##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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FORM 10-K

|           |  |                                                                                              
|---------- |  | ---------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                              
|x          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934.    
|          
|           |  | For the fiscal year ended December 31,
    2003                                              
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15
    (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from          to                                               

Commission file no. 1-14537



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Lodgian, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                                |  |                                         
|----------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                        |  | 52-2093696                              
|(State or other jurisdiction of
    incorporation or organization)                              |  | (I.R.S. Employer
    Identification No.)
|                                                                                               
|3445 Peachtree Road N.E., Suite 700
    Atlanta, GA(Address of principal executive
    offices) |  | 30326(Zip Code)                         

Registrants telephone number, including
area code:

(404) 364-9400


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

|                                             |  |                                          
|-------------------------------------------- |  | -----------------------------------------
|Title of Each Class                          |  | Name of Each Exchange on Which Registered
|                                             |  |                                          
|Common Stock, $.01 par value per share       |  | American Stock Exchange                  
|Preferred Stock, $.01 par value per share    |  | American Stock Exchange                  
|(initial liquidation value of $25 per share) |  |                                          

Securities registered pursuant to
Section 12(g) of the Act

Title of Each Class





Class A warrants


Class B warrants


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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K
(Section 229.405 of this chapter) is not contained herein
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or
any amendment to this
Form 10-K.    o

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

The aggregate market value of Common Stock, par
value $.01 per share, held by non-affiliates of the registrant
as of March 1, 2004, was $24,444,812 based on the closing
price of $7.90 per share on the American Stock Exchange on
such date. For purposes of this computation, all directors,
executive officers and 10% shareholders are treated as
affiliates of the registrant.

Indicate by check mark whether the registrant has
filed all documents and reports required to be filed by
sections 12, 13 or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan
confirmed by a
court.    Yes þ         No o

The registrant had 6,830,942 shares of
Common Stock, par value $.01, outstanding as of March 1,
2004.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the 2003
Annual Meeting of Shareholders, to be filed with the Securities
and Exchange Commission, are incorporated by reference in
Part III of this Form 10-K.



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LODGIAN, INC.

Form 10-K


For the Year Ended December 31,
2003


TABLE OF CONTENTS

|                                                   |  |                                                                                           |    |      |    | 
|-------------------------------------------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                                   |  |                                                                                           |    | Page
|                                                   |  |                                                                                           |    |     
|PART I                                            
|Item 1.                                            |  | Business                                                                                  |    |      | 2  | 
|Item 2.                                            |  | Properties                                                                                |    |      | 20 | 
|Item 3.                                            |  | Legal Proceedings                                                                         |    |      | 20 | 
|Item 4.                                            |  | Submission of Matters to a
    Vote of Security Holders                                   |    |      | 20 | 
|                                                  
|PART II                                           
|Item 5.                                            |  | Market for Registrants
    Common Equity and Related Stockholder Matters                 |    |      | 20 | 
|Item 6.                                            |  | Selected Financial Data                                                                   |    |      | 22 | 
|Item 7.                                            |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |    |      | 24 | 
|Item 7A.                                           |  | Quantitative and Qualitative
    Disclosures About Market Risk                            |    |      | 65 | 
|Item 8.                                            |  | Financial Statements and
    Supplementary Data                                           |    |      | 67 | 
|Item 9.                                            |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure  |    |      | 67 | 
|Item 9A.                                           |  | Controls and Procedures                                                                   |    |      | 67 | 
|                                                  
|PART III                                          
|Item 10.                                           |  | Directors and Executive
    Officers of the Registrant                                    |    |      | 67 | 
|Item 11.                                           |  | Executive Compensation                                                                    |    |      | 67 | 
|Item 12.                                           |  | Security Ownership of
    Certain Beneficial Owners and Management                        |    |      | 67 | 
|Item 13.                                           |  | Certain Relationships and
    Related Transactions                                        |    |      | 67 | 
|Item 14.                                           |  | Principal Accounting Fees
    and Services                                                |    |      | 67 | 
|                                                  
|PART IV                                           
|Item 15.                                           |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                      |    |      | 68 | 
|Signatures                                         |  |                                                                                           | 69 |     
|EX-3.1 RESTATED CERTIFICATE OF INCORPORATION      
|EX-3.2 AMENDMENT TO RESTATED CERTIFICATE          
|EX-3.3 CERTIFICATE OF DESIGNATION                 
|EX-3.4 AMENDED RESTATED BYLAWS OF LODGIAN, INC.   
|EX-10.1.1 LOAN AGREEMENT                          
|EX-10.1.2 PROMISSORY NOTE                         
|EX-10.2.1 LOAN AND SECURITY AGREEMENT             
|EX-10.2.2 PROMISSORY NOTE                         
|EX-10.2.3 MODIFICATION OF LOAN AGREEMENT          
|EX-10.2.4 NOTE SEVERANCE AGREEMENT                
|EX-10.2.5 $218,217,000 AMENDED AND RESTATED       
|EX-10.2.6 $5,539,275 PROMISSORY NOTE B            
|EX-10.3.1 MEZZANINE LOAN AGREEMENT                
|EX-10.3.2 PROMISSORY NOTE                         
|EX-10.3.3 GUARANTY OF RESOURCE OBLIGATIONS        
|EX-10.3.4 MODIFICATION OF LOAN AGREEMENT          
|EX-10.3.5 $84,080,526 AMENDED, RESTATED           
|EX-10.3.6 ASSIGNMENT AND ASSUMPTION AGREEMENT     
|EX-10.4.1 LOAN AGREEMENT                          
|EX-10.4.2 $80,000,000 CONSOLIDATED, AMENDED       
|EX-10.4.3 $5,000,000 GAP MORTGAGE NOTE            
|EX-10.4.4 PRINCIPAL'S AGREEMENT                   
|EX-10.4.5 SECURITY AGREEMENT AND LOCKBOX AGREEMENT
|EX-10.4.6 FIRST AMENDMENT TO LOAN DOCUMENTS       
|EX-10.5 2002 STOCK INCENTIVE PLAN OF LODIGAN      
|EX-10.6 DISCLOSURE STATEMENT FOR JOINT PLAN       
|EX-10.7 FIRST AMENDED JOINT PLAN OF REORGANIZATION
|EX-10.8 ORDER CONFIRMING THE FIRST AMENDED        
|EX-10.9 CLASS A WARRANT AGREEMENT                 
|EX-10.10 CLASS B WARRANT AGREEMENT                
|EX-10.11 REGISTRATION RIGHTS AGREEMENT            
|EX-10.12 EMPLOYMENT AGREEMENT                     
|EX-10.13.1 DISCLOSURE STATEMENT FOR JOINT PLAN    
|EX-10.13.2 JOINT PLAN OF REORGANIZATION           
|EX-10.13.3 ORDER CONFIRMING JOINT PLAN            
|EX-10.13.4 POST CONFIRMATION ORDER AND NOTICE     
|EX-10.14.1 LEASE AGREEMENT                        
|EX-10.14.2 FIRST AMENDMENT TO LEASE AGREEMENT     
|EX-10.14.3 SECOND AMENDMENT TO LEASE AGREEMENT    
|EX-10.14.4 THIRD AMENDMENT TO LEASE AGREEMENT     
|EX-10.14.5 FOURTH AMENDMENT TO LEASE AGREEMENT    
|EX-10.14.6  FIFTH AMENDMENT TO LEASE AGREEMENT    
|EX-21.1 SUBSIDIARIES OF LODGIAN, INC.             
|EX-31.1 SECTION 302 CERTIFICATION BY THE CEO      
|EX-31.2 SECTION 302 CERTIFICATION BY THE CFO      
|EX-32 SECTION 906 CERTIFICATION BY THE CEO AND CFO



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PART I






|        |         
|------- | --------
|Item 1. | Business

When we use the terms Lodgian, we,
our, and us, we mean Lodgian, Inc. and
its subsidiaries.

Our Company

We are one of the largest independent owners and
operators of full-service hotels in the United States in terms
of our number of guest rooms and gross annual revenues, as
reported by Hotel & Motel Management Magazine in September
2003. We are considered an independent owner and operator
because we do not operate our hotels under our own name. We
operate substantially all of our hotels under nationally
recognized brands, such as Crowne Plaza,
Holiday Inn and Marriott. As of
March 1, 2004, we operated 92 hotels with an aggregate
of 17,417 rooms, located in 30 states and Canada. Of the 92
hotels, 78 hotels, with an aggregate of 14,348 rooms, are
part of our continuing operations, while 14 hotels, with an
aggregate of 3,069 rooms, are held for sale. Our portfolio of 92
hotels consists of:



| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | 87 hotels that we wholly own and operate through
    subsidiaries;                                                                      
|
| |  | four hotels that we operate in joint ventures in
    which we have a 50% or greater voting equity interest and
    exercise control; and
|
| |  | one hotel that we operate in a joint venture in
    which we have a 30% non-controlling equity interest.                                

We consolidate all of these entities in our
financial statements, other than the one entity in which we hold
a non-controlling equity interest and for which we account under
the equity method.

Our hotels are primarily full-service properties
that offer food and beverage services, meeting space and banquet
facilities and compete in the midscale and upscale market
segments of the lodging industry. We operate all but five of our
hotels under franchises obtained from nationally recognized
hospitality franchisors. We operate sixty-one of our hotels
under franchises obtained from InterContinental Hotels Group as
franchisor of the Crowne Plaza, Holiday Inn, Holiday Inn Select
and Holiday Inn Express brands. We operate sixteen of our hotels
under franchises from Marriott International as franchisor of
the Marriott, Courtyard by Marriott, Fairfield Inn by Marriott
and Residence Inn by Marriott brands. We operate another 10
hotels under other nationally recognized brands. We believe that
these strong national brands afford us many benefits, such as
guest loyalty and market share premiums.

Our management consists of an experienced team of
professionals with extensive lodging industry experience led by
our president and chief executive officer, W. Thomas Parrington,
who has been in the lodging industry for over 30 years,
including most recently as chief executive officer of Interstate
Hotels Company through 1998. Our chief operating officer,
Michael Amaral, and our three regional vice presidents have a
combined 90 years of industry experience and our vice
president of sales and marketing has 20 years of industry
experience. We will use the experience of our management team to
improve property-level performance, implement our hotel
renovation and repositioning program, dispose of hotels that do
not fit our strategy, identify potential acquisitions and
maintain our relationships with our franchisors.

Our Operations

Our operations team is responsible for the
management of our properties. Our chief operating officer and
three regional vice presidents of operations are responsible for
the supervision of our general managers, who oversee the
day-to-day operations of our hotels. Our corporate office is
located in Atlanta, Georgia. The centralized management services
provided by our corporate office include sales and marketing,
purchasing, finance and accounting, information technology,
renovations, human resources, legal services, training and
quality programs. We believe that our centralized services and
functions provide significant cost savings due to economies of
scale.

Our corporate management team coordinates the
financial and accounting functions of our business. These
functions include internal audits, insurance and contract review
and overseeing the budgeting and

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forecasting for our hotels. The corporate
management team also identifies new systems and procedures to
employ within our hotels to improve efficiency and
profitability. The corporate management team also coordinates
the sales forces for our hotels, designs sales training
programs, tracks future business under contract and identifies,
employs and monitors marketing programs aimed at specific target
markets. Interior design of all hotels, each hotels
product quality, and the detailed refurbishment of existing
properties are also managed from our corporate headquarters.


We use information systems at the corporate
office to track each hotels daily occupancy, average daily
rate, room revenues and food and beverage revenues. By having
current information available, we are better able to respond to
changes in each market by focusing sales efforts and making
appropriate adjustments to control expenses and maximize
profitability.

Creating cost and guest service efficiencies in
each hotel is a top priority. With a total of 92 hotels in our
portfolio, we believe we are able to realize significant cost
savings due to economies of scale and that we are able to secure
volume pricing from vendors that may not be available to smaller
hotel companies.

Corporate History

Lodgian was formed as a new parent company in a
merger of Servico, Inc. and Impac Hotel Group, LLC in December
1998. Servico was incorporated in Delaware in 1956 and was an
owner and operator of hotels under a series of different
entities. Impac was a private hotel ownership, management and
development company organized in Georgia in 1997 through a
reorganization of predecessor entities. After the consummation
of the merger, our portfolio consisted of 142 hotels.

Between December 1998 and the end of 2001, a
number of factors, including our heavy debt load, a lack of
available funds to maintain the quality of our hotels, a
weakening U.S. economy, and the severe decline in travel in the
aftermath of the terrorist attacks of September 11, 2001,
combined to place adverse pressure on our cash flow and
liquidity. As a result, on December 20, 2001, Lodgian and
substantially all of our subsidiaries that owned hotels filed
for voluntary reorganization under Chapter 11 of the
Bankruptcy Code. At the time of the Chapter 11 filing, our
portfolio consisted of 106 hotels.

Following the consummation of our reorganization,
we emerged from Chapter 11 with 97 hotels, eight of our hotels
having been conveyed to a lender in satisfaction of outstanding
debt obligations and one having been returned to the lessor of a
capital lease of the property. Of these 97 hotels, 78 hotels
emerged from Chapter 11 on November 25, 2002,
18 hotels emerged from Chapter 11 on May 22, 2003
and one hotel never filed under Chapter 11.

Pursuant to our portfolio improvement strategy,
during 2003 and the first two months of 2004, we sold five
hotels and one office building, and we have identified 14 other
hotels and three land parcels as held for sale. At March 1,
2004, our portfolio consisted of 92 hotels, 78 of which are
reflected in continuing operations (including one hotel that we
do not consolidate).

Franchise Affiliations

We operate substantially all of our hotels under
nationally recognized brands. We believe that in addition to
benefits in terms of guest loyalty and market share premiums,
our hotels benefit from franchisors central reservation
systems, their global distribution systems and their brand
Internet booking sites. Reservations made by means of these
franchisor facilities generally account for approximately 30% of
our total reservations.

We enter into franchise agreements, generally for
terms of between 10 and 20 years, with hotel franchisors.
The franchise agreements typically authorize us to operate a
hotel under the franchise name, at a specific location or within
a specified area, and require that we operate the hotel in
accordance with the standards specified by the franchisor. As
part of our franchise agreements, we are generally required to
pay a royalty fee, an advertising/marketing fee, a fee for the
use of the franchisors nationwide reservation system and
certain ancillary charges. Royalty fees generally range from
3.0% to 6.0% of gross room revenues, advertising/marketing fees
generally range from 1.0% to 4.5% of gross room revenues and
reservation system fees generally range from 1.0% to 2.0% of
gross room revenues. In the aggregate, royalty fees, advertising/

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marketing fees and reservation fees for the
various brands under which we operate our hotels range from 5.0%
to 12.5% of gross room revenues.


Set forth below is a summary of our hotel
portfolio as of March 1, 2004, organized by franchisors,
with the brands, number of hotels and rooms represented by each,
in continuing operations and discontinued operations (including
one hotel that we do not consolidate):

|                                          |                           |                  |    |              |    |        |        |        |        |        |    |        |    |  |       |       |       |  |    |    |    |  |        |       |        | 
|----------------------------------------- | ------------------------- | ---------------- | -- | ------------ | -- | ------ | ------ | ------ | ------ | ------ | -- | ------ | -- |  | ----- | ----- | ----- |  | -- | -- | -- |  | ------ | ----- | ------ | 
|                                          |                           |                  |    |              |    |        |        |       
|                                          |                           | Continuing       |    | Discontinued |    |       
|                                          |                           | Operations       |    | Operations   |    | Total 
|                                          |                           |                  |    |              |    |       
|                                          |                           | No. of           |    | No. of       |    | No. of |        | No. of |        | No. of |    | No. of
|                                          |                           | Hotels           |    | Rooms        |    | Hotels |        | Rooms  |        | Hotels |    | Rooms 
|                                          |                           |                  |    |              |    |        |        |        |        |        |    |       
|InterContinental Hotels Group PLC (IHG)   |                           |                  |    |              |    |        |        |        |        |        |    |        |    |  |       |       |       |  |    |    |    |  |        |      
|                                          | Holiday Inn               |                  |    | 36           |    |        |        | 6,737  |        |        |    | 8      |    |  |       | 1,693 |       |  |    | 44 |    |  |        | 8,430 |       
|                                          | Holiday Inn Express(1)    |                  |    | 4            |    |        |        | 504    |        |        |    | 1      |    |  |       | 214   |       |  |    | 5  |    |  |        | 718   |       
|                                          | Holiday Inn Select        |                  |    | 4            |    |        |        | 1,096  |        |        |    | 1      |    |  |       | 397   |       |  |    | 5  |    |  |        | 1,493 |       
|                                          | Crowne Plaza*(2)          |                  |    | 7            |    |        |        | 1,902  |        |        |    |       |    |  |       |      |       |  |    | 7  |    |  |        | 1,902 |       
|                                          |                           |                  |    |              |    |        |        |        |        |        |    |        |    |  |       |       |       |  |    |    |    |  |        |      
|Total IHG                                 |                           |                  | 51 |              |    |        | 10,239 |        |        |        | 10 |        |    |  | 2,304 |       |       |  | 61 |    |    |  | 12,543 |      
|                                         
|Marriott International, Inc.              |                           |                  |    |              |    |        |        |        |        |        |    |        |    |  |       |       |       |  |    |    |    |  |        |      
|                                          | Marriott                  |                  |    | 1            |    |        |        | 238    |        |        |    |       |    |  |       |      |       |  |    | 1  |    |  |        | 238   |       
|                                          | Courtyard by Marriott     |                  |    | 7            |    |        |        | 760    |        |        |    | 1      |    |  |       | 154   |       |  |    | 8  |    |  |        | 914   |       
|                                          | Fairfield Inn by Marriott |                  |    | 5            |    |        |        | 563    |        |        |    |       |    |  |       |      |       |  |    | 5  |    |  |        | 563   |       
|                                          | Residence Inn by Marriott |                  |    | 2            |    |        |        | 177    |        |        |    |       |    |  |       |      |       |  |    | 2  |    |  |        | 177   |       
|                                          |                           |                  |    |              |    |        |        |        |        |        |    |        |    |  |       |       |       |  |    |    |    |  |        |      
|Total Marriott                            |                           |                  | 15 |              |    |        | 1,738  |        |        |        | 1  |        |    |  | 154   |       |       |  | 16 |    |    |  | 1,892  |      
|                                         
|Hilton Hotels Corporation                 |                           |                  |    |              |    |        |        |        |        |        |    |        |    |  |       |       |       |  |    |    |    |  |        |      
|                                          | Hilton                    |                  |    | 3            |    |        |        | 587    |        |        |    |       |    |  |       |      |       |  |    | 3  |    |  |        | 587   |       
|                                          | DoubleTree                |                  |    | 1            |    |        |        | 189    |        |        |    |       |    |  |       |      |       |  |    | 1  |    |  |        | 189   |       
|                                          |                           |                  |    |              |    |        |        |        |        |        |    |        |    |  |       |       |       |  |    |    |    |  |        |      
|Total Hilton                              |                           |                  | 4  |              |    |        | 776    |        |        |        |   |        |    |  |      |       |       |  | 4  |    |    |  | 776    |      
|                                         
|Choice Hotels International, Inc.         |                           |                  |    |              |    |        |        |        |        |        |    |        |    |  |       |       |       |  |    |    |    |  |        |      
|                                          | Clarion                   |                  |    | 2            |    |        |        | 590    |        |        |    |       |    |  |       |      |       |  |    | 2  |    |  |        | 590   |       
|                                          | Quality                   |                  |    | 2            |    |        |        | 307    |        |        |    |       |    |  |       |      |       |  |    | 2  |    |  |        | 307   |       
|                                          |                           |                  |    |              |    |        |        |        |        |        |    |        |    |  |       |       |       |  |    |    |    |  |        |      
|Total Choice                              |                           |                  | 4  |              |    |        | 897    |        |        |        |   |        |    |  |      |       |       |  | 4  |    |    |  | 897    |      
|                                         
|Starwood Hotels & Resorts Worldwide, Inc. |                           |                  |    |              |    |        |        |        |        |        |    |        |    |  |       |       |       |  |    |    |    |  |        |      
|                                          | Four Points               |                  |    |             |    |        |        |       |        |        |    | 1      |    |  |       | 189   |       |  |    | 1  |    |  |        | 189   |       
|Carlson Companies                         |                           |                  |    |              |    |        |        |        |        |        |    |        |    |  |       |       |       |  |    |    |    |  |        |      
|                                          | Radisson                  |                  |    | 1            |    |        |        | 163    |        |        |    |       |    |  |       |      |       |  |    | 1  |    |  |        | 163   |       
|Non-franchised hotels                     |                           |                  | 3  |              |    |        | 535    |        |        |        | 2  |        |    |  | 422   |       |       |  | 5  |    |    |  | 957    |      
|                                          |                           |                  |    |              |    |        |        |        |        |        |    |        |    |  |       |       |       |  |    |    |    |  |        |      
|                                          |                           | Total All Hotels |    |              | 78 |        |        |        | 14,348 |        |    |        | 14 |  |       |       | 3,069 |  |    |    | 92 |  |        |       | 17,417 | 
|                                          |                           |                  |    |              |    |        |        |        |        |        |    |        |    |  |       |       |       |  |    |    |    |  |        |      



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|    |                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes one hotel in discontinued operations for
    which we have entered into a voluntary termination of the
    franchise agreement.
|   
|(2) | Includes one hotel on which the existing debt
    matures on June 30, 2004 and for which we have escrowed
    foreclosure documents.    

During the term of our franchise agreements, the
franchisors may require us to upgrade facilities to comply with
their current standards. Our current franchise agreements
terminate at various times and have differing remaining terms.
For example, the terms of seven, twelve and ten of our franchise
agreements are scheduled to expire in 2004, 2005 and 2006,
respectively. As franchise agreements expire, we may apply for a

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franchise renewal. In connection with renewals,
the franchisor may require payment of a renewal fee, increased
royalty and other recurring fees and substantial renovation of
the facilities, or the franchisor may elect at its sole
discretion not to renew the franchise.


If we do not comply with the terms of a franchise
agreement, following notice and an opportunity to cure the
noncompliance or default, the franchisor has the right to
terminate the agreement, which could lead to a default and
acceleration under one or more of our loan agreements, which
could materially and adversely affect us. In the past, we have
been able to cure most cases of noncompliance and most defaults
within the cure periods. If we perform an economic analysis of
the hotel and determine that it is not economically justifiable
to comply with a franchisors requirements, we will either
select an alternative franchisor or operate the hotel without a
franchise affiliation. This could adversely affect us. See
Factors Which May Affect Future Results  Risks
Related to Our Business.

As of March 1, 2004, we have been notified
that we were not in compliance with some of the terms of ten of
our franchise agreements and have received default and
termination notices from franchisors with respect to an
additional five hotels. We cannot assure you that we will be
able to complete our action plans (which we estimate will cost
approximately $6.4 million) to cure the alleged instances
of noncompliance and default prior to the specified termination
dates or be granted additional time in which to cure any
defaults or other noncompliance. We believe we are in compliance
with our other franchise agreements.

In addition, as part of our bankruptcy
reorganization proceedings, we entered into stipulations with
each of our major franchisors setting forth a timeline for
completion of capital expenditures for some of our hotels.
However, as of March 1, 2004 we have not completed the
required capital expenditures for 35 hotels in accordance with
the stipulations and estimate that the cost of completing these
required capital expenditures is $26.1 million. A
franchisor could therefore seek to declare its franchise
agreement in default and could seek to terminate the franchise
agreement.

With the exception of one hotel held for sale, we
believe that we will cure the noncompliance and defaults on
these hotels before the applicable termination dates, but we
cannot provide assurance that we will be able to do so or that
we will be able to obtain additional time in which to do so. If
a franchise agreement is terminated, we will either select an
alternative franchisor or operate the hotel independently of any
franchisor. However, terminating or changing the franchise
affiliation of a hotel could require us to incur significant
expenses, including liquidated damages, and capital expenditures.

Sales and Marketing

We market our hotels through national marketing
programs that we coordinate with local sales managers and a
director of sales at most of our hotels. Although we make
periodic modifications to our marketing plans in order to
address local differences and maintain a sales organization
structure based on market needs and local preferences, we
generally utilize the same major marketing plans throughout the
country. We develop these concepts at our headquarters, while
modifications are implemented by our hotels regional
managers and local sales force, all of whom are experienced in
hotel marketing. Our local sales force reacts promptly to local
changes and market trends in order to customize marketing
programs to meet each hotels competitive needs. The local
sales force is also responsible for developing and implementing
marketing programs targeted at specific customer segments within
their respective markets. Our marketing efforts focus primarily
on business travelers, who account for roughly half of the rooms
rented in our hotels.

Our core market consists of business travelers
who visit a given area several times per year, such as sales
people who cover a regional territory, government and military
personnel, and technicians. We believe that business travelers
are attracted to our hotels because of their convenient
locations, their proximity to corporate headquarters, plants,
convention centers or other major facilities, the availability
of ample meeting space and our high level of service. Our sales
force markets to organizations that can utilize a high volume of
room nights and that have a significant number of individuals
traveling in our operating regions. We also target groups and
conventions by focusing on the proximity of our hotels to nearby
convention or trade centers. Our hotels group meeting
logistics include flexible space readily adaptable to groups of
varying size, up-to-date audio-visual equipment and on-site
catering facilities.

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In addition to the business market, our targeted
customers include leisure travelers looking for comfortable and
convenient lodging at an affordable price.

Our franchised hotels use the centralized
reservation systems of our franchisors, which we believe are
among the more advanced reservation systems in the lodging
industry. The franchisors reservation systems receive
reservation requests entered (1) on terminals located at
all of their respective properties, (2) at reservation
centers utilizing 1-800 phone access, (3) through global
distribution systems and (4) through Internet booking
sites. These reservation systems immediately confirm
reservations or indicate accommodations available at alternate
hotels in the respective franchisors systems.
Confirmations are transmitted automatically to the hotel for
which the reservations are made. These systems are effective in
directing customers to our franchised hotels and account for
approximately 30% of our revenues.

Joint Ventures

As of March 1, 2004, we operate four hotels
in joint ventures in which we have a 50% or greater voting
equity interest and exercise control, and we operate one hotel
in a joint venture in which we have a 30% non-controlling equity
interest. In each joint venture, we share decision making
authority with our joint venture partner and may not, and in the
case of our hotel in which we do not have a controlling
interest, have sole discretion with respect to a hotels
disposition.

Growth Strategy

We believe that occupancy and ADR, and
consequently RevPAR, in our continuing operations will increase
as a result of an expected improvement in lodging industry
supply and demand fundamentals, our hotel renovation and
repositioning program, and our strong management team. We
believe our planned capital expenditures and operational
improvements will generate increased revenues and enhance our
financial performance. Additionally, we will continue to monitor
the ongoing performance of our hotels as part of our portfolio
improvement strategy.

Based on the expected improvement in lodging
industry fundamentals, we believe it is an opportune time in the
lodging industry cycle to own and acquire hotels. We intend to
acquire or invest in additional hotels primarily through joint
ventures with other investors. We believe that entering into
joint ventures will enable us to increase our revenues and
enhance our financial performance from both the management fees
we would receive for managing the hotels owned by the joint
ventures, as well as from our ownership interest in those
hotels. Under certain circumstances, we also may seek to acquire
select hotels on a wholly-owned basis.

We intend to focus our acquisition and investment
efforts on limited service, midscale and upscale hotels that are
less than five years old, contain approximately 100 to 250 rooms
and enhance our brand diversification.

Competition and Seasonality

The hotel business is highly competitive. Each of
our hotels competes in its market area with numerous other
hotels operating under various lodging brands, and with other
lodging establishments. National chains, including in many
instances chains from which we obtain franchises, may compete
with us in various markets. There is, however, no single
competitor or group of competitors of our hotels that is
consistently located nearby and competing with most of our
hotels. Our competition is highly fragmented and is comprised of
public companies, privately-held equity funds, and relatively
small, private owners and operators of hotels. Competitive
factors in the lodging industry include, among others, supply in
a particular market, franchise affiliations, reasonableness of
room rates, quality of accommodations, service levels,
convenience of locations and amenities customarily offered to
the traveling public. In addition, the development of
travel-related Internet web sites has increased price awareness
among travelers and price competition among similarly located,
comparable hotels.

Demand for accommodations, and the resulting cash
flow, vary seasonally. The high season tends to be the summer
months for hotels located in colder climates and the winter
months for properties located in

6



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warmer climates. Aggregate demand for
accommodations in our portfolio is, however, lowest during the
winter months. Levels of demand are dependent upon many factors
that are beyond our control, including general and local
economic conditions and changes in levels of leisure and
business-related travel. Our hotels depend on both business and
leisure travelers for revenues.


We also compete with other hotel owners and
operators with respect to obtaining desirable franchises for
upscale and midscale hotels in targeted markets and acquiring
hotels to renovate and reposition.

The Lodging Industry

We believe that we have passed the bottom of the
U.S. economic and lodging industry cycle, based on industry
forecasts, general economic forecasts and historical data. After
two consecutive years of declines in 2001 and 2002 in revenue
per available room, or RevPAR, the U.S. lodging industry
showed signs of recovery in the second half of 2003, with full
year RevPAR growth of 0.5% according to Smith Travel Research.
For 2004, Smith Travel Research recently forecasted annual
U.S. lodging industry RevPAR growth of 4.5% and an annual
increase in demand, as measured by average daily rooms sold, of
4.0%, which it forecasted will outpace the annual net change in
supply of 1.4%. Although these are only industry forecasts, and
do not apply specifically to our portfolio of hotels, based on
forecasted industry fundamentals, we believe that it is an
opportune time in the business cycle to own, acquire and
reinvest in hotels.

As illustrated by the graph below, the
U.S. lodging industry enjoyed nine years of consecutive
positive RevPAR growth from 1992 through 2000 following the
economic recession of 1991. The periods of greater RevPAR growth
over this time period generally occurred when growth in room
demand exceeded new supply growth.

(CHART)

Properties

We retain responsibility for all aspects of the
day-to-day management of each of our hotels. We establish and
implement standards for hiring, training and supervising staff,
developing and maintaining financial controls, complying with
laws and regulations relating to hotel operations and providing
for the repair and maintenance of the hotels.

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| |          
| | ---------
| | Portfolio

Our hotel portfolio, as of March 1, 2004, by
franchisor, is set forth below.

|                                                        |  |        |     |          |  |               |                     |  |  |  |      | 
|------------------------------------------------------- |  | ------ | --- | -------- |  | ------------- | ------------------- |  |  |  | ---- | 
|                                                        |  |        |     |          |  | Year of      
|                                                        |  |        |     |          |  | Last Major   
|                                                        |  | No. of |     |          |  | Renovation or
|Franchisor/Hotel Name                                   |  | Rooms  |     | Location |  | Construction 
|                                                        |  |        |     |          |  |              
|InterContinental Hotels Group PLC (IHG)
    (61 hotels) |  |        |     |          |  |               |                     | 
|Crowne Plaza Albany                                     |  |        | 384 |          |  |               | Albany, NY          |  |  |  | 2001 | 
|Crowne Plaza Cedar Rapids                               |  |        | 275 |          |  |               | Cedar Rapids, IA    |  |  |  | 1998 | 
|Crowne Plaza Houston                                    |  |        | 291 |          |  |               | Houston, TX         |  |  |  | 1999 | 
|Crowne Plaza Macon (60% owned)(1)                       |  |        | 297 |          |  |               | Macon, GA           |  |  |  | 1996 | 
|Crowne Plaza Pittsburgh                                 |  |        | 193 |          |  |               | Pittsburgh, PA      |  |  |  | 2001 | 
|Crowne Plaza West Palm Beach (50% owned)                |  |        | 219 |          |  |               | West Palm Beach, FL |  |  |  | 2001 | 
|Crowne Plaza Worcester                                  |  |        | 243 |          |  |               | Worcester, MA       |  |  |  | 1996 | 
|Holiday Inn Arden Hills                                 |  |        | 156 |          |  |               | St. Paul, MN        |  |  |  | 1995 | 
|Holiday Inn Austin  South(2)                           |  |        | 210 |          |  |               | Austin, TX          |  |  |  | 1994 | 
|Holiday Inn Brunswick                                   |  |        | 126 |          |  |               | Brunswick, GA       |  |  |  | 1998 | 
|Holiday Inn BWI Airport                                 |  |        | 260 |          |  |               | Baltimore, MD       |  |  |  | 2000 | 
|Holiday Inn City Center (30% owned)                     |  |        | 240 |          |  |               | Columbus, OH        |  |  |  | 2002 | 
|Holiday Inn Clarksburg                                  |  |        | 159 |          |  |               | Clarksburg, WV      |  |  |  | 1997 | 
|Holiday Inn Cromwell Bridge                             |  |        | 139 |          |  |               | Cromwell Bridge, MD |  |  |  | 2000 | 
|Holiday Inn East Hartford                               |  |        | 130 |          |  |               | East Hartford, CT   |  |  |  | 2000 | 
|Holiday Inn Express Dothan                              |  |        | 112 |          |  |               | Dothan, AL          |  |  |  | 2002 | 
|Holiday Inn Express Gadsden                             |  |        | 141 |          |  |               | Gadsden, AL         |  |  |  | 1996 | 
|Holiday Inn Express Palm Desert                         |  |        | 129 |          |  |               | Palm Desert, CA     |  |  |  | 2003 | 
|Holiday Inn Express Pensacola North(2)(3)               |  |        | 214 |          |  |               | Pensacola, FL       |  |  |  | 1996 | 
|Holiday Inn Express Pensacola University Mall           |  |        | 122 |          |  |               | Pensacola, FL       |  |  |  | 2002 | 
|Holiday Inn Fairmont                                    |  |        | 106 |          |  |               | Fairmont, WV        |  |  |  | 1997 | 
|Holiday Inn Florence(2)                                 |  |        | 105 |          |  |               | Florence, KY        |  |  |  | 1997 | 
|Holiday Inn Fort Wayne                                  |  |        | 208 |          |  |               | Fort Wayne, IN      |  |  |  | 1995 | 
|Holiday Inn Frederick                                   |  |        | 158 |          |  |               | Frederick, MD       |  |  |  | 2000 | 
|Holiday Inn Frisco                                      |  |        | 217 |          |  |               | Frisco, CO          |  |  |  | 1997 | 
|Holiday Inn Glen Burnie North                           |  |        | 127 |          |  |               | Glen Burnie, MD     |  |  |  | 2000 | 
|Holiday Inn Grand Island(2)                             |  |        | 261 |          |  |               | Grand Island, NY    |  |  |  | 2000 | 
|Holiday Inn Greentree                                   |  |        | 201 |          |  |               | Pittsburgh, PA      |  |  |  | 2000 | 
|Holiday Inn Hamburg                                     |  |        | 130 |          |  |               | Buffalo, NY         |  |  |  | 1998 | 
|Holiday Inn Hilton Head                                 |  |        | 201 |          |  |               | Hilton Head, SC     |  |  |  | 2001 | 
|Holiday Inn Inner Harbor                                |  |        | 375 |          |  |               | Baltimore, MD       |  |  |  | 2000 | 
|Holiday Inn Jamestown                                   |  |        | 146 |          |  |               | Jamestown, NY       |  |  |  | 1998 | 
|Holiday Inn Jekyll Island(2)                            |  |        | 198 |          |  |               | Jekyll Island, GA   |  |  |  | 2000 | 
|Holiday Inn Lancaster (East)                            |  |        | 189 |          |  |               | Lancaster, PA       |  |  |  | 2000 | 
|Holiday Inn Lansing West                                |  |        | 244 |          |  |               | Lansing, MI         |  |  |  | 1998 | 
|Holiday Inn Lawrence                                    |  |        | 192 |          |  |               | Lawrence, KS        |  |  |  | 2002 | 
|Holiday Inn Manhattan                                   |  |        | 197 |          |  |               | Manhattan, KS       |  |  |  | 2002 | 
|Holiday Inn Marietta                                    |  |        | 193 |          |  |               | Marietta, GA        |  |  |  | 2003 | 

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|                                             |           |        |     |          |  |               |                     |  |  |  |                 |  | 
|-------------------------------------------- | --------- | ------ | --- | -------- |  | ------------- | ------------------- |  |  |  | --------------- |  | 
|                                             |           |        |     |          |  | Year of      
|                                             |           |        |     |          |  | Last Major   
|                                             |           | No. of |     |          |  | Renovation or
|Franchisor/Hotel Name                        |           | Rooms  |     | Location |  | Construction 
|                                             |           |        |     |          |  |              
|Holiday Inn McKnight Road                    |           |        | 146 |          |  |               | Pittsburgh, PA      |  |  |  | 1995            | 
|Holiday Inn Meadowlands                      |           |        | 138 |          |  |               | Pittsburgh, PA      |  |  |  | 1996            | 
|Holiday Inn Melbourne (50% owned)            |           |        | 295 |          |  |               | Melbourne, FL       |  |  |  | 2002            | 
|Holiday Inn Memphis(2)                       |           |        | 173 |          |  |               | Memphis, TN         |  |  |  | 1998            | 
|Holiday Inn Monroeville                      |           |        | 188 |          |  |               | Monroeville, PA     |  |  |  | 1998            | 
|Holiday Inn Morgantown(2)                    |           |        | 147 |          |  |               | Morgantown, WV      |  |  |  | 1997            | 
|Holiday Inn Sunspree Resort Myrtle Beach     |           |        | 133 |          |  |               | Myrtle Beach, SC    |  |  |  | 1998            | 
|Holiday Inn Parkway East(2)                  |           |        | 177 |          |  |               | Pittsburgh, PA      |  |  |  | 2001            | 
|Holiday Inn Phoenix West                     |           |        | 144 |          |  |               | Phoenix, AZ         |  |  |  | 2003            | 
|Holiday Inn Rolling Meadows(2)               |           |        | 422 |          |  |               | Rolling Meadows, IL |  |  |  | 2000            | 
|Holiday Inn Santa Fe                         |           |        | 130 |          |  |               | Santa Fe, NM        |  |  |  | 2003            | 
|Holiday Inn Select DFW Airport               |           |        | 282 |          |  |               | Dallas, TX          |  |  |  | 1997            | 
|Holiday Inn Select Niagara Falls(2)          |           |        | 397 |          |  |               | Niagara Falls, NY   |  |  |  | 1999            | 
|Holiday Inn Select Phoenix Airport           |           |        | 298 |          |  |               | Phoenix, AZ         |  |  |  | Being Renovated | 
|Holiday Inn Select Strongsville              |           |        | 302 |          |  |               | Cleveland, OH       |  |  |  | 1996            | 
|Holiday Inn Select Windsor                   |           |        | 214 |          |  |               | Windsor, Ontario    |  |  |  | Being Renovated | 
|Holiday Inn Sheffield                        |           |        | 201 |          |  |               | Sheffield, AL       |  |  |  | 1996            | 
|Holiday Inn Silver Spring                    |           |        | 231 |          |  |               | Silver Spring, MD   |  |  |  | 1998            | 
|Holiday Inn St. Louis North                  |           |        | 390 |          |  |               | St. Louis, MO       |  |  |  | 1996            | 
|Holiday Inn University Mall                  |           |        | 152 |          |  |               | Pensacola, FL       |  |  |  | 1997            | 
|Holiday Inn Valdosta                         |           |        | 167 |          |  |               | Valdosta, GA        |  |  |  | 2003            | 
|Holiday Inn Winter Haven                     |           |        | 228 |          |  |               | Winter Haven, FL    |  |  |  | 1998            | 
|Holiday Inn York                             |           |        | 100 |          |  |               | York, PA            |  |  |  | 2000            | 
|                                             |           |        |     |          |  |               |                     |  |  |  |                 | 
|                                             | Total IHG |        |     | 12,543   |  |               |                     |  |  |  |                 |  | 
|Marriott International, Inc.
    (16 hotels) |           |        |     |         
|Courtyard by Marriott Abilene                |           |        | 99  |          |  |               | Abilene, TX         |  |  |  | 1996(4)         | 
|Courtyard by Marriott Bentonville            |           |        | 90  |          |  |               | Bentonville, AR     |  |  |  | 1996(4)         | 
|Courtyard by Marriott Buckhead               |           |        | 181 |          |  |               | Atlanta, GA         |  |  |  | Being renovated | 
|Courtyard by Marriott Florence               |           |        | 78  |          |  |               | Florence, KY        |  |  |  | Being renovated | 
|Courtyard by Marriott Lafayette              |           |        | 90  |          |  |               | Lafayette, LA       |  |  |  | 1997(4)         | 
|Courtyard by Marriott Paducah                |           |        | 100 |          |  |               | Paducah, KY         |  |  |  | 1997(4)         | 
|Courtyard by Marriott Revere(2)              |           |        | 154 |          |  |               | Revere, MA          |  |  |  | 1999            | 
|Courtyard by Marriott Tulsa                  |           |        | 122 |          |  |               | Tulsa, OK           |  |  |  | 1997(4)         | 
|Fairfield Inn by Marriott Augusta            |           |        | 117 |          |  |               | Augusta, GA         |  |  |  | 2002            | 
|Fairfield Inn by Marriott Colchester         |           |        | 117 |          |  |               | Colchester, VT      |  |  |  | 2002            | 
|Fairfield Inn by Marriott Jackson            |           |        | 105 |          |  |               | Jackson, TN         |  |  |  | 2002            | 
|Fairfield Inn by Marriott Merrimack          |           |        | 116 |          |  |               | Merrimack, NH       |  |  |  | 1998(4)         | 
|Fairfield Inn by Marriott Valdosta           |           |        | 108 |          |  |               | Valdosta, GA        |  |  |  | 1997(4)         | 
|Marriott Denver                              |           |        | 238 |          |  |               | Denver, CO          |  |  |  | 1998            | 

