's capital (deficit) - General Partner.......................                      13,571                    (17,290)
Partners' capital (deficit) - Limited Partners......................                   1,343,565                 (1,711,710) 
                                                                        ------------------------      ---------------------
          Total partners' capital (deficit).........................                   1,357,136                 (1,729,000)
                                                                        ------------------------      ---------------------
          Total liabilities and partners' capital (deficit).........                 $40,730,386                $17,772,046
                                                                        ========================      =====================
</TABLE>     

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

                                      23
<PAGE>
 
                               AGH LEASING, L.P.
                     CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
                                  (UNAUDITED)


<TABLE>
<CAPTION>
 
                                                                         THREE MONTHS               THREE MONTHS
                                                                            ENDED                       ENDED
                                                                        MARCH 31, 1998             MARCH 31, 1997
                                                                     --------------------       --------------------
<S>                                                                  <C>                        <C>
Revenues
     Room revenue..................................................  $         58,224,156       $         19,465,968
     Food and beverage revenue.....................................            17,367,968                  5,197,244
     Other revenue.................................................             3,449,076                  1,305,853
                                                                     --------------------       --------------------
          Total revenue............................................            79,041,200                 25,969,065
                                                                     --------------------       --------------------
Expenses
     Property operating costs and expenses.........................            13,956,762                  5,340,286
     Food and beverage costs and expenses..........................            12,238,150                  4,239,312
     General and administrative....................................             6,315,376                  2,475,288
     Advertising and promotion.....................................             5,316,895                  1,820,589
     Repairs and maintenance.......................................             2,906,546                  1,032,093
     Utilities.....................................................             2,872,937                  1,147,891
     Management fees...............................................             1,759,353                     82,854
     Franchise costs...............................................             2,300,237                    676,148
     Depreciation..................................................                15,750                     15,750
     Amortization..................................................                10,348                     10,052
     Interest expense..............................................                 5,858                      7,192
     Other expense.................................................                91,628                     20,746
     Participating Lease expenses..................................            28,165,224                  9,508,365
                                                                     --------------------       --------------------
          Total expenses...........................................            75,955,064                 26,376,566
                                                                     --------------------       --------------------
          Net income (loss)........................................  $          3,086,136       $           (407,501)
                                                                     ====================       ====================
</TABLE>

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

                                      24
<PAGE>
 
                               AGH LEASING, L.P.
                  CONSOLIDATED STATEMENT OF PARTNERS' CAPITAL
                   FOR THE THREE MONTHS ENDED MARCH 31, 1998
                                  (UNAUDITED)


    
<TABLE> 
<CAPTION> 
                                                             General      Limited
                                                             Partner      Partners      Total
                                                               1%           99% 
                                                             -------      --------      -----
<S>                                                          <C>        <C>          <C> 
Balance at December 31, 1997................................ $(17,290)  $(1,711,710) $(1,729,000)
Net income..................................................   30,861     3,055,275    3,086,136 
                                                             --------   -----------  -----------
Balance at March 31, 1998................................... $ 13,571   $ 1,343,565  $ 1,357,136
                                                             ========   ===========  ===========
</TABLE> 
                                                                    

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

                                      25
<PAGE>
 
                               AGH LEASING, L.P.
                     CONSOLIDATED STATEMENT OF CASH FLOWS
              FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
                                  (UNAUDITED)
<TABLE>
<CAPTION>
 
                                                                         THREE MONTHS               THREE MONTHS
                                                                             ENDED                      ENDED
                                                                         MARCH 31, 1998            MARCH 31, 1997
                                                                     --------------------       -------------------- 
<S>                                                                  <C>                        <C> 
Cash flow from operating activities:
     Net income..................................................... $          3,086,136       $           (407,501)
     Adjustments to reconcile net income to net cash provided
      by operating activities:
        Depreciation................................................               15,750                     15,750
        Amortization................................................               10,348                     10,052
     Changes in assets and liabilities:
          Accounts receivable.......................................           (6,347,425)                (1,367,672)
          Inventories...............................................             (501,110)                  (146,066)
          Prepaid expenses..........................................              (98,615)                    44,250
          Other assets..............................................             (173,903)                  (113,119)
          Accounts payable, trade...................................            2,666,433                    420,001
          Participating Lease payable, American General                         
           Hospitality Operating Partnership, L.P...................            9,372,334                    419,460
          Accrued expenses and other liabilities....................            7,900,122                    (30,138)
          Deferred income...........................................              (52,500)                   420,001
                                                                     --------------------       --------------------
          Net cash  provided by operating activities................           15,877,570                   (734,982)
                                                                     --------------------       --------------------
Cash flow from financing activities:
     Principal payments on borrowings...............................              (14,185)                   (12,851)
                                                                     --------------------       --------------------
Net change in cash and cash equivalents.............................           15,863,385                   (747,833)
Cash and cash equivalents at beginning of period....................            8,781,329                  5,673,232
                                                                     --------------------       --------------------
Cash and cash equivalents at end of period..........................  $        24,644,714       $          4,925,399
                                                                     ====================       ====================
Supplemental disclosures of cash flow information:
     Cash paid during the period for interest.......................  $             5,858       $              7,192
                                                                     ====================       ====================

</TABLE>

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

                                      26
<PAGE>
 
                               AGH LEASING, L.P.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   ORGANIZATION
    
     AGH Leasing, L.P. is a Delaware limited partnership which was formed on May
29, 1996, and commenced operations on July 31, 1996. AGH Leasing is owned in
part by certain executive officers of American General Hospitality Corporation
(the "Company") and American General Hospitality, Inc. ("AGHC"). AGH Leasing,
L.P. leases 44 of the 53 Hotels (the "AGH Leasing Hotels") in which American
General Hospitality Operating Partnership, L.P. (the "Operating Partnership")
owns an interest in at March 31, 1998, pursuant to operating leases
("Participating Leases") which provide for rent based on the revenues of the AGH
Leasing Hotels.     
 
     Twin Towers Leasing, L.P. ("Twin Towers Leasing" and, together with AGH
Leasing, L.P., "AGH Leasing") leases the Radisson Twin Towers Orlando, pursuant
to a Participating Lease which is substantially similar in form to the other
Participating Leases.  Twin Towers Leasing is a Florida limited partnership
which was formed on June 1, 1997, and commenced operations on June 25, 1997. AGH
Leasing is the 51% sole general partner of Twin Towers Leasing. The remaining
49% is owned by Regent Carolina Corporation ("Regent"), an affiliate of the
selling entity.  Based on the partnership agreement, Regent is allocated 100% of
any losses generated by Twin Towers Leasing up to their capital contribution of
$3 million.  The operations of Twin Towers Leasing are consolidated with the
operations of AGH Leasing for financial statement purposes.
     
     The consolidated financial statements of AGH Leasing include the results of
operations of the AGH Leasing Hotels leased from the Operating Partnership due
to AGH Leasing's control over the operations of the AGH Leasing Hotels and their
respective affiliated Beverage Corporations during the 12-year term of the
Participating Leases. AGH Leasing has complete discretion in establishing room
rates and all rates for hotel goods and services. Likewise, all operating
expenses of the AGH Leasing are under the control of AGH Leasing. AGH Leasing
has the right to manage or to enter into management contracts with other parties
to manage the AGH Leasing Hotels. If AGH Leasing elects to enter into management
contracts with parties other than AGHI, AGH Leasing must obtain prior written
consent of the Operating Partnership, which consent may not be unreasonably
withheld. AGH Leasing has entered into management agreements pursuant to which
44 of the AGH Leasing Hotels are managed by AGHI and the remaining AGH Leasing
Hotel is managed by Wyndham Hotel Corporation.     
 
     AGH Leasing's results of operations are seasonal.  The aggregate room
revenues in the first, second and third quarters of each fiscal year may be
higher than room revenues in the first quarter and fourth quarter of each fiscal
year.  Consequently, AGH Leasing may have net income on some quarters and may
have net losses in other quarters of the same year.
 
     Upon consummation of the Company's Initial Public Offering ("IPO"), the
partners of AGH Leasing capitalized AGH Leasing with $500,000 cash and pledged
275,000 units of limited partnership interest in the Operating Partnership ("OP
Units") to the Company to collateralize the Lessee's obligations under the
Participating Leases.  Twin Towers Leasing was capitalized with $3 million by
the 49% limited partner upon commencement of operations.
 
     These unaudited financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission ("SEC") and
should read in conjunction with the financial statements and notes thereto of
the Company and AGH Leasing included in the Company's Form 10-K for the fiscal
year ended December 31, 1997 (the "10-K").  The notes to the financial
statements included herein highlight significant changes to the notes included
in the 10-K and present interim disclosures required by the SEC.  The
accompanying financial statements reflect, in the opinion of management, all
adjustments necessary for a fair presentation of the interim financial
statements.  All adjustments are of a normal and recurring nature.
 
2.   COMMITMENTS AND CONTINGENCIES

    
     Franchise costs represent the annual expense for franchise royalties and
reservation services under the terms of hotel franchise agreements, which expire
from 1998 to 2013.  Franchise costs are based upon varying percentages of gross
room revenue ranging from 1.0% to 5.0%.  These fees are paid by the Lessee.  No
franchise costs were incurred for the Hotel Maison de Ville or the Lodge at
Seaport Mystic.     

                                      27
<PAGE>
 
    
     Forty-four of the AGH Leasing Hotels are managed by AGHI on behalf of the
AGH Leasing.  AGH Leasing pays AGHI a base management fee of 1.5% of total
revenue and an incentive fee of up to 2.0% of total revenue.  The incentive fee,
if applicable, is equal to 0.025% of annual total revenue for each 0.1% increase
in annual total revenue over the total revenues for the preceding twelve-month
period up to the maximum incentive fee.     
 
     The remaining AGH Leasing Hotel, the Wyndham Garden Hotel Marietta, is
managed by Wyndham Hotel Corporation ("WHC") on behalf of AGH Leasing.  AGH
Leasing pays WHC a base management fee equal to 1.5% of gross revenues at the
Hotel plus an incentive management fee of up to 1.5% of gross revenues.  The
incentive fee, if applicable, will be earned if gross revenues exceed certain
year over year thresholds.
 
     Each Hotel, except the Lodge at Seaport Mystic and the Hotel Maison de
Ville, is required to remit varying percentages of gross room revenue ranging
from 1.0% to 5.0% to the various franchisors for sales and advertising expenses
incurred to promote the hotel at the national level.  Additional sales and
advertising costs are incurred at the local property level.  These fees are paid
by AGH Leasing.