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|                                                          |                         |        |        |          |  |               |                   |  |  |  |                 |  | 
|--------------------------------------------------------- | ----------------------- | ------ | ------ | -------- |  | ------------- | ----------------- |  |  |  | --------------- |  | 
|                                                          |                         |        |        |          |  | Year of      
|                                                          |                         |        |        |          |  | Last Major   
|                                                          |                         | No. of |        |          |  | Renovation or
|Franchisor/Hotel Name                                     |                         | Rooms  |        | Location |  | Construction 
|                                                          |                         |        |        |          |  |              
|Residence Inn by Marriott Dedham                          |                         |        | 81     |          |  |               | Dedham, MA        |  |  |  | Being renovated | 
|Residence Inn by Marriott Little Rock                     |                         |        | 96     |          |  |               | Little Rock, AR   |  |  |  | 1998            | 
|                                                          |                         |        |        |          |  |               |                   |  |  |  |                 | 
|                                                          | Total Marriott          |        |        | 1,892    |  |               |                   |  |  |  |                 |  | 
|Hilton Hotels Corporation
    (4 hotels)                  |                         |        |        |          |  |               |                   |  |  |  |                 | 
|Doubletree Club Philadelphia                              |                         |        | 189    |          |  |               | Philadelphia, PA  |  |  |  | 2003            | 
|Hilton Fort Wayne                                         |                         |        | 244    |          |  |               | Fort Wayne, IN    |  |  |  | 2003            | 
|Hilton Columbia                                           |                         |        | 152    |          |  |               | Columbia, MD      |  |  |  | 2003            | 
|Hilton Northfield                                         |                         |        | 191    |          |  |               | Troy, MI          |  |  |  | 2003            | 
|                                                          |                         |        |        |          |  |               |                   |  |  |  |                 | 
|                                                          | Total Hilton            |        |        | 776      |  |               |                   |  |  |  |                 |  | 
|Choice Hotels International, Inc. (4
    hotels)          |                         |        |        |          |  |               |                   |  |  |  |                 | 
|Clarion Northwoods Atrium Inn                             |                         |        | 197    |          |  |               | Charleston, SC    |  |  |  | 1994            | 
|Quality Hotel Metairie                                    |                         |        | 205    |          |  |               | New Orleans, LA   |  |  |  | 1995(4)         | 
|Clarion Hotel Louisville                                  |                         |        | 393    |          |  |               | Louisville, KY    |  |  |  | 2000            | 
|Quality Inn Dothan                                        |                         |        | 102    |          |  |               | Dothan, AL        |  |  |  | 1996            | 
|                                                          |                         |        |        |          |  |               |                   |  |  |  |                 | 
|                                                          | Total Choice            |        |        | 897      |  |               |                   |  |  |  |                 |  | 
|Starwood Hotels and Resorts Worldwide, Inc.
    (1 hotel) |                         |        |        |          |  |               |                   | 
|Four Points Niagara Falls(2)                              |                         |        | 189    |          |  |               | Niagara Falls, NY |  |  |  | 1999            | 
|                                                          |                         |        |        |          |  |               |                   |  |  |  |                 | 
|                                                          | Total Starwood          |        |        | 189      |  |               |                   |  |  |  |                 |  | 
|Carlson Companies (1 hotel)                               |                         |        |        |          |  |               |                   |  |  |  |                 | 
|Radisson Phoenix Hotel                                    |                         |        | 163    |          |  |               | Phoenix, AZ       |  |  |  | Being renovated | 
|                                                          |                         |        |        |          |  |               |                   |  |  |  |                 | 
|                                                          | Total Carlson           |        |        | 163      |  |               |                   |  |  |  |                 |  | 
|Non-franchised hotels (5 hotels)                          |                         |        |        |          |  |               |                   |  |  |  |                 | 
|Downtown Plaza Hotel, Cincinnati(2)                       |                         |        | 243    |          |  |               | Cincinnati, OH    |  |  |  | 1998            | 
|French Quarter Suites Memphis                             |                         |        | 105    |          |  |               | Memphis, TN       |  |  |  | 1997            | 
|The Mayfair House(2)                                      |                         |        | 179    |          |  |               | Miami, FL         |  |  |  | 2003            | 
|New Orleans Airport Plaza Hotel (82% owned)               |                         |        | 244    |          |  |               | New Orleans, LA   |  |  |  | 1996(4)         | 
|University Inn, Bloomington                               |                         |        | 186    |          |  |               | Bloomington, IN   |  |  |  | 1992            | 
|                                                          |                         |        |        |          |  |               |                   |  |  |  |                 | 
|                                                          | Total Non-franchised(5) |        |        | 957      |  |               |                   |  |  |  |                 |  | 
|                                                          |                         |        |        |          |  |               |                   |  |  |  |                 | 
|Total hotels (92 hotels)                                  |                         |        | 17,417 |          |  |               |                   |  |  |  |                 | 
|                                                          |                         |        |        |          |  |               |                   |  |  |  |                 | 



---



|    |                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------
|(1) | The existing debt for this hotel matures on
    June 30, 2004, and we have escrowed foreclosure documents
    with respect to this debt.
|(2) | These hotels are held for sale and accounted for
    in discontinued operations.                                                        
|(3) | We have entered into a voluntary termination of
    the franchise agreement for this hotel.                                             
|(4) | Renovations planned for 2004.                                                                                                           

We sold the following hotels between
January 1, 2004 and March 1, 2004:



| |   |                                       
| | - | --------------------------------------
| |  | Holiday Inn Baltimore West, MD;       
|
| |  | Holiday Inn Market Center, Dallas, TX;
|
| |  | Holiday Inn Syracuse, NY; and         
|
| |  | Holiday Inn Fort Mitchell, KY.        

10



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Fourteen of our hotels are located on land
subject to long-term leases. Generally, these leases are for
terms in excess of the depreciable lives of the building. We
also have the right of first refusal on several leases if a
third party offers to purchase the land. We pay fixed rents on
some of these leases; on others, we pay fixed rents plus
additional rents based on a percentage of revenue or cash flow.
Some of the leases are subject to periodic rate increases. The
leases generally require us to pay the cost of repairs,
insurance and real estate taxes.



| |             
| | ------------
| | Dispositions

During 2001, prior to our Chapter 11 filing,
we sold six hotels. In January 2003, in connection with our
emergence from Chapter 11, eight hotels were conveyed to a
secured lender in satisfaction of indebtedness and one hotel was
returned to the lessor of a capital lease. During 2003, we
developed a plan to reduce debt and interest costs, and to
implement a portfolio improvement strategy, in order to enhance
our future growth. Pursuant to this strategy, during 2003 and
the first two months of 2004, we sold five hotels and one office
building, and we have identified 14 hotels and three land
parcels as held for sale. As of March 1, 2004, our
portfolio consisted of 92 hotels, 78 of which are reflected
in continuing operations (including one hotel that we do not
consolidate).

|                              |                                                               |           |     |         |   |          |   |   |  |  |   |    |  
|----------------------------- | ------------------------------------------------------------- | --------- | --- | ------- | - | -------- | - | - |  |  | - | -- | -
|                              |                                                               |          
|                              |                                                               | Number of
|                              |                                                               |          
|                              |                                                               |           |     | Land    |   | Office  
|                              |                                                               | Hotels    |     | Parcels |   | Building
|                              |                                                               |           |     |         |   |         
|Operated at January 1, 2001   |                                                               |           | 112 |         |   |          | 3 |   |  |  | 1 |   
|                              | Sold during 2001                                              |           |     | (6      | ) |          |   |  |  |  |   |   |  
|                              |                                                               |           |     |         |   |          |   |   |  |  |   |   
|Operated at December 31, 2001 |                                                               |           | 106 |         |   |          | 3 |   |  |  | 1 |   
|                              | Dispositions during 2002                                      |           |     |        |   |          |   |  |  |  |   |   |  
|                              |                                                               |           |     |         |   |          |   |   |  |  |   |   
|Operated at December 31, 2002 |                                                               |           | 106 |         |   |          | 3 |   |  |  | 1 |   
|                              | Conveyed to lender in January 2003                            |           |     | (8      | ) |          |   |  |  |  |   |   |  
|                              | Returned to the lessor of a capital lease in
    January 2003 |           |     | (1      | ) |          |   |  |  |  |   |   |  
|                              | Sold in 2003                                                  |           |     | (1      | ) |          |   |  |  |  |   | (1 | )
|                              |                                                               |           |     |         |   |          |   |   |  |  |   |   
|Operated at December 31, 2003 |                                                               |           | 96  |         |   |          | 3 |   |  |  |  |   
|                              | Sold between January 1 and March 1, 2004                      |           |     | (4      | ) |          |   |  |  |  |   |   |  
|                              |                                                               |           |     |         |   |          |   |   |  |  |   |   
|Operated at March 1, 2004     |                                                               |           | 92  |         |   |          | 3 |   |  |  |  |   
|                              |                                                               |           |     |         |   |          |   |   |  |  |   |   

As previously discussed, 14 hotels and three
land parcels remain held for sale as of March 1, 2004.



| |                                            
| | -------------------------------------------
| | Hotel data by market segment and
    region

The following two tables present data on
occupancy, ADR and RevPAR for the hotels in our portfolio
(including one hotel that we do not consolidate) at
December 31, 2003, by market segment for 2003, the 2002
Combined Period and 2001. During the first two months of 2004,
we sold four of the hotels included in the following table as
part of our discontinued operations.

11



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##### Table of Contents



Figures for the 2002 Combined Period combine the
period before we emerged from Chapter 11 (January 1,
2002 to November 22, 2002) and the post-emergence period
(November 23, 2002 to December 31, 2002).



| |                                                               
| | --------------------------------------------------------------
| | Combined Continuing and Discontinued
    Operations 96 hotels

|                                 |                      |                  |   |              |  |          |   |              |   |  |   |        |   |  |   |        |  
|-------------------------------- | -------------------- | ---------------- | - | ------------ |  | -------- | - | ------------ | - |  | - | ------ | - |  | - | ------ | -
|                                 |                      |                  |   |              |  | 2002     |   |             
|                                 |                      | 2003 Capital     |   | December 31, |  | Combined |   | December 31,
|                                 |                      | Expenditures     |   | 2003         |  | Period   |   | 2001        
|                                 |                      |                  |   |              |  |          |   |             
|                                 |                      | ($ in thousands) |   |              |  |          |   |             
|Upper Upscale                    |                      |                  |   |              |  |          |   |              |   |  |   |        |   |  |   |       
|                                 | Number of properties |                  | $ | 13,232       |  |          |   | 4            |   |  |   | 4      |   |  |   | 4      |  
|                                 | Number of rooms      |                  |   |              |  |          |   | 825          |   |  |   | 825    |   |  |   | 825    |  
|                                 | Occupancy            |                  |   |              |  |          |   | 60.7         | % |  |   | 65.6   | % |  |   | 64.1   | %
|                                 | ADR                  |                  |   |              |  |          | $ | 90.98        |   |  | $ | 93.41  |   |  | $ | 101.92 |  
|                                 | RevPAR               |                  |   |              |  |          | $ | 55.23        |   |  | $ | 61.32  |   |  | $ | 65.36  |  
|Upscale                          |                      |                  |   |              |  |          |   |              |   |  |   |        |   |  |   |       
|                                 | Number of properties |                  |   | 2,353        |  |          |   | 18           |   |  |   | 18     |   |  |   | 19     |  
|                                 | Number of rooms      |                  |   |              |  |          |   | 3,156        |   |  |   | 3,156  |   |  |   | 3,400  |  
|                                 | Occupancy            |                  |   |              |  |          |   | 65.9         | % |  |   | 67.6   | % |  |   | 64.3   | %
|                                 | ADR                  |                  |   |              |  |          | $ | 82.78        |   |  | $ | 83.20  |   |  | $ | 86.40  |  
|                                 | RevPAR               |                  |   |              |  |          | $ | 54.54        |   |  | $ | 56.27  |   |  | $ | 55.52  |  
|Midscale with Food & Beverage    |                      |                  |   |              |  |          |   |              |   |  |   |        |   |  |   |       
|                                 | Number of properties |                  |   | 12,308       |  |          |   | 59           |   |  |   | 59     |   |  |   | 60     |  
|                                 | Number of rooms      |                  |   |              |  |          |   | 11,945       |   |  |   | 11,795 |   |  |   | 11,981 |  
|                                 | Occupancy            |                  |   |              |  |          |   | 56.3         | % |  |   | 57.4   | % |  |   | 60.1   | %
|                                 | ADR                  |                  |   |              |  |          | $ | 70.79        |   |  | $ | 70.68  |   |  | $ | 73.00  |  
|                                 | RevPAR               |                  |   |              |  |          | $ | 39.87        |   |  | $ | 40.58  |   |  | $ | 43.87  |  
|Midscale without Food & Beverage |                      |                  |   |              |  |          |   |              |   |  |   |        |   |  |   |       
|                                 | Number of properties |                  |   | 2,330        |  |          |   | 10           |   |  |   | 8      |   |  |   | 10     |  
|                                 | Number of rooms      |                  |   |              |  |          |   | 1,281        |   |  |   | 1,047  |   |  |   | 1,281  |  
|                                 | Occupancy            |                  |   |              |  |          |   | 52.9         | % |  |   | 55.7   | % |  |   | 59.6   | %
|                                 | ADR                  |                  |   |              |  |          | $ | 57.51        |   |  | $ | 55.94  |   |  | $ | 57.29  |  
|                                 | RevPAR               |                  |   |              |  |          | $ | 30.41        |   |  | $ | 31.17  |   |  | $ | 34.16  |  
|Independent Hotels               |                      |                  |   |              |  |          |   |              |   |  |   |        |   |  |   |       
|                                 | Number of properties |                  |   | 3,742        |  |          |   | 5            |   |  |   | 7      |   |  |   | 3      |  
|                                 | Number of rooms      |                  |   |              |  |          |   | 957          |   |  |   | 1,341  |   |  |   | 677    |  
|                                 | Occupancy            |                  |   |              |  |          |   | 38.2         | % |  |   | 44.6   | % |  |   | 43.9   | %
|                                 | ADR                  |                  |   |              |  |          | $ | 73.90        |   |  | $ | 73.48  |   |  | $ | 92.51  |  
|                                 | RevPAR               |                  |   |              |  |          | $ | 28.23        |   |  | $ | 32.78  |   |  | $ | 40.62  |  
|All Hotels                       |                      |                  |   |              |  |          |   |              |   |  |   |        |   |  |   |       
|                                 | Number of properties |                  |   | 33,965       |  |          |   | 96           |   |  |   | 96     |   |  |   | 96     |  
|                                 | Number of rooms      |                  |   |              |  |          |   | 18,164       |   |  |   | 18,164 |   |  |   | 18,164 |  
|                                 | Occupancy            |                  |   |              |  |          |   | 57.0         | % |  |   | 58.5   | % |  |   | 60.4   | %
|                                 | ADR                  |                  |   |              |  |          | $ | 73.41        |   |  | $ | 73.70  |   |  | $ | 76.50  |  
|                                 | RevPAR               |                  |   |              |  |          | $ | 41.83        |   |  | $ | 43.13  |   |  | $ | 46.22  |  

12



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##### Table of Contents





| |                                     
| | ------------------------------------
| | Continuing Operations 78
    hotels

|                                                          |                      |                  |       |              |  |          |   |              |   |  |   |        |   |  |   |        |  
|--------------------------------------------------------- | -------------------- | ---------------- | ----- | ------------ |  | -------- | - | ------------ | - |  | - | ------ | - |  | - | ------ | -
|                                                          |                      |                  |       |              |  | 2002     |   |             
|                                                          |                      | 2003 Capital     |       | December 31, |  | Combined |   | December 31,
|                                                          |                      | Expenditures     |       | 2003         |  | Period   |   | 2001        
|                                                          |                      |                  |       |              |  |          |   |             
|                                                          |                      | ($ in thousands) |       |              |  |          |   |             
|Upper Upscale                                             |                      |                  |       |              |  |          |   |              |   |  |   |        |   |  |   |       
|                                                          | Number of properties |                  | $     | 13,232       |  |          |   | 4            |   |  |   | 4      |   |  |   | 4      |  
|                                                          | Number of rooms      |                  |       |              |  |          |   | 825          |   |  |   | 825    |   |  |   | 825    |  
|                                                          | Occupancy            |                  |       |              |  |          |   | 60.7         | % |  |   | 65.6   | % |  |   | 64.1   | %
|                                                          | ADR                  |                  |       |              |  |          | $ | 90.98        |   |  | $ | 93.41  |   |  | $ | 101.92 |  
|                                                          | RevPAR               |                  |       |              |  |          | $ | 55.23        |   |  | $ | 61.32  |   |  | $ | 65.36  |  
|Upscale                                                   |                      |                  |       |              |  |          |   |              |   |  |   |        |   |  |   |       
|                                                          | Number of properties |                  |       | 2,323        |  |          |   | 17           |   |  |   | 17     |   |  |   | 18     |  
|                                                          | Number of rooms      |                  |       |              |  |          |   | 3,002        |   |  |   | 3,002  |   |  |   | 3,246  |  
|                                                          | Occupancy            |                  |       |              |  |          |   | 66.1         | % |  |   | 67.5   | % |  |   | 64.3   | %
|                                                          | ADR                  |                  |       |              |  |          | $ | 83.45        |   |  | $ | 83.58  |   |  | $ | 85.83  |  
|                                                          | RevPAR               |                  |       |              |  |          | $ | 55.14        |   |  | $ | 56.39  |   |  | $ | 55.18  |  
|Midscale with Food & Beverage                             |                      |                  |       |              |  |          |   |              |   |  |   |        |   |  |   |       
|                                                          | Number of properties |                  |       | 11,194       |  |          |   | 45           |   |  |   | 44     |   |  |   | 45     |  
|                                                          | Number of rooms      |                  |       |              |  |          |   | 8,919        |   |  |   | 8,526  |   |  |   | 8,712  |  
|                                                          | Occupancy            |                  |       |              |  |          |   | 59.2         | % |  |   | 61.6   | % |  |   | 63.9   | %
|                                                          | ADR                  |                  |       |              |  |          | $ | 71.57        |   |  | $ | 72.23  |   |  | $ | 74.66  |  
|                                                          | RevPAR               |                  |       |              |  |          | $ | 42.35        |   |  | $ | 44.47  |   |  | $ | 47.67  |  
|Midscale without Food & Beverage Number
    of properties |                      |                  | 2,297 |              |  |          | 9 |              |   |  | 7 |        |   |  | 9 |       
|                                                          | Number of rooms      |                  |       |              |  |          |   | 1,067        |   |  |   | 833    |   |  |   | 1,067  |  
|                                                          | Occupancy            |                  |       |              |  |          |   | 53.9         | % |  |   | 57.6   | % |  |   | 62.4   | %
|                                                          | ADR                  |                  |       |              |  |          | $ | 58.70        |   |  | $ | 56.54  |   |  | $ | 57.79  |  
|                                                          | RevPAR               |                  |       |              |  |          | $ | 31.64        |   |  | $ | 32.55  |   |  | $ | 36.07  |  
|Independent Hotels                                        |                      |                  |       |              |  |          |   |              |   |  |   |        |   |  |   |       
|                                                          | Number of properties |                  |       | 1,703        |  |          |   | 3            |   |  |   | 6      |   |  |   | 2      |  
|                                                          | Number of rooms      |                  |       |              |  |          |   | 535          |   |  |   | 1,162  |   |  |   | 498    |  
|                                                          | Occupancy            |                  |       |              |  |          |   | 41.4         | % |  |   | 44.1   | % |  |   | 39.6   | %
|                                                          | ADR                  |                  |       |              |  |          | $ | 61.98        |   |  | $ | 64.34  |   |  | $ | 65.83  |  
|                                                          | RevPAR               |                  |       |              |  |          | $ | 25.64        |   |  | $ | 28.40  |   |  | $ | 26.07  |  
|All Hotels                                                |                      |                  |       |              |  |          |   |              |   |  |   |        |   |  |   |       
|                                                          | Number of properties |                  |       | 30,749       |  |          |   | 78           |   |  |   | 78     |   |  |   | 78     |  
|                                                          | Number of rooms      |                  |       |              |  |          |   | 14,348       |   |  |   | 14,348 |   |  |   | 14,348 |  
|                                                          | Occupancy            |                  |       |              |  |          |   | 59.7         | % |  |   | 61.4   | % |  |   | 63.0   | %
|                                                          | ADR                  |                  |       |              |  |          | $ | 74.34        |   |  | $ | 74.83  |   |  | $ | 77.39  |  
|                                                          | RevPAR               |                  |       |              |  |          | $ | 44.35        |   |  | $ | 45.94  |   |  | $ | 48.77  |  

The categories in the tables above are based on
the Smith Travel Research Chain Scales and are defined as:



| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Upper Upscale: Hilton and Marriott;                                                                                                                       
|
| |  | Upscale: Courtyard by Marriott, Crowne Plaza,
    Radisson and Residence Inn by Marriott;                                                                 
|
| |  | Midscale with Food & Beverage: Clarion,
    DoubleTree, Four Points, Holiday Inn, Holiday Inn Select,
    Holiday Inn SunSpree Resort and Quality Inn; and
|
| |  | Midscale without Food & Beverage: Fairfield
    Inn by Marriott and Holiday Inn Express.                                                                  

13



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##### Table of Contents



The following two tables present data on
occupancy, ADR and RevPAR for the hotels in our portfolio
(including one hotel that we do not consolidate) at
December 31, 2003, by geographic region for 2003, the 2002
Combined Period and 2001. During the first two months of 2004,
we sold four of the hotels included in the table below in
discontinued operations.

Combined
Continuing and Discontinued Operations  96
hotels

|                 |                      |                  |   |              |  |          |   |              |   |  |   |        |   |  |   |        |  
|---------------- | -------------------- | ---------------- | - | ------------ |  | -------- | - | ------------ | - |  | - | ------ | - |  | - | ------ | -
|                 |                      |                  |   |              |  | 2002     |   |             
|                 |                      | 2003 Capital     |   | December 31, |  | Combined |   | December 31,
|                 |                      | Expenditures     |   | 2003         |  | Period   |   | 2001        
|                 |                      |                  |   |              |  |          |   |             
|                 |                      | ($ in thousands) |   |              |  |          |   |             
|Northeast Region |                      |                  |   |              |  |          |   |              |   |  |   |        |   |  |   |       
|                 | Number of properties |                  | $ | 7,556        |  |          |   | 37           |   |  |   | 37     |   |  |   | 37     |  
|                 | Number of rooms      |                  |   |              |  |          |   | 7,009        |   |  |   | 7,009  |   |  |   | 7,009  |  
|                 | Occupancy            |                  |   |              |  |          |   | 60.3         | % |  |   | 61.8   | % |  |   | 61.7   | %
|                 | ADR                  |                  |   |              |  |          | $ | 79.56        |   |  | $ | 77.92  |   |  | $ | 80.82  |  
|                 | RevPAR               |                  |   |              |  |          | $ | 47.95        |   |  | $ | 48.16  |   |  | $ | 49.87  |  
|Southeast Region |                      |                  |   |              |  |          |   |              |   |  |   |        |   |  |   |       
|                 | Number of properties |                  |   | 9,273        |  |          |   | 33           |   |  |   | 33     |   |  |   | 33     |  
|                 | Number of rooms      |                  |   |              |  |          |   | 5,695        |   |  |   | 5,695  |   |  |   | 5,695  |  
|                 | Occupancy            |                  |   |              |  |          |   | 55.2         | % |  |   | 55.8   | % |  |   | 57.9   | %
|                 | ADR                  |                  |   |              |  |          | $ | 67.02        |   |  | $ | 67.93  |   |  | $ | 69.94  |  
|                 | RevPAR               |                  |   |              |  |          | $ | 37.00        |   |  | $ | 37.91  |   |  | $ | 40.49  |  
|Midwest Region   |                      |                  |   |              |  |          |   |              |   |  |   |        |   |  |   |       
|                 | Number of properties |                  |   | 11,890       |  |          |   | 19           |   |  |   | 19     |   |  |   | 19     |  
|                 | Number of rooms      |                  |   |              |  |          |   | 4,141        |   |  |   | 4,141  |   |  |   | 4,141  |  
|                 | Occupancy            |                  |   |              |  |          |   | 52.0         | % |  |   | 54.9   | % |  |   | 59.7   | %
|                 | ADR                  |                  |   |              |  |          | $ | 69.05        |   |  | $ | 71.44  |   |  | $ | 74.72  |  
|                 | RevPAR               |                  |   |              |  |          | $ | 35.91        |   |  | $ | 39.23  |   |  | $ | 44.60  |  
|West Region      |                      |                  |   |              |  |          |   |              |   |  |   |        |   |  |   |       
|                 | Number of properties |                  |   | 5,246        |  |          |   | 7            |   |  |   | 7      |   |  |   | 7      |  
|                 | Number of rooms      |                  |   |              |  |          |   | 1,319        |   |  |   | 1,319  |   |  |   | 1,319  |  
|                 | Occupancy            |                  |   |              |  |          |   | 62.8         | % |  |   | 64.0   | % |  |   | 66.8   | %
|                 | ADR                  |                  |   |              |  |          | $ | 77.69        |   |  | $ | 79.92  |   |  | $ | 84.83  |  
|                 | RevPAR               |                  |   |              |  |          | $ | 48.79        |   |  | $ | 51.12  |   |  | $ | 56.68  |  
|All Hotels       |                      |                  |   |              |  |          |   |              |   |  |   |        |   |  |   |       
|                 | Number of properties |                  |   | 33,965       |  |          |   | 96           |   |  |   | 96     |   |  |   | 96     |  
|                 | Number of rooms      |                  |   |              |  |          |   | 18,164       |   |  |   | 18,164 |   |  |   | 18,164 |  
|                 | Occupancy            |                  |   |              |  |          |   | 57.0         | % |  |   | 58.5   | % |  |   | 60.4   | %
|                 | ADR                  |                  |   |              |  |          | $ | 73.41        |   |  | $ | 73.70  |   |  | $ | 76.50  |  
|                 | RevPAR               |                  |   |              |  |          | $ | 41.83        |   |  | $ | 43.13  |   |  | $ | 46.22  |  

14



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##### Table of Contents



Continuing
Operations  78 hotels

|                 |                      |                  |   |              |  |          |   |              |   |  |   |        |   |  |   |        |  
|---------------- | -------------------- | ---------------- | - | ------------ |  | -------- | - | ------------ | - |  | - | ------ | - |  | - | ------ | -
|                 |                      |                  |   |              |  | 2002     |   |             
|                 |                      | 2003 Capital     |   | December 31, |  | Combined |   | December 31,
|                 |                      | Expenditures     |   | 2003         |  | Period   |   | 2001        
|                 |                      |                  |   |              |  |          |   |             
|                 |                      | ($ in thousands) |   |              |  |          |   |             
|Northeast Region |                      |                  |   |              |  |          |   |              |   |  |   |        |   |  |   |       
|                 | Number of properties |                  | $ | 7,007        |  |          |   | 28           |   |  |   | 28     |   |  |   | 28     |  
|                 | Number of rooms      |                  |   |              |  |          |   | 5,154        |   |  |   | 5,154  |   |  |   | 5,154  |  
|                 | Occupancy            |                  |   |              |  |          |   | 64.3         | % |  |   | 66.3   | % |  |   | 66.2   | %
|                 | ADR                  |                  |   |              |  |          | $ | 81.76        |   |  | $ | 81.09  |   |  | $ | 84.12  |  
|                 | RevPAR               |                  |   |              |  |          | $ | 52.57        |   |  | $ | 53.76  |   |  | $ | 55.66  |  
|Southeast Region |                      |                  |   |              |  |          |   |              |   |  |   |        |   |  |   |       
|                 | Number of properties |                  |   | 7,033        |  |          |   | 27           |   |  |   | 27     |   |  |   | 27     |  
|                 | Number of rooms      |                  |   |              |  |          |   | 4,612        |   |  |   | 4,612  |   |  |   | 4,612  |  
|                 | Occupancy            |                  |   |              |  |          |   | 56.8         | % |  |   | 57.8   | % |  |   | 60.0   | %
|                 | ADR                  |                  |   |              |  |          | $ | 67.12        |   |  | $ | 67.42  |   |  | $ | 68.46  |  
|                 | RevPAR               |                  |   |              |  |          | $ | 38.15        |   |  | $ | 38.96  |   |  | $ | 41.08  |  
|Midwest Region   |                      |                  |   |              |  |          |   |              |   |  |   |        |   |  |   |       
|                 | Number of properties |                  |   | 11,463       |  |          |   | 16           |   |  |   | 16     |   |  |   | 16     |  
|                 | Number of rooms      |                  |   |              |  |          |   | 3,263        |   |  |   | 3,263  |   |  |   | 3,263  |  
|                 | Occupancy            |                  |   |              |  |          |   | 55.0         | % |  |   | 57.7   | % |  |   | 60.7   | %
|                 | ADR                  |                  |   |              |  |          | $ | 69.67        |   |  | $ | 71.67  |   |  | $ | 75.01  |  
|                 | RevPAR               |                  |   |              |  |          | $ | 38.33        |   |  | $ | 41.35  |   |  | $ | 45.57  |  
|West Region      |                      |                  |   |              |  |          |   |              |   |  |   |        |   |  |   |       
|                 | Number of properties |                  |   | 5,246        |  |          |   | 7            |   |  |   | 7      |   |  |   | 7      |  
|                 | Number of rooms      |                  |   |              |  |          |   | 1,319        |   |  |   | 1,319  |   |  |   | 1,319  |  
|                 | Occupancy            |                  |   |              |  |          |   | 62.8         | % |  |   | 64.0   | % |  |   | 66.8   | %
|                 | ADR                  |                  |   |              |  |          | $ | 77.69        |   |  | $ | 79.92  |   |  | $ | 84.83  |  
|                 | RevPAR               |                  |   |              |  |          | $ | 48.79        |   |  | $ | 51.12  |   |  | $ | 56.68  |  
|All Hotels       |                      |                  |   |              |  |          |   |              |   |  |   |        |   |  |   |       
|                 | Number of properties |                  |   | 30,749       |  |          |   | 78           |   |  |   | 78     |   |  |   | 78     |  
|                 | Number of rooms      |                  |   |              |  |          |   | 14,348       |   |  |   | 14,348 |   |  |   | 14,348 |  
|                 | Occupancy            |                  |   |              |  |          |   | 59.7         | % |  |   | 61.4   | % |  |   | 63.0   | %
|                 | ADR                  |                  |   |              |  |          | $ | 74.34        |   |  | $ | 74.83  |   |  | $ | 77.39  |  
|                 | RevPAR               |                  |   |              |  |          | $ | 44.35        |   |  | $ | 45.94  |   |  | $ | 48.77  |  

The regions in the table above are defined as:



| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | Northeast: Canada, Connecticut, Massachusetts,
    Maryland, New Hampshire, New York, Ohio, Pennsylvania, Vermont,
    West Virginia;
|
| |  | Southeast: Alabama, Florida, Georgia, Kentucky,
    Louisiana, South Carolina, Tennessee;                                            
|
| |  | Midwest: Arkansas, Iowa, Illinois, Indiana,
    Kansas, Michigan, Minnesota, Missouri, Oklahoma, Texas; and                          
|
| |  | West: Arizona, California, Colorado, New Mexico.                                                                                     

15



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##### Table of Contents





| |                   
| | ------------------
| | Hotel Encumbrances

All of our hotels are pledged as collateral to
secure long-term debt. The following table summarizes the book
values of our hotel assets (except for one hotel that we do not
consolidate) along with the related long-term debt (including
current portion) which they collateralize as of
December 31, 2003. Book value means the value
at which the asset is reflected in our consolidated financial
statements. Financial statement book values are presented in
accordance with U.S. generally accepted accounting principles
(GAAP), but do not necessarily represent fair market
values.

|                                                                  |  |           |     |                       |  |                |         |   |  |   |         |  
|----------------------------------------------------------------- |  | --------- | --- | --------------------- |  | -------------- | ------- | - |  | - | ------- | -
|                                                                  |  |           |     |                      
|                                                                  |  |           |     | December 31, 2003    
|                                                                  |  |           |     |                      
|                                                                  |  | Number    |     | Property, Plant       |  | Long-term     
|                                                                  |  | of Hotels |     | and Equipment, net(1) |  | Obligations(1)
|                                                                  |  |           |     |                       |  |               
|                                                                  |  |           |     |                      
|                                                                  |  |           |     | ($ in thousands)     
|Exit Financing                                                    |  |           |     |                       |  |                |         |   |  |   |         |  
|Merrill Lynch Mortgage Lending, Inc. 
    Senior                 |  |           |     |                       |  |                |         |   |  | $ | 216,052 |  
|Merrill Lynch Mortgage Lending, Inc. 
    Mezzanine              |  |           |     |                       |  |                |         |   |  |   | 83,281  |  
|                                                                  |  |           |     |                       |  |                |         |   |  |   |         |  
|Merrill Lynch Mortgage Lending, Inc. 
    Total                  |  |           | 56  |                       |  | $              | 401,793 |   |  |   | 299,333 |  
|Computershare Trust Company of Canada                             |  |           | 1   |                       |  |                | 14,106  |   |  |   | 7,521   |  
|Lehman Financing                                                  |  |           |     |                       |  |                |         |   |  |   |         |  
|Lehman Brothers Holdings, Inc.                                    |  |           | 17  |                       |  |                | 69,539  |   |  |   | 76,449  |  
|Other Financings                                                  |  |           |     |                       |  |                |         |   |  |   |         |  
|Column Financial, Inc.                                            |  |           | 9   |                       |  |                | 61,681  |   |  |   | 27,300  |  
|Lehman Brothers Holdings, Inc.                                    |  |           | 5   |                       |  |                | 38,125  |   |  |   | 23,409  |  
|JP Morgan Chase Bank                                              |  |           | 2   |                       |  |                | 8,913   |   |  |   | 10,644  |  
|DDL Kinser                                                        |  |           | 1   |                       |  |                | 3,188   |   |  |   | 2,385   |  
|First Union Bank                                                  |  |           | 1   |                       |  |                | 4,297   |   |  |   | 3,359   |  
|Column Financial, Inc.                                            |  |           | 1   |                       |  |                | 6,491   |   |  |   | 8,943   |  
|Column Financial, Inc.                                            |  |           | 1   |                       |  |                | 6,120   |   |  |   | 3,206   |  
|Robb Evans, Trustee                                               |  |           | 1   |                       |  |                | 6,365   |   |  |   | 6,982   |  
|                                                                  |  |           |     |                       |  |                |         |   |  |   |         |  
|Total  Other Financings                                          |  |           | 21  |                       |  |                | 135,180 |   |  |   | 86,228  |  
|                                                                  |  |           |     |                       |  |                |         |   |  |   |         |  
|                                                                  |  |           | 95  |                       |  |                | 620,618 |   |  |   | 469,531 |  
|Long-term debt  other                                            |  |           |     |                       |  |                |         |   |  |   |         |  
|Deferred interest  long-term                                     |  |           |    |                       |  |                |        |   |  |   | 4,337   |  
|Deferred rent on a long-term ground lease                         |  |           |    |                       |  |                |        |   |  |   | 2,506   |  
|Tax notes issued pursuant to our Joint Plan of
    Reorganization |  |           |    |                       |  |                |        |   |  |   | 1,957   |  
|Other                                                             |  |           |    |                       |  |                |        |   |  |   | 551     |  
|                                                                  |  |           |     |                       |  |                |         |   |  |   |         |  
|                                                                  |  |           |    |                       |  |                |        |   |  |   | 9,351   |  
|                                                                  |  |           |     |                       |  |                |         |   |  |   |         |  
|Property, plant and equipment  other                             |  |           |    |                       |  |                | 4,824   |   |  |   |        |  
|                                                                  |  |           |     |                       |  |                |         |   |  |   |         |  
|                                                                  |  |           | 95  |                       |  |                | 625,442 |   |  |   | 478,882 |  
|Held for sale                                                     |  |           | (18 | )                     |  |                | (61,624 | ) |  |   | (53,204 | )
|                                                                  |  |           |     |                       |  |                |         |   |  |   |         |  
|Total December 31, 2003                                           |  |           | 77  |                       |  | $              | 563,818 |   |  | $ | 425,678 |  
|                                                                  |  |           |     |                       |  |                |         |   |  |   |         |  



---



|    |                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excluded are long-term obligations and property,
    plant and equipment of one hotel in which we have a
    non-controlling equity interest and do not consolidate.

16



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##### Table of Contents



Insurance

We maintain the following types of insurance:



| |   |                                                 
| | - | ------------------------------------------------
| |  | general liability;                              
|
| |  | property damage;                                
|
| |  | directors and officers liability;             
|
| |  | liquor liability;                               
|
| |  | workers compensation;                          
|
| |  | fiduciary liability;                            
|
| |  | business automobile; and                        
|
| |  | environmental insurance (on certain properties).

We are self-insured up to certain amounts with
respect to our insurance coverages. We establish liabilities for
these self-insured obligations annually, based on actuarial
valuations and our history of claims. If these claims exceed our
estimates, our future financial condition and results of
operations would be adversely affected. As of December 31,
2003, we had an accrued balance of approximately
$10 million for these expenses.

There are other types of losses for which we
cannot obtain insurance at all or at a reasonable cost,
including losses caused by acts of war. If an uninsured loss or
a loss that exceeds our insurance limits were to occur, we could
lose both the revenues generated from the affected hotel and the
capital that we have invested. We also could be liable for any
outstanding mortgage indebtedness or other obligations related
to the hotel. Any such loss could materially and adversely
affect our financial condition and results of operations.

We believe that we maintain sufficient insurance
coverage for the operation of our business.

Regulation

Our hotels are subject to certain federal, state
and local regulations which require us to obtain and maintain
various licenses and permits. These licenses and permits must be
periodically renewed and may be revoked or suspended for cause
at any time.

Occupancy licenses are obtained prior to the
opening of a hotel and may require renewal if there has been a
major renovation. The loss of the occupancy license for any of
the larger hotels in our portfolio could have a material adverse
effect on our financial condition and results of operations.
Liquor licenses are required for hotels to be able to serve
alcoholic beverages and are generally renewable annually. We
believe that the loss of a liquor license for an individual
hotel would not have a material effect on our financial
condition and results of operations. We are not aware of any
reason why we should not be in a position to maintain our
licenses.

We are subject to certain federal and state labor
laws and regulations such as minimum wage requirements,
regulations relating to working conditions, laws restricting the
employment of illegal aliens, and the Americans with
Disabilities Act. As a provider of restaurant services, we are
subject to certain federal, state and local health laws and
regulations. We believe that we comply in all material respects
with these laws and regulations. We are also subject in certain
states to dramshop statutes, which may give an injured person
the right to recover damages from us if we wrongfully serve
alcoholic beverages to an intoxicated person who causes an
injury. We believe that our insurance coverage relating to
contingent losses in these areas is adequate.

Our hotels also are subject to environmental
regulations under federal, state and local laws. These
environmental regulations have not had a material adverse effect
on our operations. However, such regulations potentially impose
liability on property owners for cleanup costs for hazardous
waste contamination. If material hazardous waste contamination
problems exist on any of our properties, we would be exposed to
liability for the costs associated with the cleanup of those
sites.

17



---



##### Table of Contents



Employees

At December 31, 2003, we had 4,467 full-time
and 2,523 part-time employees. We had 125 full-time employees
engaged in administrative and executive activities. The balance
of our employees manage, operate and maintain our properties. At
December 31, 2003, 729 of our full and part-time employees
located at eight hotels were covered by collective bargaining
agreements. These agreements expire between 2004 and 2006,
except for three agreements covering approximately 200 employees
which have expired and are currently being renegotiated. We
consider relations with our employees to be satisfactory.

Legal Proceedings



| |                       
| | ----------------------
| | Bankruptcy Proceedings

On December 20, 2001, Lodgian and
substantially all of our subsidiaries that owned hotels filed
for voluntary reorganization under Chapter 11 of the Bankruptcy
Code in the Southern District of New York. At the time of the
filing, our portfolio included 106 hotels.

Less than one year after filing for bankruptcy,
on November 5, 2002, the Bankruptcy Court confirmed the
First Amended Joint Plan of Reorganization (Joint Plan of
Reorganization) and, on November 25, 2002, Lodgian and our
subsidiaries owning 78 of our hotels emerged from Chapter 11.
Pursuant to the terms of the Joint Plan of Reorganization, eight
of our wholly-owned hotels were conveyed to a lender in
satisfaction of outstanding debt obligations and one hotel was
transferred to the lessor of a capital lease secured by the
property in January 2003.

Pursuant to the Joint Plan of Reorganization, the
following significant events took effect upon our emergence from
reorganization proceedings:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 5,000,000 shares of manditorily redeemable 12.25%
    cumulative Series A Preferred Stock (Preferred
    Stock), par value $0.01, initial liquidation value $25 per
    share, were issued or reserved for issuance in satisfaction of
    outstanding debt and other obligations;                                                                                                                                              
|
| |  | 7,000,000 shares of common stock, par value $0.01
    per share, were issued or reserved for issuance in satisfaction
    of outstanding debt and other obligations;                                                                                                                                                                                                                                                              
|
| |  | Class A warrants to purchase an aggregate of
    1,510,638 shares of common stock at $18.29 per share were made
    available for issuance in satisfaction of outstanding debt and
    other obligations;                                                                                                                                                                                                                         
|
| |  | Class B warrants to purchase an aggregate of
    1,029,366 shares of common stock at $25.44 per share were made
    available for issuance in satisfaction of outstanding debt and
    other obligations;                                                                                                                                                                                                                         
|
| |  | Our previous equity, consisting of an aggregate
    of 28,479,837 shares, was cancelled, and in exchange our
    stockholders received their pro rata share of 207,900 shares of
    common stock, plus Class A warrants to purchase an
    aggregate of 251,823 shares of common stock and Class B
    warrants to purchase an aggregate of 778,304 shares of common
    stock;                                                  
|
| |  | Our Convertible Redeemable Equity Structured
    Trust Securities (CRESTS) were cancelled and the
    holders received their pro rata share of 868,000 shares of the
    common stock, plus Class A warrants to purchase 1,258,815
    shares of common stock and Class B warrants to purchase
    251,062 shares of common stock;                                                                                              
|
| |  | Our 12.25% Senior Subordinated Notes were
    cancelled and the holders of the notes received their pro rata
    share of 4,690,600 shares of Preferred Stock and 5,557,511
    shares of common stock;                                                                                                                                                                                                                           
|
| |  | The holders of allowed general unsecured claims
    became entitled to 309,400 shares of Preferred Stock and 366,589
    shares of common stock, referred to as the disputed claims
    reserve. Until distributed, these shares are part of the
    disputed claims reserve for the pre-bankruptcy petition general
    unsecured creditors. These shares are periodically distributed
    as the disputed claims are resolved;
|
| |  | We closed on $302.7 million of exit
    financing arrangements with Merrill Lynch Mortgage Lending, Inc.
    (Merrill Lynch Mortgage) which was used to repay
    previous debt obligations, fund payments of                                                                                                                                                                                                                   

18



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | certain allowed claims and fund portions of
    certain required cash escrows. These financings were secured by
    56 (54 as of March 1, 2004) of our hotels;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | We closed on a $6.3 million exit financing
    arrangement with Computershare Trust Company of Canada, secured
    by one of our hotels;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Loans from lenders approximating
    $86.0 million, secured by 21 of our hotels, were reinstated
    on their previous terms, except for the extension of certain
    maturities and, in the case of one loan, a new interest rate; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | In accordance with AICPA, Statement of Position
    90-7, Financial Reporting by Entities in Reorganization Under
    the Bankruptcy Code, we implemented fresh start reporting
    effective November 22, 2002 (the date on which the exit
    financing agreement was signed). As a result, our assets and
    liabilities have been recorded based on the fair values. Our
    consolidated financial statements since our emergence from
    Chapter 11 are those of a new reporting entity (referred to
    as the successor) and are not comparable with our
    financial statements on or prior to the effective date of the
    Joint Plan of Reorganization (our former reporting entity is
    referred to as the predecessor).

Eighteen additional hotels previously owned by
two subsidiaries, Impac Hotels II, L.L.C. and Impac
Hotels III, L.L.C., were not part of the Joint Plan of
Reorganization. On April 24, 2003, the Bankruptcy Court
confirmed a plan of reorganization relating to these 18 hotels
(the Impac Plan of Reorganization). These 18 hotels
remained in Chapter 11 until May 22, 2003, the date on
which we finalized the Lehman Financing. We used the proceeds
from our financing (the Lehman Financing) with The
Lehman Brothers Holdings, Inc. (Lehman) primarily to
satisfy the remaining amounts due to the lender of the debt
secured by these hotels. The Impac Plan of Reorganization also
provided for a pool of funds of approximately $0.3 million
to be paid in cash to the general unsecured creditors of the 18
hotels.



| |                 
| | ----------------
| | Other Litigation

From time to time, as we conduct our business,
legal actions and claims are brought against us. The outcome of
these matters is uncertain. However, we believe that all
currently pending matters will be resolved without a material
adverse effect on our results of operations or financial
condition. Claims relating to the period before we filed for
Chapter 11 are limited to the amounts approved by the
Bankruptcy Court for settlement of such claims and are payable
out of the disputed claims reserves, which, in the case of the
Joint Plan of Reorganization, consists of our securities, and in
the case of the Impac Plan of Reorganization, consists of
$0.3 million of cash. We have reserved for all claims
approved by the Bankruptcy Court that have not yet been paid.

SEC Filings and financial
information

This Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and amendments
to those reports are available free of charge on our website
(www.Lodgian.com) as soon as practicable after they are
submitted to the Securities and Exchange Commission
(SEC).

You may read and copy any materials the Company
files with the SEC at the SECs Public Reference Room at
450 Fifth Street, NW, Washington, DC 20549. You may
obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet site (http://www.sec.gov) that contains reports, proxy
and information statements, and other information about us.

Financial information about our revenues and
expenses for the last three fiscal years and assets and
liabilities for the last two years may be found in the
Consolidated Financial Statements.

19



---



##### Table of Contents








|        |           
|------- | ----------
|Item 2. | Properties

The information required to be presented in this
section is presented in ITEM 1. Business.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

The information required to be presented in this
section is presented in ITEM 1. Business.






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

No matters were submitted to a vote of security
holders during the fourth quarter of 2003.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Historical Data

On November 25, 2002, the date on which the
first of the two plans of reorganization became effective,
28,479,837 outstanding shares of our old common stock were
cancelled and 7,000,000 shares of new common stock were issued
or reserved for issuance. New preferred stock totaling 5,000,000
shares also became available for issuance. The table below
summarizes the activity on our common and preferred stock
between emergence from Chapter 11 and December 31,
2003:

|                                                                           |  |        |           |           |  |  |           | 
|-------------------------------------------------------------------------- |  | ------ | --------- | --------- |  |  | --------- | 
|                                                                           |  | Common |           | Preferred
|                                                                           |  |        |           |          
|Shares issued in connection with the plans of
    reorganization           |  |        | 6,830,004 |           |  |  | 4,857,249 | 
|Shares reserved for distribution to the general
    unsecured creditors    |  |        | 169,996   |           |  |  | 142,751   | 
|                                                                           |  |        |           |           |  |  |           | 
|                                                                           |  |        | 7,000,000 |           |  |  | 5,000,000 | 
|Stock options exercised                                                    |  |        | 774       |           |  |  |          | 
|                                                                           |  |        |           |           |  |  |           | 
|                                                                           |  |        | 7,000,774 |           |  |  | 5,000,000 | 
|Dividends paid in shares                                                   |  |        |          |           |  |  | 594,299   | 
|Dividends reserved for distribution to the
    general unsecured creditors |  |        |          |           |  |  | 17,461    | 
|                                                                           |  |        |           |           |  |  |           | 
|                                                                           |  |        | 7,000,774 |           |  |  | 5,611,760 | 
|                                                                           |  |        |           |           |  |  |           | 

Prior to November 21, 2001, our common stock
traded on the New York Stock Exchange under the symbol
LOD. Subsequent to November 21, 2001, our
common stock traded on the Over-the-Counter Bulletin Board under
the trading symbol LODN.OB. Subsequent to
November 25, 2002, the common stock traded on the
Over-the-Counter Bulletin Board under the symbol
LDGIV.OB until January 28, 2003 when it began
trading on the American Stock Exchange under the symbol
LGN. The following table sets forth, where
applicable, the high and low closing prices of our common stock
on a quarterly basis commencing on November 26, 2002.

|                                                  |  |      |      |     |  |   |      |  
|------------------------------------------------- |  | ---- | ---- | --- |  | - | ---- | -
|                                                  |  | High |      | Low
|                                                  |  |      |      |    
|2002                                              |  |      |      |     |  |   |      |  
|Period November 26, 2002 to
    December 31, 2002 |  |      | (1   | )   |  |   | (1   | )
|                                                 
|2003                                              |  |      |      |     |  |   |      |  
|First Quarter (from January 28, 2003)             |  | $    | 5.25 |     |  | $ | 2.95 |  
|Second Quarter                                    |  |      | 3.41 |     |  |   | 2.57 |  
|Third Quarter                                     |  |      | 5.75 |     |  |   | 2.95 |  
|Fourth Quarter                                    |  | $    | 9.25 |     |  | $ | 5.04 |  



---



|    |                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------
|(1) | No meaningful market information relating to the
    price of our common stock was available for this period.

20



---



##### Table of Contents



The Preferred Stock also began trading on the
American Stock Exchange on January 28, 2003 under the
symbol LGN.pr.

We have not declared or paid any cash dividends
on our common stock and our board of directors does not
anticipate declaring or paying any cash dividends in the
foreseeable future. We anticipate that all of our earnings and
other cash resources, if any, will be retained to fund our
business and will be available for other strategic opportunities
that may develop. Future dividend policy will be subject to the
discretion of our board of directors, and will be contingent
upon our results of operations, financial position, cash flow,
liquidity, capital expenditure plan and requirements, general
business conditions, restrictions imposed by financing
arrangements, if any, legal and regulatory restrictions on the
payment of dividends and other factors that our board of
directors deems relevant.

The Preferred Stock issued on November 25,
2002 (the date on which the first of the two plans of
reorganization became effective) accrues dividends at the rate
of 12.25% per annum. As required by the Preferred Stock
agreement, we paid the dividend due on November 21, 2003 by
issuing additional shares of Preferred Stock, except for
fractional shares which we paid in cash. We have the option of
paying the dividends due on November 21, 2004 and
November 21, 2005 either in cash or by issuing additional
shares of Preferred Stock.

Equity Compensation Plan Information

The tables below summarize certain information
with respect to our equity compensation plan:

|                                                                |  |                      |         |                   |  |                      |      |  |  |  |         | 
|--------------------------------------------------------------- |  | -------------------- | ------- | ----------------- |  | -------------------- | ---- |  |  |  | ------- | 
|                                                                |  |                      |         |                   |  | Number of           
|                                                                |  |                      |         |                   |  | Securities Remaining
|                                                                |  | Number of            |         | Weighted-Average  |  | Available for Future
|                                                                |  | Securities to be     |         | Exercise Price of |  | Issuance under      
|                                                                |  | Issued upon Exercise |         | Outstanding       |  | Equity Compensation 
|                                                                |  | of Outstanding       |         | Options,          |  | Plans (Excluding    
|                                                                |  | Options, Warrants    |         | Warrants and      |  | Securities Reflected
|                                                                |  | and Rights           |         | Rights            |  | in Column(a))       
|                                                                |  | (a)                  |         | (b)               |  | (c)                 
|                                                                |  |                      |         |                   |  |                     
|Equity compensation plans approved by security
    holders      |  |                      |        |                   |  |                      | n/a  |  |  |  |        | 
|Equity compensation plans not approved by
    security holders* |  |                      | 673,500 |                   |  | $                    | 3.26 |  |  |  | 386,500 | 



---



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | On November 25, 2002, we adopted a new Stock
    Incentive Plan (the Stock Incentive Plan) which
    replaced the Option Plan previously in place. The Stock
    Incentive Plan was not approved, nor was it required to be
    approved, by our security holders, because it was approved by
    the Bankruptcy Court in connection with the Joint Plan of
    Reorganization approved in our Chapter 11 proceedings. A
    maximum of 1,060,000 shares of common stock (subject to
    adjustment in the event of stock splits and other similar
    events) have been reserved for issuance under the Stock
    Incentive Plan upon the exercise of stock awards granted
    thereunder.

Our board of directors has adopted, subject to
the approval of the stockholders, amendments to the Stock
Incentive Plan to increase the number of shares reserved for
issuance under such plan. See Note 2 to our consolidated
financial statements included in this Form 10-K for a
description of our Stock Incentive Plan.

As of March 1, 2004, options to purchase
470,999 shares of our common stock were outstanding and
200,000 shares of restricted stock had been awarded
pursuant to the Stock Incentive Plan. In addition, pursuant to
our employment agreement with Mr. Parrington, our Chief
Executive Officer, we have committed to grant him options to
purchase 150,000 additional shares of common stock. After taking
into account the outstanding options and shares of restricted
stock granted under the Stock Incentive Plan, as well as our
contractual commitment to Mr. Parrington, we have
237,500 shares of common stock available for grant under
the Stock Incentive Plan.

21



---



##### Table of Contents



Awards made during 2003 pursuant to the Stock
Incentive Plan are summarized below:

|                           |  |                |         |      |  |                 |                  |  |  |  |           | 
|-------------------------- |  | -------------- | ------- | ---- |  | --------------- | ---------------- |  |  |  | --------- | 
|                           |  |                |         |      |  | Available for  
|                           |  | Issues Under   |         |      |  | Issuance       
|                           |  | the Stock      |         |      |  | Under the Stock
|                           |  | Incentive Plan |         | Type |  | Incentive Plan 
|                           |  |                |         |      |  |                
|Total, December 31, 2002   |  |                |        |      |  |                 |                  |  |  |  | 1,060,000 | 
|Issued  July 15, 2003     |  |                | 100,000 |      |  |                 | stock option     |  |  |  | 960,000   | 
|Issued  July 15, 2003     |  |                | 200,000 |      |  |                 | restricted stock |  |  |  | 760,000   | 
|Issued  September 5, 2003 |  |                | 352,000 |      |  |                 | stock option     |  |  |  | 408,000   | 
|Issued  October 13, 2003  |  |                | 21,500  |      |  |                 | stock option     |  |  |  | 386,500   | 
|                           |  |                |         |      |  |                 |                  |  |  |  |           | 
|Total, December 31, 2003   |  |                | 673,500 |      |  |                 |                  |  |  |  |           | 
|                           |  |                |         |      |  |                 |                  |  |  |  |           | 






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

Selected Consolidated Financial Data

We present, in the table below, selected
financial data derived from our historical financial statements
for the five years ended December 31, 2003. On
November 22, 2002, in connection with our emergence from
Chapter 11 and in accordance with generally accepted
accounting principles, we restated our assets and liabilities to
reflect their fair values referred to as fresh start reporting.
As a result, our financial statements for the period subsequent
to November 22, 2002 are those of a new reporting entity,
and are not comparable with the financial statements for the
period prior to November 22, 2002. For this reason, we use
the term successor when we refer to periods
subsequent to November 22, 2002 and the term
predecessor when we refer to the periods prior to
November 22, 2002.

In addition, in accordance with generally
accepted accounting principles, our results of operations
distinguish between the results of operations of those
properties which we plan to retain in our portfolio for the
foreseeable future, referred to as continuing operations, and
the results of operations of those properties which have been
sold or have been identified for sale, referred to as
discontinued operations.

You should read the financial data below in
conjunction with ITEM 7. Managements Discussion
and Analysis of Financial Condition and Results of
Operations and Item 8. Financial Statements and
Supplementary Data included in this Form 10-K.

The financial data were extracted from the
audited financials as of December 31, 2003 and 2002 and for
the year ended December 31, 2003, the period
November 23, 2002 to December 31, 2002, the period
January 1, 2002 to November 22, 2002, and the year
ended December 31, 2001 included in this Form 10-K.

|                                                      |  |                                       |         |                 |  |               |        |      |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |  
|----------------------------------------------------- |  | ------------------------------------- | ------- | --------------- |  | ------------- | ------ | ---- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                      |  |                                      
|                                                      |  | (In thousands, except per share data)
|                                                      |  |                                       |         |                
|                                                      |  | Successor                             |         | Predecessor    
|                                                      |  |                                       |         |                
|                                                      |  |                                       |         | November 23, to |  | January 1, to |        |     
|                                                      |  |                                       |         | December 31,    |  | November 22,  |        |     
|                                                      |  | 2003                                  |         | 2002            |  | 2002          |        | 2001 |  | 2000 |         | 1999
|                                                      |  |                                       |         |                 |  |               |        |      |  |      |         |     
|Income statement data:                                |  |                                       |         |                 |  |               |        |      |  |      |         |      |  |   |         |   |  |   |         |   |  |   |         |  
|Revenues  continuing operations                      |  | $                                     | 311,414 |                 |  | $             | 25,306 |      |  | $    | 299,267 |      |  | $ | 351,072 |   |  | $ | 370,561 |   |  | $ | 363,953 |  
|Revenues  discontinued operations                    |  |                                       | 61,137  |                 |  |               | 6,441  |      |  |      | 78,757  |      |  |   | 96,484  |   |  |   | 210,336 |   |  |   | 228,467 |  
|Revenues  continuing and discontinued
    operations |  |                                       | 372,551 |                 |  |               | 31,747 |      |  |      | 378,024 |      |  |   | 447,556 |   |  |   | 580,897 |   |  |   | 592,420 |  
|(Loss) income  continuing operations                 |  |                                       | (27,074 | )               |  |               | (6,745 | )    |  |      | 16,999  |      |  |   | (87,537 | ) |  |   | (46,523 | ) |  |   | (51,123 | )
|Loss  discontinued operations                        |  |                                       | (4,603  | )               |  |               | (2,581 | )    |  |      | (4,633  | )    |  |   | (55,227 | ) |  |   | (41,432 | ) |  |   | (9,570  | )

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|                                                                                                         |                                                    |                                       |         |                 |   |               |         |       |   |      |         |       |   |   |          |       |   |   |           |       |   |   |           |       |  
|-------------------------------------------------------------------------------------------------------- | -------------------------------------------------- | ------------------------------------- | ------- | --------------- | - | ------------- | ------- | ----- | - | ---- | ------- | ----- | - | - | -------- | ----- | - | - | --------- | ----- | - | - | --------- | ----- | -
|                                                                                                         |                                                    |                                      
|                                                                                                         |                                                    | (In thousands, except per share data)
|                                                                                                         |                                                    |                                       |         |                
|                                                                                                         |                                                    | Successor                             |         | Predecessor    
|                                                                                                         |                                                    |                                       |         |                
|                                                                                                         |                                                    |                                       |         | November 23, to |   | January 1, to |         |      
|                                                                                                         |                                                    |                                       |         | December 31,    |   | November 22,  |         |      
|                                                                                                         |                                                    | 2003                                  |         | 2002            |   | 2002          |         | 2001  |   | 2000 |         | 1999 
|                                                                                                         |                                                    |                                       |         |                 |   |               |         |       |   |      |         |      
|Net (loss) income                                                                                        |                                                    |                                       | (31,677 | )               |   |               | (9,326  | )     |   |      | 12,366  |       |   |   | (142,764 | )     |   |   | (87,955   | )     |   |   | (60,693   | )    
|Net (loss) income attributable to common
    stock                                                       |                                                    |                                       | (39,271 | )               |   |               | (10,836 | )     |   |      | 12,366  |       |   |   | (142,764 | )     |   |   | (87,955   | )     |   |   | (60,693   | )    
|(Loss) income from continuing operations
    attributable to common stock before discontinued operations |                                                    |                                       | (34,668 | )               |   |               | (8,255  | )     |   |      | 16,999  |       |   |   | (87,537  | )     |   |   | (46,523   | )     |   |   | (51,123   | )    
|Earnings per common share, basic and diluted:                                                            |                                                    |                                       |         |                 |   |               |         |       |   |      |         |       |   |   |          |       |   |   |           |       |   |   |           |      
|                                                                                                         | (Loss) income  continuing operations              |                                       |         | (3.87           | ) |               |         | (0.96 | ) |      |         | 0.60  |   |   |          | (3.09 | ) |   |           | (1.65 | ) |   |           | (1.88 | )
|                                                                                                         | Loss  discontinued operations, net of
    taxes   |                                       |         | (0.66           | ) |               |         | (0.37 | ) |      |         | (0.17 | ) |   |          | (1.95 | ) |   |           | (1.47 | ) |   |           | (0.35 | )
|                                                                                                         | Net (loss) income                                  |                                       |         | (4.53           | ) |               |         | (1.33 | ) |      |         | 0.43  |   |   |          | (5.04 | ) |   |           | (3.12 | ) |   |           | (2.23 | )
|                                                                                                         | Net (loss) income attributable to common
    stock |                                       |         | (5.61           | ) |               |         | (1.55 | ) |      |         | 0.43  |   |   |          | (5.04 | ) |   |           | (3.12 | ) |   |           | (2.23 | )
|(Loss) income from continuing operations
    attributable to common stock before discontinued operations |                                                    |                                       | (4.95   | )               |   |               | (1.18   | )     |   |      | 0.60    |       |   |   | (3.09    | )     |   |   | (1.65     | )     |   |   | (1.88     | )    
|Basic and diluted weighted average shares(1)                                                             |                                                    |                                       | 7,000   |                 |   |               | 7,000   |       |   |      | 28,480  |       |   |   | 28,350   |       |   |   | 28,186    |       |   |   | 27,222    |      
|Balance sheet data (at period end):                                                                      |                                                    |                                       |         |                 |   |               |         |       |   |      |         |       |   |   |          |       |   |   |           |       |   |   |           |      
|Total assets                                                                                             |                                                    | $                                     | 709,174 |                 |   | $             | 762,164 |       |   | $    | 967,131 |       |   | $ | 975,362  |       |   | $ | 1,160,344 |       |   | $ | 1,421,996 |      
|Assets held for sale                                                                                     |                                                    |                                       | 68,567  |                 |   |               |        |       |   |      |        |       |   |   |         |       |   |   |          |       |   |   |          |      
|Long-term debt(2)                                                                                        |                                                    |                                       | 551,292 |                 |   |               | 389,752 |       |   |      | 7,215   |       |   |   | 7,652    |       |   |   | 674,038   |       |   |   | 856,675   |      
|Liabilities related to assets held for sale                                                              |                                                    |                                       | 57,948  |                 |   |               |        |       |   |      |        |       |   |   |         |       |   |   |          |       |   |   |          |      
|Liabilities subject to compromise(2)                                                                     |                                                    |                                       |        |                 |   |               | 93,816  |       |   |      | 926,387 |       |   |   | 925,894  |       |   |   |          |       |   |   |          |      
|Mandatorily redeemable 12.25% cumulative
    Series A preferred stock(3)                                 |                                                    |                                       |        |                 |   |               | 126,510 |       |   |      |        |       |   |   |         |       |   |   |          |       |   |   |          |      
|Total liabilities                                                                                        |                                                    |                                       | 666,248 |                 |   |               | 553,581 |       |   |      | 990,682 |       |   |   | 982,043  |       |   |   | 1,027,067 |       |   |   | 1,197,454 |      
|Total liabilities and preferred stock                                                                    |                                                    |                                       | 666,248 |                 |   |               | 680,091 |       |   |      | 990,682 |       |   |   | 982,043  |       |   |   | 1,027,067 |       |   |   | 1,197,454 |      
|Total stockholders equity (deficit)                                                                     |                                                    |                                       | 40,606  |                 |   |               | 78,457  |       |   |      | (28,841 | )     |   |   | (6,681   | )     |   |   | 136,880   |       |   |   | 224,542   |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The number of shares in the successor period
    ended December 31, 2002, represents the new shares issued
    on the consummation of the first of the two plans of
    reorganization in November 25, 2002. The 28,479,837 old
    shares were cancelled and 7,000,000 new shares were issued.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(2) | Reported long-term debt was impacted in 2001 by
    our filing for Chapter 11. On filing for Chapter 11, all
    our debts (except the debt relating to a non-filed entity), and
    certain other liabilities were classified as liabilities subject
    to compromise. On emergence from Chapter 11, some of our
    debt was forgiven. The remaining long-term debt and other
    settled claims were reclassified out of liabilities subject to
    compromise to long-term debt (if long-term) and current
    liabilities (if short-term).                                                                                                                                                                                                                             
|(3) | The Preferred Stock was issued on
    November 25, 2002. At December 31, 2002, the Preferred
    Stock was classified between long-term debt and equity on the
    consolidated balance sheet, called the mezzanine section. In
    accordance with Statement of Financial Accounting Standards
    (SFAS) No. 150, which was effective on
    July 1, 2003, we reclassified the Preferred Stock to
    long-term debt. The Preferred Stock outstanding at
    December 31, 2003 was $142.2 million, compared to
    $126.5 million at December 31, 2002. In addition, the
    dividend for the period July 1, 2003 to December 31,
    2003, was reported in interest expense. In accordance with
    SFAS No. 150, we continued to show the dividends for
    the periods

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| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | January 1, 2003 to June 30, 2003, and
    November 23, 2002 to December 31, 2002 as deductions
    from retained earnings.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

You should read the discussion below in
conjunction with the consolidated financial statements and
accompanying notes. Also, the discussion which follows contains
forward-looking statements which involve risks and
uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a
result of various factors, including those discussed below under
Factors Which May Affect Future Results.

Executive Summary

We are one of the largest independent owners and
operators of full-service hotels in the United States in terms
of our number of guest rooms and gross annual revenues, as
reported by Hotel & Motel Management Magazine in September
2003. We are considered an independent owner and operator
because we do not operate our hotels under our own name. We
operate substantially all of our hotels under nationally
recognized brands, such as Crowne Plaza,
Holiday Inn and Marriott. As of
March 1, 2004, we operated 92 hotels with an aggregate
of 17,417 rooms, located in 30 states and Canada. Of
the 92 hotels, 78 hotels, with an aggregate of
14,348 rooms, are part of our continuing operations, while
14 hotels, with an aggregate of 3,069 rooms, are being
held for sale and classified as discontinued operations. Our
portfolio of 92 hotels consists of:



| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | 87 hotels that we wholly own and operate
    through subsidiaries;                                                                      
|
| |  | four hotels that we operate in joint ventures in
    which we have a 50% or greater voting equity interest and
    exercise control; and
|
| |  | one hotel that we operate in a joint venture in
    which we have a 30% non-controlling equity interest.                                

We consolidate all of these entities in our
financial statements, other than the one entity in which we hold
a non-controlling equity interest and for which we account under
the equity method.

On December 20, 2001, due to a number of
factors, including our heavy debt load, a lack of available
funds to maintain the quality of our hotels, a weakening
U.S. economy, and the severe decline in travel in the
aftermath of the terrorist attacks on September 11, 2001,
we filed for voluntary reorganization under Chapter 11 of
the Bankruptcy Code. At the time of the Chapter 11 filing,
our portfolio consisted of 106 hotels.

Following the consummation of our two plans of
reorganization, we emerged from Chapter 11 with
97 hotels, eight of the hotels having been conveyed to a
lender in satisfaction of outstanding debt obligations and one
having been returned to the lessor of a capital lease. Of the
portfolio of 97 hotels, 78 hotels emerged from
Chapter 11 on November 25, 2002, 18 hotels emerged
from Chapter 11 on May 22, 2003 and one hotel never
filed under Chapter 11.

In 2003, we developed a strategy of owning and
operating a portfolio of profitable, well-maintained and
appealing hotels at superior locations in strong markets. We are
implementing this strategy by:



| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | renovating and repositioning certain of our
    existing hotels to improve performance;                                        
|
| |  | divesting hotels that do not fit this strategy or
    that are unlikely to do so without significant effort or
    expense; and
|
| |  | acquiring selected hotels that better fit this
    strategy.                                                                   

In accordance with this strategy and our efforts
to reduce debt and interest costs, in 2003 we identified
19 hotels, our only office building property and three land
parcels for sale. During 2003 and the first two months of 2004,
we sold five hotels and the office building for an aggregate
sales price of $24.6 million. Of the $23.2 million
aggregate net proceeds from the sales of these assets, we used
$14.6 million to pay down debt and $8.6 million for
general corporate purposes, including capital expenditures. As a
result of these sales, as of

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March 1, 2004, our portfolio consisted of
92 hotels and three land parcels, of which 14 hotels
and the three land parcels are held for sale.


Operating Summary

Below is a summary of our results of operations,
which are presented in more detail in  Results
of Operations  Continuing Operations:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenues declined in 2003 and the 2002 Combined
    Period as a result of a lack of available funds to maintain the
    quality and competitiveness of our hotels, the weak U.S. economy
    and the severe decline in the lodging industry in the aftermath
    of the terrorist attacks of September 11, 2001. Though the
    lodging industry experienced some recovery during the second
    half of 2003, we were not able to benefit fully from the
    recovery due to deferred capital expenditures and renovation
    displacement at some of our hotels.                 
|
| |  | Operating expenses declined in 2003 and the 2002
    Combined Period primarily as a result of lower revenues. As
    revenues declined, variable expenses also fell. Operating
    expenses also declined, in part, as a result of our cost
    reduction efforts in the wake of the weak economy and lower
    revenues.                                                                                                                                                                                                                                                          
|
| |  | Interest expense declined in 2003 and the 2002
    Combined Period because we were able to reorganize our debt as
    part of the Chapter 11 proceedings. The reorganization
    resulted in lower principal amounts on some of our debt due to
    debt forgiveness, and lower interest rates on other of our debt.
    Also, during the bankruptcy proceedings, we did not pay interest
    on certain debt, as approved by the Bankruptcy Court.                                                                                                                                
|
| |  | Depreciation and amortization expense declined in
    2003 and the 2002 Combined Period due to the restatement of our
    assets to fair value as part of fresh start reporting. Since we
    are depreciating a lower asset base, our depreciation in 2003
    was significantly less than in the 2002 Combined Period.                                                                                                                                                                                                                                                           
|
| |  | During 2003, after identifying assets held for
    sale, we recorded impairment charges where the carrying values
    exceeded the estimated selling prices, net of selling costs. We
    also analyzed our assets held for use at December 31, 2003
    and recorded impairment charges, as appropriate, when the
    carrying values exceeded their undiscounted future cash flows.
    During the 2002 Combined Period, we recorded a significant write
    down of our hotels as part of our fresh start reporting. We also
    recorded significant impairment losses in 2001.

Summary of Discontinued Operations

As previously discussed, pursuant to the terms of
the plan of reorganization approved by the Bankruptcy Court on
November 5, 2002, we conveyed eight wholly-owned hotels to
the lender in satisfaction of outstanding debt obligations and
one wholly-owned hotel was returned to the lessor of a capital
lease in January 2003. The results of operations of these nine
hotels are reported in discontinued operations in our
consolidated statement of operations. Due primarily to the
application of fresh start reporting in November 2002, in which
these and other assets were adjusted to their respective fair
values, there were no gains or losses on these transactions.

In addition, pursuant to the strategy outlined
above, at December 31, 2003, 18 of our hotels and three
land parcels were held for sale and reported in discontinued
operations. Discontinued operations also include one hotel and
one office building sold in 2003. Accordingly, as of
December 31, 2003, there were 28 hotels and one office
building reported in discontinued operations. The assets held
for sale at December 31, 2003 and the liabilities related
to these assets are separately disclosed as current assets and
current liabilities, respectively, in our consolidated balance
sheet.

Where the carrying values of the assets held for
sale exceeded their estimated fair values, net of selling costs,
we reduced the carrying values and recorded impairment charges.
Fair values were determined using market prices and where the
estimated selling prices, net of selling costs, exceeded the
carrying values, no adjustments were recorded. We classify an
asset as held for sale if we expect to dispose of it within one
year

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and it satisfies the other criteria specified by
SFAS No. 144. While we believe the completion of these
dispositions is probable, the sale of these assets is subject to
market conditions and we cannot provide assurance that we will
finalize the sale of all or any of these assets on favorable
terms or at all.


Summarized below is certain financial data
related to the five hotels and one office building sold between
November 1, 2003 and March 1, 2004:

|                                                                         |  |                |        | 
|------------------------------------------------------------------------ |  | -------------- | ------ | 
|                                                                         |  | (in thousands)
|Aggregate sales price                                                    |  | $              | 24,585 | 
|Debt pay down                                                            |  |                | 14,635 | 
|Total revenues for the year ended
    December 31, 2003                  |  |                | 12,298 | 
|Total direct operating expenses for the year
    ended December 31, 2003 |  |                | 5,650  | 

The results of operations of the other
78 hotels, 77 of which we consolidate in our financial
statements and one for which we account under the equity method,
are reported in continuing operations. Our continuing operations
reflect the results of operations of those hotels which we plan
to retain in our portfolio for the foreseeable future and
exclude results of operations of those hotels held for sale.

Critical Accounting Policies and
Estimates

Our financial statements are prepared in
accordance with GAAP. As we prepare our financial statements, we
make estimates and assumptions which affect the reported amounts
of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from our estimates. A
summary of our significant accounting policies and estimates is
included in Note 1 of the notes to our consolidated
financial statements. We consider the following to be our
critical accounting policies and estimates:

Consolidation
policy All of our hotels
are owned by operating subsidiaries. We consolidate the assets,
liabilities and results of operations of those hotels where we
own at least 50% of the voting equity interest and we exercise
control. All of the subsidiaries are wholly owned except for
five joint ventures, one of which is not consolidated but is
accounted for under the equity method.

When we consolidate hotels in which we own less
than 100% of the voting equity interest, we include the assets
and liabilities of those hotels in our consolidated balance
sheet. The third party interests in the net assets of those
hotels are reported as minority interest on our consolidated
balance sheet. In addition, our consolidated statement of
operations reflects the full revenues and expenses of those
hotels and the third party portion of the net income or loss is
reported as minority interest in our consolidated statements of
operations. If the loss applicable to the minority interest
exceeds the minoritys equity, we report the entire loss in
our consolidated statement of operations.

When we account for an entity under the equity
method, we record only our share of the investment on our
consolidated balance sheet and our share of the net income or
loss in our consolidated statement of operations. We own a 30%
non-controlling equity interest in an unconsolidated joint
venture and have included our share of this investment in
other assets on our consolidated balance sheet. Our
share of the net income or loss of the unconsolidated joint
venture is shown in interest income and other in our
consolidated statements of operations. Our investment in this
entity at December 31, 2003 was $0.2 million and our
share of the loss was $20,000.

Deferral
policy We defer franchise
application fees on the acquisition or renewal of a franchise as
well as loan origination costs related to new or renewed loan
financing arrangements. Deferrals relating to the acquisition or
renewal of a franchise are amortized on a straight-line basis
over the period of the franchise agreement. We amortize deferred
financing costs over the term of the loan using the effective
interest method. The effective interest method incorporates the
present values of future cash outflows and the effective yield
on the debt in determining the amortization of loan fees. At
December 31, 2003, these deferrals totaled
$15.1 million, of which $11.6 million related to our
continuing operations. If we were to write these expenses off in
the year of payment, our operating expenses in those years would
be significantly higher.

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Asset
impairment We invest
significantly in real estate assets. Property, plant and
equipment represent approximately 80% of the total assets on our
consolidated balance sheet. Our policy on asset impairment is,
therefore, considered critical. Under GAAP, real estate assets
are stated at the lower of depreciated cost or fair value, if
deemed impaired. We periodically evaluate our real estate assets
to determine if there has been any impairment in the carrying
value. We record impairment charges if there are indicators of
impairment and the undiscounted cash flows estimated to be
generated by those assets are less than the assets
carrying values.

As part of this evaluation, and in accordance
with SFAS No. 144, we classify our properties into two
categories, assets held for sale and assets held for use.

The fair values of the assets held for sale are
based on the estimated selling prices less estimated costs to
sell. We determine the estimated selling prices in conjunction
with our real estate brokers. The estimated selling costs are
based on our experience with similar asset sales. We record
impairment charges and write-down respective hotel assets if
their carrying values exceed the estimated selling prices less
costs to sell. As a result of this evaluation, during 2003, we
recorded impairment losses of $5.4 million on assets held
for sale.

With respect to assets held for use, we estimate
the undiscounted cash flows to be generated by these assets. We
then compare the estimated undiscounted cash flows for each
hotel with their respective carrying values to determine if
there are indicators of impairment. If there are indicators of
impairment, we determine the estimated fair values of these
assets in conjunction with our real estate brokers. As a result
of this evaluation, we recorded impairment losses during 2003 of
$12.7 million on assets held for use. In connection with
our emergence from Chapter 11, and the application of fresh
start reporting in which we were required to restate our assets
to fair values, we recorded a net write-down of
$222.1 million on our real estate assets during 2002. In
2001, we recorded impairment losses of $67.3 million.

Reorganization
items In accordance with
GAAP, income and expenses related to our Chapter 11
proceedings were classified as reorganization items while the
respective hotels were in Chapter 11. We continue to incur
expenses as a result of the Chapter 11 proceedings but now
classify these as general, administrative and other expenses.
The classification between reorganization items and operating
expenses while we were in Chapter 11 involved judgment on
the part of management. In addition, as a result of the
separation required between continuing operations and
discontinued operations, we allocated the reorganization items
incurred during the Chapter 11 proceedings between
continuing operations and discontinued operations based on the
values assigned to the respective properties subsequent to their
emergence from Chapter 11.

Accrual of self-insured
obligations We are
self-insured up to certain amounts with respect to employee
medical, employee dental, property insurance, general liability
insurance, personal injury claims, workers compensation,
automobile liability and other coverages. We establish reserves
for our estimates of the loss that we will ultimately incur on
reported claims as well as estimates for claims that have been
incurred but not yet reported. Our reserves, which are reflected
in accrued liabilities in our consolidated balance sheet, are
based on actuarial valuations and our history of claims. Our
actuaries incorporate historical loss experience and judgments
about the present and expected levels of costs per claim. Trends
in actual experience are an important factor in the
determination of these estimates. We believe that our estimated
reserves for such claims are adequate, however, actual
experience in claim frequency and amount could materially differ
from our estimates and adversely affect our results of
operations, cash flow, liquidity and financial condition. As of
December 31, 2003, we had an accrued balance of
approximately $10 million for these expenses.