     The Company entered into an agreement for a license and an association
membership from one of the sellers of the Wyndham Safari Lake Buena Vista, which
the Company immediately assigned to AGH Leasing.  Commencing January 1998, in
connection with the license and the association membership, AGH Leasing is
required to pay recurring association fees including a base monthly fee equal to
1.0% of the prior month's gross room revenues generated at the Hotel, and an
additional fee of 0.5% to 1.0% of gross monthly revenues if the trailing twelve
month's gross room revenues at the Hotel exceed a threshold of approximately $13
million (subject to increase based on the percentage increase in the CPI).  In
addition, AGH Leasing is obligated to pay a recurring royalty for the royal
safari theme equal to an amount which ranges from 10% to 25% of net operating
income in excess of $6 million (subject to adjustment if the Operating
Partnership invests more than $40 million in the hotel).  AGH Leasing is also
obligated to pay a marketing assistance fee equal to .25% of gross room
revenues.  The marketing and association fees are not expected to exceed 2.25%
of gross room revenues for any twelve-month period.  The association membership
agreement terminates in October 2008; AGH Leasing is obligated to pay liquidated
damages if the agreement is terminated earlier.
    
  In order to facilitate compliance with state and local liquor laws and
regulations, AGH Leasing subleases those areas of certain of the Current Hotels
that comprise the restaurant and other areas where alcoholic beverages are
served to the Beverage Corporations, 39 of which are wholly owned by an
executive of the Company but controlled by AGH Leasing. In accordance with the
terms of the Beverage Subleases, each Beverage Corporation is obligated to pay
to AGH Leasing rent payments equal to 30% of each such corporation's annual
gross revenues generated from the sale of alcoholic beverages generated from
such areas; however, pursuant to the Participating Leases, such subleases will
not reduce the Participating Rent payments to the Operating Partnership, which
it is entitled to receive from such beverage sales.      

     AGH Leasing  has future lease commitments to the Company under the
Participating Leases, which have various expiration dates between July 2008 to
February 2010.  The Participating Lease expenses are based on percentages of
room revenues, food and beverage revenues, telephone and other revenues.  The
departmental revenue thresholds in the Participating Leases are seasonally
adjusted for interim periods and the Participating Lease formulas are adjusted
effective January 1, 1997, by a percentage equal to the percentage increase in
the CPI, plus .75% as compared to the prior year.  Additionally, several of the
Hotels will have further adjustments to the Participating Lease formulas due to
the significant renovations expected to be completed in those Hotels.  Minimum
future rental expense (i.e., base rents) under these noncancellable
Participating Leases is as follows:

<TABLE>     
<CAPTION>
                                             Year                                            Amount
                        ----------------------------------------------                -------------------
<S>                                                                                   <C>
                        Remainder of 1998...........................................  $        60,281,213
                        1999........................................................           82,847,593
                        2000........................................................           89,987,995
                        2001........................................................           93,054,855
                        2002........................................................           96,057,229
                        2003 and thereafter.........................................          593,633,673
                                                                                      -------------------
 
                        Minimum future base rents                                     $     1,015,862,558
                                                                                      ===================
</TABLE>      
    
3.   SUBSEQUENT EVENTS      

Proposed Merger
 
     On March 15, 1998 the Company and CapStar Hotel Company ("CapStar") entered
into a definitive agreement (the "Merger Agreement") pursuant to which the
parties agreed, subject to stockholder approval and other conditions and
covenants, to merge as equals (the "Proposed Merger"). Accordingly, no assurance
can be given that the Proposed Merger will be consummated. Pursuant to the
Merger Agreement, CapStar will spin off (the "Spin-Off") in a taxable
transaction, its hotel  operations and management business to its current
stockholders as a new C-Corporation to be called 

                                      28
<PAGE>
 
MeriStar Hotels & Resorts, Inc. ("MeriStar Resorts"). CapStar will subsequently
merge with and into the Company, in a reorganization which will qualify under
Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). The
Company will be renamed MeriStar Hospitality Corporation after the Proposed
Merger. In a separate transaction, which will close immediately after the
closing of the Proposed Merger, MeriStar Resorts will acquire AGH Leasing and
AGHI which acquisition is a condition to closing the Proposed Merger. If the
Proposed Merger is consummated, MeriStar will become the lessee and manager of
all of the Current Hotels currently leased by AGH Leasing and will have a right
of first refusal to become the lessee of hotels acquired by the Company in the
future except for the Primary Group II Acquisition hotels.

     The Merger Agreement defines the exchange ratios for both the Company's and
CapStar's stockholders.  CapStar stockholders will receive one share each of
MeriStar Hospitality Corporation and MeriStar Resorts for each CapStar share
owned. The Company's stockholders will receive 0.8475 shares of MeriStar
Hospitality Corporation for each share of Common Stock owned.  Both exchange
ratios are fixed, with no adjustment mechanism.

     The Company expects the Proposed Merger to close in July 1998.  The
Proposed Merger will be submitted for approval at separate meetings of the
stockholders of the stockholders of the Company and CapStar. The Company filed a
registration statement with the SEC registering under the Securities Act of
1933, as amended, the shares of MeriStar Hospitality Corporation to be issued in
the Proposed Merger.

    
     

                                      29
<PAGE>
 
                               AGH LEASING, L.P.

                PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
                                        
                     FOR THE QUARTER ENDED MARCH 31, 1998
                                        
    
     The following unaudited Pro Forma Consolidated Statement of Operations is
presented as if the 45 hotels which the Company and its affiliates leases to AGH
Leasing (the "AGH Leasing March 31 Hotels") and one of the additional hotels to
be acquired by the Company and leased to AGH Leasing (the "Proposed Acquisition
Hotel", together with the AGH Leasing March 31 Hotels, the "AGH Leasing Hotels")
were leased pursuant to Participating Leases as of January 1, 1997. The Proposed
Acquisition Hotel is the Madison Hotel Acquisition. The Pro Forma Consolidated
Statement of Operations does not include the effects of the Proposed Merger with
CapStar.      

     In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.

     The following unaudited Pro Forma Consolidated Statement of Operation are
derived from AGH Leasing's Consolidated Statements of Operations as of March 31,
1998 and should be read in conjunction with the financial statements filed with
American General Hospitality Corporation's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998.

     The following Pro Forma Consolidated Statement of Operations are not
necessarily indicative of what the actual results of operations would have been
assuming such transactions had been completed as of January 1, 1997.

                                      30
<PAGE>
 
                               AGH LEASING, L.P.
                PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
                   FOR THE THREE MONTHS ENDED MARCH 31, 1998
                                  (UNAUDITED)

<TABLE>    
<CAPTION>
                                                    HISTORICAL      AGH LEASING
                                                   THREE MONTHS   MARCH 31 HOTELS     PROPOSED
                                                       ENDED         PRO FORMA       ACQUISITION
                                                  MARCH 31, 1998    ADJUSTMENTS        HOTELS          COMBINED 
                                                         (A)           (B)              (C)            PRO FORMA
                                                  --------------    -----------      -----------      ------------
<S>                                               <C>             <C>                <C>              <C>
Revenues

   Room revenue (D).............................   $58,224,156      $10,591,753                       $68,815,909

   Food and beverage revenue (D)................    17,367,968        3,125,341                        20,493,309

   Other revenue (D)............................     3,449,076          839,369           3,373         4,291,818
                                                   -----------       ----------       ---------       -----------
          Total revenue.........................    79,041,200       14,556,463           3,373        93,601,036
Expenses                                           -----------       ----------       ---------       -----------

     Property operating cost and expenses (E)...   13,956,762         3,068,333           7,492        17,032,587

     Food and beverage costs and expenses (E)...   12,238,150         2,693,625            (411)       14,931,364

     General and administrative (E).............    6,315,376         1,486,918          46,447         7,848,741

     Advertising and promotion (E)..............    5,316,895         1,030,001           7,289         6,354,185

     Repairs and maintenance (E)................    2,906,546           735,838           1,135         3,643,519

     Utilities (E)..............................    2,872,937           694,370           9,151         3,576,458

     Management fees (F)........................    1,759,353           311,020                         2,070,373
                                                                                                                
     Franchise costs (G)........................    2,300,237           409,716                         2,709,953
                                                                                                                
     Depreciation...............................       15,750                                              15,750
                                                                                                                
     Amortization (H)...........................       10,348                                              10,348
                                                                                                                
     Interest expense...........................        5,858                                               5,858

     Other expense..............................       91,628            19,500                           111,128

      Participating Lease expense (I)...........   28,165,224         5,358,517         238,997        33,762,738
                                                  -----------      ------------       ---------       -----------
          Total expenses........................   75,955,064        15,807,838         310,100        92,073,002
                                                  -----------      ------------       ---------       -----------

Net income (loss)...............................  $ 3,086,136      $ (1,251,375)      $(306,727)      $ 1,528,034
                                                  ===========      ============       =========       ===========
</TABLE>     

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

                                      31
<PAGE>
 
                               AGH LEASING, L.P.

            NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
    
     The Pro Forma Consolidated Statement of Operations of AGH Leasing, L.P.
("AGH Leasing") include the results of operations of the 45 hotels leased from
the American General Hospitality Operating Partnership, L.P. (the "Operating
Partnership") due to AGH Leasing's control over the operations of the hotels
during the twelve-year term of the Participating Leases.  AGH Leasing has
complete discretion in establishing room rates and all rates for hotel goods and
services.  Likewise, all operating expenses of the hotels are under the control
of AGH Leasing.  AGH Leasing has the right to manage or to enter into management
contracts with other parties to manage the hotels.  If AGH Leasing elects to
enter into management contracts with parties other than American General
Hospitality, Inc. ("AGHI"), AGH Leasing must obtain the prior written consent of
the Company, which consent may not be unreasonably withheld.     

     AGH Leasing's results of operations are seasonal.  Generally, hotel revenue
is greater in the second and third quarters of a calendar year, although this
may not be true for hotels in major tourist destinations.  With the Company's
acquisition and subsequent leasing of the FSA Portfolio Acquisition Hotels,
which include several hotels in tourist destinations, the AGH Hotels may now
produce greater revenues in the first and second quarters.

(A)  Represents the Company's historical statement of operations for the year
     ended March 31, 1998.

(B)  Represents the adjustments to present a statement of operations for the 18
     hotels acquired by the Company and leased to AGH Leasing during the first
     quarter of 1998 prior to their acquisition by the Company based on
     historical balances of the previous owners.  The combination of the
     historical statement of operations presented in column (A) and the pro
     forma statement of operation presented in column (B) represent the results
     of operations of the 45 AGH Leasing March 31 Hotels as if all of the AGH
     Hotels were acquired on January 1, 1997 and leased to AGH Leasing pursuant
     to a Participating Lease since that date.
    
(C)  Proposed Acquisition Hotel  represents the acquisition of one hotel, the
     Madison Hotel, to be acquired by the Company and leased to AGH Leasing
     pursuant to a Participating Lease.  The Madison Hotel was closed for a
     complete renovation in September 1997 and is expected to reopen in July
     1998.     

(D)  Represents historical room, food and beverage and other revenues of AGH
     Hotels.

(E)  Represents the historical expenses of the AGH Hotels.