Income Statement Overview

On November 22, 2002, in connection with our
emergence from Chapter 11 and in accordance with GAAP, we
applied fresh start reporting. Under fresh start reporting,
assets and liabilities are restated to reflect their fair
values. As a result, for accounting purposes, our financial
statements for periods subsequent to November 22, 2002 are
considered to be those of a new reporting entity and are not
considered to be comparable with the financial statements for
periods on or prior to November 22, 2002. For this reason,
we use the term successor when we refer to periods
subsequent to November 22, 2002, and the term
predecessor when we refer to periods on or prior to
November 22, 2002. Although we are required to make this
distinction

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under GAAP, for purposes of the discussion of
results below, we have combined the predecessors results
for the period January 1, 2002 to November 22, 2002
with the successors results for the period
November 23, 2002 to December 31, 2002 and refer to it
as the 2002 Combined Period. The differences between
periods due to fresh start reporting are explained where
necessary.


The discussion below focuses primarily on our
continuing operations. In the continuing operations discussions,
we compare the results of operations for the last three years
for the 77 consolidated hotels that we plan to retain in
our portfolio for the foreseeable future.

Revenues

We categorize our revenues into the following
three categories:



| |   |                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Room revenues  derived from guest
    room rentals;                                                                                                                                                                                  
|
| |  | Food and beverage
    revenues  derived from hotel restaurants, room
    service, hotel catering and meeting room rentals; and                                                                                                       
|
| |  | Other revenues  derived from
    guests long-distance telephone usage, laundry services,
    parking services, in-room movie services, vending machine
    commissions, leasing of hotel space and other miscellaneous
    revenues.

Transient revenues, which generally account for
approximately 70% of our room revenues, are revenues derived
from individual guests who stay only for brief periods of time
without a long-term contract. Demand from groups makes up
approximately 23% of our room revenues while our contract
revenues (such as contracts with airlines for crew rooms)
account for the remaining 7%.

We believe revenues in the hotel industry are
best explained by the following three key performance indicators:



| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Occupancy  computed by dividing
    total room nights sold by the total available room nights;                                                                                                
|
| |  | Average daily rate
    (ADR)  computed by dividing total room revenues
    by total room nights sold; and                                                                                     
|
| |  | Revenue per available room
    (RevPAR)  computed by dividing total room
    revenues by total available room nights. RevPAR can also be
    obtained by multiplying the occupancy by the ADR.

To obtain available room nights for a year, we
multiply the number of rooms in our portfolio by the number of
days in the year. To obtain available room nights for a hotel
sold during the year, we multiply the number of rooms in the
hotel by the number of days between January 1 and the date the
hotel was sold.

These measures are influenced by a variety of
factors, including national, regional and local economic
conditions, the degree of competition with other hotels in the
area and changes in travel patterns. The demand for
accommodations is also affected by normally recurring seasonal
patterns and most of our hotels experience lower occupancy
levels in the fall and winter months (November through February)
which generally results in lower revenues, lower net income and
less cash flow during these months.



| |                   
| | ------------------
| | Operating expenses

Operating expenses fall into the following
categories:



| |   |                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Direct expenses  these expenses tend
    to vary with available rooms and occupancy. However, hotel level
    expenses contain significant elements of fixed costs and,
    therefore, do not decline proportionately with revenues. Direct
    expenses are further categorized as follows:



| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | Rooms expenses  expenses incurred in
    generating room revenues;                             
|
| |  | Food and beverage expenses  expenses
    incurred in generating food and beverage revenues; and

28



---



##### Table of Contents





| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | Other direct expenses  expenses
    incurred in generating the revenue activities classified in
    other revenues.



| |   |                                                               
| | - | --------------------------------------------------------------
| |  | General, administrative and other expenses, which
    include:



| |   |                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Salaries for hotel management;                                                                                                                                                                                                                                                                                                                   
|
| |  | Advertising and promotion;                                                                                                                                                                                                                                                                                                                       
|
| |  | Franchise fees;                                                                                                                                                                                                                                                                                                                                  
|
| |  | Repairs and maintenance;                                                                                                                                                                                                                                                                                                                         
|
| |  | Utilities;                                                                                                                                                                                                                                                                                                                                       
|
| |  | Equipment, ground and building rentals;                                                                                                                                                                                                                                                                                                          
|
| |  | Insurance;                                                                                                                                                                                                                                                                                                                                       
|
| |  | Property and other taxes;                                                                                                                                                                                                                                                                                                                        
|
| |  | Legal and professional fees; and                                                                                                                                                                                                                                                                                                                 
|
| |  | Corporate overhead, including corporate salaries
    and benefits, accounting services, directors fees, costs
    for office space and information technology costs. Also included
    in general, administrative and other expenses for the year ended
    December 31, 2003 are expenses relating to post-emergence
    Chapter 11 activities.



| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Depreciation and amortization expense 
    depreciation of fixed assets (primarily hotel assets) and
    amortization of deferred franchise fees.
|
| |  | Impairment charges  charges which were
    required to write down hotel carrying values to their fair
    values.                                



| |                    
| | -------------------
| | Non-operating items

Non-operating items include:



| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Interest expense, Preferred Stock dividends and
    amortization of deferred loan fees;                                                           
|
| |  | Gain on disposal of assets;                                                                                                                       
|
| |  | Interest income;                                                                                                                                  
|
| |  | Our 30% share of the income or loss of our
    non-controlling equity interest in one hotel, for which we
    account under the equity method; and



| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | Minority interests  our equity
    partners share of the income or loss of the four hotels
    owned by joint ventures that we consolidate.

29



---



##### Table of Contents



Results of
Operations  Continuing Operations



| |                                                                      
| | ---------------------------------------------------------------------
| | Year Ended December 31, 2003 Compared
    to the 2002 Combined Period

Revenues  Continuing
Operations

|                           |                   |      |       |          |  |                     |       |         |  |   |       |         |   |  |      |       |   
|-------------------------- | ----------------- | ---- | ----- | -------- |  | ------------------- | ----- | ------- |  | - | ----- | ------- | - |  | ---- | ----- | --
|                           |                   |      |       | 2002     |  |                     |       |        
|                           |                   |      |       | Combined |  |                    
|                           |                   | 2003 |       | Period   |  | Increase (decrease)
|                           |                   |      |       |          |  |                    
|                           |                   |      |       |          |  |                     |       |        
|Revenues ($ in thousands): |                   |      |       |          |  |                     |       |         |  |   |       |         |   |  |      |      
|                           | Rooms             |      | $     | 229,519  |  |                     | $     | 237,800 |  |   | $     | (8,281  | ) |  |      | (3.5  | )%
|                           | Food and beverage |      |       | 70,791   |  |                     |       | 74,124  |  |   |       | (3,333  | ) |  |      | (4.5  | )%
|                           | Other             |      |       | 11,104   |  |                     |       | 12,649  |  |   |       | (1,545  | ) |  |      | (12.2 | )%
|                           |                   |      |       |          |  |                     |       |         |  |   |       |         |   |  |      |      
|                           | Total revenues    |      | $     | 311,414  |  |                     | $     | 324,573 |  |   | $     | (13,159 | ) |  |      | (4.1  | )%
|                           |                   |      |       |          |  |                     |       |         |  |   |       |         |   |  |      |      
|Occupancy                  |                   |      | 59.9  | %        |  |                     | 61.5  | %       |  |   |       |         |   |  | (2.6 | )%   
|ADR                        |                   | $    | 74.44 |          |  | $                   | 75.02 |         |  | $ | (0.58 | )       |   |  | (0.8 | )%   
|RevPAR                     |                   | $    | 44.57 |          |  | $                   | 46.16 |         |  | $ | (1.59 | )       |   |  | (3.4 | )%   

The 3.5% decline in room revenues results from
the decline in occupancy and ADR. Occupancy declined by 2.6%
while ADR declined by 0.8%. The decline in occupancy reflected
the general decline in the lodging industry but also reflected,
in part, some loss in volume due to renovations being performed
at some of our hotels, brand changes and reduced performance at
some hotels due to their need for renovation. The decline in ADR
was due to lower demand for hotels as well as a change in buying
patterns with more guests purchasing discounted rooms via the
Internet.

Food and beverage and other revenues were also
affected by the decline in occupancy and a reduction in group
banquet and catering functions. Other revenues, which declined
by 12.2%, were affected by a decline in telephone revenues as a
result of the increased usage of cell phones by our guests as
well as the availability of free high speed Internet access at
some of our hotels.

Some positive signs have started to emerge for
the lodging industry. Smith Travel Research recently forecasted
RevPAR growth in 2004 due to rising occupancy and room rates and
improving supply and demand fundamentals. We expect to realize
some of the benefits of that growth but believe that we will not
benefit fully from the recovery, particularly as some of our
hotels are still under renovation and some need to be renovated.
Some of our hotels recently have been renovated and we expect
that these and others will benefit from the recovery.

To assist us in isolating the temporary effects
on hotels which have undergone major change or are undergoing
change, we have identified a group of hotels as stabilized
hotels. Stabilized hotels are those hotels included in our
portfolio on December 31, 2003 which:



| |   |                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Were not held for sale;                                                                                                                                                 
|
| |  | Were not undergoing major renovation during 2002
    or 2003 (we consider a major renovation to be a renovation which
    in the aggregate exceeded $5,000 per room); or
|
| |  | Were not subject to brand changes during 2002 or
    2003.                                                                                                              

The table below presents data on our stabilized
hotels:

|                            |  |      |        |          |  |            |        |   |  |  |      |   
|--------------------------- |  | ---- | ------ | -------- |  | ---------- | ------ | - |  |  | ---- | --
|                            |  |      |        | 2002     |  |           
|                            |  |      |        | Combined |  | % increase
|                            |  | 2003 |        | Period   |  | (decrease)
|                            |  |      |        |          |  |           
|Number of stabilized hotels |  |      | 58     |          |  |            | 58     |   |  |  |     |   
|Number of rooms             |  |      | 10,659 |          |  |            | 10,659 |   |  |  |     |   
|Occupancy                   |  |      | 62.5   | %        |  |            | 64.1   | % |  |  | (2.5 | )%
|ADR                         |  | $    | 75.59  |          |  | $          | 76.30  |   |  |  | (0.9 | )%
|RevPAR                      |  | $    | 47.22  |          |  | $          | 48.87  |   |  |  | (3.4 | )%

30



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##### Table of Contents



The decline in occupancy for our stabilized
hotels was lower than the decline in occupancy for our hotels
included in continuing operations, as stabilized hotels were not
affected by displacements from hotel renovations. However, ADR
of stabilized hotels declined more than ADR for all hotels in
continuing operations because stabilized hotels included a
higher proportion of hotels in need of renovation, resulting in
the decline in RevPAR for our stabilized hotels being the same
as for all hotels included in our continuing operations.



| |                                                      
| | -----------------------------------------------------
| | Direct operating expenses 
    Continuing Operations

|                           |                                 |                  |      |          |  |                     |      |         |  |  |   |        |   |  |  |      |   
|-------------------------- | ------------------------------- | ---------------- | ---- | -------- |  | ------------------- | ---- | ------- |  |  | - | ------ | - |  |  | ---- | --
|                           |                                 |                  |      | 2002     |  |                     |      |        
|                           |                                 |                  |      | Combined |  |                    
|                           |                                 | 2003             |      | Period   |  | Increase (decrease)
|                           |                                 |                  |      |          |  |                    
|                           |                                 |                  |      |          |  |                     |      |        
|                           |                                 |                  |      |         
|                           |                                 | ($ in thousands) |      |         
|Direct operating expenses: |                                 |                  |      |          |  |                     |      |         |  |  |   |        |   |  |  |     
|                           | Rooms                           |                  | $    | 65,814   |  |                     | $    | 65,624  |  |  | $ | 190    |   |  |  | 0.3  | % 
|                           | Food and beverage               |                  |      | 48,686   |  |                     |      | 52,269  |  |  |   | (3,583 | ) |  |  | (6.9 | )%
|                           | Other                           |                  |      | 7,970    |  |                     |      | 8,716   |  |  |   | (746   | ) |  |  | (8.6 | )%
|                           |                                 |                  |      |          |  |                     |      |         |  |  |   |        |   |  |  |     
|                           | Total direct operating expenses |                  | $    | 122,470  |  |                     | $    | 126,609 |  |  | $ | (4,139 | ) |  |  | (3.3 | )%
|                           |                                 |                  |      |          |  |                     |      |         |  |  |   |        |   |  |  |     
|% of total revenues        |                                 |                  | 39.3 | %        |  |                     | 39.0 | %       |  |  |   |        |   |  |  |     

Direct operating expenses, which vary with
revenues, were lower due to lower revenues. However, these
expenses were not reduced proportionately with revenues due to
fixed costs and the need to maintain minimum levels of service
regardless of occupancy declines. Fixed costs primarily relate
to salaried employees and benefits.

Rooms expenses on an actual cost per occupied
room basis increased as a result of increases in benefit costs
(28% of the total increase), enhanced complimentary food and
beverage items to guests enrolled in our brand loyalty programs
(31% of the total increase) and general cost increases for
expendable items used in the rooms department. Benefit costs
include group health insurance, our 401(k) plan and
workers compensation. Due to declining room demand in the
first half of 2003 and a shift in room demand to Internet
booking sites that provide discounted room rates, we were unable
to achieve gains in ADR to offset these cost increases.

The food and beverage department benefited from
our improved purchasing program and greater controls on
inventory, partially offset by increased benefit costs.

Other expenses decreased by $0.7 million due
in part to a $0.4 million decline in telephone expenses as
a result of increased usage of cell phones by our guests.

We continued to realize cost efficiencies through
the negotiation of national purchase contracts for all of our
hotels. Through such contracts, we have benefited from lower
unit costs on some of our routinely purchased items.



| |                                                     
| | ----------------------------------------------------
| | Other operating expenses 
    Continuing Operations

|                          |                                   |                  |      |          |  |                     |      |         |  |  |   |         |   |  |  |       |   
|------------------------- | --------------------------------- | ---------------- | ---- | -------- |  | ------------------- | ---- | ------- |  |  | - | ------- | - |  |  | ----- | --
|                          |                                   |                  |      | 2002     |  |                     |      |        
|                          |                                   |                  |      | Combined |  |                    
|                          |                                   | 2003             |      | Period   |  | Increase (decrease)
|                          |                                   |                  |      |          |  |                    
|                          |                                   |                  |      |          |  |                     |      |        
|                          |                                   |                  |      |         
|                          |                                   | ($ in thousands) |      |         
|Other operating expenses: |                                   |                  |      |          |  |                     |      |         |  |  |   |         |   |  |  |      
|                          | General, administrative and other |                  | $    | 137,888  |  |                     | $    | 132,194 |  |  | $ | 5,694   |   |  |  | 4.3   | % 
|                          | Depreciation and amortization     |                  |      | 29,761   |  |                     |      | 43,636  |  |  |   | (13,875 | ) |  |  | (31.8 | )%
|                          | Impairment of long-lived assets   |                  |      | 12,667   |  |                     |      |        |  |  |   | 12,667  |   |  |  | n/m   |   
|                          |                                   |                  |      |          |  |                     |      |         |  |  |   |         |   |  |  |      
|                          | Total other operating expenses    |                  | $    | 180,316  |  |                     | $    | 175,830 |  |  | $ | 4,486   |   |  |  | 2.6   | % 
|                          |                                   |                  |      |          |  |                     |      |         |  |  |   |         |   |  |  |      
|% of total revenues       |                                   |                  | 57.9 | %        |  |                     | 54.2 | %       |  |  |   |         |   |  |  |      

31



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##### Table of Contents



General, administrative and other expenses were
$5.7 million higher in 2003 as a result of increases in the
following:



| |   |                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We incurred $4.6 million in legal,
    professional and other costs related to the Chapter 11
    proceedings. Prior to our emergence from Chapter 11, these
    costs would have been classified as reorganization expenses.
|
| |  | Insurance costs increased $1.7 million due
    to increased insurance premium costs and safety training
    programs;                                                                                                        
|
| |  | Utility costs increased $1.6 million due to
    increases in rates and increases in consumption caused by severe
    weather conditions in the Northeast;                                                                    
|
| |  | Ground and property rent increased
    $0.5 million due to escalation clauses in the lease
    agreements; and                                                                                                               
|
| |  | Repairs and maintenance costs increased
    $0.4 million due to enhanced preventative maintenance
    programs as well as to delayed renovations on some of our hotels.                                                      

These higher expenses were offset by reductions
in other expenses, as follows:



| |   |                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Legal and other professional fees decreased by
    approximately $1.2 million partially as a result of our
    reduced reliance on external professional services and also as a
    result of the resolution of a number of litigation cases through
    the Chapter 11 proceedings;
|
| |  | Equipment rentals decreased by $0.5 million
    as a result of the initiation of improved lease programs for
    hotel vans, copiers and other equipment;                                                                                                                           
|
| |  | Franchise fees decreased by $0.4 million.
    Substantially all of our franchise fees are revenue-based and,
    therefore, fell as a result of the reduction in revenues; and                                                                                                      
|
| |  | Bad debt expense decreased by $1.8 million.
    This was partially due to a release of previous reserves during
    2003 of $0.8 million that was no longer needed and an
    improvement in our portfolio as compared to the 2002 Combined
    Period.                             

Depreciation and amortization expense declined by
$13.9 million. Depreciation expense was reduced as a result
of fresh start reporting. As part of fresh start reporting, we
were required to adjust our assets to fair values and, as a
result, recorded a net write-down of fixed assets of
$193.2 million. After implementing fresh start reporting,
our monthly depreciation decreased by $1.2 million
($14.4 million annualized). This decrease was partially
offset by an increase in amortization of deferred franchise fees
due to an increase in the fair values of deferred franchise
fees. Amortization of deferred franchise fees increased by
approximately $34,000 per month ($0.4 million annualized).

The impairment of long-lived assets of
$12.7 million recorded during 2003 represents reductions
made to the carrying values of certain hotels held for use, to
bring them in line with their estimated fair values.



| |                                                            
| | -----------------------------------------------------------
| | Non-operating income
    (expenses)  Continuing Operations

|                                 |                            |                          |   |          |         |                     |   |        |         |   |   |         |       |  |  |        |     |  
|-------------------------------- | -------------------------- | ------------------------ | - | -------- | ------- | ------------------- | - | ------ | ------- | - | - | ------- | ----- |  |  | ------ | --- | -
|                                 |                            |                          |   | 2002     |         |                     |   |       
|                                 |                            |                          |   | Combined |         |                    
|                                 |                            | 2003                     |   | Period   |         | Increase (decrease)
|                                 |                            |                          |   |          |         |                    
|                                 |                            |                          |   |          |         |                     |   |       
|                                 |                            |                         
|                                 |                            | ($ in thousands)        
|Non-operating income (expenses): |                            |                          |   |          |         |                     |   |        |         |   |   |         |       |  |  |       
|                                 | Interest income and other  |                          | $ | 807      |         |                     | $ | 4,954  |         |   | $ | (4,147  | )     |  |  | (83.7  | )% 
|                                 | Interest expense:          |                          |   |          |         |                     |   |        |         |   |   |         |       |  |  |        |    
|                                 |                            | Preferred Stock dividend |   |          | (8,092  | )                   |   |        |        |   |   |         | 8,092 |  |  |        | n/m |  
|                                 |                            | Other interest expense   |   |          | (28,581 | )                   |   |        | (28,273 | ) |   |         | 308   |  |  |        | 1.1 | %
|                                 | Gain on asset dispositions |                          |   | 445      |         |                     |   |       |         |   |   | 445     |       |  |  | n/m    |    
|                                 | Reorganization items       |                          |   | (1,397   | )       |                     |   | 11,038 |         |   |   | (12,435 | )     |  |  | (112.7 | )% 
|                                 | Minority interests         |                          |   | 1,294    |         |                     |   | 273    |         |   |   | 1,021   |       |  |  | 374.0  | %  

32



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##### Table of Contents



Interest income and other for the 2002 Combined
Period included $4.4 million of gain on extinguishment of debt.
This gain related to discharge of a promissory note in the name
of Macon Hotel Associates, LLC (MHA), a 60% owned
subsidiary. The lender discharged the indebtedness of
$3.9 million plus related accrued interest approximating
$0.7 million in exchange for payment by MHA of
$0.2 million.

The Preferred Stock dividend relates to dividends
on the Preferred Stock issued on November 25, 2002.
Dividends for the period January 1, 2003 to
December 31, 2003 totaled $15.7 million. In accordance
with SFAS No. 150, effective for us on July 1, 2003,
dividends relating to the period after the effective date are
reported as interest expense. Dividends for the period prior to
the effective date continue to be shown as a deduction from
retained earnings with no effect on our results of operations.
As a result, the $8.1 million dividend accrued for the period
July 1, 2003 to December 31, 2003 is reported in
interest expense while the $7.6 million dividend accrued
for the periods January 1, 2003 to June 30, 2003 are
shown as deductions from retained earnings.

Included in other interest expense for 2003 is
amortization of loan fees of $3.9 million. For the 2002
Combined Period, amortization of loan fees were de minimus
because we wrote off all deferred loan fees when we filed for
Chapter 11 in December 2001.

A significant portion of our debt is variable
based primarily on one month LIBOR. Our variable rate debt at
December 31, 2003 approximated $382.8 million.
Interest expense on our variable rate debt fell as a result of
reductions in LIBOR and reductions in the interest rate spread.
LIBOR averaged 1.25% for 2003 and 1.77% for the 2002 Combined
Period. Also, the interest rate spread on the Merrill Lynch
Mortgage debt incurred in November 2002 is approximately 200
basis points, or 2%, lower than the interest rate spread on the
variable rate debt that it replaced. The interest expense
associated with the Lehman Financing obtained in May 2003 served
to offset the reduction in interest discussed above. Though the
Lehman Financing replaced previous debt, we paid no interest
during 2002 on the debt that it replaced, as approved by the
Bankruptcy Court.

The gain on asset dispositions for 2003 relates
to consideration received for condemned land less the carrying
values.

Reorganization items for 2003 of
$1.4 million represent Chapter 11 expenses incurred
between January 1, 2003 and May 22, 2003 relating to
the 18 hotels that emerged from Chapter 11 on May 22,
2003. We continue to incur expenses related to the
Chapter 11 proceedings but currently report these expenses
as part of general, administrative and other expenses. In
accordance with GAAP, all expenses related to the
Chapter 11 proceedings between January 1, 2002 and
November 22, 2002 were reported as reorganization items,
including the fair value adjustments recorded on the
implementation of fresh start reporting.

Reorganization items for the 2002 Combined Period
consisted of the following:



| |   |                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Adjustments recorded on the application of fresh
    start reporting of $33.3 million consisting of a gain on
    extinguishment of debt of $223.1 million offset by fixed
    asset write downs and other fresh start adjustments of
    $189.8 million; and
|
| |  | Expenses incurred as a result of the
    Chapter 11 proceedings of approximately $22.3 million,
    consisting mainly of legal and professional fees.                                                                                                        

Minority interests represent the third party
owners share of the net income or loss of the four joint
ventures in which we have a controlling equity interest. The
increase of $1.0 million relates primarily to one joint
venture owning one hotel. The net loss of this joint venture was
higher in 2003 as a result of an impairment charge recorded to
write down the carrying value of the hotel.

33



---



##### Table of Contents



The 2002
Combined Period Compared to the Year Ended December 31,
2001

Revenues 
Continuing Operations

|                            |                   |          |       |         |  |           |       |         |  |   |       |         |   |  |      |       |   
|--------------------------- | ----------------- | -------- | ----- | ------- |  | --------- | ----- | ------- |  | - | ----- | ------- | - |  | ---- | ----- | --
|                            |                   | 2002     |       |         |  |           |       |        
|                            |                   | Combined |       |         |  |           |       |        
|                            |                   | Period   |       | 2001    |  |           |       |        
|                            |                   |          |       |         |  |           |       |        
|                            |                   |          |       |         |  | )        
|                            |                   |          |       |         |  | Increase 
|                            |                   |          |       |         |  | (decrease
|Revenues ($ in thousands)*: |                   |          |       |         |  |           |       |         |  |   |       |         |   |  |      |      
|                            | Rooms             |          | $     | 237,800 |  |           | $     | 257,100 |  |   | $     | (19,300 | ) |  |      | (7.5  | )%
|                            | Food and beverage |          |       | 74,124  |  |           |       | 79,554  |  |   |       | (5,430  | ) |  |      | (6.8  | )%
|                            | Other             |          |       | 12,649  |  |           |       | 14,418  |  |   |       | (1,769  | ) |  |      | (12.3 | )%
|                            |                   |          |       |         |  |           |       |         |  |   |       |         |   |  |      |      
|                            | Total revenues    |          | $     | 324,573 |  |           | $     | 351,072 |  |   | $     | (26,499 | ) |  |      | (7.5  | )%
|                            |                   |          |       |         |  |           |       |         |  |   |       |         |   |  |      |      
|Occupancy                   |                   |          | 61.5  | %       |  |           | 63.0  | %       |  |   |       |         |   |  | (2.4 | )%   
|ADR                         |                   | $        | 75.02 |         |  | $         | 77.60 |         |  | $ | (2.58 | )       |   |  | (3.3 | )%   
|RevPAR                      |                   | $        | 46.16 |         |  | $         | 48.91 |         |  | $ | (2.75 | )       |   |  | (5.6 | )%   



---



|  |                                                                                                                                                                                                                                
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Revenues for 2001 in the table above include the
    revenues of six hotels sold in 2001, while occupancy, ADR and
    RevPAR in the table exclude the six hotels sold in 2001.
    Revenues in 2001 for these six hotels were:

|                  |  |                  |       | 
|----------------- |  | ---------------- | ----- | 
|                  |  | ($ in thousands)
|Rooms             |  | $                | 5,041 | 
|Food and beverage |  |                  | 1,520 | 
|Other             |  |                  | 465   | 
|                  |  |                  |       | 
|Total revenues    |  | $                | 7,026 | 
|                  |  |                  |       | 

After excluding the $5.0 million from the
2001 room revenues for six hotels sold in 2001, thereby
producing room revenues for a comparable portfolio, the decline
in room revenues was 5.7%. This reduction in room revenues
resulted from declines in both occupancy and ADR. Occupancy
declined by 2.4% while ADR declined by 3.3%. These reductions
reflected the general decline in the economy and the lodging
industry in the aftermath of the terrorist attacks of
September 11, 2001 and hotel quality issues due to the
liquidity constraints which led to our Chapter 11 filing.
Occupancy, ADR and RevPAR were also affected by renovation
displacement at some of our hotels.

The lower food and beverage revenues were due to
the lower occupancy levels in the 2002 Combined Period. Other
revenues declined in the 2002 Combined Period primarily due to a
$1.3 million reduction in telephone revenues resulting from
increased cell phone usage.

The table below presents data on our stabilized
hotels:

|                            |  |          |        |      |  |            |        |   |  |  |      |   
|--------------------------- |  | -------- | ------ | ---- |  | ---------- | ------ | - |  |  | ---- | --
|                            |  | 2002     |        |      |  |           
|                            |  | Combined |        |      |  | % increase
|                            |  | Period   |        | 2001 |  | (decrease)
|                            |  |          |        |      |  |           
|Number of stabilized hotels |  |          | 58     |      |  |            | 58     |   |  |  |     |   
|Number of rooms             |  |          | 10,659 |      |  |            | 10,659 |   |  |  |     |   
|Occupancy                   |  |          | 64.1   | %    |  |            | 64.4   | % |  |  | (0.5 | )%
|ADR                         |  | $        | 76.30  |      |  | $          | 79.31  |   |  |  | (3.8 | )%
|RevPAR                      |  | $        | 48.87  |      |  | $          | 51.11  |   |  |  | (4.4 | )%

The decline in occupancy for our stabilized
hotels was lower than the decline in occupancy for all hotels
included in our continuing operations, as stabilized hotels were
not affected by renovation displacements. In addition, ADR of
stabilized hotels declined more than ADR of all hotels in
continuing operations because stabilized hotels included a
higher proportion of hotels in need of renovation, resulting in
the decline in RevPAR for our stabilized hotels being greater
than the decline in RevPAR for all hotels included in our
continuing operations.

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Direct operating
expenses  Continuing Operations

|                            |                                 |                  |      |         |  |            |      |         |  |  |   |        |   |  |  |      |   
|--------------------------- | ------------------------------- | ---------------- | ---- | ------- |  | ---------- | ---- | ------- |  |  | - | ------ | - |  |  | ---- | --
|                            |                                 | 2002             |      |         |  |           
|                            |                                 | Combined         |      |         |  | Increase  
|                            |                                 | Period           |      | 2001    |  | (decrease)
|                            |                                 |                  |      |         |  |           
|                            |                                 |                  |      |         |  |            |      |        
|                            |                                 |                 
|                            |                                 | ($ in thousands)
|Direct operating expenses*: |                                 |                  |      |         |  |            |      |         |  |  |   |        |   |  |  |     
|                            | Rooms                           |                  | $    | 65,624  |  |            | $    | 69,257  |  |  | $ | (3,633 | ) |  |  | (5.2 | )%
|                            | Food and beverage               |                  |      | 52,269  |  |            |      | 55,459  |  |  |   | (3,190 | ) |  |  | (5.8 | )%
|                            | Other                           |                  |      | 8,716   |  |            |      | 8,540   |  |  |   | 176    |   |  |  | 2.1  | % 
|                            |                                 |                  |      |         |  |            |      |         |  |  |   |        |   |  |  |     
|                            | Total direct operating expenses |                  | $    | 126,609 |  |            | $    | 133,256 |  |  | $ | (6,647 | ) |  |  | (5.0 | )%
|                            |                                 |                  |      |         |  |            |      |         |  |  |   |        |   |  |  |     
|% of total revenues         |                                 |                  | 39.0 | %       |  |            | 38.0 | %       |  |  |   |        |   |  |  |     



---



|  |                                                                                                                                                                                                 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Direct operating expenses for 2001 in the table
    above include the direct operating expenses of six hotels sold
    in 2001. Direct operating expenses in 2001 for these six hotels
    were:

|                      |  |                  |       | 
|--------------------- |  | ---------------- | ----- | 
|                      |  | ($ in thousands)
|Rooms                 |  | $                | 1,794 | 
|Food and beverage     |  |                  | 1,241 | 
|Other                 |  |                  | 202   | 
|                      |  |                  |       | 
|Total direct expenses |  | $                | 3,237 | 
|                      |  |                  |       | 

After excluding the $1.8 million from the
2001 room expenses for six hotels sold in 2001, thereby
producing room expenses for a comparable portfolio, the decline
in room expenses was 2.7%. As a percentage of room revenues, our
room expenses increased in the 2002 Combined Period but the
actual cost per occupied room declined. Our margins were also
affected by the decline in ADR.

Food and beverage margins were negatively
affected by a decline in banquet catering and meetings business
in the 2002 Combined Period. The banquet catering and meetings
business is the most profitable area of our food and beverage
operations.

Other operating expenses remained flat despite
lower sales due to our inability to offset a large portion of
fixed expenses in this department.

Other operating
expenses  Continuing Operations

|                          |                                   |                  |      |         |  |                     |      |         |  |  |   |         |   |  |  |        |   
|------------------------- | --------------------------------- | ---------------- | ---- | ------- |  | ------------------- | ---- | ------- |  |  | - | ------- | - |  |  | ------ | --
|                          |                                   | 2002             |      |         |  |                     |      |        
|                          |                                   | Combined         |      |         |  |                    
|                          |                                   | Period           |      | 2001    |  | Increase (decrease)
|                          |                                   |                  |      |         |  |                    
|                          |                                   |                  |      |         |  |                     |      |        
|                          |                                   |                 
|                          |                                   | ($ in thousands)
|Other operating expenses: |                                   |                  |      |         |  |                     |      |         |  |  |   |         |   |  |  |       
|                          | General, administrative and other |                  | $    | 132,194 |  |                     | $    | 154,320 |  |  | $ | (22,126 | ) |  |  | (14.3  | )%
|                          | Depreciation and amortization     |                  |      | 43,636  |  |                     |      | 46,065  |  |  |   | (2,429  | ) |  |  | (5.3   | )%
|                          | Impairment of long-lived assets   |                  |      |        |  |                     |      | 20,503  |  |  |   | (20,503 | ) |  |  | (100.0 | )%
|                          |                                   |                  |      |         |  |                     |      |         |  |  |   |         |   |  |  |       
|                          | Total other operating expenses    |                  | $    | 175,830 |  |                     | $    | 220,888 |  |  | $ | (45,058 | ) |  |  | (20.4  | )%
|                          |                                   |                  |      |         |  |                     |      |         |  |  |   |         |   |  |  |       
|% of total revenues       |                                   |                  | 54.2 | %       |  |                     | 62.9 | %       |  |  |   |         |   |  |  |       

General, administrative and other expenses
decreased by $22.1 million. Of the $22.1 million
decrease, $3.3 million related to six hotels sold in 2001.
In addition, the property level component of general,
administrative and other expenses was lower in the 2002 Combined
Period, primarily as a result of reductions in revenues.
General, administrative and other expenses for the 2002 Combined
Period also declined as a result of reductions in corporate
overhead due to cost reductions at the corporate office. These
initiatives included reductions in staffing, office space and
technology.

Depreciation and amortization expense for the
2002 Combined Period decreased by $2.4 million. Of the
$2.4 million decrease, $0.6 million was attributable to six
hotels sold in 2001. The reduction in depreciation and
amortization expense was also due to the reduced carrying values
of certain assets arising from

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impairment charges recorded in the fourth quarter
of 2001. This decrease was partially offset by additional
depreciation related to capital improvements. Also, depreciation
for the period November 23, 2002 to December 31, 2002
declined as a result of the write-down of fixed assets recorded
when we implemented fresh start reporting.


The $20.5 million of impairment charges for
2001 consisted of the following:



| |   |                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A $6.6 million charge related to revised
    estimates of fair value for properties held for sale;                                                                                                                                   
|
| |  | A $4.0 million charge related to one
    property which was identified as held for sale and also sold in
    2001; and                                                                                                               
|
| |  | Impairment charges on assets held for use of
    $21.7 million, offset by a recapture of $11.8 million
    of impairment charges related to assets previously held for sale
    that were no longer being actively marketed for sale.

Non-operating
income (expenses)  Continuing Operations

|                                 |                                                          |                  |     |         |   |                     |    |         |   |  |     |         |   |  |       |        |   
|-------------------------------- | -------------------------------------------------------- | ---------------- | --- | ------- | - | ------------------- | -- | ------- | - |  | --- | ------- | - |  | ----- | ------ | --
|                                 |                                                          | 2002             |     |         |   |                     |    |        
|                                 |                                                          | Combined         |     |         |   |                    
|                                 |                                                          | Period           |     | 2001    |   | Increase (decrease)
|                                 |                                                          |                  |     |         |   |                    
|                                 |                                                          |                  |     |         |   |                     |    |        
|                                 |                                                          |                 
|                                 |                                                          | ($ in thousands)
|Non-operating income (expenses): |                                                          |                  |     |         |   |                     |    |         |   |  |     |         |   |  |       |       
|                                 | Interest income and other                                |                  | $   | 4,954   |   |                     | $  | 709     |   |  | $   | 4,245   |   |  |       | 598.7  | % 
|                                 | Interest expense                                         |                  |     | (28,273 | ) |                     |    | (71,817 | ) |  |     | (43,544 | ) |  |       | (60.6  | )%
|                                 | Gain on asset dispositions                               |                  |     |        |   |                     |    | 23,975  |   |  |     | 23,975  |   |  |       | (100.0 | )%
|                                 | Reorganization items                                     |                  |     | 11,038  |   |                     |    | (21,672 | ) |  |     | (32,710 | ) |  |       | 150.9  | % 
|                                 | Minority interests  Preferred
    redeemable securities |                  |     |        |   |                     |    | (12,869 | ) |  |     | 12,869  |   |  |       | (100.0 | )%
|Minority interests  Other       |                                                          |                  | 273 |         |   |                     | 38 |         |   |  | 235 |         |   |  | 618.4 | %     

Interest income and other increased significantly
in the 2002 Combined Period primarily as the result of a
discharge of indebtedness in respect of MHA, a 60% owned
subsidiary. The resulting gain on extinguishment of this
indebtedness was $4.4 million and resulted from the
exchange of a promissory note of $3.9 million plus related
accrued interest approximating $0.7 million in exchange for
payment by MHA of $0.2 million.

Interest expense for the 2002 Combined Period
decreased as a result of the suspension of interest payments on
debt secured by highly leveraged hotels while we were in
Chapter 11. Where the estimated value of the underlying
collateral in respect of certain debts was considered to be less
than the carrying value of that debt, we ceased accruing
interest on those debts. Contractual interest expense in respect
of those debts that was not recorded for the 2002 Combined
Period (excluding interest on our CRESTS) approximated
$28.2 million. Recorded interest expense for the 2002
Combined Period also declined as a result of decreasing interest
rates on our variable rate debt. LIBOR for the 2002 Combined
Period averaged 1.77% while the average for 2001 was 3.71%.

The gain on asset disposition for 2001 related
primarily to the sale of one hotel in the first quarter of 2001
and represents the excess of the net proceeds of the sale over
the net book value of assets sold.

Reorganization items for the 2002 Combined Period
consisted of the following:



| |   |                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Adjustments recorded on the application of fresh
    start reporting of $33.3 million, consisting of gain on
    extinguishment of debt of $223.1 million offset by fixed
    asset write downs and other fresh start adjustments of
    $189.8 million; and
|
| |  | Expenses incurred as a result of the
    Chapter 11 proceedings of approximately $22.3 million
    consisting mainly of legal and professional fees.                                                                                                        

Reorganization items for 2001 consisted of
write-offs of deferred loan fees of $18.7 million and
expenses incurred as a result of the Chapter 11 proceedings
of approximately $3.0 million.

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Minority interest differed significantly in the
2002 Combined Period compared to 2001 as a result of the
non-accrual of interest on the CRESTS. We ceased accruing
interest on the CRESTS while we were in Chapter 11 as these
were unsecured debts. CRESTS interest not accrued for the 2002
Combined Period approximated $12.7 million.

Results of Operations  Discontinued
Operations

Discontinued operations include results of
operations for both assets sold during the reporting period and
assets that have been identified for sale. Consequently, the 18
hotels and three land parcels that were held for sale at
December 31, 2003, as well as the ten hotels and the
office building that were sold or otherwise disposed of during
2003, are included in discontinued operations. We present the
current years results of these hotels as discontinued
operations as well as the comparative results for the previous
two years.

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##### Table of Contents





| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Year Ended December 31, 2003 Compared
    to the 2002 Combined Period and the Year Ended December 31,
    2001

Set forth below is the condensed combined
statement of operations for properties classified as
discontinued operations:

|                                                  |                                   |                                |        |             |        |                  |         |                  |        |                  |         |        |         |   |         |         |         |   |        |         |         |  
|------------------------------------------------- | --------------------------------- | ------------------------------ | ------ | ----------- | ------ | ---------------- | ------- | ---------------- | ------ | ---------------- | ------- | ------ | ------- | - | ------- | ------- | ------- | - | ------ | ------- | ------- | -
|                                                  |                                   |                                |        | 2002        |        |                  |         | Increase         |        | Increase        
|                                                  |                                   |                                |        | Combined    |        |                  |         | (decrease)       |        | (decrease)      
|                                                  |                                   | 2003                           |        | Period      |        | 2001             |         | 2003 versus 2002 |        | 2002 versus 2001
|                                                  |                                   |                                |        |             |        |                  |         |                  |        |                 
|                                                  |                                   | (28 hotels)(1)                 |        | (28 hotels) |        | (28 hotels)      |         |                  |        |                 
|                                                  |                                   |                                |        |             |        | ($ in thousands) |         |                  |        |                 
|Revenues                                          |                                   |                                |        |             |        |                  |         |                  |        |                  |         |        |         |   |         |         |         |   |        |        
|                                                  | Rooms                             |                                | $      | 46,451      |        |                  | $       | 63,860           |        |                  | $       | 71,752 |         |   | $       | (17,409 | )       |   | $      | (7,892  | )      
|                                                  | Food and beverage                 |                                |        | 11,264      |        |                  |         | 16,709           |        |                  |         | 19,020 |         |   |         | (5,445  | )       |   |        | (2,311  | )      
|                                                  | Other                             |                                |        | 3,422       |        |                  |         | 4,629            |        |                  |         | 5,712  |         |   |         | (1,207  | )       |   |        | (1,083  | )      
|                                                  |                                   |                                |        |             |        |                  |         |                  |        |                  |         |        |         |   |         |         |         |   |        |        
|                                                  | Total revenues                    |                                |        | 61,137      |        |                  |         | 85,198           |        |                  |         | 96,484 |         |   |         | (24,061 | )       |   |        | (11,286 | )      
|                                                  |                                   |                                |        |             |        |                  |         |                  |        |                  |         |        |         |   |         |         |         |   |        |        
|Operating expenses                                |                                   |                                |        |             |        |                  |         |                  |        |                  |         |        |         |   |         |         |         |   |        |        
|                                                  | Direct:                           |                                |        |             |        |                  |         |                  |        |                  |         |        |         |   |         |         |         |   |        |         |        
|                                                  |                                   | Rooms                          |        |             | 14,439 |                  |         |                  | 20,782 |                  |         |        | 22,158  |   |         |         | (6,343  | ) |        |         | (1,376  | )
|                                                  |                                   | Food and beverage              |        |             | 8,905  |                  |         |                  | 13,516 |                  |         |        | 15,206  |   |         |         | (4,611  | ) |        |         | (1,690  | )
|                                                  |                                   | Other                          |        |             | 2,483  |                  |         |                  | 3,075  |                  |         |        | 3,662   |   |         |         | (592    | ) |        |         | (587    | )
|                                                  |                                   |                                |        |             |        |                  |         |                  |        |                  |         |        |         |   |         |         |         |   |        |        
|                                                  |                                   | Total direct expenses          |        |             | 25,827 |                  |         |                  | 37,373 |                  |         |        | 41,026  |   |         |         | (11,546 | ) |        |         | (3,653  | )
|                                                  |                                   |                                |        |             |        |                  |         |                  |        |                  |         |        |         |   |         |         |         |   |        |        
|                                                  |                                   |                                | 35,310 |             |        |                  | 47,825  |                  |        |                  | 55,458  |        |         |   | (12,515 | )       |         |   | (7,633 | )      
|Other operating expenses                          |                                   |                                |        |             |        |                  |         |                  |        |                  |         |        |         |   |         |         |         |   |        |        
|                                                  | General, administrative and other |                                |        | 29,643      |        |                  |         | 40,478           |        |                  |         | 40,515 |         |   |         | (10,835 | )       |   |        | (37     | )      
|                                                  | Depreciation and amortization     |                                |        | 3,367       |        |                  |         | 13,558           |        |                  |         | 16,480 |         |   |         | (10,191 | )       |   |        | (2,922  | )      
|                                                  | Impairment of long-lived assets   |                                |        | 5,387       |        |                  |         |                 |        |                  |         | 46,837 |         |   |         | 5,387   |         |   |        | (46,837 | )      
|                                                  |                                   |                                |        |             |        |                  |         |                  |        |                  |         |        |         |   |         |         |         |   |        |        
|                                                  |                                   | Total other operating expenses |        |             | 38,397 |                  |         |                  | 54,036 |                  |         |        | 103,832 |   |         |         | (15,639 | ) |        |         | (49,796 | )
|                                                  |                                   |                                |        |             |        |                  |         |                  |        |                  |         |        |         |   |         |         |         |   |        |        
|                                                  |                                   |                                | (3,087 | )           |        |                  | (6,211  | )                |        |                  | (48,374 | )      |         |   | 3,124   |         |         |   | 42,163 |        
|Non-operating income (expense):                   |                                   |                                |        |             |        |                  |         |                  |        |                  |         |        |         |   |         |         |         |   |        |        
|Interest expense                                  |                                   |                                | (3,953 | )           |        |                  | (3,855  | )                |        |                  | (3,509  | )      |         |   | (98     | )       |         |   | (346   | )      
|Gain on asset dispositions                        |                                   |                                | 3,085  |             |        |                  |        |                  |        |                  |        |        |         |   | 3,085   |         |         |   |       |        
|                                                  |                                   |                                |        |             |        |                  |         |                  |        |                  |         |        |         |   |         |         |         |   |        |        
|Loss before income taxes and reorganization items |                                   |                                | (3,955 | )           |        |                  | (10,066 | )                |        |                  | (51,883 | )      |         |   | 6,111   |         |         |   | 41,817 |        
|Reorganization items                              |                                   |                                | (648   | )           |        |                  | 1,652   |                  |        |                  | (3,344  | )      |         |   | (2,300  | )       |         |   | 4,996  |        
|                                                  |                                   |                                |        |             |        |                  |         |                  |        |                  |         |        |         |   |         |         |         |   |        |        
|Loss before income taxes                          |                                   |                                | (4,603 | )           |        |                  | (8,414  | )                |        |                  | (55,227 | )      |         |   | 3,811   |         |         |   | 46,813 |        
|Benefit for income taxes                          |                                   |                                |       |             |        |                  | 1,200   |                  |        |                  |        |        |         |   | (1,200  | )       |         |   | 1,200  |        
|                                                  |                                   |                                |        |             |        |                  |         |                  |        |                  |         |        |         |   |         |         |         |   |        |        
|Net loss                                          |                                   | $                              | (4,603 | )           |        | $                | (7,214  | )                |        | $                | (55,227 | )      |         | $ | 2,611   |         |         | $ | 48,013 |        
|                                                  |                                   |                                |        |             |        |                  |         |                  |        |                  |         |        |         |   |         |         |         |   |        |        



---



|    |                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The 2003 revenues and expenses in the table above
    includes de minimus amounts of the eight hotels conveyed to a
    lender in January 2003 and the one hotel returned to the lessor
    of a capital lease, also in January 2003.

38



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##### Table of Contents



The disposition of nine hotels in
January 2003 adversely affects comparability between
periods of results of operations for the properties included in
discontinued operations. Results of operations for our
discontinued operations were affected by the same macroeconomic
factors discussed above for our continuing operations.
Additional factors affecting the results for 2003, the 2002
Combined Period and 2001 are discussed below.



| |                                                                      
| | ---------------------------------------------------------------------
| | Year Ended December 31, 2003 Compared
    to the 2002 Combined Period

Revenues and expenses included in discontinued
operations were affected by hotel dispositions in January 2003.

The 2002 Combined Period results include the
following revenues and expenses for eight hotels conveyed to a
lender in satisfaction of related debt and one hotel returned to
the lessor of a capital lease in January 2003:

|                                  |                   |                       |        |        |        | 
|--------------------------------- | ----------------- | --------------------- | ------ | ------ | ------ | 
|                                  |                   | 2002 Combined        
|                                  |                   | Period               
|                                  |                   |                      
|                                  |                   | ($ in thousands)     
|Revenues:                         |                   |                       |        |       
|                                  | Rooms             |                       | $      | 17,116 |       
|                                  | Food and beverage |                       |        | 4,657  |       
|                                  | Other             |                       |        | 716    |       
|                                  |                   |                       |        |       
|                                  | Total revenues    |                       |        | 22,489 |       
|                                  |                   |                       |        |       
|Operating expenses:               |                   |                       |        |       
|                                  | Direct:           |                       |        |        |       
|                                  |                   | Rooms                 |        |        | 5,959  | 
|                                  |                   | Food and beverage     |        |        | 3,781  | 
|                                  |                   | Other                 |        |        | 653    | 
|                                  |                   |                       |        |       
|                                  |                   | Total direct expenses |        |        | 10,393 | 
|                                  |                   |                       |        |       
|                                  |                   | $                     | 12,096 |       
|                                  |                   |                       |        |       
|General, administrative and other |                   | $                     | 10,406 |       
|Depreciation and amortization     |                   | $                     | 2,938  |       

Substantially all of the total revenue, direct
expense, and general, administrative and other expense
differences between 2003 and the 2002 Combined Period are a
result of the disposition of these nine hotels. Of the $10.2
million decrease in depreciation and amortization expense
between 2003 and the 2002 Combined Period, $2.9 million was
attributable to the disposition of these nine hotels.
Additionally, the lower asset base as a result of fresh start
reporting and the effect of not depreciating assets once they
are identified for sale accounted for an additional
$4.8 million and $2.3 million of the decrease,
respectively.

The impairment of long-lived assets of
$5.4 million recorded in 2003 represents the write-down of
assets held for sale. In accordance with GAAP, assets identified
for sale are valued at the lower of their estimated selling
prices, less costs to sell, and their carrying values. Where the
estimated net selling prices exceeded the carrying values, no
gain was recorded.

Gain on asset dispositions of $3.1 million
represents gain on the sale of one hotel and one office building
in November 2003. The gain represents the excess of the net
proceeds of the sale over the carrying values of these two
properties. The income tax benefit for the 2002 Combined Period
related to a hotel sold during 2001 and represented reductions
of accruals for state income tax provisions recorded during 2001.



| |                                                                          
| | -------------------------------------------------------------------------
| | The 2002 Combined Period Compared to the
    Year Ended December 31, 2001

The reduction in depreciation and amortization
expense between the 2002 Combined Period and 2001 was due to the
reduced carrying values of certain assets arising from
impairment charges recorded in the fourth quarter of 2001. This
decrease was partially offset by additional depreciation related
to capital

39



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##### Table of Contents



improvements. Also, depreciation for the period
November 23, 2002 to December 31, 2002 declined as a
result of the write-down of fixed assets recorded on the
implementation of fresh start reporting.


Of the impairment charges of $46.8 million
for 2001, $47.3 million related to assets held for use,
offset by a recapture of $0.5 million of impairment charges
related to assets previously held for sale that were no longer
being actively marketed for sale.

Reorganization items for the 2002 Combined Period
consisted of:



| |   |                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Adjustments recorded on the application of fresh
    start reporting of $5.0 million consisting of gain on
    extinguishment of debt of $33.3 million offset by fixed asset
    write downs and other fresh start adjustments of
    $28.3 million; and
|
| |  | Expenses incurred as a result of the
    Chapter 11 proceedings of approximately $3.3 million,
    consisting mainly of legal and professional fees.                                                                                                    

Reorganization items for 2001 consisted of
write-offs of deferred loan fees of $2.8 million and
expenses incurred as a result of the Chapter 11 proceedings
of approximately $0.5 million.

Income taxes

Because we incurred net losses, we paid no
federal income tax for the year ended December 31, 2003,
the 2002 Combined Period or the year ended December 31,
2001. At December 31, 2003, we had available net operating
loss carryforwards of approximately $270 million for
federal income tax purposes, which will expire in 2004 through
2023. Under our plans of reorganization, substantial amounts of
net operating loss carryforwards were utilized to offset income
from debt cancellations in the 2002 Combined Period. Also, our
reorganization under Chapter 11 resulted in an ownership
change, as defined in Section 382 of the Internal Revenue
Code. Consequently, our ability to use the net operating loss
carryforwards to offset future income is subject to certain
annual limitations. Due to these limitations, a portion or all
of these net operating loss carryforwards could expire unused.
At December 31, 2003, we established a valuation allowance
of $140.0 million to fully offset our net deferred tax
asset.

In addition, we recognized an income tax
provision of $0.2 million for 2003, a benefit of
$1.3 million for the 2002 Combined Period and a provision
of $2.8 million for 2001. The benefit for the 2002 Combined
Period related primarily to a reduction of the provision
recorded in 2001, while the 2003 and 2001 provisions related
primarily to liabilities for state income taxes.

EBITDA

Earnings before interest, taxes, depreciation and
amortization (EBITDA) is a widely-used industry
measure of performance and also is used in the assessment of
hotel property values. EBITDA is a non-GAAP measure and should
not be used as a substitute for measures such as net income
(loss), cash flows from operating activities, or other measures
computed in accordance with GAAP. Depreciation and amortization
are significant non-cash expenses for us as a result of the high
proportion of our assets which are long-lived, including
property, plant and equipment. We depreciate property, plant and
equipment over their estimated useful lives and amortize
deferred financing and franchise fees over the term of the
applicable agreements. We believe that EBITDA provides pertinent
information to investors as an additional indicator of our
performance.

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The following table presents EBITDA, a non-GAAP
measure, for 2003, the 2002 Combined Period and 2001 and
provides a reconciliation with our (loss) income from continuing
operations, a GAAP measure:

|                                                                 |  |                  |         |                 |  |      |         |   |  |   |         |  
|---------------------------------------------------------------- |  | ---------------- | ------- | --------------- |  | ---- | ------- | - |  | - | ------- | -
|                                                                 |  |                  |         | 2002            |  |     
|                                                                 |  | 2003             |         | Combined Period |  | 2001
|                                                                 |  |                  |         |                 |  |     
|                                                                 |  |                 
|                                                                 |  | ($ in thousands)
|Continuing operations:                                           |  |                  |         |                 |  |      |         |   |  |   |         |  
|(Loss) income  continuing operations                            |  | $                | (27,074 | )               |  | $    | 10,254  |   |  | $ | (87,537 | )
|Depreciation and amortization                                    |  |                  | 29,761  |                 |  |      | 43,636  |   |  |   | 46,065  |  
|Impairment of long-lived asset                                   |  |                  | 12,667  |                 |  |      |        |   |  |   | 20,503  |  
|Fresh start adjustments                                          |  |                  |        |                 |  |      | (33,318 | ) |  |   |        |  
|Interest income and other                                        |  |                  | (807    | )               |  |      | (4,954  | ) |  |   | (709    | )
|Interest expense                                                 |  |                  | 28,581  |                 |  |      | 28,273  |   |  |   | 71,817  |  
|Preferred stock dividends                                        |  |                  | 8,092   |                 |  |      |        |   |  |   |        |  
|Gain on asset dispositions                                       |  |                  | (445    | )               |  |      |        |   |  |   | (23,975 | )
|Interest on the preferred redeemable securities
    (CRESTS)     |  |                  |        |                 |  |      |        |   |  |   | 12,869  |  
|Provision (benefit) for income taxes 
    continuing operations |  |                  | 178     |                 |  |      | (128    | ) |  |   | 2,829   |  
|                                                                 |  |                  |         |                 |  |      |         |   |  |   |         |  
|EBITDA                                                           |  | $                | 50,953  |                 |  | $    | 43,763  |   |  | $ | 41,862  |  
|                                                                 |  |                  |         |                 |  |      |         |   |  |   |         |  

EBITDA for the three periods presented above were
negatively affected by the following reorganization expenses:

|                                      |                             |                  |       |                 |  |      |        |        |  |   |        |       | 
|------------------------------------- | --------------------------- | ---------------- | ----- | --------------- |  | ---- | ------ | ------ |  | - | ------ | ----- | 
|                                      |                             |                  |       | 2002            |  |     
|                                      |                             | 2003             |       | Combined Period |  | 2001
|                                      |                             |                  |       |                 |  |     
|                                      |                             |                 
|                                      |                             | ($ in thousands)
|Write-off of deferred financing costs |                             | $                |      |                 |  | $    |       |        |  | $ | 18,628 |      
|Other reorganization items:           |                             |                  |       |                 |  |      |        |        |  |   |        |      
|                                      | Legal and professional fees |                  |       | 311             |  |      |        | 19,414 |  |   |        | 2,766 | 
|                                      | Loan extension fees         |                  |       | 1,025           |  |      |        |       |  |   |        |      | 
|                                      | Other                       |                  |       | 61              |  |      |        | 2,864  |  |   |        | 278   | 
|                                      |                             |                  |       |                 |  |      |        |        |  |   |        |      
|                                      |                             | $                | 1,397 |                 |  | $    | 22,278 |        |  | $ | 21,672 |      
|                                      |                             |                  |       |                 |  |      |        |        |  |   |        |      

In addition, EBITDA for 2003 and the 2002
Combined Period were affected by other Chapter 11 expenses
(included in general, administrative and other) of
$4.6 million, and EBITDA for the 2002 Combined Period was
affected by other Chapter 11 expenses of $0.8 million.

Quarterly Results of Operations

The following table presents certain quarterly
data for the eight quarters ended December 31, 2003. The
data have been derived from our unaudited condensed consolidated
financial statements for the periods indicated. Our unaudited
consolidated financial statements have been prepared on
substantially the same basis as our audited consolidated
financial statements included elsewhere in this report and
include all adjustments, consisting primarily of normal
recurring adjustments, that we consider to be necessary to
present fairly this information when read in conjunction with
our consolidated financial statements and notes thereto
appearing elsewhere in this report. The results of operations
for any quarter are not necessarily indicative of the results to
be expected for future periods. Total revenues and total
expenses for each quarter were as reported in our quarterly
filings with the Securities and Exchange Commission. However,
the allocation of the revenues and expenses between our
continuing operations and discontinued operations are not as
reported in our quarterly filings because the results of
discontinued operations, in the tables below, are based on the
hotels held for sale as of December 31, 2003. The
allocation of results of operations between our continuing
operations and

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discontinued operations, at the time of the
quarterly filings, was based on the assets held for sale, if
any, as of the dates of those filings.


|                                                                         |  |                                       |         |                     |  |         |        |         |  |                |        |              |  |         |         |         |  |         |         |   |  |   |        |   |  |   |        |   |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------ |  | ------------------------------------- | ------- | ------------------- |  | ------- | ------ | ------- |  | -------------- | ------ | ------------ |  | ------- | ------- | ------- |  | ------- | ------- | - |  | - | ------ | - |  | - | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                                                         |  |                                       |         |                    
|                                                                         |  | Successor                             |         | Predecessor        
|                                                                         |  |                                       |         |                    
|                                                                         |  |                                       |         |                     |  |        
|                                                                         |  |                                       |         | Fourth Quarter 2002 |  |        
|                                                                         |  | Fourth                                |         | Third               |  | Second  |        | First   |  |                |        | Third        |  | Second  |         | First  
|                                                                         |  | Quarter                               |         | Quarter             |  | Quarter |        | Quarter |  | November 23    |        | October 1 to |  | Quarter |         | Quarter |  | Quarter
|                                                                         |  | 2003                                  |         | 2003                |  | 2003    |        | 2003    |  | to December 31 |        | November 22  |  | 2002    |         | 2002    |  | 2002   
|                                                                         |  |                                       |         |                     |  |         |        |         |  |                |        |              |  |         |         |         |  |        
|                                                                         |  |                                      
|                                                                         |  | (In thousands, except per share data)
|Revenues  Continuing operations                                         |  | $                                     | 73,685  |                     |  | $       | 81,699 |         |  | $              | 82,738 |              |  | $       | 73,292  |         |  | $       | 25,306  |   |  | $ | 49,612 |   |  | $ | 83,508 |   |  | $ | 89,532 |   |  | $ | 76,615  |  
|Direct operating  Continuing operations                                 |  |                                       | 30,758  |                     |  |         | 31,739 |         |  |                | 30,937 |              |  |         | 29,037  |         |  |         | 12,573  |   |  |   | 18,665 |   |  |   | 32,088 |   |  |   | 33,567 |   |  |   | 29,716  |  
|                                                                         |  |                                       |         |                     |  |         |        |         |  |                |        |              |  |         |         |         |  |         |         |   |  |   |        |   |  |   |        |   |  |   |        |   |  |   |         |  
|Gross profit                                                             |  |                                       | 42,927  |                     |  |         | 49,960 |         |  |                | 51,801 |              |  |         | 44,255  |         |  |         | 12,733  |   |  |   | 30,947 |   |  |   | 51,420 |   |  |   | 55,965 |   |  |   | 46,899  |  
|                                                                         |  |                                       |         |                     |  |         |        |         |  |                |        |              |  |         |         |         |  |         |         |   |  |   |        |   |  |   |        |   |  |   |        |   |  |   |         |  
|Net income (loss)*                                                       |  | $                                     | (16,506 | )                   |  | $       | (3,646 | )       |  | $              | (2,441 | )            |  | $       | (9,084  | )       |  | $       | (9,326  | ) |  | $ | 27,890 |   |  | $ | (4,557 | ) |  | $ | 3,463  |   |  |   | (14,430 | )
|Net income (loss) attributable to common stock*                          |  | $                                     | (16,506 | )                   |  | $       | (3,646 | )       |  | $              | (6,259 | )            |  | $       | (12,860 | )       |  | $       | (10,836 | ) |  | $ | 27,890 |   |  | $ | (4,557 | ) |  | $ | 3,463  |   |  | $ | (14,430 | )
|Basic and diluted loss per common share
    attributable to common stock |  | $                                     | (2.36   | )                   |  | $       | (0.52  | )       |  | $              | (0.89  | )            |  | $       | (1.84   | )       |  | $       | (1.55   | ) |  | $ | 0.98   |   |  | $ | (0.16  | ) |  | $ | 0.12   |   |  | $ | (0.51   | )
|Direct operating expenses as a % of revenues                             |  |                                       | 41.7    | %                   |  |         | 38.8   | %       |  |                | 37.4   | %            |  |         | 39.6    | %       |  |         | 49.7    | % |  |   | 37.6   | % |  |   | 38.4   | % |  |   | 37.5   | % |  |   | 38.8    | %
|Gross contribution as a % of revenues                                    |  |                                       | 58.3    | %                   |  |         | 61.2   | %       |  |                | 62.6   | %            |  |         | 60.4    | %       |  |         | 50.3    | % |  |   | 62.4   | % |  |   | 61.6   | % |  |   | 62.5   | % |  |   | 61.2    | %



---



|  |                                                                                                                           
|- | --------------------------------------------------------------------------------------------------------------------------
|* | There were no extraordinary items or cumulative
    effect of accounting change adjustments, during the above
    periods.

Historically, our operations and related revenues
and operating results have varied substantially from quarter to
quarter. We expect these variations to continue for a variety of
reasons, primarily seasonality. However, due to the fixed nature
of certain expenses, such as marketing and rent, our operating
expenses do not vary as significantly from quarter to quarter.

Liquidity and Capital Resources



| |                
| | ---------------
| | Working Capital

We use our cash flows primarily for operating
expenses, debt service, and capital expenditures. Currently, our
principal sources of liquidity consist of cash flows from
operations, existing cash balances and a $2.0 million
working capital revolving credit facility that expires on
May 1, 2004. Cash flows from operations may be adversely
affected by factors such as a reduction in demand for lodging or
certain large scale renovations being performed at our hotels.
To the extent that significant amounts of our accounts
receivable are due from airline companies, a further downturn in
the airline industry also could materially and adversely affect
the collectibility of our accounts receivable, and hence our
liquidity. At December 31, 2003, airline receivables
represented approximately 25% of our accounts receivable, net of
allowances. A further downturn in the airline industry could
also affect our revenues by decreasing the aggregate levels of
demand for travel. We expect that the sale of certain assets
will provide additional cash to pay down outstanding debt and to
fund a portion of our capital expenditures. One of our hotels
and an office building were sold during 2003, four hotels were
sold between January 1, 2004 and March 1, 2004 and we
have 14 hotels and three land parcels as held for sale. Of the
five hotels and one office building sold between
November 1, 2003 and March 1, 2004, the aggregate net
proceeds received were $23.2 million, $14.6 million of
which was used to pay down debt and $8.6 million of which
was used for general corporate purposes, including capital
expenditures.

Our ability to make scheduled debt service
payments and fund operations and capital expenditures depends on
our future performance and financial results, including the
successful implementation of our business strategy and, to a
certain extent, the general condition of the lodging industry
and the general economic, political, financial, competitive,
legislative and regulatory environment. In addition, our ability
to

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refinance our indebtedness depends to a certain
extent on these factors as well. Many factors affecting our
future performance and financial results, including the severity
and duration of macroeconomic downturns, are beyond our control.
See Matters Which May Affect Future Results 
Risks Related to Our Business.


During 2004, we will seek to raise capital
through an offering to the public of our common stock, the
purpose of which will be to redeem our outstanding Preferred
Stock to fund capital expenditures related to renovations and
repositionings of selected hotels, and for general corporate
purposes, including funding our growth strategy.

We intend to continue to use our cash flow to
make scheduled debt service payments and fund our operations and
capital expenditures and, therefore, do not anticipate paying
dividends on our common stock in the foreseeable future. As
provided by the terms of the Preferred Stock, we paid the
dividends that were due on our Preferred Stock on
November 21, 2003 by the issuance of additional shares of
Preferred Stock, with fractional shares paid in cash.

Although we have emerged from Chapter 11,
the distribution of shares to the general unsecured creditors is
not complete as we continue to reconcile the claims made by
those creditors. We have established a disputed claims reserve
out of which those claims will be paid. Until this process is
complete, we will continue to incur expenses in respect of these
claims as well as Bankruptcy Court fees and professional fees.

In accordance with GAAP, all assets held for
sale, including assets that would normally be classified as
long-term assets in the ordinary course of business, were
reported as assets held for sale in current assets.
Similarly, all liabilities related to assets held for sale were
moved to the current liability category, including debt that
would otherwise be classified as long-term liabilities in the
ordinary course of business.

At December 31, 2003, after reclassifying
assets held for sale as current assets and liabilities related
to the assets held for sale as current liabilities, we had
working capital (current assets less current liabilities) of
$2.4 million, compared with a working capital deficit of
$6.8 million at December 31, 2002. See
 Debt, contractual obligations and franchise
agreements  Exit Financing with respect to our
decision to include the Merrill Lynch Mortgage debt financing in
our long-term debt.

Although there was some recovery in the hotel
industry during the second half of 2003, the weak U.S. economy
and the severe decline in the lodging industry after the
terrorist attacks on September 11, 2001 continued to
negatively affect lodging demand during 2003. It is difficult to
predict how long it will take for the industry to recover fully
and for our revenues from continuing operations to reach
satisfactory levels. We continue to focus on hotel renovations
and repositionings, both as a means of improving our competitive
position in individual markets and to comply with franchisor
requirements. During 2004, we plan to spend approximately
$40 million on capital expenditures, subject to
availability of funds. In the short term, we continue to
diligently monitor our costs.

We believe that the combination of our current
cash, cash flows from operations, capital expenditure escrows,
and the proceeds of asset sales will be sufficient to meet our
liquidity needs for the next 24 months. If we fail to
qualify for extensions of maturity on our debt obligations to
Merrill Lynch Mortgage and/or Lehman, we will seek to refinance
those obligations with other lenders. If we are unable to
refinance those obligations with other lenders, we will pursue
asset sales to reduce total indebtedness and loan-to-value
ratios, and then seek to refinance the remaining debt. It may
not be possible to effect those asset sales in a timely fashion;
further, large-scale sales of hotels might adversely affect our
business. We cannot provide assurance that we will qualify for
extensions of maturity on either the Merrill Lynch or Lehman
debt, or that, if we do not so qualify, we would be able to
refinance those obligations with third parties on favorable
terms, or at all.

Our ability to meet our longer-term cash needs is
dependent on the recovery of the economy and the lodging
industry, improved operating results, the successful
implementation of our portfolio improvement strategy and our
ability to obtain third party sources of capital on favorable
terms as and when needed. Our future liquidity needs and sources
of working capital are subject to uncertainty and we can provide
no assurance that we will have sufficient liquidity to be able
to meet our operating expenses, debt service requirements,
including scheduled maturities, and planned capital
expenditures. We could lose the right to operate certain hotels
under nationally recognized brand names, and furthermore, the
termination of one or

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more franchise agreements could lead to defaults
and acceleration under one or more of our loan agreements as
well as obligations to pay liquidated damages under the
franchise agreements. See Matters Which May Affect Future
Results  Risks Related to Our Business for
further discussion of conditions that could adversely affect our
estimates of future liquidity needs and sources of working
capital.


Cash Flow



| |                                                 
| | ------------------------------------------------
| | Operating activities (Continuing
    Operations)

During 2003, operating activities generated
$34.8 million in cash, while cash flows used in operating
activities for the 2002 Combined Period was $6.0 million. The
increase in cash provided by operating activities is partially
attributable to the availability in 2003 of cash which was
previously restricted and also to the reduction in
Chapter 11 expenses.



| |                                                 
| | ------------------------------------------------
| | Investing activities (Continuing
    Operations)

Investing activities accounted for an outlay of
approximately $22.9 million for 2003 compared with
$30.6 million for the 2002 Combined Period. Due primarily
to large scale renovations performed at some of our hotels
during 2003, capital expenditures totaled $30.8 million,
$7.5 million higher than the $23.3 million spent in
the 2002 Combined Period. Capital expenditures in 2003 were
partially funded by withdrawals of $7.2 million from
lender-controlled capital expenditure escrows, while in the 2002
Combined Period, these escrow balances were increased by
$6.2 million. We also received proceeds of
$0.8 million in 2003 as compensation for the condemnation
of land. Net proceeds from the sale of a hotel and an office
building totaled $12.3 million. Though the net sale
proceeds of $12.3 million formed part of our cash provided
from investing activities, on a consolidated basis, this is not
reflected in the investing activities for our continuing
operations on our consolidated statement of cash flows since it
forms part of the cash flows of our discontinued operations.
Other investing activities consisted primarily of other deposits
and payments of franchise application fees net of refunds.



| |                                                 
| | ------------------------------------------------
| | Financing activities (Continuing
    Operations)

Cash flows used in financing activities were
$11.8 million for 2003 while cash provided by financing
activities was $33.7 million for the 2002 Combined Period.
Financing activities for 2003 consisted primarily of proceeds of
long-term debt of $80.0 million relating to the Lehman
Financing and proceeds from the working capital revolver of
$2.0 million, offset by repayment of other long-term debt
of $87.1 million and the revolver of $2.0 million. The
repayment of long-term obligations of $87.1 million
includes the repayment of the mortgage debt which was secured by
18 hotels that emerged from Chapter 11 on May 22, 2003.
This debt was repaid from the proceeds of the Lehman Financing.
Payment of deferred loan fees for 2003 of $4.8 million
relates to the Lehman Financing. For the 2002 Combined Period,
financing activities consisted of proceeds of long-term debt of
$309.0 million from our exit financing, received in
November 2002, less payments of long-term debt of
$267.8 million, primarily relating to debt repaid from the
exit financing. The payments of deferred loan fees for the 2002
Combined Period of $7.6 million related primarily to costs
of obtaining the exit financing.

On September 18, 2003, we drew down the full
availability of $2.0 million under a revolving loan
agreement with OCM Real Estate Opportunities Fund II, L.P.
(OCM Fund II). The facility is secured by two
land parcels located in California and New Jersey and expires on
May 1, 2004. Borrowings under the facility bear interest at
the fixed rate of 10% per annum and were repaid in December 2003
out of the proceeds we received from the sale of an office
building. As of March 1, 2004, the full amount was
available on the facility.

Oaktree Capital Management, LLC
(Oaktree) may be deemed to be the beneficial owner
of 1,664,752 shares of our common stock, including 1,578,611
shares owned by OCM Fund II. Oaktree is the general partner
of OCM Fund II; accordingly, Oaktree may be deemed to
beneficially own the shares owned by OCM Fund II. Oaktree
disclaims any such beneficial ownership. Russel S. Bernard, a
principal of Oaktree, and Sean F. Armstrong, a managing director
of Oaktree, are also directors of Lodgian.

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##### Table of Contents



Debt, contractual obligations and franchise
agreements

The following table sets forth our debt and
contractual obligations:

|                                                                                  |                                                       |                  |         |                                     |  |      |        |        |  |      |         |         |  |            |       |       |  |   |        |        |  |   |       |       |  |   |         |         | 
|--------------------------------------------------------------------------------- | ----------------------------------------------------- | ---------------- | ------- | ----------------------------------- |  | ---- | ------ | ------ |  | ---- | ------- | ------- |  | ---------- | ----- | ----- |  | - | ------ | ------ |  | - | ----- | ----- |  | - | ------- | ------- | 
|                                                                                  |                                                       |                  |         |                                    
|                                                                                  |                                                       |                  |         | Contractual Obligations Due by Year
|                                                                                  |                                                       |                  |         |                                    
|                                                                                  |                                                       | Total            |         | 2004                                |  | 2005 |        | 2006   |  | 2007 |         | 2008    |  | After 2008
|                                                                                  |                                                       |                  |         |                                     |  |      |        |        |  |      |         |         |  |           
|                                                                                  |                                                       |                 
|                                                                                  |                                                       | ($ in thousands)
|Continuing Operations                                                             |                                                       |                  |         |                                     |  |      |        |        |  |      |         |         |  |            |       |       |  |   |        |        |  |   |       |       |  |   |         |        
|Exit Financing(1)                                                                 |                                                       |                  |         |                                     |  |      |        |        |  |      |         |         |  |            |       |       |  |   |        |        |  |   |       |       |  |   |         |        
|Merrill Lynch Mortgage Lending, Inc.(6)                                           |                                                       | $                | 274,238 |                                     |  | $    | 4,237  |        |  | $    | 270,001 |         |  | $          |      |       |  | $ |       |        |  | $ |      |       |  | $ |        |        
|Computershare Trust Company of Canada                                             |                                                       |                  | 7,521   |                                     |  |      | 222    |        |  |      | 240     |         |  |            | 259   |       |  |   | 6,800  |        |  |   |      |       |  |   |        |        
|Lehman Financing(2)                                                               |                                                       |                  |         |                                     |  |      |        |        |  |      |         |         |  |            |       |       |  |   |        |        |  |   |       |       |  |   |         |        
|Lehman Brothers Holdings, Inc.                                                    |                                                       |                  | 51,126  |                                     |  |      | 757    |        |  |      | 50,369  |         |  |            |      |       |  |   |       |        |  |   |      |       |  |   |        |        
|Other Financings(3)                                                               |                                                       |                  |         |                                     |  |      |        |        |  |      |         |         |  |            |       |       |  |   |        |        |  |   |       |       |  |   |         |        
|Column Financial, Inc.                                                            |                                                       |                  | 27,300  |                                     |  |      | 2,242  |        |  |      | 2,491   |         |  |            | 2,768 |       |  |   | 3,076  |        |  |   | 3,418 |       |  |   | 13,305  |        
|Lehman Brothers Holdings, Inc.                                                    |                                                       |                  | 23,409  |                                     |  |      | 482    |        |  |      | 529     |         |  |            | 580   |       |  |   | 21,818 |        |  |   |      |       |  |   |        |        
|JP Morgan Chase Bank                                                              |                                                       |                  | 10,644  |                                     |  |      | 530    |        |  |      | 570     |         |  |            | 615   |       |  |   | 665    |        |  |   | 720   |       |  |   | 7,544   |        
|DDL Kinser                                                                        |                                                       |                  | 2,385   |                                     |  |      | 98     |        |  |      | 2,287   |         |  |            |      |       |  |   |       |        |  |   |      |       |  |   |        |        
|Column Financial, Inc.                                                            |                                                       |                  | 8,943   |                                     |  |      | 398    |        |  |      | 437     |         |  |            | 480   |       |  |   | 528    |        |  |   | 580   |       |  |   | 6,520   |        
|Column Financial, Inc.                                                            |                                                       |                  | 3,206   |                                     |  |      | 137    |        |  |      | 3,069   |         |  |            |      |       |  |   |       |        |  |   |      |       |  |   |        |        
|Robb Evans, Trustee                                                               |                                                       |                  | 6,982   |                                     |  |      | 6,982  |        |  |      |        |         |  |            |      |       |  |   |       |        |  |   |      |       |  |   |        |        
|                                                                                  |                                                       |                  |         |                                     |  |      |        |        |  |      |         |         |  |            |       |       |  |   |        |        |  |   |       |       |  |   |         |        
|                                                                                  | Total Other Financings                                |                  |         | 82,869                              |  |      |        | 10,869 |  |      |         | 9,383   |  |            |       | 4,443 |  |   |        | 26,087 |  |   |       | 4,718 |  |   |         | 27,369  | 
|                                                                                  |                                                       |                  |         |                                     |  |      |        |        |  |      |         |         |  |            |       |       |  |   |        |        |  |   |       |       |  |   |         |        
|                                                                                  |                                                       |                  | 415,754 |                                     |  |      | 16,085 |        |  |      | 329,993 |         |  |            | 4,702 |       |  |   | 32,887 |        |  |   | 4,718 |       |  |   | 27,369  |        
|Long-term debt  other(4)                                                         |                                                       |                  | 8,043   |                                     |  |      | 478    |        |  |      | 3,447   |         |  |            | 391   |       |  |   | 397    |        |  |   | 382   |       |  |   | 2,948   |        
|                                                                                  |                                                       |                  |         |                                     |  |      |        |        |  |      |         |         |  |            |       |       |  |   |        |        |  |   |       |       |  |   |         |        
|                                                                                  |                                                       |                  | 423,797 |                                     |  |      | 16,563 |        |  |      | 333,440 |         |  |            | 5,093 |       |  |   | 33,284 |        |  |   | 5,100 |       |  |   | 30,317  |        
|12.25% cumulative Series A Preferred Stock
    subject to mandatory redemption(5) |                                                       |                  | 140,294 |                                     |  |      |       |        |  |      |        |         |  |            |      |       |  |   |       |        |  |   |      |       |  |   | 140,294 |        
|Ground and parking lease obligations                                              |                                                       |                  | 107,245 |                                     |  |      | 2,765  |        |  |      | 2,776   |         |  |            | 2,784 |       |  |   | 2,806  |        |  |   | 2,846 |       |  |   | 93,268  |        
|                                                                                  |                                                       |                  |         |                                     |  |      |        |        |  |      |         |         |  |            |       |       |  |   |        |        |  |   |       |       |  |   |         |        
|                                                                                  | Total continuing obligations                          |                  |         | 671,336                             |  |      |        | 19,328 |  |      |         | 336,216 |  |            |       | 7,877 |  |   |        | 36,090 |  |   |       | 7,946 |  |   |         | 263,879 | 
|Obligations Related to Assets Held for
    Sale                                   |                                                       |                  |         |                                     |  |      |        |        |  |      |         |         |  |            |       |       |  |   |        |        |  |   |       |       |  |   |         |        
|Exit Financing(1)                                                                 |                                                       |                  |         |                                     |  |      |        |        |  |      |         |         |  |            |       |       |  |   |        |        |  |   |       |       |  |   |         |        
|Merrill Lynch Mortgage Lending, Inc.(6)                                           |                                                       |                  | 25,095  |                                     |  |      | 388    |        |  |      | 24,707  |         |  |            |      |       |  |   |       |        |  |   |      |       |  |   |        |        
|Lehman Financing(2)                                                               |                                                       |                  |         |                                     |  |      |        |        |  |      |         |         |  |            |       |       |  |   |        |        |  |   |       |       |  |   |         |        
|Lehman Brothers Holdings, Inc.                                                    |                                                       |                  | 25,323  |                                     |  |      | 327    |        |  |      | 24,996  |         |  |            |      |       |  |   |       |        |  |   |      |       |  |   |        |        
|Other Financings(3)                                                               |                                                       |                  |         |                                     |  |      |        |        |  |      |         |         |  |            |       |       |  |   |        |        |  |   |       |       |  |   |         |        
|First Union Bank                                                                  |                                                       |                  | 3,359   |                                     |  |      | 56     |        |  |      | 63      |         |  |            | 69    |       |  |   | 3,171  |        |  |   |      |       |  |   |        |        
|Long-term debt  other(4)                                                         |                                                       |                  | 1,308   |                                     |  |      |       |        |  |      | 1,308   |         |  |            |      |       |  |   |       |        |  |   |      |       |  |   |        |        
|Ground and parking lease obligations                                              |                                                       |                  | 7,539   |                                     |  |      | 555    |        |  |      | 563     |         |  |            | 571   |       |  |   | 554    |        |  |   | 552   |       |  |   | 4,744   |        
|                                                                                  |                                                       |                  |         |                                     |  |      |        |        |  |      |         |         |  |            |       |       |  |   |        |        |  |   |       |       |  |   |         |        
|                                                                                  | Total Obligations Related to Assets Held for
    Sale |                  |         | 62,624                              |  |      |        | 1,326  |  |      |         | 51,637  |  |            |       | 640   |  |   |        | 3,725  |  |   |       | 552   |  |   |         | 4,744   | 
|                                                                                  |                                                       |                  |         |                                     |  |      |        |        |  |      |         |         |  |            |       |       |  |   |        |        |  |   |       |       |  |   |         |        
|                                                                                  |                                                       | $                | 733,960 |                                     |  | $    | 20,654 |        |  | $    | 387,853 |         |  | $          | 8,517 |       |  | $ | 39,815 |        |  | $ | 8,498 |       |  | $ | 268,623 |        
|                                                                                  |                                                       |                  |         |                                     |  |      |        |        |  |      |         |         |  |            |       |       |  |   |        |        |  |   |       |       |  |   |         |        



---



|    |                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Discussed below under the caption Exit
    Financing.                                                                                                                                                                                                                                             
|   
|(2) | Discussed below under the caption Lehman
    Financing.                                                                                                                                                                                                                                           
|   
|(3) | Discussed below under the caption Other
    Financings.                                                                                                                                                                                                                                           
|   
|(4) | Comprised of deferred interest related to the
    Lehman Financing of $4.3 million, a long-term ground lease
    ($2.5 million), unsecured notes payable of
    $2.0 million and other deferred credits of
    $0.6 million.                                                                        
|   
|(5) | Discussed below under the caption Preferred
    Stock.                                                                                                                                                                                                                                            
|   
|(6) | In the table above, we report the Merrill Lynch
    Mortgage debt as maturing in November 2005 because we intend to
    extend the maturity date and we believe we will be eligible for
    that extension. See also Factors Which May Affect Future
    Results  Risks Relating to Our Business.