(F)  Represents management fees to be incurred under the Management Agreements.
     The management fees payable to AGHI consist of a base fee of 1.5% of total
     revenue and an incentive fee of up to 2.0% of total revenue.  The incentive
     fee, if applicable, is equal to 0.025% of annual total revenue for each
     0.01% increase in annual total revenues over the total revenues for the
     preceding twelve month period up to the maximum incentive fee.  The payment
     of the management fees to AGHI by AGH Leasing is subordinate to AGH
     Leasing's obligations to the Company under the Participating Leases.


<TABLE>
<CAPTION>
                                                                  Base                  Incentive                 Total
                                                             management fee          management fee           management fee
                                                         ---------------------   ---------------------   ----------------------
     <S>                                                 <C>                     <C>                     <C>
     AGH Leasing March 31 Hotels                                    $1,403,965                $666,408               $2,070,373
                                   
     Proposed Acquisition Hotel    
          Madison Hotel                                                      0                       0                        0
                                                         ---------------------   ---------------------   ----------------------
                                   
     Total management fees                                          $1,403,965                $666,408               $2,070,373
                                                         =====================   =====================   ======================
</TABLE> 
                          
    
(G)  Represents the historical franchise fees of the AGH Hotels.  Franchise fees
     associated with the hotel conversions are not included in the pro forma
     statements of operations since other impacts including possible revenue
     enhancements and operating expense reductions are also not included.      

(H)  Historical deferred loan costs and the related amortization has been
     eliminated since AGH Leasing is not expected to incur similar costs.
     Amortization expense relates to the amortization of organization costs
     which are being amortized over a 60 month period.

                                      32
<PAGE>

     
(I)  Represents lease payments to the Operating Partnership from AGH Leasing
     pursuant to the Participating Leases calculated on a pro forma basis by
     applying the rent provisions of the Participating Leases to the revenues of
     the AGH Hotels.  The departmental thresholds in the Participating Leases
     are seasonally adjusted for interim periods.  The Participating Lease
     payments for the Acquired Hotels and the Proposed Acquisition Hotel are
     calculated by applying the rent provisions applicable in the first year of
     the respective leases to the historical operating revenues of the hotels
     prior to the acquisition by the Company.     

<TABLE>
<CAPTION>
                                                                                        Excess of
                                                                                      Participating
                                                                                      Rent over Base         Total Participating
                                                                 Base Rent                 Rent                     Rent
                                                          ---------------------   --------------------    -----------------------
      <S>                                                 <C>                     <C>                     <C>
     AGH Leasing March 31 Hotels                                   $20,195,193            $13,328,548                $33,523,741
                                                   
     Base and Participating Lease payments for the
      Proposed Acquisition Hotel                  
          Madison Hotel                                                238,997                      0                    238,997
                                                          ---------------------   --------------------    -----------------------
                                                  
          Total                                                    $20,434,190            $13,328,548                $33,762,738
                                                          =====================   ====================    =======================
</TABLE>

                                      33
<PAGE>
 
                             CLIFTON HOLDING CORP.
                          CONSOLIDATED BALANCE SHEET
                                MARCH 31, 1998
                                  (UNAUDITED)


<TABLE>
<CAPTION>
                                 ASSETS
 
<S>                                                                     <C>
Cash and cash equivalents.............................................  $          1,394,613
Investment in marketable securities...................................             3,423,111
Accounts receivable, net..............................................             2,200,470
Prepaid expenses......................................................             1,284,313
Inventories...........................................................               722,949
Other assets..........................................................                23,695
                                                                        --------------------

   Total assets.......................................................  $          9,049,151
                                                                        ====================

                         LIABILITIES AND EQUITY

Accounts payable, trade...............................................  $            954,305
Accrued expenses and other liabilities................................             2,542,551
                                                                        --------------------

   Total liabilities..................................................             3,496,856
                                                                        --------------------

Commitments and contingencies (Note 2)................................

Capital...............................................................             5,529,101
Retained earnings.....................................................                23,194
                                                                        --------------------

   Total equity.......................................................             5,552,295
                                                                        --------------------

   Total liabilities and equity.......................................  $          9,049,151
                                                                        ====================
</TABLE>


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

                                       34
<PAGE>
 
                             CLIFTON HOLDING CORP.
                     CONSOLIDATED STATEMENT OF OPERATIONS
         FOR THE PERIOD FROM JANUARY 8, 1998 (INCEPTION OF OPERATIONS)
                            THROUGH MARCH 31, 1998
                                  (UNAUDITED)
                                        


<TABLE>
<S>                                                                      <C>
Revenues
    Room revenue........................................................ $          7,604,805
    Food and beverage revenue...........................................            2,971,362
    Other revenue.......................................................              353,323
    Interest income.....................................................               23,111
                                                                         --------------------

        Total revenue...................................................           10,952,601
                                                                         --------------------

Expenses
    Property operating costs and expenses...............................            1,953,015
    Food and beverage costs and expenses................................            2,240,277
    General and administrative..........................................              629,551
    Advertising and promotion...........................................              941,879
    Repairs and maintenance.............................................              480,625
    Utilities...........................................................              568,653
    Other expense.......................................................                  394
    Participating Lease expense.........................................            4,115,013
                                                                         --------------------

        Total expenses..................................................           10,929,407
                                                                         --------------------

        Net income...................................................... $             23,194
                                                                         ====================
</TABLE>



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

                                       35
<PAGE>
 
                             CLIFTON HOLDING CORP.
                CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
         FOR THE PERIOD FROM JANUARY 8, 1998 (INCEPTION OF OPERATIONS)
                            THROUGH MARCH 31, 1998
                                  (UNAUDITED)
                                        


<TABLE>
<S>                                                                                          <C>
Initial Contributions, January 8, 1998.....................................................  $       5,529,101
    Net income.............................................................................             23,194
                                                                                     
                                                                                             -----------------

Balance, March 31, 1998....................................................................  $       5,552,295
                                                                                             =================
</TABLE>



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

                                       36
<PAGE>
 
                             CLIFTON HOLDING CORP.
                     CONSOLIDATED STATEMENT OF CASH FLOWS
         FOR THE PERIOD FROM JANUARY 8, 1998 (INCEPTION OF OPERATIONS)
                             THROUGH MARCH 31, 1998
                                  (UNAUDITED)


<TABLE>    
<S>                                                                                                  <C>
Cash flow from operating activities:
   Net income........................................................................................ $         23,194
   Adjustments to reconcile net income to net cash provided by operating activities:
   Changes in assets and liabilities:
      Accounts receivable............................................................................       (2,200,470)
      Prepaid expense................................................................................       (1,284,313)
      Inventories....................................................................................         (722,949)
      Other assets...................................................................................          (23,695)
      Accounts payable...............................................................................          954,305
      Accrued expenses and other liabilities.........................................................        2,542,551
                                                                                                      ----------------

            Net cash provided by operating activities................................................         (711,377)
                                                                                                      ----------------

Cash flows from investing activities:
   Investment in marketable securities...............................................................       (3,423,111)
                                                                                                      ----------------

            Net cash used in investing activities....................................................       (3,423,111)
                                                                                                      ----------------

Cash flows from financing activities:
   Capital contributions.............................................................................        5,529,101
                                                                                                      ----------------

            Net cash provided by financing activities................................................        5,529,101
                                                                                                      ----------------

Net change in cash and cash equivalents..............................................................        1,394,613
Cash and cash equivalents at beginning of period.....................................................                0
                                                                                                      ----------------

Cash and cash equivalents at end of period........................................................... $      1,394,613
                                                                                                      ================
</TABLE>     


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

                                       37
<PAGE>
 
                             CLIFTON HOLDING CORP.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   ORGANIZATION

     On January 8, 1998 American General Hospitality Operating Partnership, L.P.
(the "Operating Partnership"), a subsidiary of American General Hospitality
Corporation (the "Company"), together with two of its subsidiaries, Mt.
Arlington L.L.C and Portland/Shelton L.L.C acquired a 100% ownership interest in
eight hotels ("Prime Group I") from Prime Hospitality Corporation ("Prime").
The hotels are leased to Clifton Holding Corp., an independent lessee (the
"Prime Lessee"), that is affiliated with Prime Hospitality Corporation, under
separate Participating Leases which provide for rent based on the revenues of
the hotels.  The Participating Leases entered into with the Prime Lessee are for
a term of 10 years from the inception of the lease and provide for rent equal to
the greater of base rent or participating rent.  The leases prohibit the
Operating Partnership from selling the hotels for a period of three years.

     Eleven additional hotels ("Prime Group II") will be acquired from Prime
between September 30, 1998 and March 31, 1999 at the option of the Company. The
Prime Group I and Prime Group II Hotels (collectively, the "Prime Hotels")
consist of the following:

<TABLE>
<CAPTION>
        PROPERTY NAME                                        LOCATION                        NO. OF ROOMS
        -------------                                        --------                        ------------
<S>                                                          <C>                             <C>
        Prime Group I :                                                                      
        St. Tropez Suites Las Vegas                          Las Vegas, Nevada                        149
        Crowne Plaza Suites Las Vegas                        Las Vegas, Nevada                        201
        Ramada Inn Mahwah                                    Mahwah, New Jersey                       128
        Sheraton Crossroads Hotel Mahwah                     Mahwah, New Jersey                       225
        Ramada Plaza Meriden                                 Meriden, Connecticut                     150
        Sheraton Four Points Hotel Mt. Arlington             Mt. Arlington, New Jersey                124
        Crowne Plaza Portland                                Portland, Oregon                         161
        Ramada Plaza Shelton                                 Shelton, Connecticut                     155
                                                                                             ------------
                                                                                                    1,293
                                                                                             ------------
        Prime Group II :                                                                     
        Ramada Inn Armonk                                    Armonk, New York                         140
        Ramada Inn Danbury                                   Danbury, Connecticut                     181
        Ramada Inn Elmsford                                  Elmsford, New York                       101
        Radisson Hotel and Suites Fairfield                  Fairfield, New Jersey                    204
        Ramada Inn Fairfield                                 Fairfield, New Jersey                    176
        Crowne Plaza Hotel Hasbrouck Heights                 Hasbrouck Heights, New Jersey            355
        Holiday Inn Jamesburg                                Jamesburg, New Jersey                    150
        Holiday Inn Princeton                                Princeton, New Jersey                    240
        Sheraton Hotel Saratoga Springs                      Saratoga Springs, New York               240
        Radisson Suites Secaucus                             Secaucus, New Jersey                     151
        Radisson Hotel Trevose                               Trevose, Pennsylvania                    272
                                                                                             ------------
                                                                                                    2,210
        Total Prime Hotels                                                                          3,503
                                                                                             ============
</TABLE>
                                                                               
     The consolidated financial statements of the Prime Lessee include the
results of operations of the hotels leased from the Operating Partnership due to
the Prime Lessee's control over the operations of the hotels during the ten-year
term of the Participating Leases.  The Prime Lessee has complete discretion in
establishing room rates and all rates for hotel goods and services.  Likewise,
all operating expenses of the hotels are under the control of the Prime Lessee.
The Prime Lessee has the right to manage or enter into management contracts with
other parties to manage the hotels.  If the Prime Lessee elects to enter into
management contracts with other parties, the Prime Lessee must obtain prior
written consent of the Operating Partnership, which consent may not be
unreasonably withheld.

                                       38
<PAGE>
 
     The Prime Lessee's results of operations are seasonal.  The aggregate room
revenues in the second and third quarters of each fiscal year may be higher than
room revenues in the first and fourth quarter of each fiscal year.  Consequently
the Prime Lessee may have net income in some quarters and may have net losses in
other quarters of the same year.

     These unaudited consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC") and should be read in conjunction with the financial statements and
notes thereto of the Company included in the Company's Form 10-K for the fiscal
year ended December 31, 1997 (the "10-K").  The notes to the financial
statements present interim disclosures required by the SEC.  The accompanying
financial statements reflect, in the opinion of management, all adjustments
necessary for a fair presentation of the interim financial statements.  All
adjustments are of a normal and recurring nature.


2.   COMMITMENTS AND CONTINGENCIES

     The Prime Lessee is required to maintain a minimum net worth of $3.4
million through the end of 1998, and thereafter an amount equal to 17.5% of the
aggregate rent paid to the Company in the prior year.  Such net worth must be
maintained in the form of cash, marketable securities and/or letter(s) of credit
or any combination thereof.  Moreover, Prime is contractually obligated to
wholly own the Prime Lessee during the term of the Participating Leases.

     The Prime Group I Hotels pay franchise costs that represent the annual
expense for franchise royalties and reservation services under the terms of
hotel franchise agreements.  Franchise fees range from 1.5% to 5% of gross room
revenue.  The Prime Group I Hotels are also required to remit 1% to 4.5% of
gross room revenue to franchisors for sales and advertising expenses incurred to
promote the hotels at the national level.  Additional sales and advertising
costs are incurred at the local property level.  These fees are paid by the
Prime Lessee.

Participating Leases

     The Prime Lessee has future lease commitments to the Company under the
Participating Leases which expire in 2008.  The Participating Lease expenses are
based on percentages of room revenues, food and beverage revenues and telephone
and other revenues.  The departmental thresholds are increased annually by a
percentage equal to the percentage increase in the Consumer Price Index.
Certain of the Participating Leases with the Prime Lessee contain provisions for
an additional 0.75% increase to the Participating Rent departmental revenue
thresholds compared to the prior year.  The monthly departmental thresholds and
the monthly base rent are set based on each hotel's annual budget, which
reflects seasonal variations in the hotel's revenues.  Minimum future rental
expense (i.e. base rents) under these noncancellable Participating Leases is as
follows:

<TABLE>
<CAPTION>
                                   Year                                   Amount
                --------------------------------------------       -----------------------
<S>                                                                <C>
                Remainder of 1998...........................          $        10,624,627
                1999........................................                   14,544,799
                2000........................................                   14,934,293
                2001........................................                   15,319,897
                2002........................................                   15,715,664
                2003 and thereafter.........................                   97,122,806
                                                                      -------------------
                                                                 
                Minimum future base rents                             $       168,262,086
                                                                      ===================
</TABLE>

3.   SUBSEQUENT EVENTS

     The Company intends to purchase the Prime Group II Acquisition hotels
between September 30, 1998 and March 31, 1999, at its option.  The financial
statements do not reflect any of the transactions in connection with the
proposed Prime Group II Acquisition by the Company.

                                       39
<PAGE>

     
     On March 15, 1998 the Company and CapStar Hotel Company ("CapStar") entered
into a definitive agreement (the "Merger Agreement") pursuant to which the
parties agreed, subject to stockholder approval and other conditions and
covenants, to merge as equals (the "Proposed Merger"). Accordingly, no assurance
can be given that the Proposed Merger will be consummated. Pursuant to the
Merger Agreement, CapStar will spin off (the "Spin-Off") in a taxable
transaction, its hotel operations and management business to its current
stockholders as a new C-Corporation to be called MeriStar Hotels & Resorts, Inc.
("MeriStar Resorts"). CapStar will subsequently merge with and into the Company,
in a reorganization which will qualify under Section 368 of the Internal Revenue
Code of 1986, as amended (the "Code"). The Company will be renamed MeriStar
Hospitality Corporation after the Proposed Merger. In a separate transaction,
which will close immediately after the closing of the Proposed Merger, MeriStar
Resorts will acquire AGH Leasing, L.P. (an affiliate) and American General
Hospitality, Inc. which acquisition is a condition to closing the Proposed
Merger. If the Proposed Merger is consummated, MeriStar Resorts will become the
lessee and manager of all of the Current Hotels currently leased by by AGH
Leasing and will have a right of first refusal to become the lessee of hotels
acquired by the Company in the future except for the Prime Group II Acquisition
hotels.    

     The Merger Agreement defines the exchange ratios for both the Company and
CapStar's stockholders.  CapStar stockholders will receive one share each of
MeriStar Hospitality Corporation and MeriStar Resorts for each CapStar share
owned.  The Company's stockholders will receive 0.8475 shares of MeriStar
Hospitality Corporation for each share of Common Stock owned.  Both exchange
ratios are fixed, with no adjustment mechanism.

     The Company expects the Proposed Merger to close in July 1998.  The
Proposed Merger will be submitted for approval at separate meetings of the
stockholders of the Company and CapStar.  The Company filed a registration
statement with the SEC registering under the Securities Act of 1933, as amended,
the shares of MeriStar Hospitality Corporation to be issued in the Proposed
Merger.

    
     

                                      40
<PAGE>
 
                             CLIFTON HOLDING CORP.

                  PRO FORMA COMBINED STATEMENT OF OPERATIONS
                                        
                   FOR THE THREE MONTHS ENDED MARCH 31, 1998
                                        
    
     The following unaudited Pro Forma Consolidated Statement of Operations is
presented as if the Company had completed the acquisition of the eight Prime
Group I Acquisition Hotels and leased them to Clifton Holding Corp (the "Prime
Lessee") pursuant to Participating Leases as of January 1, 1997. The Pro Forma
Consolidated Statement of Operations does not include the effects of the Prime
Group II Acquisition Hotels.     

     In management's opinion, all material adjustments necessary to reflect the
effect of these transactions have been made.

     The following unaudited Pro Forma Combined Statement of Operation are
derived from the Prime Portfolio Acquisition Hotels' Combined Statements of
Operations as of December 31, 1997 and should be read in conjunction with the
financial statements filed with American General Hospitality Corporation's
Report on Form 8-K dated April 6, 1998 and filed April 7, 1998.

     The following Pro Forma Consolidated Statement of Operations are not
necessarily indicative of what the actual results of operations would have been
assuming such transactions had been completed as of January 1, 1997.

                                      41
<PAGE>
 
                             CLIFTON HOLDING CORP.
                PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
                   FOR THE THREE MONTHS ENDED MARCH 31, 1998
                                  (UNAUDITED)

<TABLE>     
<CAPTION>
                                                  HISTORICAL
                                                   MARCH 31,           PRO FORMA
                                                      1998            ADJUSTMENTS
                                                       (A)                 (B)             PRO FORMA
                                                  -----------         -----------         -----------
<S>                                               <C>                 <C>                 <C>
Revenues
   Room revenue (C).............................  $ 7,604,805         $   419,617         $ 8,024,422
   Food and beverage revenue (C)................    2,971,362             151,697           3,123,059
   Other revenue (C)............................      353,323              53,323             406,646
   Interest income (C)..........................       23,111                                  23,111
                                                  -----------         -----------         -----------
     Total revenue..............................   10,952,601             624,637          11,577,238
                                                  -----------         -----------         -----------

Expenses
   Property operating costs and expenses (D)....    1,953,015             109,141           2,062,156
   Food and beverage costs and expenses (D).....    2,240,277             105,867           2,346,144
   General and administrative (D)...............      629,551              66,853             696,404
   Advertising and promotion (D)................      941,879              20,549             962,428
   Repairs and maintenance (D)..................      480,625              41,126             521,751
   Utilities (D)................................      568,653               1,720             570,373
   Other expense (D)............................          394                                     394
   Participating Lease expense (E)..............    4,115,013             228,015           4,343,028
                                                  -----------         -----------         -----------

     Total expenses.............................   10,929,407             573,271          11,502,678
                                                  -----------         -----------         -----------

     Net income (loss)..........................  $    23,194         $    51,366              74,560
                                                  ===========         ===========         ===========
</TABLE>      

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

                                      42
<PAGE>
 
                             CLIFTON HOLDING CORP.

              NOTES TO PRO FORMA COMBINED STATEMENT OF OPERATIONS

     The pro forma combined statement of operations of the Clifton Holding Corp.
(the "Prime Lessee") include the results of operations of the eight hotels
leased from the American General Hospitality Operating Partnership, L.P. (the
"Operating Partnership") due to Prime Lessee's control over the operations of
the hotels during the ten-year term of the Participating Leases.  The Prime
Lessee has complete discretion in establishing room rates and all rates for
hotel goods and services.  Likewise, all operating expenses of the hotels are
under the control of the Prime Lessee.  The Prime Lessee has the right to manage
or to enter into management contracts with other parties to manage the hotels.
If the Prime Lessee elects to enter into management contracts with other
parties, the Prime Lessee must obtain the prior written consent of the Company,
which consent may not be unreasonably withheld.

     The Prime Lessee's results of operations are seasonal.  Generally, hotel
revenue is greater in the second and third quarters of a calendar year, although
this may not be true for hotels in major tourist destinations

(A)  Represents the Prime Group I Acquisition Hotels' historical statement of
     operations for the three months ended March 31, 1998.

(B)  Represents the adjustments to present a statement of operations for the
     eight hotels acquired by the Company and leased to the Prime Lessee during
     1998 prior to their acquisition by the Company based on historical balances
     of the previous owners.  The combination of the historical statement of
     operations presented in column (A) and the pro forma adjustments in column
     (B) represent the results of operations of the eight Prime Group I
     Acquisition Hotels as if all of the Prime Group I Acquisition Hotels were
     acquired on January 1, 1997 and leased to the Prime Lessee pursuant to a
     Participating Lease since that date.

(C)  Represents historical room, food and beverage and other revenues of the
     Prime Group I Acquisition Hotels.

(D)  Represents the historical expenses of the Prime Group I Acquisition Hotels.
    
(E)  Represents lease payments to the Operating Partnership from the Prime
     Lessee pursuant to the Participating Leases calculated on a pro forma basis
     by applying the rent provisions of the Participating Leases to the revenues
     of the Prime Group I Acquisition Hotels.  The departmental thresholds in
     the Participating Leases are seasonally adjusted for interim periods.  The
     Participating Lease payments for the Prime Group I Acquisition Hotels are
     calculated by applying the rent provisions applicable in the first year of
     the respective leases to the historical operating revenues of the hotels
     prior to the acquisition by the Company.      