45



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##### Table of Contents



We did not include the following information in
the table above:



| |   |                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Interest obligations  A substantial
    portion of our interest payments vary with LIBOR and would be
    difficult to project. For 2003, interest paid with respect to
    our continuing operations was $29.8 million;                                                                                                          
|
| |  | Franchise fees  Substantially all of
    our franchise fees vary with our revenues. Franchise fees
    expense for 2003 relating to our continuing operations are shown
    below under the caption Franchise Agreements and Capital
    Expenditures;                                                                          
|
| |  | Equipment rentals and costs relating to our
    maintenance contracts  These items are of a short
    term nature and are cancellable by us. For 2003, costs relating
    to equipment rentals and maintenance contracts for our
    continuing operations were approximately $1.9 million and
    $4.6 million, respectively; and
|
| |  | Property and income taxes  These taxes
    vary from year to year and are not estimable. For 2003, property
    taxes relating to our continuing operations were
    $12.2 million. We paid no federal income taxes for 2003.
    State income taxes paid, net of refunds, for 2003 were
    $0.2 million.                        
|
| |  | Other purchase obligations  As of
    December 31, 2003, we had no material purchase obligations.                                                                                                                                                                                                                                 

Exit Financing

On November 25, 2002, we received exit
financing of $309.0 million comprised of three separate
components as follows:



| |   |                                                                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Senior debt of $224.0 million from Merrill
    Lynch Mortgage, accruing interest at the rate of LIBOR plus
    2.24%, secured by, among other things, first mortgage liens on
    the fee simple or leasehold interests in 55 of our hotels;                                                                                              
|
| |  | Mezzanine debt of $78.7 million from Merrill
    Lynch Mortgage, accruing interest at the rate of LIBOR plus
    9.00%, secured by the equity interest in the subsidiaries owning
    56 of our hotels (the 55 hotels which secure the senior debt and
    one additional hotel); and                                                     
|
| |  | Debt provided through Computershare Trust Company
    of Canada, a Canadian lender, of $10.0 million Canadian
    dollars (approximately $6.3 million U.S. dollars at
    inception) maturing in December 2007, accruing interest at the
    fixed rate of 7.88% and secured by a mortgage on the property
    located in Windsor, Canada.

In March 2003, as permitted by the terms of the
senior and mezzanine debt agreements, Merrill Lynch Mortgage
exercised its right to resize the senior and
mezzanine debt amounts, prior to the securitization of the
mortgage loan. As a result, the principal amount of the senior
debt was decreased from $223.7 million (initially
$224.0 million less $0.3 million of principal
payments) to $218.1 million, and the principal amount of
the mezzanine debt was increased from $78.6 million
(initially $78.7 million less $0.1 million of
principal payments) to $84.1 million. Though the blended
interest rate on the Merrill Lynch Mortgage debt remained at
LIBOR plus 4.00% at the date of the resizing, the interest rate
on the senior debt was modified to LIBOR plus 2.36% and the
interest rate on the mezzanine debt was modified to LIBOR plus
8.25%. The interest rate on the mezzanine debt increased to
LIBOR plus 8.79% as of December 1, 2003. Therefore, the new
blended rate on the Merrill Lynch Mortgage debt is LIBOR plus
4.15%. Furthermore, as a result of the securitization of the
mortgage loan, Merrill Lynch Mortgage no longer has the right to
amend or waive provisions thereunder.

The senior and mezzanine debt matures in November
2004, but we have three one-year options which could extend the
maturity date for an additional three years. The first option to
extend the maturity date of the senior and mezzanine debt by up
to one year (to November 2005) is available to us provided no
events of default occur in respect of the payment of principal,
interest and other required amounts. Because we intend to extend
the maturity date and we believe we will be eligible for that
extension, we report the senior and mezzanine debt as maturing
in 2005. The second and third extension terms will be available
to us only if no events of default of any kind exist, and are
subject to a minimum debt service coverage ratio of 1.20x and a
debt yield requirement of 13.25%, which we currently do not
satisfy. Payments of principal and interest under

46



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##### Table of Contents



this facility are due monthly. At maturity, we
will either exercise the extension option with Merrill Lynch
Mortgage or seek to refinance these loans with a new lender.


The senior and mezzanine debt agreements provide
that when either (i) the debt yield for the trailing
12-month period is below 13.25% during the year ending November
2004 (and if the loan is extended, 13.50%, 13.75% and 14.00%
during each of the next three years of the loan, respectively)
or (ii) the debt service coverage ratio is below 1.20x,
excess cash flows produced by the mortgaged hotels (after
payment of operating expenses, management fees, required
reserves, service fees, principal and interest) must be
deposited in a restricted cash account. These funds can be used
for the prepayment of aggregate outstanding borrowings, capital
expenditures reasonably approved by the lender, and up to an
aggregate $3.0 million of scheduled principal and interest
payments due under these agreements. Funds will no longer be
deposited into the restricted cash account when the debt yield
and the debt service coverage ratio are sustained above the
minimum requirements for three consecutive months. On
March 31, 2003, the debt yield for the hotels securing this
debt fell below the then applicable 12.75% minimum threshold
and, therefore, the excess cash flow produced by the hotels
securing the debt was retained in the restricted cash account
starting on May 1, 2003. The restricted cash balance in
this account as of December 31, 2003 was $0.9 million.
During 2003, $7.5 million was released from the restricted
cash account for capital expenditures and scheduled interest and
principal payments. As of March 1, 2004, no cash was being
retained in the restricted cash account. At December 31,
2003, the debt yield and the debt service coverage ratio
remained below the minimum requirements. Further, the mezzanine
debt agreement with Merrill Lynch Mortgage requires that we
maintain a minimum net worth of at least $10.0 million.



| |                 
| | ----------------
| | Lehman Financing

On May 22, 2003, we completed the
$80.0 million Lehman Financing, which was primarily used to
settle debts secured by 18 hotels. The Lehman Financing,
provided to 18 newly-formed subsidiaries (one for each
hotel), is a two-year term loan with an optional one-year
extension and bears interest at the higher of 7.25% or LIBOR
plus 5.25%. The one-year extension is only available if, at the
time of electing to extend and at the initial maturity date,
there are no events of default. If we opt for the one-year
extension, an extension fee of $3.0 million is payable.
Pursuant to the terms of the agreement, additional interest of
$4.4 million is also payable upon the maturity date
(May 22, 2005, or the new maturity date if we opt for the
extension). Payments of principal and interest on the Lehman
Financing are due monthly. If an event of default occurs, the
interest rate increases by 325 basis points, or 3.25%, for
the period of the default. At maturity in May 2005, we will
either exercise this extension option with Lehman or seek to
refinance these loans with a new lender.



| |                 
| | ----------------
| | Other Financings

On November 25, 2002, loans approximating
$83.5 million, secured by 20 hotels, were substantially
reinstated on their original terms, except for the extension of
certain maturities. The terms of one other loan, in the amount
of $2.5 million and secured by one hotel, were amended to
provide for a new interest rate and a new maturity date.

Our indebtedness to J.P. Morgan Chase of
approximately $10.6 million represents industrial revenue
bonds issued on the Holiday Inn Lawrence and Holiday Inn
Manhattan, both Kansas properties. The industrial revenue bonds
require a minimum debt service coverage ratio, calculated as of
the end of each calendar year. For the year ended
December 31, 2003, the cash flows of both hotels were
insufficient to meet the minimum debt service coverage ratio
requirements. The trustee of the industrial revenue bonds may
give notice of default, at which time we could remedy the
default by depositing with the trustee an amount currently
estimated at approximately $0.4 million. In the event a
default is declared and not cured, the properties would be
subject to foreclosure and we would be obligated to reimburse
bondholders, pursuant to a partial guaranty, of approximately
$1.4 million. In addition, we could be obligated to pay our
franchisor liquidated damages in the amount of
$1.3 million. Total revenues for these two hotels for the
year ended December 31, 2003, the 2002 Combined Period and
the year ended December 31, 2001 were $8.0 million,
$7.2 million and $9.1 million, respectively.

47



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##### Table of Contents



On September 30, 2003, first mortgage debt
of approximately $7.0 million of MHA became due. We own 60%
of MHA, and MHAs sole asset is the Crowne Plaza Hotel in
Macon, Georgia. The lender initially agreed to extend the term
of the debt to December 31, 2003, and then to June 30,
2004, while we explore alternative financing opportunities. We
have escrowed foreclosure documents that will allow the lender
to foreclose on the property on June 30, 2004 if we have
not repaid the mortgage debt by that date. There can be no
assurance that we will complete a refinancing on or before the
due date or that the lender will grant further extensions. If we
are not able to refinance the debt and the lender does not grant
further extensions, the property would be subject to
foreclosure. A foreclosure on the property would constitute a
default of the franchise agreement; therefore, we may be liable
for $0.9 million in liquidated damages under the franchise
agreement. Total revenues for the Crowne Plaza Hotel in Macon,
Georgia for the year ended December 31, 2003, the 2002
Combined Period and the year ended December 31, 2001 were
$5.6 million, $5.9 million and $6.0 million,
respectively. The debt of approximately $7.0 million is
included in the current portion of long-term debt in our
consolidated balance sheet.

48



---



##### Table of Contents





| |                     
| | --------------------
| | Mortgaged Properties

Set forth below, by debt pool, is a summary of
our long-term debt (including current portion) with the
applicable interest rates and the carrying values of the
property, plant and equipment which collateralize the long-term
debt:

|                                                     |                                                                   |                          |     |                     |    |                |         |                |         |   |         |       |         |                                     |                  |  |  | 
|---------------------------------------------------- | ----------------------------------------------------------------- | ------------------------ | --- | ------------------- | -- | -------------- | ------- | -------------- | ------- | - | ------- | ----- | ------- | ----------------------------------- | ---------------- |  |  | 
|                                                     |                                                                   |                          |     |                     |    |               
|                                                     |                                                                   |                          |     | December 31, 2003   |    |               
|                                                     |                                                                   |                          |     |                     |    |               
|                                                     |                                                                   | No. of                   |     | Property, plant and |    | Long-term      |         |               
|                                                     |                                                                   | Hotels                   |     | equipment, net(1)   |    | obligations(1) |         | Interest rates
|                                                     |                                                                   |                          |     |                     |    |                |         |               
|                                                     |                                                                   |                          |     |                     |    |               
|                                                     |                                                                   |                          |     | ($ in thousands)    |    |               
|Exit Financing                                       |                                                                   |                          |     |                     |    |                |         |                |         |   |         |       |         |                                     |                  | 
|Merrill Lynch Mortgage Lending, Inc. 
    Senior    |                                                                   |                          |     |                     |    |                |         |                |         | $ | 216,052 |       |         |                                     | LIBOR plus 2.36% | 
|Merrill Lynch Mortgage Lending, Inc. 
    Mezzanine |                                                                   |                          |     |                     |    |                |         |                |         |   | 83,281  |       |         |                                     | LIBOR plus 8.79% | 
|                                                     |                                                                   |                          |     |                     |    |                |         |                |         |   |         |       |         |                                     |                  | 
|Merrill Lynch Mortgage Lending, Inc. 
    Total     |                                                                   |                          | 56  |                     |    | $              | 401,793 |                |         |   | 299,333 |       |         |                                     |                  | 
|Computershare Trust Company of Canada                |                                                                   |                          | 1   |                     |    |                | 14,106  |                |         |   | 7,521   |       |         |                                     | 7.88%            | 
|Lehman Financing                                     |                                                                   |                          |     |                     |    |                |         |                |         |   |         |       |         |                                     |                  | 
|Lehman Brothers Holdings, Inc.                       |                                                                   |                          | 17  |                     |    |                | 69,539  |                |         |   | 76,449  |       |         | Higher of LIBOR plus 5.25% or 7.25%
|Other Financings                                     |                                                                   |                          |     |                     |    |                |         |                |         |   |         |       |         |                                     |                  | 
|Column Financial, Inc.                               |                                                                   |                          | 9   |                     |    |                | 61,681  |                |         |   | 27,300  |       |         |                                     | 10.59%           | 
|Lehman Brothers Holdings, Inc.                       |                                                                   |                          | 5   |                     |    |                | 38,125  |                |         |   | 23,409  |       |         | $16,496 at 9.40%; $6,913 at 8.90%  
|JP Morgan Chase Bank                                 |                                                                   |                          | 2   |                     |    |                | 8,913   |                |         |   | 10,644  |       |         |                                     | 7.25%            | 
|DDL Kinser                                           |                                                                   |                          | 1   |                     |    |                | 3,188   |                |         |   | 2,385   |       |         |                                     | 8.25%            | 
|First Union Bank                                     |                                                                   |                          | 1   |                     |    |                | 4,297   |                |         |   | 3,359   |       |         |                                     | 9.38%            | 
|Column Financial, Inc.                               |                                                                   |                          | 1   |                     |    |                | 6,491   |                |         |   | 8,943   |       |         |                                     | 9.45%            | 
|Column Financial, Inc.                               |                                                                   |                          | 1   |                     |    |                | 6,120   |                |         |   | 3,206   |       |         |                                     | 10.74%           | 
|Robb Evans, Trustee                                  |                                                                   |                          | 1   |                     |    |                | 6,365   |                |         |   | 6,982   |       |         |                                     | Prime plus 4.00% | 
|                                                     |                                                                   |                          |     |                     |    |                |         |                |         |   |         |       |         |                                     |                  | 
|                                                     |                                                                   | Total  Other Financings |     |                     | 21 |                |         |                | 135,180 |   |         |       | 86,228  |                                     |                  |  |  | 
|                                                     |                                                                   |                          |     |                     |    |                |         |                |         |   |         |       |         |                                     |                  | 
|                                                     |                                                                   |                          | 95  |                     |    |                | 620,618 |                |         |   | 469,531 |       |         |                                     | 6.33%(2)         | 
|Long-term debt 
    other                           |                                                                   |                          |     |                     |    |                |         |                |         |   |         |       |         |                                     |                  | 
|                                                     | Deferred interest  long-term                                     |                          |     |                    |    |                |         |               |         |   |         | 4,337 |         |                                     |                  |  | 
|                                                     | Deferred rent on a long-term ground lease                         |                          |     |                    |    |                |         |               |         |   |         | 2,506 |         |                                     |                  |  | 
|                                                     | Tax notes issued pursuant to our Joint Plan of
    Reorganization |                          |     |                    |    |                |         |               |         |   |         | 1,957 |         |                                     |                  |  | 
|                                                     | Other                                                             |                          |     |                    |    |                |         |               |         |   |         | 551   |         |                                     |                  |  | 
|                                                     |                                                                   |                          |     |                     |    |                |         |                |         |   |         |       |         |                                     |                  | 
|                                                     |                                                                   |                          |    |                     |    |                |        |                |         |   | 9,351   |       |         |                                     |                  | 
|                                                     |                                                                   |                          |     |                     |    |                |         |                |         |   |         |       |         |                                     |                  | 
|Property, plant and equipment  other                |                                                                   |                          |    |                     |    |                | 4,824   |                |         |   |        |       |         |                                     |                  | 
|                                                     |                                                                   |                          |     |                     |    |                |         |                |         |   |         |       |         |                                     |                  | 
|                                                     |                                                                   |                          | 95  |                     |    |                | 625,442 |                |         |   | 478,882 |       |         |                                     |                  | 
|Held for sale                                        |                                                                   |                          | (18 | )                   |    |                | (61,624 | )              |         |   | (53,204 | )     |         |                                     |                  | 
|                                                     |                                                                   |                          |     |                     |    |                |         |                |         |   |         |       |         |                                     |                  | 
|                                                     |                                                                   | Total December 31, 2003  |     |                     | 77 |                |         | $              | 563,818 |   |         | $     | 425,678 |                                     |                  |  |  | 
|                                                     |                                                                   |                          |     |                     |    |                |         |                |         |   |         |       |         |                                     |                  | 



---



|    |                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Long-term obligations and property, plant and
    equipment of the one hotel in which we have a non-controlling
    equity interest and do not consolidate are excluded from the
    table above.
|   
|(2) | Represents the annual weighted average cost at
    December 31, 2003.                                                                                                                            

The documents governing the terms of both the
Merrill Lynch Mortgage debt and the Lehman Financing contain
covenants that place restrictions on certain of our
subsidiaries activities, including acquisitions, mergers
and consolidations, the sale of our assets, and the incurrence
of liens. Failure to comply with the covenants under a loan
agreement would, and franchise agreement terminations could,
constitute an event of default that would permit acceleration by
a lender. Acceleration of a loan agreement could materially and
adversely affect us. See Matters Which May Affect Future
Results  Risks Relating to Our Business.

49



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##### Table of Contents





| |                
| | ---------------
| | Preferred Stock

On November 25, 2002, we issued 5,000,000
shares of Preferred Stock with a par value of $0.01 at $25.00
per share. Each share of Preferred Stock has a liquidation
preference over our common stock. The dividend is cumulative,
compounded annually and is payable at the rate of 12.25% per
annum on November 21 of each year. As provided by the terms
of the Preferred Stock, the first dividend was paid on
November 21, 2003 by means of the issuance of additional
shares of Preferred Stock, with fractional shares paid in cash.
We thus issued 594,299 shares of Preferred Stock as dividends
and paid cash dividends of approximately $18,500 for fractional
shares. We expect to issue an additional 17,461 shares of
Preferred Stock as dividends to those general unsecured
creditors who have not yet received their shares of Preferred
Stock. If any Preferred Stock is then outstanding, the board of
directors will determine whether the dividends due
November 21, 2004 and 2005 will be paid in cash or in kind
via the issuance of additional shares of Preferred Stock. The
Preferred Stock is subject to redemption at any time at our
option and to mandatory redemption on November 21, 2012. If
we redeem the Preferred Stock prior to November 21, 2004,
the redemption price will be 104% of the liquidation value per
share of the Preferred Stock. The liquidation value is $25.00
per share plus accrued dividends. The redemption price is
reduced by 1% for each succeeding twelve-month period through
November 20, 2007, after which the Preferred Stock is
redeemable for the liquidation value.

On July 1, 2003, in accordance with SFAS
No. 150, we reclassified the Preferred Stock to the
liability section of our consolidated balance sheet and began
presenting the related dividends in interest expense, which
totaled $8.1 million for the period July 1, 2003 to
December 31, 2003. Prior to the adoption of SFAS
No. 150, we presented the Preferred Stock between
liabilities and equity in our consolidated balance sheet (called
the mezzanine section) and reported the Preferred
Stock dividend as a deduction from retained earnings, with no
effect on our results of operations. In accordance with SFAS
No. 150, the Preferred Stock and the dividends for the
period prior to July 1, 2003, have not been reclassified.



| |                                                  
| | -------------------------------------------------
| | Franchise Agreements and Capital
    Expenditures

We benefit from the superior brand qualities of
the Crowne Plaza, Holiday Inn, Marriott, Hilton and other
brands, including the reputation of these brands, reservation
bookings through their central reservation systems, global
distribution systems, guest loyalty programs and brand Internet
booking sites. Reservations made by means of these franchisor
facilities generally account for approximately 30% of our total
reservations.

To obtain these franchise affiliations, we enter
into franchise agreements with hotel franchisors that generally
have terms of between 10 and 20 years. These franchise
agreements typically authorize us to operate a hotel under the
franchise name, at a specific location or within a specified
area, and require that we operate the hotel in accordance with
the standards specified by the franchisor. As part of our
franchise agreements, we are generally required to pay a royalty
fee, an advertising/marketing fee, a fee for the use of the
franchisors nationwide reservation system and certain
ancillary charges. Royalty fees generally range from 3.0% to
6.0% of gross room revenues, advertising/marketing fees
generally range from 1.0% to 4.5% of gross room revenues and
reservation system fees generally range from 1.0% to 2.0% of
gross room revenues. In the aggregate, royalty fees,
advertising/marketing fees and reservation fees for the various
brands under which we operate our hotels range from 5.0% to
12.5% of gross room revenues.

The costs incurred in connection with these
agreements are primarily monthly payments due to the franchisors
based on a percentage of room revenues. These costs vary with
revenues and are not fixed commitments. Franchise fees incurred
for the year ended December 31, 2003 and the comparative
periods were:

|                        |  |                  |        |          |  |      |        |  |  |   |        | 
|----------------------- |  | ---------------- | ------ | -------- |  | ---- | ------ |  |  | - | ------ | 
|                        |  |                  |        | 2002     |  |     
|                        |  |                  |        | Combined |  |     
|                        |  | 2003             |        | Period   |  | 2001
|                        |  |                  |        |          |  |     
|                        |  |                 
|                        |  | ($ in thousands)
|Continuing operations   |  | $                | 20,569 |          |  | $    | 20,996 |  |  | $ | 22,531 | 
|Discontinued operations |  |                  | 3,816  |          |  |      | 5,303  |  |  |   | 6,053  | 
|                        |  |                  |        |          |  |      |        |  |  |   |        | 
|                        |  | $                | 24,385 |          |  | $    | 26,299 |  |  | $ | 28,584 | 
|                        |  |                  |        |          |  |      |        |  |  |   |        | 

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During the term of the franchise agreements, the
franchisors may require us to upgrade facilities to comply with
their current standards. Our current franchise agreements
terminate at various times and have differing remaining terms.
For example, the terms of seven, twelve and ten of our franchise
agreements are scheduled to expire in 2004, 2005 and 2006,
respectively. As franchise agreements expire, we may apply for a
franchise renewal. In connection with renewals, the franchisor
may require payment of a renewal fee, increased royalty and
other recurring fees and substantial renovation of the
facilities, or the franchisor may elect at its sole discretion
not to renew the franchise.

If we do not comply with the terms of a franchise
agreement, following notice and an opportunity to cure the
noncompliance or default, the franchisor has the right to
terminate the agreement, which could lead to a default and
acceleration under one or more of our loan agreements, which
could materially and adversely affect us. In the past, we have
been able to cure most cases of noncompliance and most defaults
within the cure periods. If we perform an economic analysis of
the hotel and determine that it is not economically justifiable
to comply with a franchisors requirements, we will either
select an alternative franchisor or operate the hotel without a
franchise affiliation. This could adversely affect us. See
Factors Which May Affect Future
Results  Risks Related to Our Business.

As of March 1, 2004, we have been notified
that we were not in compliance with some of the terms of ten of
our franchise agreements and have received default and
termination notices from franchisors with respect to an
additional five hotels. We cannot assure you that we will be
able to complete our action plans (which we estimate will cost
approximately $6.4 million) to cure the alleged instances
of noncompliance and default prior to the specified termination
dates or be granted additional time in which to cure any
defaults or other noncompliance. We believe we are in compliance
with our other franchise agreements.

In addition, as part of our bankruptcy
reorganization proceedings, we entered into stipulations with
each of our major franchisors setting forth a timeline for
completion of capital expenditures for some of our hotels.
However, we have not completed the required capital expenditures
for 35 hotels in accordance with the stipulations and estimate
that the cost of completing the required capital expenditures is
$26.1 million. The franchisor could therefore seek to
declare its franchise agreement in default and could seek to
terminate the franchise agreement.

With the exception of one hotel held for sale, we
believe that we will cure the noncompliance and defaults on
these hotels before the applicable termination dates, but we
cannot provide assurance that we will be able to do so or that
we will be able to obtain additional time in which to do so. If
a franchise agreement is terminated, we will either select an
alternative franchisor or operate the hotel independently of any
franchisor. However, terminating or changing the franchise
affiliation of a hotel could require us to incur significant
expenses, including liquidated damages, and capital expenditures.

To comply with the requirements of our
franchisors and to improve our competitive position in the
individual markets, we plan to enhance our capital expenditures
in 2004.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements.

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FACTORS WHICH MAY AFFECT FUTURE
RESULTS

We make forward looking statements in this report
and other reports we file with the SEC. In addition, management
may make oral forward-looking statements in discussions with
analysts, the media, investors and others. These statements
include statements relating to our plans, strategies,
objectives, expectations, intentions and adequacy of resources,
and are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The words
believes, anticipates,
expects, intends, plans,
estimates, and projects and similar
expressions are intended to identify forward-looking statements.
These forward-looking statements reflect our current views with
respect to future events and the impact of these events on our
business, financial condition, results of operations and
prospects are subject to many risks and uncertainties including
the following:



| |   |                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The effects of regional, national and
    international economic conditions, including the magnitude and
    duration of the recent economic downturn in the United States;                                                                                           
|
| |  | Competitive conditions in the lodging industry
    and increases in room capacity;                                                                                                                                                                                    
|
| |  | The effects of actual and threatened terrorist
    attacks and international conflicts and their impact on domestic
    and international travel, including the potentially marked
    decrease in travel in connection with military action in Iraq or
    elsewhere;
|
| |  | The effectiveness of changes in management and
    our ability to retain qualified individuals to serve in senior
    management positions;                                                                                                                           
|
| |  | Requirements of franchise agreements, including
    the right of some franchisors to immediately terminate their
    respective agreements if we breach certain provisions;                                                                                           
|
| |  | Seasonality of the hotel business;                                                                                                                                                                                                                                    
|
| |  | The financial condition of the airline industry
    and its impact on air travel;                                                                                                                                                                                     
|
| |  | The effect that Internet reservation channels may
    have on the rates that we are able to charge for hotel rooms;                                                                                                                                                   
|
| |  | Increases in the cost of debt and our continued
    compliance with the terms of our loan agreements;                                                                                                                                                                 
|
| |  | The high level of our assets which are encumbered;                                                                                                                                                                                                                    
|
| |  | Our ability to meet the continuing listing
    requirements of the American Stock Exchange;                                                                                                                                                                           
|
| |  | The effect of self-insured claims in excess of
    our reserves, or our ability to obtain adequate property and
    liability insurance to protect against losses, or to obtain
    insurance at reasonable rates;                                                    
|
| |  | Potential litigation and/or governmental
    inquiries and investigations;                                                                                                                                                                                            



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Laws and regulations applicable to our business,
    including federal, state or local hotel, resort, restaurant or
    land use regulations, employment, labor or disability laws and
    regulations;
|
| |  | The short time that the public market for our new
    securities has existed; and                                                                                                                      
|
| |  | The risks identified below under Risks
    Related to Our Business and Risks Relating to Our
    Common Stock.                                                                                     

Any of these risks and uncertainties could cause
actual results to differ materially from historical results or
those anticipated. Although we believe the expectations
reflected in our forward-looking statements are based upon
reasonable assumptions, we can give no assurance that our
expectations will be attained and caution you not to place undue
reliance on such statements. We undertake no obligation to
publicly update or revise any forward-looking statements to
reflect current or future events or circumstances or their
impact on our business, financial condition, results of
operations and prospects.

The following represents risks and uncertainties
which could either individually or together cause actual results
to differ materially from those described in the forward-looking
statements. If any of the following risks

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actually occur, our business, financial
condition, results of operations, cash flow, liquidity and
prospects are likely to suffer. In that case, the trading price
of our common stock could decline and you may lose all or part
of your investment in our common stock.


Risks Related to Our Business



| |                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to meet the requirements
    imposed by our franchisors in our franchise agreements and
    therefore could lose the right to operate one or more hotels
    under a national brand.

We operate substantially all of our hotels
pursuant to franchise agreements with franchisors for nationally
recognized hotel brands. The franchise agreements generally
contain specific standards for, and restrictions and limitations
on, the operation and maintenance of a hotel in order to
maintain uniformity within the franchisor system. The standards
are subject to change over time. Compliance with any new
standards could cause us to incur significant expenses and
capital expenditures.

If we do not comply with standards or terms of
any of our franchise agreements, those franchise agreements may
be terminated after we have been given notice and an opportunity
to cure the noncompliance or default. As of March 1, 2004,
we have been notified that we were not in compliance with some
of the terms of ten of our franchise agreements and have
received default and termination notices from franchisors with
respect to an additional five hotels. We cannot assure you that
we will be able to complete our action plans (which we estimate
will cost approximately $6.4 million) to cure the alleged
instances of noncompliance and default prior to the specified
termination dates or be granted additional time in which to cure
any defaults or other noncompliance.

In addition, as part of our bankruptcy
reorganization proceedings, we entered into stipulations with
each of our major franchisors setting forth a timeline for
completion of capital expenditures for some of our hotels.
However, as of March 1, 2004, we have not completed the
required capital expenditures for 35 hotels in accordance with
the stipulations and we estimate that the cost of completing
these required capital expenditures is $26.1 million. The
franchisor could therefore seek to declare its franchise
agreement in default and could seek to terminate the franchise
agreement.

If a franchise agreement is terminated, we will
either select an alternative franchisor or operate the hotel
independently of any franchisor. However, terminating or
changing the franchise affiliation of a hotel could require us
to incur significant expenses, including liquidated damages and
capital expenditures. Moreover, the loss of a franchise
agreement could have a material adverse effect upon the
operations or the underlying value of the hotel covered by the
franchise because of the loss of associated guest loyalty, name
recognition, marketing support and centralized reservation
systems provided by the franchisor. We also would be in default
under one or more of our loan agreements if:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we are unable to replace, in a timely fashion
    (which, in the case of hotels that secure our Lehman Financing,
    is only five days), a terminated franchise agreement with a new
    franchise agreement acceptable to the lender whose loan is
    secured by the affected hotel and we fail to prepay a
    contractually specified release value relating to that hotel to
    the lender; or
|
| |  | in the case of hotels that secure our borrowings
    from Merrill Lynch Mortgage, we experience either:                                                                                                                                                                                                                                                                                              



| |   |                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | four franchise agreement terminations at one
    time, or                                                                                              
|
| |  | one or more franchise agreement terminations for
    hotels whose allocated loan amounts represents 5% or more of the
    total allocated loan amounts.

Any such franchise agreement terminations could
materially and adversely affect us.

Our current franchise agreements terminate at
various times and have differing remaining terms. For example,
the terms of seven, twelve and ten of our franchise agreements
are scheduled to expire in 2004, 2005 and 2006, respectively. As
a condition to renewal, the franchise agreements frequently
contemplate a renewal application process, which may require
substantial capital improvements to be made to the hotel and

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substantial increases in franchise fees payable
to the franchisor. Significant unexpected capital expenditures
and franchise fees would adversely affect us.


Hotels
require a high level of capital expenditures, maintenance and
repairs and if we are not able to meet these requirements of our
hotels appropriately, our business and operating results will
suffer.

In order to maintain our hotels in good condition
and attractive appearance, it is necessary to replace
furnishings, fixtures and equipment periodically, generally
every five to seven years, and to maintain and repair public
areas and exteriors on an ongoing basis. Due to a lack of
available funds, made worse by our heavy debt load, weakness in
the U.S. economy, and the severe decline in travel in the
aftermath of the terrorist attacks of September 11, 2001,
we have deferred many capital expenditures on our hotels. If we
do not make necessary maintenance, repairs and capital
improvements, occupancy and room rates could fall, thereby
adversely affecting our operating results, and we risk
termination of franchise agreements at the affected hotels.
Further, the process of renovating a hotel can be disruptive to
operations, and a failure to properly plan and execute
renovations and to schedule them during seasonal declines in
business can result in renovation displacement, an industry term
for a temporary loss of revenue due to implementing renovations.

All of our
hotels are pledged as collateral for mortgage loans, and we have
a significant amount of debt that could limit our operational
flexibility or otherwise adversely affect our financial
condition.

As of December 31, 2003, we had
$478.9 million of total long-term debt outstanding. We are
subject to the risks normally associated with significant
amounts of debt, such as:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We may not be able to repay, refinance or extend
    our maturing indebtedness on favorable terms or at all. We have
    $17.3 million, $384.5 million and $5.2 million of
    indebtedness maturing in 2004, 2005 and 2006, respectively. Of
    these amounts, the Merrill Lynch Mortgage financing, which
    matures in November 2004 and is subject to three one-year
    extensions, totaled $299.3 million as of December 31,
    2003 and currently is secured by 54 of our hotels. The first
    option to extend the maturity date of the Merrill Lynch Mortgage
    debt by up to one year (to November 2005) will be available
    to us as long as no events of default occur in respect of the
    payment of principal, interest and other required amounts.
    Because we intend to extend the maturity date and we believe we
    will be eligible for that extension, we report that debt as
    maturing in 2005. The second and third extension terms will be
    available to us only if no events of default of any type exist
    and minimum debt service coverage ratio and debt yield
    requirements are satisfied, which requirements we currently do
    not satisfy. The Lehman Financing, which matures in 2005 and is
    subject to a one-year extension, totaled $76.4 million as
    of December 31, 2003 and currently is secured by 15 of our
    hotels. The one-year extension will be available only if, at the
    time of electing to extend and at the initial maturity date, no
    events of default of any type exist, and we pay an extension fee
    in the amount of $3.0 million;
|
| |  | If we are unable to refinance or extend the
    maturity of our maturing indebtedness, we may not otherwise be
    able to repay such indebtedness. Debt defaults could lead to us
    being forced to sell one or more of our hotels on unfavorable
    terms or, in the case of secured debt, convey the mortgaged
    hotel(s) to the lender, causing a loss of any anticipated income
    and cash flow from, and our invested capital in, such hotel(s);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | All of our hotels are pledged as collateral under
    existing mortgage loans totaling $469.5 million as of
    December 31, 2003, which represented 75.7% of the book
    value of our hotel property, plant and equipment, net, as of
    December 31, 2003, and, as a result, we have limited
    flexibility to sell our hotels to satisfy cash needs;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Increased vulnerability to downturns in our
    business, the lodging industry and the general economy;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Our cash flow from operations may be insufficient
    to make required debt service payments;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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| |   |                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our ability to obtain other financing to fund
    future working capital, capital expenditures and other general
    corporate requirements may be limited;                                                                                                                                                                                                  
|
| |  | We may be required to dedicate a substantial
    portion of our cash flow from operations to debt service
    payments, reducing the availability of our cash flow to fund
    working capital, capital expenditures, and other needs and
    placing us at a competitive disadvantage with other companies
    that have greater resources and/or less debt;
|
| |  | Our flexibility in planning for, or reacting to,
    changes in our business and industry may be restricted; and                                                                                                                                                                                                                                             
|
| |  | We currently are, and may in the future be,
    unable to pay dividends on our common stock.                                                                                                                                                                                                                                                                 

The terms of
our debt instruments place many restrictions on us, which reduce
operational flexibility and create default risks.

Our outstanding debt instruments subject us to
financial covenants, including leverage and coverage ratios. Our
compliance with these covenants depends substantially upon the
financial results of our hotels. In particular, our debt
agreements with Merrill Lynch Mortgage, an affiliate of one of
the underwriters, require a minimum debt yield and a minimum
debt service coverage ratio. The senior and mezzanine debt
agreements with Merrill Lynch Mortgage provide that when either
(i) the debt yield for the trailing 12-month period is
below 13.25% during the year ending November 2004 (and if the
loan is extended, 13.50%, 13.75% and 14.00% during each of the
next three years of the loan, respectively) or (ii) the
debt service coverage ratio is below 1.20x, excess cash flows
produced by the mortgaged hotels (after payment of operating
expenses, management fees, required reserves, service fees,
principal and interest) must be deposited in a restricted cash
account. These funds can be used for the prepayment of aggregate
outstanding borrowings under these debt agreements, capital
expenditures reasonably approved by the lender, and up to an
aggregate $3.0 million of scheduled principal and interest
payments due under these agreements. Funds will no longer be
deposited into the restricted cash account when the debt yield
and the debt service coverage ratio are sustained above the
minimum requirements for three consecutive months. On
March 31, 2003, the debt yield fell below the 12.75%
minimum threshold and, therefore, the excess cash flow produced
by the mortgaged hotels was retained in the restricted cash
account starting on May 1, 2003. The cash that was retained
in the restricted cash account has since been released by
Merrill Lynch Mortgage for capital expenditures and scheduled
principal and interest payments. As of March 1, 2004, no
cash was being retained in the restricted cash account. However,
the debt yield and the debt service coverage ratio continue to
remain below the minimum requirements.

Through our wholly-owned subsidiaries, we owe
approximately $10.6 million under industrial revenue bonds
secured by the Holiday Inns Lawrence, Kansas and Manhattan,
Kansas hotels. For the year ended December 31, 2003, the
cash flows of the two hotels were insufficient to meet the
minimum debt service coverage ratio requirements. The trustee of
the bonds may give notice of default, at which time we could
remedy the default by depositing with the trustee an amount
currently estimated at approximately $0.4 million. In the
event a default is declared and not cured, the two hotels would
be subject to foreclosure and we would be obligated to reimburse
bondholders pursuant to a partial guaranty of approximately
$1.4 million. In addition, we could be obligated to pay our
franchisor liquidated damages in the amount of $1.3 million.

On September 30, 2003, mortgage debt of
approximately $7.0 million of Macon Hotel Associates,
L.L.C. became due, which maturity has been extended to
June 30, 2004. We own 60% of Macon Hotel Associates, and
Macon Hotel Associates sole asset is the Crowne Plaza
Hotel in Macon, Georgia. We are attempting to refinance this
debt and have escrowed foreclosure documents that will allow the
lender to foreclose on the property on June 30, 2004 if our
attempts are not successful. If we are not able to refinance the
debt and the lender does not grant further extensions, the
property would be subject to foreclosure. A foreclosure on the
property would constitute a default of the franchise agreement;
therefore, we may be liable for $0.9 million in liquidated
damages under the franchise agreement.

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The restrictive covenants in our debt documents
may reduce our flexibility in conducting our operations and may
limit our ability to engage in activities that may be in our
long-term best interest. Our failure to comply with our debt
documents, including these restrictive covenants, may result in
additional interest being due and would constitute an event of
default, in some cases with notice or the lapse of time, that,
if not cured or waived, could result in the acceleration of the
defaulted debt and the sale or foreclosure of the affected
hotels. As noted above, under certain circumstances the
termination of a hotel franchise agreement could also result in
the same effects. A foreclosure would result in a loss of any
anticipated income and cash flow from, and our invested capital
in, the affected hotel. No assurance can be given that we will
be able to repay, through financings or otherwise, any
accelerated indebtedness or that we will not lose all or a
portion of our invested capital in any hotels that we sell in
such circumstances.



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

A significant portion of our indebtedness is
subject to variable interest rates. In the future, we may incur
additional indebtedness bearing interest at a variable rate, or
we may be required to refinance our existing indebtedness at
higher interest rates. Accordingly, increases in interest rates
will increase our interest expense and adversely affect our cash
flow, reducing the amounts available to make payments on our
indebtedness, fund our operations and our capital expenditure
program, make acquisitions or pursue other business
opportunities.



| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | To service our indebtedness, we require a
    significant amount of cash. Our ability to generate cash depends
    on many factors beyond our control.