<TABLE>
<CAPTION>
                                                                                           Excess of
                                                                                         Participating               Total
                                                                                         Rent over Base         Participating 
                                                                     Base Rent                Rent                   Rent
                                                                ------------------   --------------------   ---------------------
     <S>                                                        <C>                  <C>                    <C>
     Prime Group I Acquisition Hotels                                   $3,382,139               $960,889              $4,343,028
                                                                ==================   ====================   =====================
</TABLE>

                                      43
<PAGE>
 
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS

OVERVIEW AND RECENT DEVELOPMENTS

          The following should be read in conjunction with the Company's
consolidated financial statements included elsewhere in this report. Certain
statements in this Form 10-Q constitute "forward-looking statements" as that
term is defined under the Private Securities Reform Act of 1995 and by the
Securities and Exchange Commission. The words "believe", "expect", "anticipate",
"intend", "estimate" and other expressions which are predictions of or indicate
future events and trends, and which do not relate to historical matters,
identify forward-looking statements. Although the Company believes that such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be achieved.

          The Company was incorporated and formed on April 12, 1996, as a
Maryland corporation. The Company is a self-administered real estate investment
trust (a "REIT") that owns a geographically diverse portfolio of primarily full-
service hotels. As of March 31, 1998 the Company owned 53 hotels located in 21
states containing an aggregate of approximately 12,600 guest rooms (the "Current
Hotels"). Substantially all of the Current Hotels are operated under licensing
or franchising agreements with national hotel brands including, but not limited
to, Crowne Plaza, Hilton, Wyndham, Marriott, Holiday Inn Select, Radisson,
Westin, DoubleTree Guest Suites, Sheraton, Holiday Inn and Hampton Inn. On July
31, 1996, the Company commenced operations and completed an Initial Public
Offering ("IPO") of an aggregate of approximately 8,075,000 shares of its Common
Stock. Concurrently with the closing of the IPO, the Operating Partnership
acquired directly or indirectly the equity interests in the 13 Initial Hotels
for an aggregate of 1,896,996 units of limited partnership interest in the
Operating Partnership ("OP Units") and approximately $91.0 million in cash.

          Since the IPO, the Company has acquired 40 additional hotels.  The
following table provides certain information regarding the Current Hotels:


<TABLE>
<CAPTION>
                                                                                    
                                                                                                            
                                                                                                               Aggregate   
                                                           Number of Hotels            Number of              Acquisition 
                                                               Acquired               Guestrooms                 Price
                                                           -----------------      ------------------      -------------------- 
        1996                                                                                              (dollars in millions)
        ----
<S>                                                        <C>                    <C>                     <C>
        Initial Hotels...................................                13                   3,012                   $  183.5
        4/th/ Quarter....................................                 2                     694                       49.0
                                                                                                                     
        1997                                                                                                         
        ----                                                                                                         
        1/st/ Quarter....................................                 5                     927                       84.1
        2/nd/ Quarter....................................                 6                   2,030                      193.8
        3/rd/ Quarter....................................                 0                       0                        0.0
        4/th/ Quarter....................................                 1                     146                       11.8
                                                                                                                     
        1998                                                                                                         
        ----                                                                                                         
        1/st/ Quarter....................................                26                   5,696                      542.0
                                                                                                                     
        Additional guestrooms constructed by the Company                                                             
         at its Current Hotels...........................                                                            
                                                                                                 94                  
                                                           -----------------      ------------------      -------------------- 
        Total............................................                53                  12,599                   $1,064.2
                                                           =================      ==================      ==================== 

</TABLE>

          In addition, as of March 31, 1998, the Company has entered into
contracts to purchase 13 additional hotels containing an aggregate of
approximately 2,560 guestrooms for purchases prices totaling approximately $241
million (the "Proposed Acquisition Hotels", together with the Current Hotels,
the "Hotels"). If all of the Proposed Acquisition Hotels are acquired, the
Company will have invested approximately $783 million since December 31, 1997 in
hotel acquisitions and will own 66 hotels containing more the 15,150 guestrooms,
an approximate 120% increase in the Company's hotel portfolio since December 31,
1997 based upon the number of guestrooms.

                                      44
<PAGE>
 
     In order for the Company to qualify as a REIT, neither the Company nor the
Operating Partnership can operate hotels.  The Operating Partnership leases the
Hotels to the Lessee for terms of 10 to 12 years pursuant to separate
Participating Leases providing for the payment of base rent and participating
rent.  The principal source of revenue for the Operating Partnership and the
Company is lease payments paid by the Lessee under the Participating Leases. The
Lessee's ability to make payments to the Operating Partnership under the
Participating Leases is dependent on the ability of the Lessee, AGHI and any
other lessees or operators to generate cash flow from the operations of the
Hotels.  The Lessee has entered into management agreements whereby 44 of the
Current Hotels are managed by AGHI and one Hotel is managed by Wyndham.

RESULTS OF OPERATIONS

Actual Comparison for the Three Months Ended March 31, 1998 and 1997

     In the first three months of 1998 and the comparable period of 1997, the
Company's Participating Lease revenues increased from $9,508,365 to $31,248,960
as a result of the additional property acquisitions and the internal growth
generated from the Company's renovation/repositioning programs at its hotels, as
well as improving market conditions in certain markets in which the Company owns
hotels.  Interest income increased from $394,713 to $710,874 reflecting the
interest income earned from the Company's mortgage loans to PSS I, Inc., a
preferred stock subsidiary, which owns four properties which are slated for
sale. The Company acquired several hotels in the Florida resort markets which
has caused a shift in the seasonality of the portfolio's results.  The
portfolio's operations are now generally stronger in the first and second
quarters which operations were previously stronger in the second and third
quarters.

     The Company's expenses increased from $5,159,761 to $23,485,568 which
reflects the additional expenses associated with the Company's growth, its
additional hotels and the related increases to the Company's Credit Facilities
and increase in the outstanding balance on the Company's Credit Facilities.  The
expenses for the three months ended March 31, 1998 also include $2,100,000 in
merger related expenses associated with the Proposed Merger between the Company
and CapStar Hotel Company.  Merger related costs will continue to be expensed
pending the consummation of the Proposed Merger.

     Income before merger costs increased $6,648,642 from $4,743,317 to
$11,391,959 resulting in an increase in income per basic common share before
merger costs to $0.44 from $0.34 and an increase in income per diluted common
share before merger costs to $0.43 from $0.34.  After considering merger costs,
net income increased $4,041,288 for an increase in net income per basic common
share to $0.35 from $0.34 and an increase in net income per diluted common share
to $0.35 from $0.34.

Pro Forma for the Three Months Ended March 31, 1998
    
     On a pro forma basis, the Company's Participating Lease revenue would have
been $36.5 million reflecting the Company's operations as if all of the
Company's Hotels, excluding the Prime Group II Acquisition Hotels, had been
owned and leased to the Lessee from the beginning of the quarter. Interest
income reported would have been $1.3 million reflecting the interest income
which would have been generated from the Company's mortgage loans to PSS I, Inc.
The resulting total Company revenue would have been $45.9 million.     
    
     Expenses for the Company, on a pro forma basis, would have been $28.4
million which reflects the increase in depreciation expense, real estate and
personal property taxes and insurance, ground lease expense and interest expense
as if all properties, excluding the Group II Prime Acquisition hotels, had been
acquired on January 1, 1998.      
    
     Income before merger costs would have been $10.5 million or $0.43 per basic
and diluted common share.  Net income after merger costs would have been $8.7
million or $0.36 per basic and diluted common share.      

Funds from Operations

     Funds From Operations consists of net income applicable to common
stockholders (computed in accordance with generally accepted accounting
principles) excluding gains (losses) from debt restructuring and sales of
property (including furniture and equipment) plus real estate related
depreciation and amortization (excluding amortization of deferred financing
costs) and after adjustments for unconsolidated partnerships and joint ventures.
The Company considers Funds From Operations to be an appropriate measure of the
performance of an equity REIT. Funds From 

                                      45
<PAGE>
 
Operations should not be considered as an alternative to net income or other
measurements under generally accepted accounting principles as an indicator of
operating performance or to cash flows from operating, investing or financing
activities as a measure of liquidity. Although Funds From Operations has been
calculated in accordance with the NAREIT definition, Funds From Operations as
presented may not be comparable to other similarly titled measures used by other
REIT's. Funds From Operations does not reflect cash expenditures for capital
improvements or principal amortization of indebtedness on the Hotels.

     Actual Funds from Operations before deducting the costs associated with the
proposed merger between the Company and CapStar for the three months ended March
31, 1998 and 1997, calculated using the NAREIT definition of Funds from
Operations, was $17,419,631 and $5,754,461, respectively, which is the sum of
net income applicable to common stockholders and the Company's share of
depreciation.  On a per share basis, Funds From Operations before merger costs
for the same periods were $0.76 and $0.49, respectively.  Funds from Operations
after merger related expenses for the three months ended March 31, 1998 and
1997, was $15,590,198 or $0.68 per share and $5,754,461 or $0.49 per share,
respectively.

     The Company considers Funds from Operations to be a key measure of the
performance of an equity REIT.  Funds from Operations should not be considered
an alternative to net income or other measurements under generally accepted
accounting principles as an indicator of operating performance, or an
alternative to cash flows from operating, investing or financing activities, as
a measure of liquidity.

     The following is a reconciliation of pro forma net income applicable to
common stockholders to pro forma Funds from Operations and illustrates the
difference in the two measures of operating performance:

 
<TABLE>     
<CAPTION>
                                                                                         March 31, 1998
                                                                       ------------------------------------------------
                                                                      Before Merger Costs             After Merger Costs
                                                                 ---------------------------     ---------------------------
 
<S>                                                              <C>                             <C>
Pro forma net income applicable to common stockholders.........
                                                                      $           10,541,919           $           8,732,177
Depreciation (Company's share).................................                    8,513,831                       8,513,831
                                                                 ---------------------------     ---------------------------
Funds from Operations..........................................       $           19,055,750           $          17,246,008
                                                                 ===========================     ===========================
 
Weighted average number of basic shares of Common Stock
 outstanding...................................................                   24,270,320                      24,270,320
 
Weighted average number of diluted shares of Common Stock
 outstanding...................................................                   24,496,149                      24,496,149
 
</TABLE>      


THE LESSEE

     The Lessee refers to the combined operations of AGH Leasing, L.P., its
subsidiary Twin Towers Leasing, L.P. (together "AGH Leasing") and independent
lessees that are affiliates of Prime Hospitality Corp. ("Prime"), a NYSE listed
company (together, the "Prime Lessee" collectively with AGH Leasing, the
"Lessee").  The Company leases 45 of the Current Hotels to AGH Leasing and eight
of the Current Hotels to the Prime Lessee each pursuant to separate
Participating Leases.

All Current Hotels

<TABLE>
<CAPTION>
                                                      First Quarter
              ----------------------------------------------------------------------------------------------------

           1998 REVPAR vs.           Occupancy               Occupancy                  ADR                     ADR
               1997                    1998                  vs. 1997                  1998                   vs. 1997
        ---------------------     ----------------      ------------------      -------------------     -------------------
<S>                               <C>                   <C>                     <C>                     <C> 
               + 9.0 %                 70.6 %                 + 1.3 %                  $95.97                 + 7.6 %
</TABLE>


     In total, the 53 hotels owned at the end of the first quarter produced
revenue per available room (REVPAR) for the first quarter of $67.73, an increase
of 9.0%.  The REVPAR growth the Company has been successful in achieving is

                                      46
<PAGE>
 
comprised of improvement in both occupancy and average daily rate (ADR).  ADR
rose 7.6% to $95.97 for the three months, while occupancy increased to 70.6% in
the first quarter from 69.7% in last year?s first quarter.  These results were
achieved in light of the fact that 10 of the Company?s hotels were in some stage
of repositioning.  If the impact of the 10 hotels under repositioning was
removed, the stabilized portfolio achieved a 10.9% increase in REVPAR to $68.27,
a 2.5% increase in occupancy to 71.8% and an 8.1% increase in ADR.  The Current
Hotels' operations reflect the successful implementation of the Company's
repositioning strategies at certain of the Current Hotels, as well as, general
improvements in market conditions in certain markets in which the Company owns
hotels.

Current Hotels Under Renovation

<TABLE>
<CAPTION>
                                                      First Quarter
              ----------------------------------------------------------------------------------------------------

           1998 REVPAR vs.           Occupancy               Occupancy                  ADR                     ADR
               1997                    1998                  vs. 1997                  1998                   vs. 1997
        ---------------------     ----------------      ------------------      -------------------     -------------------
<S>                               <C>                   <C>                     <C>                     <C> 
             + 1.3 %                    65.3 %                 (4.1) %                 $100.24                  + 5.7 %
</TABLE>

     The 10 Current Hotels which were in some stage of repositioning during the
quarter still produced a 1.3% increase in REVPAR despite rooms out of service
and the related renovation disruption.  The growth in REVPAR during
renovation/repositioning is a direct result of the Company?s ability to
strategically time the renovation process during periods of lower demand in
order to minimize the impact on operations.  The 10 hotels were able to increase
ADR by 5.7% in spite of a 4.1% decrease in occupancy.

     Certain of the Current Hotels are performing below the Company's
expectations and below last year's performance due to increases in market supply
of hotel rooms, disruptions in operations due to renovations and capital
improvements and a slower than expected improvements in operations created by
the renovations and rebranding process.  Hotels which have completed the
renovation process are generally reflecting marked improvements in operations.
The Company expects these trends to continue for the remainder of the current
year and into the following year.


AGH LEASING

     AGH Leasing refers to the consolidated operations of AGH Leasing, L.P. and
Twin Towers Leasing.  Twin Towers Leasing commenced operations on June 25, 1997,
with the acquisition of the Radisson Twin Towers Hotel in Orlando, Florida.
Twin Towers Leasing is owned 51% by AGH Leasing, L.P., which is the sole general
partner, and 49% by Regent Carolina Corporation, which is an affiliate of the
selling entity of the Radisson Twin Towers Orlando and the sole limited partner.
Regent Carolina Corporation is allocated 100% of the losses of Twin Towers
Leasing up to their original capital contribution of $3 million.

Actual for the Three Months Ended March 31, 1998 and 1997

     Total revenues increased 204% from $26.0 million for the three months ended
March 31, 1997 to $79.0 million for the same period of 1998.  The increase is
attributable to the hotels acquired by the Company and leased to AGH Leasing and
the improvement in hotel operations as result of improving market conditions and
the effects of the Company's renovation/repositioning programs.  The increases
in Participating Lease expense, property operating costs and other hotel
expenses in the first three months of 1998 compared to the same period of 1997
relate primarily to the increased number of hotels operated by AGH Leasing.  AGH
Leasing had a net income of $3,086,136 for the three months ended March 31, 1998
and a net loss of $407,501 for the three months ended March 31, 1997.  The
Company acquired and leased to AGH Leasing several hotels in the Florida resort
markets which has caused a shift in the seasonality of the portfolio's results.
The portfolio's operations are now generally stronger in the first and second
quarters while operations were previously stronger in the second and third
quarters.

13 IPO Hotels

<TABLE>
<CAPTION>
                                                      First Quarter
              ----------------------------------------------------------------------------------------------------

           1998 REVPAR vs.           Occupancy               Occupancy                  ADR                     ADR
               1997                    1998                  vs. 1997                  1998                   vs. 1997
        ---------------------     ----------------      ------------------      -------------------     -------------------
<S>                               <C>                   <C>                     <C>                     <C> 

</TABLE> 

                                      47
<PAGE>
 
<TABLE> 
<S>                               <C>                   <C>                     <C>                     <C> 
             + 24.6 %                  71.6 %                 + 11.2 %                 $90.89                + 12.1 %
</TABLE>

     The 13 hotels acquired at the time of the Company?s IPO posted operating
results which substantially exceeded industry averages and reflected the fact
that many of the hotels were undergoing extensive renovation in the first
quarter of 1997 and were experiencing the attendant operating disruptions.
REVPAR increased 24.6% to $65.04; occupancy increased 11.2% to 71.6%; and ADR
increased 12.1% to $90.89.  Ten of the 13 initial hotels have benefited from the
Company?s brand, product and operational repositioning strategies that have
received approximately $45 million of capital investments.


Potomac Partners Portfolio

<TABLE>
<CAPTION>

                                                      First Quarter
              ----------------------------------------------------------------------------------------------------

           1998 REVPAR vs.           Occupancy               Occupancy                  ADR                     ADR
               1997                    1998                  vs. 1997                  1998                   vs. 1997
        ---------------------     ----------------      ------------------      -------------------     -------------------
<S>                               <C>                   <C>                     <C>                     <C> 
             + 10.9 %                  57.9 %                 + 4.6 %                  $84.50                + 6.0 %
</TABLE>

     The 4 Potomac hotels, purchased January 22, 1998, also produced strong
results for the quarter.  REVPAR increased to $48.93, a 10.9% increase quarter
over quarter.  Occupancy increased 4.6% to 57.9% and ADR increased 6.0% to
$84.50.  The strong performance was led by the Holiday Inn Annapolis, which
posted a REVPAR increase of 21.6%.


Holiday Inn O'Hare International

<TABLE>
<CAPTION>

                                                      First Quarter
              ----------------------------------------------------------------------------------------------------

           1998 REVPAR vs.           Occupancy               Occupancy                  ADR                     ADR
               1997                    1998                  vs. 1997                  1998                   vs. 1997
        ---------------------     ----------------      ------------------      -------------------     -------------------
<S>                               <C>                   <C>                     <C>                     <C> 
              + 6.9 %                   73.3 %                 (5.4) %                 $100.27               + 13.0 %
</TABLE>

     The Holiday Inn O'Hare International Airport hotel, acquired February 3,
1998, is a 507-room hotel and convention facility in Rosemont, IL.  This
property posted a 6.9% increase in REVPAR to $73.48, a 13.0% increase in ADR to
$100.27, and a decrease in occupancy of 5.4% to 73.3%.  The company plans to
invest approximately $7 million to renovate the existing guest rooms and
approximately $19 million for the addition of 253 guest rooms.

FSA Portfolio

<TABLE>
<CAPTION>
                                                      First Quarter
              ----------------------------------------------------------------------------------------------------

           1998 REVPAR vs.           Occupancy               Occupancy                  ADR                     ADR
               1997                    1998                  vs. 1997                  1998                   vs. 1997
        ---------------------     ----------------      ------------------      -------------------     -------------------
<S>                               <C>                   <C>                     <C>                     <C> 
              + 9.3 %                   77.0 %                + 3.2 %                  $95.79                  + 5.8 %
</TABLE>

     The 13 FSA hotels, acquired on February 13, 1998, generated a 9.3% increase
in REVPAR to $73.73 in spite of weather-related issues affecting the performance
of the seven FSA Florida properties.  ADR increased 5.8% to $95.79, and
occupancy increased 3.2% to 77.0%.  The FSA hotels provide the company with
hotels in several excellent markets with high barriers to entry.  The company
plans to invest approximately $33 million to further upgrade and reposition the
hotels.

Florida

<TABLE>
<CAPTION>
                                                      First Quarter
              ----------------------------------------------------------------------------------------------------

           1998 REVPAR vs.           Occupancy               Occupancy                  ADR                     ADR
               1997                    1998                  vs. 1997                  1998                   vs. 1997
        ---------------------     ----------------      ------------------      -------------------     -------------------
<S>                               <C>                   <C>                     <C>                     <C> 

</TABLE> 

                                       48
<PAGE>
 
<TABLE> 

<S>                               <C>                   <C>                     <C>                     <C> 
              + 4.8 %                   76.3 %                 (3.7) %                 $104.21                 + 8.8 %
</TABLE>

     In spite of the fact that Florida experienced its second wettest February
since 1895 interspersed with several tornadoes throughout the state, the 11
properties the company owns in Florida were able to produce a 4.8% increase in
REVPAR for the quarter.  While the Clearwater Beach, Ft. Lauderdale and Tampa
area hotels produced favorable REVPAR results, the Key Largo market experienced
large declines in REVPAR for the quarter as a result of significant rainfall and
a tornado touchdown creating national news.  The news story coupled with the
heavy rains resulted in cancelled and postponed reservations in the Key Largo
hotels.  As a result, the Westin Resort Key Largo and the Howard Johnson Resort
Key Largo posted a 12.3% and a 16.4% decline in REVPAR, respectively.


Pro Forma Operations for the Three Months Ended March 31, 1998

     Total revenues for the three months ended March 31, 1998 for the pro forma
period would have been $93.6 million.  Participating Lease expense, property
operating costs and other hotel expenses would have been $91.8 million resulting
in a pro forma net income for the period of $1.8 million.

     The following table sets forth pro forma financial information for AGH
Leasing, as a percentage of revenue, for the three months ended March 31, 1998:

<TABLE>
<CAPTION>
                                                                                             March 31, 1998
                                                                                   --------------------------------
<S>                                                                                <C>
        Room revenue............................................................                 73.5  %
        Food and beverage revenue...............................................                 21.9
        Other revenue...........................................................                  4.6
                                                                                   --------------------------------
             Total revenue......................................................                100.0
                                                                                   --------------------------------
        Hotel operating expenses................................................                 62.1
        Other corporate expenses................................................                  0.2
        Participating Lease expense.............................................                 35.8
                                                                                   --------------------------------
             Net income.........................................................                  1.9  %
                                                                                   ================================
</TABLE>

PRIME LESSEE

     The Prime Lessee leases eight of the Current Hotels from the Company
pursuant to ten year lease agreements.  The Prime Lessee is required to maintain
a minimum net worth of $3.4 million through the end of 1998, and thereafter an
amount equal to 17.5% of the aggregate rent paid to the Company in the prior
year.  Such net worth must be maintained in the form of cash, marketable
securities and/or letter(s) of credit or any combination thereof.  Moreover,
Prime, which owns the Prime Lessee, is contractually obligated to wholly own the
Prime Lessee during the term of the Participating Leases.  Neither the Company
nor members of its management own an interest in, or participate in the
management of, the Prime Lessee.