Our ability to make payments on and to refinance
our indebtedness and to fund our operations, planned capital
expenditures and other needs will depend on our ability to
generate cash in the future. Various factors could adversely
affect our ability to meet operating cash requirements, many of
which are subject to the operating risks inherent in the lodging
industry and therefore are beyond our control. These risks
include the following:



| |   |                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Dependence on business and leisure travelers,
    which have been and continue to be affected by threats of
    terrorism, or other outbreaks of hostilities, and may otherwise
    fluctuate and be seasonal;
|
| |  | Cyclical overbuilding in the lodging industry;                                                                                                                                                                
|
| |  | Varying levels of demand for rooms and related
    services;                                                                                                                                                  
|
| |  | Competition from other hotels, motels and
    recreational properties, some of which may be owned or operated
    by companies having greater marketing and financial resources
    than we do;               
|
| |  | Decreases in air travel;                                                                                                                                                                                      
|
| |  | Fluctuations in operating costs;                                                                                                                                                                              
|
| |  | Changes in governmental laws and regulations that
    influence or determine wages or required remedial expenditures;                                                                                         
|
| |  | Changes in interest rates and the availability of
    credit; and                                                                                                                                             
|
| |  | The perception of the lodging industry and
    companies in the debt and equity markets.                                                                                                                      



| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | The value of our hotels and repayment or
    refinancing of our debt are dependent upon the successful
    operation and cash flows of the hotels.

The value of our hotels is heavily dependent on
their cash flows. If cash flow declines, the hotel values could
suffer impairment and the ability to repay or refinance our debt
could also be adversely affected. Factors affecting the
performance of our hotels include, but are not limited to,
construction of competing hotels in the markets served by our
hotels, loss of franchise affiliations, the need for
renovations, the effectiveness of renovations or repositionings
in attracting customers, changes in travel patterns and adverse
economic conditions.

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We may not be able to fund future capital needs,
including necessary working capital, funds for capital
expenditures or acquisition financing, from operating cash
flows. Consequently, we may need to rely on third-party sources
to fund our capital needs. We may not be able to obtain the
financing on favorable terms or at all, which could materially
and adversely affect us. Any additional debt we incur will
increase our leverage, which would reduce our operational
flexibility and increase our risk exposure. Our access to
third-party sources of capital depends, in part, on:



| |   |                                                     
| | - | ----------------------------------------------------
| |  | general market conditions;                          
|
| |  | the markets perception of our growth
    potential;
|
| |  | our current debt levels and property encumbrances;  
|
| |  | our current and expected future earnings;           
|
| |  | our cash flow and cash needs; and                   
|
| |  | the market price per share of our common stock.     



| |                                                         
| | --------------------------------------------------------
| | We may not be able to implement our growth
    strategy.

We compete for growth opportunities with national
and regional hospitality companies, many of which have greater
name recognition, marketing support and financial resources than
we do. Our ability to make acquisitions and investments is
dependent upon, among other things, our relationships with
owners of existing hotels, our ability to identify suitable
joint venture partners and to identify and consummate joint
venture opportunities, financing acquisitions and successfully
integrating new hotels into our operations. We cannot assure you
that suitable hotels for acquisition, investment, management, or
rebranding, or a desired nationally recognized brand in a
particular market, will be available on favorable terms or at
all. Our failure to compete successfully for acquisitions, to
finance those acquisitions on favorable terms, or to attract or
maintain relationships with hotel owners and major hotel
investors, or to achieve favorable returns on investments in
hotel acquisitions, renovations and repositionings, could
adversely affect our ability to expand our system of hotels. An
inability to implement our growth strategy successfully would
limit our ability to grow our revenues, net income and cash flow.



| |                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our current and future joint venture
    investments could be adversely affected by our lack of sole
    decision-making authority, our reliance on joint venture
    partners financial condition and performance and any
    disputes that may arise between us and our joint venture
    partners.

We currently have an ownership interest in five
of our hotels through joint ventures. We anticipate that a
significant portion of any future hotel acquisitions will be
made through joint ventures, although no assurance can be given
that we will identify suitable joint venture partners or
opportunities or enter into joint venture agreements on
favorable terms or at all. We generally will not be in a
position to exercise sole decision-making authority regarding
the hotels owned through such joint ventures. Investments in
joint ventures may, under certain circumstances, involve risks
not present when a third party is not involved, including the
possibility that joint venture partners might become bankrupt or
fail to fund their share of required capital contributions.
Joint venture partners may have business interests, strategies
or goals that are inconsistent with our business interests,
strategies or goals and may be, and in cases where we have a
minority interest will be, in a position to take actions
contrary to our policies, strategies or objectives. Joint
venture investments also entail a risk of impasse on decisions,
such as acquisitions or sales, because neither we nor our joint
venture partner would have full control over the joint venture.
Any disputes that may arise between us and our joint venture
partners may result in litigation or arbitration that could
increase our expenses and could prevent our officers and/or
directors from focusing their time and effort exclusively on our
business strategies. Consequently, actions by or disputes with
our joint venture partners might result in subjecting hotels
owned by the joint venture to additional risks. In addition, we
may in certain circumstances be liable for the actions of our
third-party joint venture partners.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Fresh start reporting will make future
    financial statements difficult to compare.

In accordance with the requirements of SOP 90-7,
Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code, we adopted fresh start reporting effective
November 22, 2002. Because SOP 90-7

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required us to reset our assets and liabilities
to current fair value, our financial position, results of
operations and cash flows for periods ending after
November 22, 2002 will not be comparable to the financial
position, results of operations and cash flows reflected in our
historical financial statements for periods ending on or prior
to November 22, 2002 included elsewhere in this
Form 10-K. The use of fresh start reporting will make it
difficult to assess our future prospects based on historical
performance.




| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | Our prior bankruptcy proceedings could
    adversely affect our operations going forward.

On December 20, 2001, Lodgian and
substantially all of our subsidiaries that owned hotels filed
for voluntary reorganization under Chapter 11 of the
Bankruptcy Code. Lodgian and affiliates owning 78 hotels
officially emerged from bankruptcy on November 25, 2002.
However, the adverse publicity and news coverage regarding our
Chapter 11 reorganization and financial condition and
performance could adversely affect our operations going forward.
Our bankruptcy filing had an adverse affect on our credit
standing with our lenders, certain suppliers and other trade
creditors. This can increase our costs of doing business and can
hinder our negotiating power with our lenders, certain suppliers
and other trade creditors. The failure to negotiate favorable
terms could adversely affect us. Though we have emerged from
Chapter 11, the distribution of shares to the general unsecured
creditors is not complete as we continue to reconcile the claims
made by these creditors. Until this process is complete, we will
continue to incur expenses with respect to the reorganization
process.



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | We have a history of significant losses and
    we may not be able to successfully improve our performance to
    achieve profitability.

We incurred cumulative net losses of
$320.0 million from January 1, 1999 through
December 31, 2003 and had an accumulated deficit of
$50.1 million as of December 31, 2003. Our ability to
improve our performance to achieve profitability is dependent
upon a recovery in the general economy, combined with an
improvement in the lodging industry specifically, and the
successful implementation of our business strategy. Our failure
to improve our performance could have a material adverse effect
on our business, results of operations, financial condition,
cash flow, liquidity and prospects. The economic downturn which
commenced in early 2001 and the terrorist attacks of
September 11, 2001 and the subsequent threat of terrorism
resulted in a sharp decline in demand for hotels and continued
to affect our results during 2002 and 2003. The lodging industry
experienced some recovery during the second half of 2003, but we
were not able to benefit fully from the recovery due to deferred
capital expenditures and renovation displacement at some of our
hotels. Although Smith Travel Research recently forecasted
RevPAR growth for the U.S. lodging industry in 2004 due to
rising occupancy and rates and an improving economy, this
forecast does not apply specifically to our portfolio of hotels.
As a result, we may not realize some or any of the benefits of
that growth, particularly as some of our hotels are still under
renovation and some need to be renovated.



| |                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Acts and threats of terrorism, the ongoing
    war against terrorism, military conflicts and other factors have
    had a negative impact on and may continue to have a negative
    effect on the lodging industry and our results of
    operations.

The terrorist attacks of September 11, 2001
and the continued threat of terrorism, including changing threat
levels announced by the Department of Homeland Security, have
had a negative impact on the lodging industry and on our hotel
operations from the third quarter of 2001 to the present. These
events have caused a significant decrease in occupancy and ADR
in our hotels due to disruptions in business and leisure travel
patterns and concerns about travel safety. In particular, major
metropolitan area and airport hotels have been adversely
affected by concerns about air travel safety and a significant
overall decrease in the amount of air travel. We believe the
uncertainty associated with subsequent terrorist threats and
incidents, military conflicts and the possibility of hostilities
with other countries may continue to hamper business and leisure
travel patterns and our hotel operations for the foreseeable
future, and if these matters worsen the effects could become
materially more adverse.

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| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | We may be unable to sell real estate,
    including our assets held for sale, in a timely manner or at
    expected prices.

We currently have 14 hotels and three land
parcels listed as assets available for sale; however, real
estate assets generally cannot be sold quickly. No assurance can
be given that we will be able to sell one or more of these
hotels on favorable terms or at all or that franchisor approval
for transfer of a brand can be obtained when requested. A
franchisor may refuse to approve a transfer in its sole
discretion. Furthermore, even if we are able to sell these
hotels, we may not be able to realize any cash proceeds from the
sales after paying off the related lenders. Additionally, we may
not be able to sell these hotels in sufficient time to apply the
proceeds to fund our working capital, capital expenditures and
debt service needs. If a franchise agreement relating to a hotel
is in default or is terminated by the franchisor, the value of
the hotel could decline, perhaps substantially. In the future,
we may not be able to vary our portfolio of hotels or other real
estate promptly in response to changes in hotel performance or
economic or other conditions. This inability to respond promptly
could adversely affect us.



| |                                                                           
| | --------------------------------------------------------------------------
| | Our expenses may remain constant or
    increase even if revenues decline.

The expenses of owning a hotel are not
necessarily reduced when circumstances such as market factors
and competition cause a reduction in revenues from the hotel. We
could be adversely affected by:



| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Rising interest rate levels;                                                                                                                                                    
|
| |  | The lack of available financing on favorable
    terms, or at all, to fund our working capital, debt service
    requirements, planned capital expenditures or other cash needs;
|
| |  | Increased costs associated with wages, employee
    benefits and taxes, property taxes, utilities and insurance; and                                                            
|
| |  | Changes in and the cost of compliance with
    government regulations, including those governing environmental,
    usage, zoning and tax matters.                              



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | We may make acquisitions or investments
    that are not successful and that adversely affect our ongoing
    operations.

We may acquire or make investments in hotel
companies or hotel portfolios that we believe complement our
business. We lack experience in making these types of
acquisitions. As a result, our ability to identify prospects,
conduct acquisitions and properly manage the integration of
acquisitions is unproven. If we fail to properly evaluate,
execute and integrate hotel acquisitions or investments, we may
be materially and adversely affected. In making or attempting to
make acquisitions or investments, we face a number of risks,
including:



| |   |                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Identifying suitable acquisition or investment
    candidates, performing appropriate due diligence, identifying
    potential liabilities and negotiating favorable terms for
    acquisitions and investments;
|
| |  | Reducing our working capital and hindering our
    ability to expand or maintain our business, including making
    capital expenditures and funding operations;                                                
|
| |  | The potential distraction of our management,
    diversion of our resources and disruption of our business;                                                                                                     
|
| |  | Competing for acquisition opportunities with
    competitors that are larger than we are or have greater
    financing and other resources than we have;                                                        
|
| |  | Accurately forecasting the financial impact of an
    acquisition or investment; and                                                                                                                            
|
| |  | Effectively integrating acquired companies or
    investments and achieving expected performance.                                                                                                               



| |                                                                    
| | -------------------------------------------------------------------
| | Losses may exceed our insurance coverage or
    estimated reserves.

We are self-insured up to certain amounts with
respect to our insurance coverages. Should a material uninsured
loss or a loss in excess of insured limits occur with respect to
any particular property, we could lose our capital invested in
the property, as well as the anticipated income and cash flow
from the property and, in the case of debt which is with
recourse to us, would remain obligated for any mortgage debt or
other financial obligations related to the property. We cannot
assure you that material losses in excess of insurance coverage
or estimated reserves will not occur in the future or that we
will not be required to pay a significant deductible

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for such coverage. Any such loss would have an
adverse effect on us. In addition, if we are unable to maintain
insurance that meets our debt and franchise agreement
requirements, and if we are unable to amend or waive those
requirements, it could have a material adverse effect on us.




| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | Competition in the lodging industry could
    have a material adverse effect on our business and results of
    operations.

There is no single competitor or small number of
competitors that are dominant in the lodging industry. We
generally operate in areas that contain numerous other
competitors, some of which may have substantially greater
resources than we have. Competitive factors in the lodging
industry include, among others, supply in a particular market,
franchise affiliation, reasonableness of room rates, quality of
accommodations, service levels, convenience of locations and
amenities customarily offered to the traveling public. There can
be no assurance that demographic, geographic or other changes in
markets will not adversely affect the convenience or
desirability of the locales in which our hotels operate,
competing hotels will not pose greater competition for guests
than presently exists, or that new hotels will not enter such
locales. New or existing competitors could offer significantly
lower rates or greater conveniences, services or amenities or
significantly expand or improve existing facilities or introduce
new facilities in markets in which we compete. Any of these
factors could materially and adversely affect us.



| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Adverse conditions in markets in which we
    do substantial amounts of business, such as our four largest
    markets of Baltimore/Washington, D.C., Pittsburgh,
    Buffalo/Niagara Falls and Phoenix, could negatively affect our
    results of operations.

Our operating results depend upon our ability to
achieve and maintain adequate room rates and occupancy levels in
our hotels. Adverse economic or other conditions in markets,
such as Pittsburgh, in which we have multiple hotels may
negatively affect our occupancy and ADR, which in turn would
negatively affect our revenue and could materially and adversely
affect our results of operations. Our hotels located in
Baltimore/Washington, D.C., Pittsburgh, Buffalo/Niagara Falls
and Phoenix provided an aggregate of approximately 27.2% of our
consolidated 2003 revenues and contained an aggregate of
approximately 22.5% of our total available rooms during the year
ended December 31, 2003. As a result of this geographic
concentration of our hotels in these markets, we are
particularly exposed to the risks of downturns in these local
economies and to other local conditions, which could adversely
affect the operating results of our hotels in these markets.



| |                                      
| | -------------------------------------
| | The lodging business is
    seasonal.

Demand for accommodations, and the resulting cash
flow, vary seasonally. The high season tends to be the summer
months for hotels located in colder climates and the winter
months for hotels located in warmer climates. Aggregate demand
for accommodations at the hotels in our portfolio is, however,
lowest during the winter months. Levels of demand are dependent
upon many factors that are beyond our control, including general
and local economic conditions and changes in levels of leisure
and business-related travel. Our hotels depend on both business
and leisure travelers for revenues. Additionally, our hotels
operate in areas that contain numerous other competitive lodging
facilities.



| |                                                                           
| | --------------------------------------------------------------------------
| | We have experienced significant changes in
    our senior management team.

There have been a number of changes in our senior
management team during the last two years and since our
emergence from bankruptcy. Our chief executive officer was hired
in July 2003 and our chief financial officer and our chief
operating officer were promoted to their positions in October
2003 and May 2002, respectively. If our new management team is
unable to develop successful business strategies, achieve our
business objectives or maintain effective relationships with
employees, suppliers, creditors and customers, our ability to
grow our business and successfully meet operational challenges
could be impaired.



| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | If we lose or are unable to obtain key
    personnel, our ability to effectively operate our business could
    be hindered.

Our ability to maintain or enhance our
competitive position will depend to a significant extent on the
efforts and ability of our executive and senior management,
particularly our chief executive officer. Our future

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success and our ability to manage future growth
will depend in large part upon the efforts of our management
team and on our ability to attract and retain other highly
qualified personnel. Competition for personnel is intense, and
we may not be successful in attracting and retaining our
personnel. Our inability to retain our current management team
and attract and retain other highly qualified personnel could
hinder our business.




| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | The increasing use of third-party travel
    websites by consumers may adversely affect our
    profitability.

Some of our hotel rooms are booked through
third-party travel websites such as Travelocity.com,
Expedia.com, Priceline.com and Hotels.com. If these Internet
bookings increase, these intermediaries may be able to obtain
higher commissions, reduced room rates or other significant
contract concessions from us. Moreover, some of these Internet
travel intermediaries are attempting to offer hotel rooms as a
commodity, by increasing the importance of price and general
indicators of quality (such as three-star downtown
hotel) at the expense of brand identification. We believe
that the goal of these Internet intermediaries is to have
consumers eventually develop brand loyalties to their
reservation systems rather than to our brands. Although most of
the business for our hotels is expected to be derived from
traditional channels, if the amount of sales made through
Internet intermediaries increases significantly, room revenues
may flatten or decrease and our profitability may be adversely
affected.



| |                                                                             
| | ----------------------------------------------------------------------------
| | We may be unable to utilize all of our net
    operating loss carryforwards.

As of December 31, 2003, we had
approximately $270 million of historical net operating loss
carryforwards for federal income tax purposes. To the extent
that we do not have sufficient future taxable income to offset
these net operating loss carryforwards, unused losses will
expire between 2004 and 2023. Our ability to use these net
operating loss carryforwards to offset future income is also
subject to annual limitations. An audit or review by the
Internal Revenue Service could result in the reduction in the
net operating loss carryforwards available to us.



| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Aspects of our operations are subject to
    government regulation, and changes in government regulations may
    adversely affect our results of operations and financial
    condition.

A number of states and local governments regulate
the licensing of hotels and restaurants, including occupancy and
liquor license grants, by requiring registration, disclosure
statements and compliance with specific standards of conduct.
Occupancy licenses are obtained prior to the opening of a hotel
but may require renewal if there is a major renovation. We
believe that our hotels are substantially in compliance with
these requirements or, in the case of liquor licenses, that they
have or will promptly obtain the appropriate licenses. Operators
of hotels also are subject to employment laws, including minimum
wage requirements, overtime, working conditions and work permit
requirements. Compliance with, or changes in, these laws could
increase the cost of operating the affected hotels and/or reduce
the revenue from our hotels and could otherwise adversely affect
our results of operations and financial condition.

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



| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | Costs of compliance with environmental laws
    and regulations could adversely affect operating
    results.

Under various federal, state, local and foreign
environmental laws, ordinances and regulations, a current or
previous owner or operator of real property may be liable for
noncompliance with applicable environmental and health and
safety requirements and for the costs of investigation,
monitoring, removal or remediation of hazardous or toxic
substances. These laws often impose liability whether or not the
owner or operator knew of, or was responsible for, the presence
of hazardous or toxic substances. The presence of these
hazardous or toxic substances on a property could also result in
personal injury or property damage or similar claims by private
parties. In addition, the presence of contamination, or the
failure to report, investigate or properly remediate
contaminated property, may adversely affect the operation of the
property or the owners ability to sell or rent the
property or to borrow funds using the property as collateral.
Persons who arrange for the disposal or treatment of hazardous
or toxic substances may also be liable for the costs of removal
or remediation of those

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substances at the disposal or treatment facility,
whether or not that facility is or ever was owned or operated by
that person.


The operation and removal of underground storage
tanks also are regulated by federal, state and local laws. In
connection with the ownership and operation of our hotels, we
could be held liable for the costs of remedial action for
regulated substances and storage tanks and related claims.

Some of our hotels contain asbestos-containing
building materials, or ACBMs. Environmental laws require that
ACBMs be properly managed and maintained, and may impose fines
and penalties on building owners or operators for failure to
comply with these requirements. Third parties may be permitted
by law to seek recovery from owners or operators for personal
injury associated with exposure to contaminants, including, but
not limited to, ACBMs. Operation and maintenance programs have
been developed for those hotels which are known to contain ACBMs.

Many, but not all, of our hotels have undergone
Phase I environmental site assessments, which generally provide
a nonintrusive physical inspection and database search, but not
soil or groundwater analyses, by a qualified independent
environmental consultant. The purpose of a Phase I assessment is
to identify potential sources of contamination for which the
hotel owner or others may be responsible. None of the
Phase I environmental site assessments revealed any past or
present environmental liability that we believe would have a
material adverse effect on us. Nevertheless, it is possible that
these assessments did not reveal all environmental liabilities
or compliance concerns or that material environmental
liabilities or compliance concerns exist of which we are
currently unaware.

Some of our hotels may contain microbial matter
such as mold, mildew and viruses. The presence of microbial
matter could adversely affect our results of operations.
Phase I assessments performed on certain of our hotels in
connection with our recent refinancings identified mold in four
of our hotels. We have completed all necessary remediation for
these properties. In addition, if any hotel in our portfolio is
not properly connected to a water or sewer system, or if the
integrity of such systems are breached, microbial matter or
other contamination can develop. If this were to occur, we could
incur significant remedial costs and we may also be subject to
private damage claims and awards.

Any liability resulting from noncompliance or
other claims relating to environmental matters could have a
material adverse effect on us and our insurability for such
matters in the future.

Risks Related to Our Common Stock



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | Our common stock could be de-listed from
    the American Stock Exchange if the listing standards are not
    maintained.

The rules of the American Stock Exchange allow
the exchange to de-list securities if it determines that a
companys securities fail to meet its guidelines in respect
of corporate net worth, public float, number of shareholders,
aggregate market value of shares or price per share. We cannot
assure purchasers of our common stock that we will continue to
meet the American Stock Exchange listing requirements. If our
common stock is delisted from the American Stock Exchange, it
would likely trade on the OTC Bulletin Board, which is a
quotation service for securities that are not listed or traded
on a national securities exchange. The OTC Bulletin Board is
viewed by most investors as less desirable and a less liquid
marketplace. Thus, delisting from the American Stock Exchange
could result in investors being unable to liquidate their
investment or make trading our shares more difficult or
expensive for investors, leading to declines in share price. It
would also make it more difficult for us to raise additional
capital. In addition, we would incur additional costs under
state blue sky laws to sell equity if our common stock is not
traded on a national securities exchange.



| |                                     
| | ------------------------------------
| | Our stock price may be
    volatile.

The market price of our common stock could
decline and fluctuate significantly in response to various
factors, including:



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | Actual or anticipated variations in our results
    of operations;                                     
|
| |  | Announcements of new services or products or
    significant price reductions by us or our competitors;

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| |   |                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Market performance by our competitors;                                                                                                                                                                          
|
| |  | Future issuances of our common stock, or
    securities convertible into or exchangeable or exercisable for
    our common stock, by us directly, or the perception that such
    issuances are likely to occur;
|
| |  | Sales of our common stock by stockholders or the
    perception that such sales may occur in the future;                                                                                                        
|
| |  | The size of our market capitalization;                                                                                                                                                                          
|
| |  | Loss of our franchises;                                                                                                                                                                                         
|
| |  | Default on our indebtedness and/or foreclosure of
    our properties;                                                                                                                                           
|
| |  | Changes in financial estimates by securities
    analysts; and                                                                                                                                                  
|
| |  | Domestic and international economic, legal and
    regulatory factors unrelated to our performance.                                                                                                             



| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may never pay dividends on our common
    stock, in which event purchasers only return on their
    investment, if any, will occur on the sale of our common
    stock.

We have not yet paid any dividends on our common
stock, and we do not intend to do so in the foreseeable future.
As a result, a purchasers only return on its investment,
if any, will occur on the sale of our common stock.



| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our charter documents, employment contracts
    and Delaware law may impede attempts to replace or remove our
    management or inhibit a takeover, which could adversely affect
    the value of our common stock.

Our certificate of incorporation and bylaws, as
well as Delaware corporate law, contain provisions that could
delay or prevent changes in our management or a change of
control that you might consider favorable and may prevent you
from receiving a takeover premium for your shares. These
provisions include, for example:



| |   |                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Authorizing the issuance of preferred stock, the
    terms of which may be determined at the sole discretion of the
    board of directors;                                               
|
| |  | Establishing advance notice requirements for
    nominations for election to the board of directors or for
    proposing matters that can be acted on by stockholders at
    meetings; and
|
| |  | Requiring all stockholder action to be taken at a
    duly called meeting, not by written consent.                                                                                        

In addition, we have entered, or will enter, into
employment contracts with certain of our employees that contain
change of control provisions.

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New
accounting pronouncements

The table below summarizes recent accounting
pronouncements and their effects on Lodgian:

|                            |  |                                                                                                                                    |  |              |  |                                                                                               |  |                                                                                                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                      
|--------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | --------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                            |  |                                                                                                                                    |  |              |  | Effective date                                                                                |  |                                                                                                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                      
|                            |  | Description                                                                                                                        |  | Month Issued |  | for Lodgian                                                                                   |  | Summary of major provisions                                                                                                                                                                                                                                                         |  | Effect on Lodgian                                                                                                                                                                                                                                                                                    
|                            |  |                                                                                                                                    |  |              |  |                                                                                               |  |                                                                                                                                                                                                                                                                                     |  |                                                                                                                                                                                                                                                                                                      
|SFAS No. 144                |  | Accounting for the Impairment or Disposal of
    Long-Lived Assets                                                                 |  | August-01    |  | January-02                                                                                    |  | Operating results of real estate assets and to be
    sold must be classified as discontinued operations.                                                                                                                                                                           |  | Assets held for sale (18 hotels and 3 land
    parcels) and assets disposed of in 2003 are included in
    discontinued operations.                                                                                                                                                                  
|FIN No. 45                  |  | Guarantors Accounting and Disclosure
    Requirements for Guarantees, Including Indirect Guarantees of
    Indebtedness of Others |  | November-02  |  | December-02                                                                                   |  | Elaborates on disclosures to be made by a
    guarantor. At the inception of the guarantee, the guarantor must
    recognize the fair value of the guarantee as a liability.                                                                                                        |  | No effect, since guarantees all relate to
    subsidiaries which are consolidated.                                                                                                                                                                                                                   
|SFAS No. 148                |  | Accounting for Stock-Based
    Compensation  Transition and Disclosure                                                            |  | December-02  |  | November 22, 2002                                                                             |  | Amends SFAS No. 123 to provide alternative
    methods of transition for an entity that voluntarily changes to
    the fair-value-based method.                                                                                                                                     |  | Not applicable                                                                                                                                                                                                                                                                                       
|                            |  |                                                                                                                                    |  |              |  |                                                                                               |  | Amends SFAS No. 123 to require prominent
    disclosure about the effect of the fair value method on reported
    net income and earnings per share and about an entitys
    accounting policy.                                                                                    |  | Required disclosures are included in the
    financial statements starting on F-1.                                                                                                                                                                                                                   
|FIN No. 46                  |  | Consolidation of Variable Interest Entities                                                                                        |  | January-03   |  | Special purpose entities 
    December 31, 2003.
    Other entities  first quarter of 2004. |  | Addresses consolidation by a business of variable
    interest entities in which it is the primary beneficiary.                                                                                                                                                                     |  | No impact, since we have no variable interest
    entities                                                                                                                                                                                                                                           
|SFAS No. 149                |  | Amendment of Statement 133 on Derivative
    Instruments and Hedging Activities                                                    |  | April-03     |  | July-03                                                                                       |  | Amends and clarifies accounting for derivative
    instruments including certain derivative instruments embedded in
    other contracts and hedging activities.                                                                                                                     |  | Immaterial impact, since our investment in
    derivatives is minimal.                                                                                                                                                                                                                               
|SFAS No. 150                |  | Accounting for Certain Financial Instruments with
    Characteristics of both Liabilities and Equity                               |  | May-03       |  | July-03                                                                                       |  | Aims to eliminate diversity by requiring that
    certain types of freestanding instruments be reported as
    liabilities including mandatorily redeemable shares which
    unconditionally obligate the issuer to redeem the shares for
    cash or by transferring other assets. |  | Our Mandatorily Redeemable 12.25% Cumulative
    Preferred Stock has been reclassified to long- term debt in the
    Consolidated Financial Statements starting on page F-1 and
    the related dividends for the period July 1, 2003 to
    December 31, 2003 has been included in interest expense.
|SFAS No. 132 (Revised 2003) |  | Employers Disclosures about Pensions and
    Other Postretirement Benefits                                                        |  | December-03  |  | January-04                                                                                    |  | Increases existing disclosures by requiring more
    details about plan assets, benefit obligations, cash flows,
    benefit costs and related information.                                                                                                                         |  | No impact, since our costs in relation to pension
    and post- retirement benefits are insignificant.                                                                                                                                                                                               

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Item 7A.     Quantitative
and Qualitative Disclosures About Market Risk

We are exposed to interest rate risks on our
variable rate debt. At December 31, 2003 and
December 31, 2002, we had outstanding variable rate debt of
approximately $382.8 million and $310.2 million,
respectively.

In order to manage our exposure to fluctuations
in interest rates on the U.S. portion of the exit financing
received in November 2002 ($299.3 million and
$302.7 million at December 31, 2003 and
December 31, 2002, respectively), we entered into two
interest rate cap agreements, which allowed us to obtain exit
financing at floating rates and effectively cap them at LIBOR of
6.44% plus the spread (See  Liquidity and
Capital Resources). Thus, we will earn periodic settlement
payments under our interest rate caps when LIBOR exceeds 6.44%
at specified intervals set forth in the caps, which generally
coincide with the dates on which interest is payable on the
underlying debt. When LIBOR is below 6.44%, there is no
settlement from the interest rate caps. Therefore, we are
exposed to interest rate risks on the exit financing debt for
increases in LIBOR up to 6.44% but we are not exposed to
increases in LIBOR above 6.44% because settlements from the
interest rate caps would offset the incremental interest
expense. The one-month LIBOR as of December 31, 2003 was
1.13%. The notional principal amount of the interest rate caps
outstanding was $302.2 million and $302.8 million at
December 31, 2003 and at December 31, 2002,
respectively.

On May 22, 2003, we finalized an
$80.0 million financing with Lehman. The Lehman Financing
is a two-year term loan with an optional one-year extension and
bears interest at the higher of 7.25% or LIBOR plus 5.25%. In
order to manage our exposure to fluctuations in interest rates
with the Lehman Financing, we entered into an interest rate cap
agreement, which allowed us to obtain this financing at a
partial floating rate and effectively caps the interest rate at
LIBOR of 5.00% plus 5.25%. When LIBOR exceeds 5.00%, the
contracts require settlement of net interest receivable at
specified intervals, which generally coincide with the dates on
which interest is payable on the underlying debt. When LIBOR is
below 5.00%, there is no settlement from the interest rate cap.
We are exposed to interest rate risks on the Lehman Financing
for LIBOR of between 2% and 5%. The notional principal amount of
the interest rate cap outstanding was $80.0 million at
December 31, 2003.

With respect to the fair market value of the
three interest rate caps, (the two related to the exit financing
and the one related to the Lehman Financing), we believe that
our interest rate risk at December 31, 2003 and
December 31, 2002 was minimal. The impact on annual results
of operations of a hypothetical one-point interest rate
reduction on the interest rate caps as of December 31, 2003
would be a reduction in net income of approximately $14,000.
These derivative financial instruments are viewed as risk
management tools and are entered into for hedging purposes only.
We do not use derivative financial instruments for trading or
speculative purposes. However, we have not elected to follow the
hedging requirements of SFAS No. 133.

The fair value of the three interest rate caps as
of December 31, 2003 and the two interest rate caps at
December 31, 2002 were approximately $15,000 and $100,000,
respectively. The fair values of the interest rate caps were
recognized on the balance sheet in other assets. Adjustments to
the carrying values of the interest rate caps are reflected in
interest expense.

The nature of our fixed rate obligations does not
expose us to fluctuations in interest payments. The impact on
the fair value of our fixed rate obligations of a hypothetical
one-point interest rate increase on the outstanding fixed-rate
debt as of December 31, 2003 and December 31, 2002
would be a reduction in value, to the holders of the debt,
approximately $3.0 million and $3.1 million,
respectively.

In addition, the hotel business is inherently
capital intensive and the hotels which constitute the vast
majority of assets are long-lived. Lodgians exposure to
market risk associated with changes in interest rates relates
primarily to its debt obligations. Approximately 80% of the
long-term mortgage debt (including current portion) carries
floating rates of interest. For the balance of long-term debt,
the nature of fixed rate obligations does not expose us to the
risk of changes in the fair value of these instruments. Our
outstanding debt was $478.9 million, at December 31,
2003, including current maturities and long-term debt related to
assets held for sale.

65



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The table below provides information about our
long-term debt obligations at December 31, 2003 (excludes
the debt relating to the hotel that we do not consolidate, and
includes the current portion of our long-term debt):

|                                                                             |  |                  |         |            |  |      |        |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|---------------------------------------------------------------------------- |  | ---------------- | ------- | ---------- |  | ---- | ------ | ---- |  | ---- | ------- | ---- |  | ---------- | ----- |  |  | - | ------ |  |  | - | ----- |  |  | - | ------ | 
|                                                                             |  | Long-term        |         |           
|                                                                             |  | Obligations      |         | Maturities
|                                                                             |  | December 31,     |         |           
|                                                                             |  | 2003             |         | 2004       |  | 2005 |        | 2006 |  | 2007 |         | 2008 |  | After 2008
|                                                                             |  |                  |         |            |  |      |        |      |  |      |         |      |  |           
|                                                                             |  |                 
|                                                                             |  | ($ in thousands)
|Exit Financing                                                               |  |                  |         |            |  |      |        |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|Merrill Lynch Mortgage Lending, Inc. 
    Senior                            |  | $                | 216,052 |            |  | $    | 3,338  |      |  | $    | 212,714 |      |  | $          |      |  |  | $ |       |  |  | $ |      |  |  | $ |       | 
|Merrill Lynch Mortgage Lending, Inc. 
    Mezzanine                         |  |                  | 83,281  |            |  |      | 1,287  |      |  |      | 81,994  |      |  |            |      |  |  |   |       |  |  |   |      |  |  |   |       | 
|                                                                             |  |                  |         |            |  |      |        |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|Merrill Lynch Mortgage Lending, Inc. 
    Total                             |  |                  | 299,333 |            |  |      | 4,625  |      |  |      | 294,708 |      |  |            |      |  |  |   |       |  |  |   |      |  |  |   |       | 
|Computershare Trust Company of Canada                                        |  |                  | 7,521   |            |  |      | 222    |      |  |      | 240     |      |  |            | 259   |  |  |   | 6,800  |  |  |   |      |  |  |   |       | 
|Lehman Financing                                                             |  |                  |         |            |  |      |        |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|Lehman Brothers Holdings, Inc.                                               |  |                  | 76,449  |            |  |      | 1,084  |      |  |      | 75,365  |      |  |            |      |  |  |   |       |  |  |   |      |  |  |   |       | 
|Other Financings                                                             |  |                  |         |            |  |      |        |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|Column Financial, Inc.                                                       |  |                  | 27,300  |            |  |      | 2,242  |      |  |      | 2,491   |      |  |            | 2,768 |  |  |   | 3,076  |  |  |   | 3,418 |  |  |   | 13,305 | 
|Lehman Brothers Holdings, Inc.                                               |  |                  | 23,409  |            |  |      | 482    |      |  |      | 529     |      |  |            | 580   |  |  |   | 21,818 |  |  |   |      |  |  |   |       | 
|JP Morgan Chase Bank                                                         |  |                  | 10,644  |            |  |      | 530    |      |  |      | 570     |      |  |            | 615   |  |  |   | 665    |  |  |   | 720   |  |  |   | 7,544  | 
|DDL Kinser                                                                   |  |                  | 2,385   |            |  |      | 98     |      |  |      | 2,287   |      |  |            |      |  |  |   |       |  |  |   |      |  |  |   |       | 
|First Union Bank                                                             |  |                  | 3,359   |            |  |      | 56     |      |  |      | 63      |      |  |            | 69    |  |  |   | 3,171  |  |  |   |       |  |  |   |        | 
|Column Financial, Inc.                                                       |  |                  | 8,943   |            |  |      | 398    |      |  |      | 437     |      |  |            | 480   |  |  |   | 528    |  |  |   | 580   |  |  |   | 6,520  | 
|Column Financial, Inc.                                                       |  |                  | 3,206   |            |  |      | 137    |      |  |      | 3,069   |      |  |            |      |  |  |   |       |  |  |   |      |  |  |   |       | 
|Robb Evans, Trustee                                                          |  |                  | 6,982   |            |  |      | 6,982  |      |  |      |        |      |  |            |      |  |  |   |       |  |  |   |      |  |  |   |       | 
|                                                                             |  |                  |         |            |  |      |        |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|                                                                             |  |                  | 86,228  |            |  |      | 10,925 |      |  |      | 9,446   |      |  |            | 4,512 |  |  |   | 29,258 |  |  |   | 4,718 |  |  |   | 27,369 | 
|                                                                             |  |                  |         |            |  |      |        |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|Total mortgage debt                                                          |  |                  | 469,531 |            |  |      | 16,856 |      |  |      | 379,759 |      |  |            | 4,771 |  |  |   | 36,058 |  |  |   | 4,718 |  |  |   | 27,369 | 
|Long-term debt  other                                                       |  |                  | 9,351   |            |  |      | 478    |      |  |      | 4,755   |      |  |            | 391   |  |  |   | 397    |  |  |   | 382   |  |  |   | 2,948  | 
|                                                                             |  |                  |         |            |  |      |        |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|Total long-term debt (including current portion)                             |  |                  | 478,882 |            |  |      | 17,334 |      |  |      | 384,514 |      |  |            | 5,162 |  |  |   | 36,455 |  |  |   | 5,100 |  |  |   | 30,317 | 
|Held for sale                                                                |  |                  | (53,204 | )          |  |      | (771   | )    |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|                                                                             |  |                  |         |            |  |      |        |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|Total long-term debt  continuing
    operations (including current portion) |  | $                | 425,678 |            |  | $    | 16,563 |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|                                                                             |  |                  |         |            |  |      |        |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 

At December 31, 2003, approximately
$382.8 million of debt instruments outstanding were subject
to changes in the LIBOR or PRIME rate. Without regard to
additional borrowings under those instruments or scheduled
amortization, the annualized effect of each twenty five basis
point increase in the LIBOR rate would be a reduction in income
before income taxes of approximately $1.0 million. The fair
value of the fixed rate mortgage debt (book value
$86.8 million) at December 31, 2003 is estimated at
$86.7 million.

66



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##### Table of Contents






Item 8.     Financial
Statements and Supplementary Data

The Consolidated Financial Statements of the
Company are included as a separate section of this report
commencing on page F-1.





|        |                                                                                              
|------- | ---------------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial
    Disclosures

There were no disagreements with accountants
during the periods covered by this report on Form 10-K.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

a) Based on an evaluation of our disclosure
controls and procedures carried out as of December 31,
2003, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were
effective since they would cause material information required
to be disclosed by us, in the reports which we file or submit
under the Securities Exchange Act of 1934, to be recorded,
processed, summarized and reported within the time periods
specified in the Commissions rules and forms.

b) During the quarter ended
December 31, 2003, there were no changes in our internal
controls over financial reporting which materially affected, or
are likely to materially affect, our internal control over
financial reporting.




PART III




Item 10.     Directors
and Executive Officers of the Registrant

Information about our Directors and Executive
Officers is incorporated by reference from the discussion in our
proxy statement for the 2004 Annual Meeting of Shareholders.




Item 11.     Executive
Compensation

Information about Executive Compensation is
incorporated by reference from the discussion in our proxy
statement for the 2004 Annual Meeting of Shareholders.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

Information about security ownership of certain
beneficial owners and management is incorporated by reference
from the discussion in our proxy statement for the 2004 Annual
Meeting of Shareholders.




Item 13.     Certain
Relationships and Related Transactions

Information about certain relationships and
transactions with related parties is incorporated by reference
from the discussion in our proxy statement for the 2004 Annual
Meeting of Shareholders.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accounting Fees and
    Services

Information about principal accounting fees and
services is incorporated by reference from the discussion in our
proxy statement for the 2004 Annual Meeting of Shareholders.