Actual for the period from January 8, 1998 (inception of operations) through
March 31, 1998

    
     Total revenues were $10,952,601 for the period from January 8, 1998 through
March 31, 1998. Participating Lease expense, property operating costs and other
hotel expenses in this same time period were $10,814,691 resulting in a net
income of $137,910.     

Prime Hospitality Portfolio

<TABLE>
<CAPTION>
                                                      First Quarter
              ----------------------------------------------------------------------------------------------------

           1998 REVPAR vs.           Occupancy               Occupancy                   ADR                    ADR
               1997                    1998                  vs. 1997                   1998                  vs. 1997
        ---------------------     ----------------      ------------------      -------------------     -------------------
<S>                               <C>                   <C>                     <C>                     <C> 
              (0.6) %                   68.0 %                 (3.3) %                 $101.53                + 2.8 %
</TABLE>

                                       49
<PAGE>
 
     The 8 Prime hotels, acquired on January 8, 1998, represent the Company?s
first unaffiliated lessee relationship.  The eight hotels in this portfolio did
not achieve the operating results that were anticipated with REVPAR declining
0.6% quarter over quarter, primarily due to the two Las Vegas hotels; the Crowne
Plaza Las Vegas and the St. Tropez Suites Las Vegas.  If the two Las Vegas
hotels were excluded from the operating results of the Prime Portfolio, REVPAR
would reflect an increase of 7.9%, ADR would have increased by 8.2% and
occupancy would have decreased slightly by 0.2%.  Large additions to hotel room
supply have occurred and are continuing in the Las Vegas market and management
anticipates that the Company's two properties there will continue to be impacted
by the additional competitive pressure.


Pro Forma Operations for the Three Months Ended March 31, 1998
    
     Total revenues for the three months ended March 31, 1998 for the pro forma
period would have been $11.6 million.  Participating Lease expense, property
operating costs and other hotel expenses would have been $11.5 million resulting
in a net income for the pro forma period of $74,560.      

     The following table sets forth pro forma financial information for the
Prime Lessee, as a percentage of revenue, for the three months ended March 31,
1998:

<TABLE>     
<CAPTION>
                                                                                             March 31, 1998
                                                                                   --------------------------------
<S>                                                                                <C>
        Room revenue.............................................................                69.3   %
        Food and beverage revenue................................................                27.0
        Other revenue............................................................                 3.7
                                                                                   --------------------------------
             Total revenue.......................................................               100.0
                                                                                   --------------------------------
        Hotel operating expenses.................................................                61.8
        Participating Lease expense..............................................                37.6
                                                                                   --------------------------------
             Net loss............................................................                 0.6   %
                                                                                   ================================
</TABLE>      

LIQUIDITY AND CAPITAL RESOURCES

     The Company's principal source of cash to meet its cash requirements,
including distributions to stockholders, is its share of the Operating
Partnership's cash flow from the Participating Leases.  For the three months
ended March 31, 1998, cash flow provided by operating activities, consisting
primarily of Participating Lease revenue, was $12,919,293 and Funds from
Operations (as previously defined) was $17,419,631. The Lessee's ability to make
rent payments under the Participating Leases and the Company's liquidity,
including its ability to make distributions to stockholders, are substantially
dependent on the ability of the Lessee, AGHI and other operators and managers to
generate sufficient cash flow from the operation of the Current Hotels.  AGH
Leasing's obligations under the Participating Leases are collateralized by the
pledge of 275,000 OP Units by the partners of AGH Leasing and the remaining
capital of $1.2 million contributed by the 49% limited partner of Twin Towers
Leasing and the Prime Lessee's obligations are collateralized by a minimum of
$3.4 million in net worth through the end of 1998 and an amount equal to 17.5%
of the aggregate rent paid to the Company for the prior year thereafter.

     On February 13, 1998, the Company replaced its $300 million secured credit
facility with two unsecured credit facilities with an aggregate principal amount
of $600 million (the "New Credit Facilities").  The financial covenants
contained in the New Credit Facilities require the Company to maintain the debt
service coverage ratio of at least 2.0 to 1.0, and an interest coverage ratio of
not less than 2.15 to 1.0 through December 31, 1998 and not less than 2.50 to
1.0 thereafter and to maintain a minimum net worth of $450 million plus 75% of
the net proceeds from stock offerings and offerings of partnership interests in
the Operating Partnership.  In addition, the New Credit Facilities contain
limits on total indebtedness based on a multiple of EBITDA (earnings before
interest, taxes, depreciation and amortization) that adjust downward as of
December 31, 1998.  As a result of the adjustment of certain financial covenants
that occur on December 31, 1998, the Company expects that it would be required
to repay or refinance a portion of the New Credit Facilities by that time. In
addition, the New Credit Facilities provide that the lenders must consent to any
development activities by the Company other than development in connection with
the limited expansion of existing hotels.  Also, the New Credit Facilities'
lenders must approve the lessee, manager and the franchise brand of the
Company's Hotels.  In addition, the New Credit Facilities require that the
current limited partners of AGH Leasing own no less than 65% of the limited
partnership interests of AGH Leasing at all times.

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<PAGE>
 
     Outside of the New Credit Facilities, the Company and its subsidiaries may
incur up to $70 million in additional qualified debt, including the debt assumed
in connection with the acquisitions of the Holiday Inn Select Dallas DFW Airport
South, Courtyard by Marriott Meadowlands, Radisson Hotel Arlington Heights,
DoubleTree Guest Suites Atlanta, Crowne Plaza Portland, Ramada Plaza Shelton and
the Holiday Inn O'Hare International Airport without prior consent of its Credit
Facilities' lenders.

     At March 31, 1998, the Company had $972,619 in cash and cash equivalents
and $442.1 million outstanding under the Credit Facilities.  The New Credit
Facilities have a three-year term and bear interest based upon the 30-day, 60-
day or 90-day LIBOR (5.6875%, 5.6875% and 5.7109% as of March 31, 1998) at the
option of the Company, plus an applicable margin for all or part of the
Facilities (the "Margins").  The Margins, which are adjusted on a quarterly
basis, range from a minimum of 1.40% per annum to a maximum of 2% per annum,
based upon certain leverage ratios.  As of March 31, 1998 the Margins were
1.875% per annum.  Economic conditions could result in higher interest rates,
which could increase debt service requirements on borrowings under the New
Credit Facilities, reduce the available credit under the New Credit Facilities,
and could reduce the amount of Cash Available for Distribution.

     During the first quarter of 1998, the Company acquired the 26 hotels (the
"1998 Acquisition Hotels") for an aggregate purchase price of approximately $542
million.  The 1998 Acquisition Hotels were funded with borrowings under the
Credit Facility and New Credit Facilities, the assumption of mortgage
indebtedness and the issuance of OP Units.  As of March 31, 1998 the amount
outstanding on the New Credit Facilities was $442.1 million.
    
     In addition to the 1998 Acquisition Hotels, the Company has entered into
contracts to purchase the Proposed Acquisition Hotels for purchase prices
aggregating approximately $241 million.  The Company expects that the Proposed
Acquisition Hotels will be completed and funded with borrowings under the New
Credit Facilities or permanent debt or equity financing.  To the extent that the
New Credit Facilities are not sufficient to make the additional property
acquisitions, complete the renovation and capital improvement programs and for
working capital, the Company expects that it will seek additional equity or
pursue alternative financing opportunities. Currently the Company does not have
a firm commitment for financing the Prime Group II Acquisition Hotels.
Management anticipates, assuming market conditions remain favorable, that it
will obtain financing to complete the acquisition.     

     Cash and cash equivalents as of March 31, 1998, were $972,619.  Restricted
cash of $3,357,229 includes escrow deposits on the Holiday Inn Select Dallas DFW
Airport South, the Courtyard by Marriott Secaucus, the DoubleTree Guest Suites
Atlanta, the Ramada Plaza Shelton, the Crowne Plaza Portland and the Holiday Inn
O'Hare International Airport as required by their loan agreements.  Cash flow
from operating activities of the Company was $12,919,293 for three months ended
March 31, 1998, which primarily represents the collection of rents under the
Participating Leases, less the Company's operating expenses for the period,
adjusted for changes in other working capital components.  Cash flow used in
investing activities during that period in the amount of $476,699,668 reflects
the purchase of and improvements made to the Current Hotels, as well as, the
investment in and mortgage loan advances to PSS I, Inc.  Cash flows from
financing activities of $463,952,739 during this period were primarily related
to the receipt of offering proceeds from the Unit Investment Trusts, the ABKB
placement and borrowings on the Credit Facilities, net of principal payments on
borrowings and payments for deferred loan costs.  The Company also paid
dividends of $9,352,973 on Common Stock and OP Units outstanding.

     To provide for additional financing flexibility, the Company has
registered up to an aggregate of $500 million in Common Stock and warrants to
purchase Common Stock pursuant to a shelf registration (the "Shelf
Registration") filed on August 6, 1997, and declared effective by the SEC on
August 28, 1997.  Under the terms of the registration, the Company may decide
the amount of securities to sell from time to time.  Any proceeds from such a
sale would be for various purposes, which may include, without limitation, the
repayment of outstanding indebtedness, the acquisition of additional hotels, the
improvement and/or expansion of one or more of its hotel properties or for
working capital purposes.  As of March 31, 1998, the Company had approximately
$295 million remaining on its Shelf Registration.

     On January 2, 1998, in accordance with the ABKB/LaSalle Agreements, the
Company privately sold an additional 495,700 shares of its Common Stock to
certain investment funds and separate accounts advised by ABKB/LaSalle
Securities Limited Partnership and LaSalle Advisors Limited Partnership at a
negotiated price of $25.216 generating net proceeds of approximately $12.5
million which were contributed to the Operating Partnership.

     On January 8, 1998, the Company privately issued 518,437 Class B OP Units
as part of the purchase price of the Prime Group I Acquisition Hotels.  At the
time of issuance, the Class B OP Units were valued at $26.697 per unit.  On
April 16, 1998, the Class B OP Units automatically converted into standard OP
Units.

                                       51
<PAGE>
 
     On January 15, 1998, in accordance with the ABKB/LaSalle Agreements, the
Company privately sold the balance of 118,972 shares of its Common Stock to
certain investment funds and separate accounts advised by ABKB/LaSalle
Securities Limited Partnership and LaSalle Advisors Limited Partnership at a
negotiated price of $25.216 generating net proceeds of approximately $3.0
million which were contributed to the Operating Partnership.  With the January
15 transaction, all shares of Common Stock which were to be issued pursuant to
the ABKB/LaSalle Agreements, had been issued.

     On February 3, 1998, the Company privately issued 1,308,406 Class C OP
Units as part of the purchase price of the Holiday Inn O'Hare International
Hotel.  At the time of issuance, the Class C OP Units were valued at $27.514 per
unit.  The Class C OP Units bear a preferred annual distribution rate of $1.89
per Class C OP Unit until such time the dividend distribution rate for the Class
C OP Units shall equal the distribution rate on the Common Stock.  In addition,
the holders of the Class C OP Units are entitled to receive additional OP Units
if the fair market value of the Common Stock (as reported on the New York Stock
Exchange, Inc.) is not at least $30 per share on the anniversary date of the
closing of the acquisition.

     On February 18, 1998, the Company sold 1,052,650 shares of Common Stock at
$28.25 per share through a public offering generating net proceeds of
approximately $28.3 million, which were contributed to the Operating Partnership
and used to repay indebtedness borrowed under the New Credit Facilities.

     On February 23, 1998, the Company sold 1,095,890 shares of Common Stock at
$27.375 per share through a public offering generating net proceeds of
approximately $28.5 million, which were contributed to the Operating partnership
and used to repay indebtedness borrowed under the New Credit Facilities.

     On February 27, 1998, the Company sold 362,812 shares of Common Stock at
$27.5625 per share through a public offering generating net proceeds of
approximately $9.5 million, which were contributed to the Operating Partnership
and used to repay indebtedness under the New Credit Facilities.
 
     On March 15, 1998, the Company and CapStar Hotel Company ("CapStar")
entered into a definitive agreement (the "Merger Agreement") pursuant to which
the parties agreed, subject to stockholder approval and other conditions and
covenants, to merge as equals (the "Proposed Merger").  Accordingly, no
assurance can be given that the Proposed Merger will be consummated.  Pursuant
to the Merger Agreement, CapStar will spin off (the "Spin-Off") in a taxable
transaction, its hotel operations and management business to its current
stockholders as a new C-Corporation to be called MeriStar Hotels & Resorts, Inc.
("MeriStar Resorts").  CapStar will subsequently merge with and into the
Company, in a reorganization which will qualify under Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code").  The Company will be
renamed MeriStar Hospitality Corporation if the Proposed Merger is consummated.
In a separate transaction, which will close immediately after the closing of the
Proposed Merger, MeriStar Resorts will acquire AGH Leasing and AGHI, which
acquisition is a condition to closing the Proposed Merger.   If the Proposed
Merger is consummated, MeriStar Resorts will become the lessee and manager of
all of the Current Hotels currently leased by AGH Leasing and will have a right
of first refusal to become the lessee of hotels acquired by the Company in the
future except for the Prime Group II Acquisition hotels.

     The Merger Agreement defines the exchange ratios for both the Company's and
CapStar's stockholders. CapStar stockholders will receive one share each of
MeriStar Hospitality Corporation and MeriStar Resorts for each CapStar share
owned. The Company's stockholders will receive 0.8475 shares of MeriStar
Hospitality Corporation for each share of Common Stock owned. Both exchange
ratios are fixed, with no adjustment mechanism.

     The Company expects the Proposed Merger to close in July 1998.  The
Proposed Merger will be submitted for approval at separate meetings of the
stockholders of the Company and CapStar.  The Company filed a registration
statement with the SEC registering under the Securities Act of 1933, as amended,
the shares of MeriStar Hospitality Corporation to be issued in the Proposed
Merger.

RENOVATIONS AND OTHER CAPITAL IMPROVEMENTS

     The Participating Leases require the Company to establish annual minimum
reserves equal to 4.0% of total revenue of the Current Hotels which will be
utilized by the Lessee for the replacement and refurbishment of FF&E and other
capital expenditures to enhance the competitive position of the Current Hotels.
The Company and the Lessee will jointly determine the use of funds in this
reserve, and the Company will have the right to approve the Lessee's capital
expenditure budgets.  While the Company expects its reserve to be adequate to
fund recurring capital needs, the Company expects to use cash available for
distribution in excess of distributions paid or funds drawn under the New

                                       52
<PAGE>
 
Credit Facilities or other borrowings or equity to fund additional capital
improvements, as necessary, including major renovations at the Company's Hotels.

          The Company has budgeted $240.8 million to fund capital improvements
and renovations at the Hotels. As of March 31, 1998, the Company had invested
approximately $87.2 million on capital improvements and renovations and has
budgeted to invest the remaining $153.6 million on the Current Hotels in 1998,
1999 and 2000. In certain circumstances such capital improvements are being
completed in connection with franchisor requirements.

          The Company intends to use borrowings under the New Credit Facilities
and the FF&E reserve established under the Participating Leases to fund these
expenditures. There can be no assurance that the Company will be able to
complete the scheduled capital improvements within the expected time frames or
that the anticipated costs for the capital improvements will not exceed the
amounts budgeted for that purpose. Changes in the scope of the work are inherent
in large renovation projects such as the ones undertaken by the Company. The
Company has increased the scope of the work in certain projects in response to
market conditions, building code, franchisor and other requirements. The Company
attempts to schedule renovations and improvements during traditionally lower
occupancy periods in an effort to minimize disruption to the hotels' operations;
however, the impact of rooms out-of-service and public area construction remains
significant. As individual hotels undergo such renovation and capital
improvements, their performance may be adversely affected, although such effects
are expected to be temporary.

INFLATION

          Operators of hotels, in general, possess the ability to adjust room
rates quickly. Competitive pressures may, however, limit the Lessee's ability to
raise room rates at the rate of inflation.


SEASONALITY

          The hotel industry is seasonal in nature. Generally, hotel revenue is
greater in the second and third quarters of a calendar year, although this may
not be true for hotels in major tourist destinations. With the Company's
acquisition of the FSA Portfolio Acquisition hotels, the Company's portfolio may
now produce greater revenues in the first and second quarters.  Seasonal
variations in revenue at the Hotels may cause quarterly fluctuations in the
Company's lease revenue.  To the extent that cash flow from operations may be
insufficient during any quarter to pay distributions at its current distribution
rate due to temporary or seasonal fluctuations in lease revenues, the Company
expects to utilize other cash on hand or borrowings under the New Credit
Facilities to make such distributions.


RISKS RELATING TO YEAR 2000 ISSUE
    
          Many existing computer programs were designed and developed without 
considering the impact of the upcoming change in the century. The problem exits 
when a computer program uses only two digits to identify a year in the date 
filed. Extensive problems can result to a company's business, requiring 
substantial resources to remedy. The Company is assessing the impact of the Year
2000 issue and is developing an implementation plan to resolve the issue during 
1999. The Company has not yet determined the total cost of the modifications to 
its systems, but management expects to have all systems appropriately modified 
before any material processing malfunctions cold occur. However, there can be no
assurance that the "Year 2000" problem will be properly or timely resolve, which
could have a material adverse effect on the Company's results of operations and,
in turn, cash available for distribution.     
 

ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

          Since January 1, 1998, each of the Company's private issuance of
shares of Common Stock and the Operating Partnership's private issuance of OP
Units has been in reliance on an exemption from registration under Section 4(2)
of the Act in the amounts and for the consideration set forth below.

          On January 2, 1998, in accordance with the ABKB/LaSalle Agreements,
the Company privately sold an additional 495,700 shares of Common Stock to
certain investment funds and separate accounts advised by ABKB/LaSalle
Securities Limited Partnership and LaSalle Advisors Limited Partnership at a
negotiated price of $25.216 generating net proceeds of approximately $12.5
million.

                                       53
<PAGE>
 
          On January 8, 1998, the Company privately issued 518,437 Class B OP
Units as part of the purchase price of the Prime Group I Acquisition Hotels. At
the time of issuance, the Class B OP Units were valued at $26.697 per unit. On
April 16, 1998 the Class B OP Units automatically converted into standard OP
Units.

          On January 15, 1998, in accordance with the ABKB/LaSalle Agreements,
the Company privately sold the balance of 118,972 shares of its Common Stock to
certain investment funds and separate accounts advised by ABKB/LaSalle
Securities Limited Partnership and LaSalle Advisors Limited Partnership at a
negotiated price of $25.216 generating net proceeds of approximately $3.0
million. With the January 15 transaction, all shares of Common Stock, which were
to be issued pursuant to the ABKB/LaSalle Agreements, had been issued.

          On February 3, 1998, the Company privately issued 1,308,406 Class C
OP as part of the purchase price of the Holiday Inn O'Hare International Hotel.
At the time of issuance, the Class C OP Units were valued at $27.514 per unit.
The Class C OP Units bear a preferred annual distribution rate of $1.89 per
Class C OP Unit until such time as the dividend distribution rate for the Class
C OP Units shall equal the distribution rate on the Common Stock. In addition,
the holders of the Class C OP Units are entitled to receive additional OP Units
if the fair market value of the Common Stock (as reported on the NYSE) is not
trading for at least $30 per share on the anniversary date of the closing of the
acquisition.


ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

(a)       None

(b)       Reports on Form 8-K

          The Company filed a current report on Form 8-K, dated January 8, 1998,
reporting that the Company had completed the Prime Group I Acquisition. The
aggregate purchase price of the Prime Group I Acquisition was approximately
$138.4 million and was paid as follows: (i) approximately $114.4 million in
cash, (ii) approximately $13.8 million through the issuance of OP Units and
(iii) the assumption of approximately $10.2 million in mortgage indebtedness.

          The Company filed a current report on Form 8-K, dated February 12,
1998, reporting that the Company had issued 1,052,650 shares of its Common Stock
in an underwritten public offering generating net proceeds of $28.3 million.

          The Company filed a current report on Form 8-K, dated February 18,
1998, reporting that the Company had issued 1,095,890 shares of its Common Stock
in an underwritten public offering generating net proceeds of $28.4 million.

          The Company filed a current report on Form 8-K, dated February 24,
1998, reporting that the Company had issued 362,812 shares of its Common Stock
in an underwritten public offering generating net proceeds of approximately $9.5
million.

          The Company filed a current report on Form 8-K, dated February 13,
1998, reporting that the Company had completed the FSA Portfolio Acquisition.
The aggregate purchase price of the FSA Portfolio Acquisition was approximately
$267 million which was paid entirely in cash. The Company also reported that it
had replaced its $300 million credit facility with the $600 million Credit
Facilities.

          The Company filed a current report on Form 8-K, dated March 15, 1998,
reporting that the Company had signed the Merger Agreement.

                                       54
<PAGE>
 
                                   SIGNATURE

     Pursuant to the requirement 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.

     
     Dated:  May 22, 1998     


                             AMERICAN GENERAL HOSPITALITY CORPORATION



                                    By:   /s/ Kenneth E. Barr
                                       ----------------------
                                    Kenneth E. Barr
                                    Executive Vice President
                                    Secretary and Chief Financial Officer
                                    (Principal Financial and Accounting Officer)

                                       55