67



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##### Table of Contents






PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a) (1) Our Consolidated Financial
Statements are filed as a separate section of this report
commencing on page F-1:



| |                                  
| | ---------------------------------
| | (2) Financial Statement Schedule:



| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All Schedules are omitted because they are not
    applicable or required information is shown in the Consolidated
    Financial Statements or notes thereto.



| |              
| | -------------
| | (3) Exhibits:



| |                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| | The information called for by this paragraph is
    contained in the Exhibits Index of this report, which is
    incorporated herein by reference.

(b) Reports on Form 8-K:

No reports were filed on Form 8-K during the
fourth quarter of 2003.

68



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##### Table of Contents






SIGNATURES

Pursuant to the requirement of Section 13 or
15(d) of the Securities Exchange Act of 1934, the Company has
duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 8, 2004.



| |              
| | -------------
| | LODGIAN, INC.



| |     |                         
| | --- | ------------------------
| | By: | /s/ W. THOMAS PARRINGTON

| |                                          
| | -----------------------------------------
| |                                          
| | W. Thomas Parrington                     
| | President and Chief Executive
    Officer

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report has been signed below by the
following persons on behalf of the Company and in the capacities
indicated, on March 8, 2004.

|                                             |  |                                                          |  | 
|-------------------------------------------- |  | -------------------------------------------------------- |  | 
|                                             |  |                                                         
|Signature                                    |  | Title                                                   
|                                             |  |                                                         
|                                            
|/s/ W. THOMAS PARRINGTONW. Thomas Parrington |  | President, Chief Executive Officer and Director         
|                                            
|/s/ MANUEL E. ARTIMEManuel E. Artime         |  | Executive Vice President and Chief Financial
    Officer
|                                            
|/s/ LINDA BORCHERT PHILPLinda Borchert Philp |  | Vice President and Chief Accounting Officer             
|                                            
|/s/ RUSSEL S. BERNARDRussel S. Bernard       |  | Chairman of the Board of Directors                      
|                                            
|/s/ SEAN F. ARMSTRONGSean F. Armstrong       |  | Director                                                
|                                            
|/s/ STEWART BROWNStewart Brown               |  | Director                                                
|                                            
|/s/ STEPHEN P. GRATHWOHLStephen P. Grathwohl |  | Director                                                
|                                            
|/s/ JONATHAN D. GRAYJonathan D. Gray         |  | Director                                                
|                                            
|/s/ KENNETH A. CAPLANKenneth A. Caplan       |  | Director                                                
|                                            
|/s/ KEVIN C. MCTAVISHKevin C. McTavish       |  | Director                                                

69



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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

The following Consolidated Financial Statements
and schedule of the registrant and its subsidiaries are
submitted herewith in response to Item 8:

|                                                                                                                                                                                                                                                                                             |  |      |     | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                                                                                                                                                                                             |  | Page
|                                                                                                                                                                                                                                                                                             |  |     
|Independent Auditors Report                                                                                                                                                                                                                                                                 |  |      | F-2 | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                                                                                                                                                                                                             |  |      | F-3 | 
|Consolidated Statements of Operations for the
    Successor year ended December 31, 2003, the Successor
    period November 23, 2002 to December 31, 2002, the
    Predecessor periods January 1, 2002 to November 22,
    2002 and the year ended December 31, 2001                         |  |      | F-4 | 
|Consolidated Statements of Stockholders
    Equity (Deficit) for the Successor year ended December 31,
    2003, the Successor period November 23, 2002 to
    December 31, 2002, the Predecessor periods January 1,
    2002 to November 22, 2002 and the year ended
    December 31, 2001 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the
    Successor year ended December 31, 2003, the Successor
    period November 23, 2002 to December 31, 2002, the
    Predecessor periods January 1, 2002 to November 22,
    2002 and the year ended December 31, 2001                         |  |      | F-6 | 
|Notes to the Consolidated Financial Statements                                                                                                                                                                                                                                               |  |      | F-7 | 

All schedules are inapplicable, or have been
disclosed in the Notes to Consolidated Financial Statements and,
therefore, have been omitted.

F-1



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Board of Directors

Lodgian, Inc.


We have audited the accompanying consolidated
balance sheets of Lodgian, Inc. (a Delaware corporation) and
subsidiaries (the Company) as of December 31,
2003 and December 31, 2002, and the related statements of
operations, stockholders equity (deficit), and cash flows
for the year ended December 31, 2003 and the periods from
November 23, 2002 to December 31, 2002 (Successor
Company operations), and from January 1, 2002 to
November 22, 2002 and the year ended December 31, 2001
(Predecessor Company operations). These financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

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

As discussed in Note 2 to the consolidated
financial statements, on November 5, 2002, the Bankruptcy
Court entered an order confirming the plan of reorganization
which became effective after the close of business on
November 25, 2002. Accordingly, the accompanying financial
statements have been prepared in conformity with AICPA Statement
of Position 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code, for the
Successor Company as a new entity with assets, liabilities, and
a capital structure having carrying values not comparable with
prior periods as described in Note 4.

In our opinion, such Successor Company
consolidated financial statements present fairly, in all
material respects, the financial position of Lodgian, Inc. and
subsidiaries as of December 31, 2003 and December 31,
2002, and the results of their operations and their cash flows
for the year ended December 31, 2003, and the period from
November 23, 2002 to December 31, 2002 in conformity
with accounting principles generally accepted in the United
States of America. Further, in our opinion, the Predecessor
Company financial statements referred to above, present fairly,
in all material respects, the Predecessor Companys results
of operations and cash flows for the period January 1, 2002
to November 22, 2002, and for the year ended
December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Note 3 to the consolidated
financial statements, in 2002, the Company changed its method of
accounting for discontinued operations to conform to Statement
of Financial Accounting Standards No. 144. As discussed in
Note 12 to the consolidated financial statements, effective
July 1, 2003, the Company adopted the provisions of
Statement of Financial Accounting Standards, No. 150.

/s/ DELOITTE & TOUCHE LLP

Atlanta, Georgia

March 5, 2004


F-2



---



##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                                                 |                                       |         |                   |         |   |         |         |         | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------- | ------- | ----------------- | ------- | - | ------- | ------- | ------- | 
|                                         |                                                                                                                                                                                 | December 31, 2003                     |         | December 31, 2002
|                                         |                                                                                                                                                                                 |                                       |         |                  
|                                         |                                                                                                                                                                                 |                                      
|                                         |                                                                                                                                                                                 | (In thousands, except per share data)
|ASSETS                                  
|Current assets:                          |                                                                                                                                                                                 |                                       |         |                   |         |   |         |        
|                                         | Cash and cash equivalents                                                                                                                                                       |                                       | $       | 10,897            |         |   | $       | 10,875  |        
|                                         | Cash, restricted                                                                                                                                                                |                                       |         | 7,084             |         |   |         | 19,384  |        
|                                         | Accounts receivable (net of allowances:
    2003  $689; 2002  $1,594)                                                                                                         |                                       |         | 8,169             |         |   |         | 10,681  |        
|                                         | Inventories                                                                                                                                                                     |                                       |         | 5,609             |         |   |         | 7,197   |        
|                                         | Prepaid expenses and other current assets                                                                                                                                       |                                       |         | 17,068            |         |   |         | 15,118  |        
|                                         | Assets held for sale                                                                                                                                                            |                                       |         | 68,567            |         |   |         |        |        
|                                         |                                                                                                                                                                                 |                                       |         |                   |         |   |         |        
|                                         |                                                                                                                                                                                 | Total current assets                  |         |                   | 117,394 |   |         |         | 63,255  | 
|Property and equipment, net              |                                                                                                                                                                                 |                                       | 563,818 |                   |         |   | 664,565 |        
|Deposits for capital expenditures        |                                                                                                                                                                                 |                                       | 15,782  |                   |         |   | 22,349  |        
|Other assets                             |                                                                                                                                                                                 |                                       | 12,180  |                   |         |   | 11,995  |        
|                                         |                                                                                                                                                                                 |                                       |         |                   |         |   |         |        
|                                         |                                                                                                                                                                                 | $                                     | 709,174 |                   |         | $ | 762,164 |        
|                                         |                                                                                                                                                                                 |                                       |         |                   |         |   |         |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Liabilities not subject to compromise    |                                                                                                                                                                                 |                                       |         |                   |         |   |         |        
|                                         | Current liabilities:                                                                                                                                                            |                                       |         |                   |         |   |         |         |        
|                                         | Accounts payable                                                                                                                                                                |                                       | $       | 7,131             |         |   | $       | 12,380  |        
|                                         | Other accrued liabilities                                                                                                                                                       |                                       |         | 31,432            |         |   |         | 41,297  |        
|                                         | Advance deposits                                                                                                                                                                |                                       |         | 1,882             |         |   |         | 1,786   |        
|                                         | Current portion of long-term debt                                                                                                                                               |                                       |         | 16,563            |         |   |         | 14,550  |        
|                                         | Liabilities related to assets held for sale                                                                                                                                     |                                       |         | 57,948            |         |   |         |        |        
|                                         |                                                                                                                                                                                 |                                       |         |                   |         |   |         |        
|                                         |                                                                                                                                                                                 | Total current liabilities             |         |                   | 114,956 |   |         |         | 70,013  | 
|Long-term debt:                          |                                                                                                                                                                                 |                                       |         |                   |         |   |         |        
|                                         | 12.25% Cumulative preferred shares subject to
    mandatory redemption                                                                                                          |                                       |         | 142,177           |         |   |         |        |        
|                                         | Long-term debt  other                                                                                                                                                          |                                       |         | 409,115           |         |   |         | 389,752 |        
|                                         |                                                                                                                                                                                 |                                       |         |                   |         |   |         |        
|                                         |                                                                                                                                                                                 | Total long-term debt                  |         |                   | 551,292 |   |         |         | 389,752 | 
|Liabilities subject to compromise        |                                                                                                                                                                                 |                                       |        |                   |         |   | 93,816  |        
|                                         |                                                                                                                                                                                 |                                       |         |                   |         |   |         |        
|                                         |                                                                                                                                                                                 | Total liabilities                     |         |                   | 666,248 |   |         |         | 553,581 | 
|Minority interests                       |                                                                                                                                                                                 |                                       | 2,320   |                   |         |   | 3,616   |        
|Commitments and contingencies            |                                                                                                                                                                                 |                                       |         |                   |         |   |         |        
|                                         | 12.25% Cumulative preferred shares subject to
    mandatory redemption                                                                                                          |                                       |         |                  |         |   |         | 126,510 |        
|Stockholders equity:                    |                                                                                                                                                                                 |                                       |         |                   |         |   |         |        
|                                         | Common stock, $.01 par value,
    30,000,000 shares authorized; 7,000,774 and 7,000,000
    issued and outstanding at December 31, 2003 and
    December 31, 2002, respectively |                                       |         | 70                |         |   |         | 70      |        
|                                         | Additional paid-in capital                                                                                                                                                      |                                       |         | 89,827            |         |   |         | 89,223  |        
|                                         | Unearned stock compensation                                                                                                                                                     |                                       |         | (508              | )       |   |         |        |        
|                                         | Accumulated deficit                                                                                                                                                             |                                       |         | (50,107           | )       |   |         | (10,836 | )      
|                                         | Accumulated other comprehensive income                                                                                                                                          |                                       |         | 1,324             |         |   |         |        |        
|                                         |                                                                                                                                                                                 |                                       |         |                   |         |   |         |        
|                                         |                                                                                                                                                                                 | Total stockholders equity            |         |                   | 40,606  |   |         |         | 78,457  | 
|                                         |                                                                                                                                                                                 |                                       |         |                   |         |   |         |        
|                                         |                                                                                                                                                                                 | $                                     | 709,174 |                   |         | $ | 762,164 |        
|                                         |                                                                                                                                                                                 |                                       |         |                   |         |   |         |        

See notes to consolidated financial statements.

F-3



---



##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |          |         |  
|---------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | -------------------- | ------- | ------------------ | ------ | ------- | ------ | - | ------- | ------- | ------- | - | ------- | -------- | ------- | -
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                     
|                                                                                   |                                                                                                                                                                                              | Successor                                                                                                                                                                                                                                                                                             |         | Predecessor         
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                     
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         | November 23, 2002 to |         | January 1, 2002 to |        |        
|                                                                                   |                                                                                                                                                                                              | 2003                                                                                                                                                                                                                                                                                                  |         | December 31, 2002    |         | November 22, 2002  |        | 2001   
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |        
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                      
|                                                                                   |                                                                                                                                                                                              | (In thousands, except per share data)                                                                                                                                                                                                                                                                
|Revenues:                                                                          |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|                                                                                   | Rooms                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                       | $       | 229,519              |         |                    | $      | 16,902  |        |   | $       | 220,898 |         |   | $       | 257,100  |        
|                                                                                   | Food and beverage                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                       |         | 70,791               |         |                    |        | 7,415   |        |   |         | 66,709  |         |   |         | 79,554   |        
|                                                                                   | Other                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                       |         | 11,104               |         |                    |        | 989     |        |   |         | 11,660  |         |   |         | 14,418   |        
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       | 311,414 |                      |         |                    | 25,306 |         |        |   | 299,267 |         |         |   | 351,072 |         
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|Operating expenses:                                                                |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|                                                                                   | Direct:                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |          |        
|                                                                                   |                                                                                                                                                                                              | Rooms                                                                                                                                                                                                                                                                                                 |         |                      | 65,814  |                    |        |         | 6,246  |   |         |         | 59,378  |   |         |          | 69,257  |  
|                                                                                   |                                                                                                                                                                                              | Food and beverage                                                                                                                                                                                                                                                                                     |         |                      | 48,686  |                    |        |         | 5,447  |   |         |         | 46,822  |   |         |          | 55,459  |  
|                                                                                   |                                                                                                                                                                                              | Other                                                                                                                                                                                                                                                                                                 |         |                      | 7,970   |                    |        |         | 880    |   |         |         | 7,836   |   |         |          | 8,540   |  
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       | 122,470 |                      |         |                    | 12,573 |         |        |   | 114,036 |         |         |   | 133,256 |         
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       | 188,944 |                      |         |                    | 12,733 |         |        |   | 185,231 |         |         |   | 217,816 |         
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|                                                                                   | General, administrative and other                                                                                                                                                            |                                                                                                                                                                                                                                                                                                       |         | 137,888              |         |                    |        | 13,982  |        |   |         | 118,212 |         |   |         | 154,320  |        
|                                                                                   | Depreciation and amortization                                                                                                                                                                |                                                                                                                                                                                                                                                                                                       |         | 29,761               |         |                    |        | 3,113   |        |   |         | 40,523  |         |   |         | 46,065   |        
|                                                                                   | Impairment of long-lived assets                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         | 12,667               |         |                    |        |        |        |   |         |        |         |   |         | 20,503   |        
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|                                                                                   |                                                                                                                                                                                              | Other operating expenses                                                                                                                                                                                                                                                                              |         |                      | 180,316 |                    |        |         | 17,095 |   |         |         | 158,735 |   |         |          | 220,888 |  
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       | 8,628   |                      |         |                    | (4,362 | )       |        |   | 26,496  |         |         |   | (3,072  | )       
|Other income (expenses):                                                           |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|                                                                                   | Interest income and other                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                       |         | 807                  |         |                    |        | 14      |        |   |         | 4,940   |         |   |         | 709      |        
|                                                                                   | Interest expense:                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |          |        
|                                                                                   |                                                                                                                                                                                              | Preferred stock dividend                                                                                                                                                                                                                                                                              |         |                      | (8,092  | )                  |        |         |       |   |         |         |        |   |         |          |        |  
|                                                                                   |                                                                                                                                                                                              | Interest expense (contractual interest:
    $29.8 million, $3.0 million, $53.5 million and
    $76.1 million for the Successor periods ended
    December 31, 2003 and December 31, 2002, the
    Predecessor periods ended November 22, 2002 and the year
    ended December 31, 2001, respectively) |         |                      | (28,581 | )                  |        |         | (2,512 | ) |         |         | (25,761 | ) |         |          | (71,817 | )
|                                                                                   |                                                                                                                                                                                              | Gain on asset dispositions                                                                                                                                                                                                                                                                            |         |                      | 445     |                    |        |         |       |   |         |         |        |   |         |          | 23,975  |  
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|(Loss) income before income taxes, reorganization
    items and minority interests |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       | (26,793 | )                    |         |                    | (6,860 | )       |        |   | 5,675   |         |         |   | (50,205 | )       
|Reorganization items                                                               |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       | (1,397  | )                    |         |                    |       |         |        |   | 11,038  |         |         |   | (21,672 | )       
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|(Loss) income before income taxes and minority
    interest                        |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       | (28,190 | )                    |         |                    | (6,860 | )       |        |   | 16,713  |         |         |   | (71,877 | )       
|Minority interests:                                                                |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|                                                                                   | Preferred redeemable securities (contractual
    interest: $12.7 million and $13.2 million for the
    Predecessor periods ended November 22, 2002 and the year
    ended December 31, 2001) |                                                                                                                                                                                                                                                                                                       |         |                     |         |                    |        |        |        |   |         |        |         |   |         | (12,869  | )      
|                                                                                   | Other                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                       |         | 1,294                |         |                    |        | 147     |        |   |         | 126     |         |   |         | 38       |        
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|                                                                                   | (Loss) income before income taxes 
    continuing operations                                                                                                                                |                                                                                                                                                                                                                                                                                                       |         | (26,896              | )       |                    |        | (6,713  | )      |   |         | 16,839  |         |   |         | (84,708  | )      
|                                                                                   | (Provision) benefit for income taxes 
    continuing operations                                                                                                                             |                                                                                                                                                                                                                                                                                                       |         | (178                 | )       |                    |        | (32     | )      |   |         | 160     |         |   |         | (2,829   | )      
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|                                                                                   | (Loss) income  continuing operations                                                                                                                                                        |                                                                                                                                                                                                                                                                                                       |         | (27,074              | )       |                    |        | (6,745  | )      |   |         | 16,999  |         |   |         | (87,537  | )      
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|Discontinued operations:                                                           |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|                                                                                   | Loss from discontinued operations before income
    taxes                                                                                                                                    |                                                                                                                                                                                                                                                                                                       |         | (4,603               | )       |                    |        | (2,581  | )      |   |         | (5,833  | )       |   |         | (55,227  | )      
|                                                                                   | Income tax benefit                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                       |         |                     |         |                    |        |        |        |   |         | 1,200   |         |   |         |         |        
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|                                                                                   | Loss from discontinued operations                                                                                                                                                            |                                                                                                                                                                                                                                                                                                       |         | (4,603               | )       |                    |        | (2,581  | )      |   |         | (4,633  | )       |   |         | (55,227  | )      
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|                                                                                   | Net (loss) income                                                                                                                                                                            |                                                                                                                                                                                                                                                                                                       |         | (31,677              | )       |                    |        | (9,326  | )      |   |         | 12,366  |         |   |         | (142,764 | )      
|                                                                                   | Preferred stock dividend                                                                                                                                                                     |                                                                                                                                                                                                                                                                                                       |         | (7,594               | )       |                    |        | (1,510  | )      |   |         |        |         |   |         |         |        
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|                                                                                   | Net (loss) income attributable to common stock                                                                                                                                               |                                                                                                                                                                                                                                                                                                       | $       | (39,271              | )       |                    | $      | (10,836 | )      |   | $       | 12,366  |         |   | $       | (142,764 | )      
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|Basic and diluted loss per common share:                                           |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         
|                                                                                   | Net (loss) income attributable to common stock                                                                                                                                               |                                                                                                                                                                                                                                                                                                       | $       | (5.61                | )       |                    | $      | (1.55   | )      |   | $       | 0.43    |         |   | $       | (5.04    | )      
|                                                                                   |                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                       |         |                      |         |                    |        |         |        |   |         |         |         |   |         |         

Upon emergence from Chapter 11, the Company
adopted fresh start reporting. As a result, all assets and
liabilities were restated to reflect their fair values. The
consolidated financial statements of the new reporting entity
(the Successor) are not comparable to the reporting
entity prior to the Companys emergence from
Chapter 11 (the Predecessor).

See notes to consolidated financial statements.

F-4



---



##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)

For the Year Ended December 31, 2001, the
period January 1, 2002 to November 22, 2002,


the period November 23, 2002 to
December 31, 2002 and the year ended December 31,
2003


|                                                |                                                                       |                                   |             |            |  |          |      |              |  |               |          |                   |  |           |      |   |  |   |          |         |   |   |        |       |  |   |          |         |  
|----------------------------------------------- | --------------------------------------------------------------------- | --------------------------------- | ----------- | ---------- |  | -------- | ---- | ------------ |  | ------------- | -------- | ----------------- |  | --------- | ---- | - |  | - | -------- | ------- | - | - | ------ | ----- |  | - | -------- | ------- | -
|                                                |                                                                       |                                   |             |            |  |          |      |              |  | Accumulated   |          | Total            
|                                                |                                                                       | Common Stock                      |             | Additional |  | Unearned |      |              |  | Other         |          | Stockholders    
|                                                |                                                                       |                                   |             | Paid-In    |  | Stock    |      | Accumulated  |  | Comprehensive |          | Equity           
|                                                |                                                                       | Shares                            |             | Amount     |  | Capital  |      | Compensation |  | Deficit       |          | Loss (net of tax) |  | (Deficit)
|                                                |                                                                       |                                   |             |            |  |          |      |              |  |               |          |                   |  |          
|                                                |                                                                       |                                  
|                                                |                                                                       | (In thousands, except share data)
|Predecessor Company:                            |                                                                       |                                   |             |            |  |          |      |              |  |               |          |                   |  |           |      |   |  |   |          |         |   |   |        |       |  |   |          |        
|Balance at December 31, 2000                    |                                                                       |                                   | 28,290,424  |            |  | $        | 282  |              |  | $             | 263,320  |                   |  | $         |     |   |  | $ | (125,542 | )       |   | $ | (1,180 | )     |  | $ | 136,880  |        
|401(k) Plan contribution                        |                                                                       |                                   | 189,413     |            |  |          | 2    |              |  |               |          |                   |  |           |     |   |  |   |          |         |   |   |        |       |  |   | 2        |        
|Net loss                                        |                                                                       |                                   |            |            |  |          |     |              |  |               |         |                   |  |           |     |   |  |   | (142,764 | )       |   |   |       |       |  |   | (142,764 | )      
|Currency translation adjustments, net of tax    |                                                                       |                                   |            |            |  |          |     |              |  |               |         |                   |  |           |     |   |  |   |         |         |   |   | (799   | )     |  |   | (799     | )      
|                                                |                                                                       |                                   |             |            |  |          |      |              |  |               |          |                   |  |           |      |   |  |   |          |         |   |   |        |       |  |   |          |        
|Comprehensive loss                              |                                                                       |                                   |             |            |  |          |      |              |  |               |          |                   |  |           |      |   |  |   |          |         |   |   |        |       |  |   | (143,563 | )      
|                                                |                                                                       |                                   |             |            |  |          |      |              |  |               |          |                   |  |           |      |   |  |   |          |         |   |   |        |       |  |   |          |        
|Balance at December 31, 2001                    |                                                                       |                                   | 28,479,837  |            |  |          | 284  |              |  |               | 263,320  |                   |  |           |     |   |  |   | (268,306 | )       |   |   | (1,979 | )     |  |   | (6,681   | )      
|Net income through November 22, 2002            |                                                                       |                                   |            |            |  |          |     |              |  |               |          |                   |  |           |     |   |  |   | 12,366   |         |   |   |        |       |  |   | 12,366   |        
|Currency translation adjustments, net of tax    |                                                                       |                                   |            |            |  |          |      |              |  |               |         |                   |  |           |     |   |  |   |          |         |   |   | 101    |       |  |   | 101      |        
|                                                |                                                                       |                                   |             |            |  |          |      |              |  |               |          |                   |  |           |      |   |  |   |          |         |   |   |        |       |  |   |          |        
|Comprehensive loss                              |                                                                       |                                   |            |            |  |          |     |              |  |               |         |                   |  |           |      |   |  |   |          |         |   |   |        |       |  |   | 12,467   |        
|                                                |                                                                       |                                   |             |            |  |          |      |              |  |               |          |                   |  |           |      |   |  |   |          |         |   |   |        |       |  |   |          |        
|Balance at November 22, 2002                    |                                                                       |                                   | 28,479,837  |            |  |          | 284  |              |  |               | 263,320  |                   |  |           |     |   |  |   | (255,940 | )       |   |   | (1,878 | )     |  |   | 5,786    |        
|Reorganization adjustments                      |                                                                       |                                   | (28,479,837 | )          |  |          | (284 | )            |  |               | (263,320 | )                 |  |           |     |   |  |   | 255,940  |         |   |   | 1,878  |       |  |   | (5,786   | )      
|                                                |                                                                       |                                   |             |            |  |          |      |              |  |               |          |                   |  |           |      |   |  |   |          |         |   |   |        |       |  |   |          |        
|Balance November 22, 2002                       |                                                                       |                                   |            |            |  |          |     |              |  |               |         |                   |  |           |     |   |  |   |         |         |   |   |       |       |  |   |         |        
|                                               
|Successor Company:                              |                                                                       |                                   |             |            |  |          |      |              |  |               |          |                   |  |           |      |   |  |   |          |         |   |   |        |       |  |   |          |        
|Distribution of new common shares               |                                                                       |                                   | 7,000,000   |            |  |          | 70   |              |  |               | 81,186   |                   |  |           |     |   |  |   |         |         |   |   |       |       |  |   | 81,256   |        
|Distribution of A warrants, 1,510,638           |                                                                       |                                   |            |            |  |          |     |              |  |               | 4,774    |                   |  |           |     |   |  |   |          |         |   |   |        |       |  |   | 4,774    |        
|Distribution of B warrants, 1,029,366           |                                                                       |                                   |            |            |  |          |     |              |  |               | 3,263    |                   |  |           |     |   |  |   |          |         |   |   |        |       |  |   | 3,263    |        
|Net loss  November 22 to
    December 31, 2002 |                                                                       |                                   |            |            |  |          |     |              |  |               |         |                   |  |           |     |   |  |   | (9,326   | )       |   |   |        |       |  |   | (9,326   | )      
|Currency translation adjustments, net of tax    |                                                                       |                                   |            |            |  |          |     |              |  |               |         |                   |  |           |     |   |  |   |         |         |   |   |       |       |  |   |         |        
|                                                |                                                                       |                                   |             |            |  |          |      |              |  |               |          |                   |  |           |      |   |  |   |          |         |   |   |        |       |  |   |          |        
|Comprehensive loss                              |                                                                       |                                   |             |            |  |          |      |              |  |               |          |                   |  |           |      |   |  |   |          |         |   |   |        |       |  |   | (9,326   | )      
|Preferred dividends accrued (not declared)      |                                                                       |                                   |             |            |  |          |      |              |  |               |          |                   |  |           |      |   |  |   | (1,510   | )       |   |   |        |       |  |   | (1,510   | )      
|                                                |                                                                       |                                   |             |            |  |          |      |              |  |               |          |                   |  |           |      |   |  |   |          |         |   |   |        |       |  |   |          |        
|Balance December 31, 2002                       |                                                                       |                                   | 7,000,000   |            |  | $        | 70   |              |  | $             | 89,223   |                   |  | $         |     |   |  | $ | (10,836  | )       |   | $ |       |       |  | $ | 78,457   |        
|Issuance of restricted stock                    |                                                                       |                                   |            |            |  |          |     |              |  |               | 600      |                   |  |           | (600 | ) |  |   |         |         |   |   |       |       |  |   |         |        
|Amortization of unearned stock compensation     |                                                                       |                                   |            |            |  |          |     |              |  |               |         |                   |  |           | 92   |   |  |   |         |         |   |   |       |       |  |   | 92       |        
|Exercise of stock options                       |                                                                       |                                   | 774         |            |  |          |     |              |  |               | 4        |                   |  |           |     |   |  |   |         |         |   |   |       |       |  |   | 4        |        
|Comprehensive loss:                             |                                                                       |                                   |             |            |  |          |      |              |  |               |          |                   |  |           |      |   |  |   |          |         |   |   |        |       |  |   |          |        
|                                                | Net loss                                                              |                                   |             |           |  |          |      |             |  |               |          |                  |  |           |      |  |  |   |          | (31,677 | ) |   |        |      |  |   |          | (31,677 | )
|                                                | Currency translation adjustments (related taxes
    estimated at nil) |                                   |             |           |  |          |      |             |  |               |          |                  |  |           |      |  |  |   |          |        |   |   |        | 1,324 |  |   |          | 1,324   |  
|                                                |                                                                       |                                   |             |            |  |          |      |              |  |               |          |                   |  |           |      |   |  |   |          |         |   |   |        |       |  |   |          |        
|Total comprehensive loss                        |                                                                       |                                   |            |            |  |          |     |              |  |               |         |                   |  |           |      |   |  |   |         |         |   |   |       |       |  |   | (30,353  | )      
|Preferred dividends*                            |                                                                       |                                   |            |            |  |          |     |              |  |               |         |                   |  |           |     |   |  |   | (7,594   | )       |   |   |       |       |  |   | (7,594   | )      
|                                                |                                                                       |                                   |             |            |  |          |      |              |  |               |          |                   |  |           |      |   |  |   |          |         |   |   |        |       |  |   |          |        
|Balance December 31, 2003                       |                                                                       |                                   | 7,000,774   |            |  | $        | 70   |              |  | $             | 89,827   |                   |  | $         | (508 | ) |  | $ | (50,107  | )       |   | $ | 1,324  |       |  | $ | 40,606   |        
|                                                |                                                                       |                                   |             |            |  |          |      |              |  |               |          |                   |  |           |      |   |  |   |          |         |   |   |        |       |  |   |          |        



---

*Represent dividends accrued for the period
January 1, 2003 to June 30, 2003. Pursuant to
Statement of Financial Accounting Standard No. 150,
dividends accrued for the period July 1, 2003 to
December 31, 2003 are reflected in interest expense.

Upon emergence from Chapter 11, the Company
adopted fresh start reporting. As a result, all assets and
liabilities were restated to reflect their fair values. The
consolidated financial statements of the new reporting entity
(the Successor) are not comparable to the reporting
entity prior to the Companys emergence from
Chapter 11 (the Predecessor).

See notes to consolidated financial statements.

F-5



---



##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                   |                                                                                                                                    |                                                            |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |          |         |        |  
|---------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | -------------------------------------------------- | -------------------- | ------ | ------------------ | ------- | ------ | ----- | ------- | ------- | -------- | -------- | ------- | ------- | -------- | ------- | ------ | -
|                                                                                   |                                                                                                                                    |                                                            |                                                    |                     
|                                                                                   |                                                                                                                                    | Successor                                                  |                                                    | Predecessor         
|                                                                                   |                                                                                                                                    |                                                            |                                                    |                     
|                                                                                   |                                                                                                                                    |                                                            |                                                    | November 23, 2002 to |        | January 1, 2002 to |         |       
|                                                                                   |                                                                                                                                    | 2003                                                       |                                                    | December 31, 2002    |        | November 22, 2002  |         | 2001  
|                                                                                   |                                                                                                                                    |                                                            |                                                    |                      |        |                    |         |       
|                                                                                   |                                                                                                                                    |                                                           
|                                                                                   |                                                                                                                                    | (In thousands)                                            
|Operating activities:                                                              |                                                                                                                                    |                                                            |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |         
|                                                                                   | Net (loss) income                                                                                                                  |                                                            | $                                                  | (31,677              | )      |                    | $       | (9,326 | )     |         | $       | 12,366   |          |         | $       | (142,764 | )      
|                                                                                   | Add: loss from discontinued operations                                                                                             |                                                            |                                                    | 4,603                |        |                    |         | 2,581  |       |         |         | 4,633    |          |         |         | 55,227   |        
|                                                                                   |                                                                                                                                    |                                                            |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |         
|                                                                                   | (Loss) income  continuing operations                                                                                              |                                                            |                                                    | (27,074              | )      |                    |         | (6,745 | )     |         |         | 16,999   |          |         |         | (87,537  | )      
|                                                                                   | Adjustments to reconcile (loss) income from
    continuing operations to net cash provided by (used in )
    operating activities: |                                                            |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |          |        
|                                                                                   |                                                                                                                                    | Depreciation and amortization                              |                                                    |                      | 29,761 |                    |         |        | 3,113 |         |         |          | 40,523   |         |         |          | 46,065  |       
|                                                                                   |                                                                                                                                    | Impairment of long-lived assets                            |                                                    |                      | 12,667 |                    |         |        |      |         |         |          | 193,202  |         |         |          | 20,503  |       
|                                                                                   |                                                                                                                                    | Gain on extinguishment of debt                             |                                                    |                      |       |                    |         |        |      |         |         |          | (226,929 | )       |         |          |        |       
|                                                                                   |                                                                                                                                    | Fresh start adjustments  other                            |                                                    |                      |       |                    |         |        |      |         |         |          | (3,426   | )       |         |          |        |       
|                                                                                   |                                                                                                                                    | Amortization of unearned stock compensation                |                                                    |                      | 92     |                    |         |        |      |         |         |          |         |         |         |          |        |       
|                                                                                   |                                                                                                                                    | Preferred stock dividends                                  |                                                    |                      | 8,092  |                    |         |        |      |         |         |          |         |         |         |          |        |       
|                                                                                   |                                                                                                                                    | Minority interests                                         |                                                    |                      | (1,296 | )                  |         |        | (147  | )       |         |          | (126     | )       |         |          | 12,831  |       
|                                                                                   |                                                                                                                                    | Gain on asset dispositions                                 |                                                    |                      | (445   | )                  |         |        |      |         |         |          |         |         |         |          | (23,975 | )     
|                                                                                   |                                                                                                                                    | Write-off and amortization of deferred financing
    costs |                                                    |                      | 3,884  |                    |         |        | 167   |         |         |          | 56       |         |         |          | 25,972  |       
|                                                                                   |                                                                                                                                    | Other                                                      |                                                    |                      | 139    |                    |         |        | (276  | )       |         |          | 429      |         |         |          | 542     |       
|                                                                                   |                                                                                                                                    | Changes in operating assets and liabilities:               |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |          |         |       
|                                                                                   |                                                                                                                                    |                                                            | Accounts receivable, net of allowances             |                      |        | 554                |         |        |       | 3,195   |         |          |          | (1,708  | )       |          |         | 7,029  |  
|                                                                                   |                                                                                                                                    |                                                            | Inventories                                        |                      |        | (241               | )       |        |       | 105     |         |          |          | (187    | )       |          |         | 497    |  
|                                                                                   |                                                                                                                                    |                                                            | Prepaid expenses, other assets and restricted cash |                      |        | 8,908              |         |        |       | 14,236  |         |          |          | (38,752 | )       |          |         | (1,607 | )
|                                                                                   |                                                                                                                                    |                                                            | Accounts payable                                   |                      |        | (3,775             | )       |        |       | (1,842  | )       |          |          | 4,718   |         |          |         | 978    |  
|                                                                                   |                                                                                                                                    |                                                            | Other accrued liabilities                          |                      |        | (1,484             | )       |        |       | (10,727 | )       |          |          | 12,058  |         |          |         | (3,170 | )
|                                                                                   |                                                                                                                                    |                                                            | Related party balances                             |                      |        | 4,556              |         |        |       | (1,493  | )       |          |          | (2,421  | )       |          |         | 5,974  |  
|                                                                                   |                                                                                                                                    |                                                            | Advance deposits                                   |                      |        | 440                |         |        |       | (187    | )       |          |          | 191     |         |          |         | (95    | )
|                                                                                   |                                                                                                                                    |                                                            |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |         
|Net cash provided by (used in) operating
    activities of continuing operations   |                                                                                                                                    |                                                            | 34,778                                             |                      |        |                    | (601    | )      |       |         | (5,373  | )        |          |         | 4,007   |         
|                                                                                   |                                                                                                                                    |                                                            |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |         
|Net cash (used in) provided by operating
    activities of discontinued operations |                                                                                                                                    |                                                            | (166                                               | )                    |        |                    | 17      |        |       |         | (259    | )        |          |         | (1,440  | )       
|                                                                                   |                                                                                                                                    |                                                            |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |         
|Investing activities:                                                              |                                                                                                                                    |                                                            |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |         
|                                                                                   | Capital improvements                                                                                                               |                                                            |                                                    | (30,756              | )      |                    |         | (4,329 | )     |         |         | (19,014  | )        |         |         | (23,360  | )      
|                                                                                   | Proceeds from sale of assets, net of related
    selling costs                                                                     |                                                            |                                                    | 802                  |        |                    |         |       |       |         |         |         |          |         |         | 67,910   |        
|                                                                                   | Withdrawals (deposits) for capital
    expenditures                                                                                |                                                            |                                                    | 7,219                |        |                    |         | (7,651 | )     |         |         | 1,501    |          |         |         | (1,221   | )      
|                                                                                   | Other                                                                                                                              |                                                            |                                                    | (192                 | )      |                    |         | (1,010 | )     |         |         | (90      | )        |         |         |         |        
|                                                                                   |                                                                                                                                    |                                                            |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |         
|Net cash (used in) provided by investing
    activities                            |                                                                                                                                    |                                                            | (22,927                                            | )                    |        |                    | (12,990 | )      |       |         | (17,603 | )        |          |         | 43,329  |         
|                                                                                   |                                                                                                                                    |                                                            |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |         
|Financing activities:                                                              |                                                                                                                                    |                                                            |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |         
|                                                                                   | Proceeds from issuance of long-term debt                                                                                           |                                                            |                                                    | 80,000               |        |                    |         |       |       |         |         | 309,098  |          |         |         |         |        
|                                                                                   | Proceeds from working capital revolver                                                                                             |                                                            |                                                    | 2,000                |        |                    |         |       |       |         |         |         |          |         |         | 21,000   |        
|                                                                                   | Proceeds from issuance of common stock                                                                                             |                                                            |                                                    | 114                  |        |                    |         |       |       |         |         |         |          |         |         |         |        
|                                                                                   | Principal payments on long-term debt                                                                                               |                                                            |                                                    | (87,059              | )      |                    |         | (1,221 | )     |         |         | (266,601 | )        |         |         | (58,293  | )      
|                                                                                   | Principal payments on working capital revolver                                                                                     |                                                            |                                                    | (2,000               | )      |                    |         |        |       |         |         |          |          |         |         | (15,000  | )      
|                                                                                   | Payments of deferred loan costs                                                                                                    |                                                            |                                                    | (4,839               | )      |                    |         |       |       |         |         | (7,599   | )        |         |         | (598     | )      
|                                                                                   |                                                                                                                                    |                                                            |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |         
|Net cash (used in) provided by financing
    activities                            |                                                                                                                                    |                                                            | (11,784                                            | )                    |        |                    | (1,221  | )      |       |         | 34,898  |          |          |         | (52,891 | )       
|                                                                                   |                                                                                                                                    |                                                            |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |         
|Effect of exchange rate changes on cash                                            |                                                                                                                                    |                                                            | 121                                                |                      |        |                    |        |        |       |         |        |          |          |         |        |         
|                                                                                   |                                                                                                                                    |                                                            |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |         
|Net increase (decrease) in cash and cash
    equivalents                           |                                                                                                                                    |                                                            | 22                                                 |                      |        |                    | (14,795 | )      |       |         | 11,663  |          |          |         | (6,995  | )       
|Cash and cash equivalents at beginning of period                                   |                                                                                                                                    |                                                            | 10,875                                             |                      |        |                    | 25,670  |        |       |         | 14,007  |          |          |         | 21,002  |         
|                                                                                   |                                                                                                                                    |                                                            |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |         
|                                                                                   |                                                                                                                                    | $                                                          | 10,897                                             |                      |        | $                  | 10,875  |        |       | $       | 25,670  |          |          | $       | 14,007  |         
|                                                                                   |                                                                                                                                    |                                                            |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |         
|Supplemental cash flow information:                                                |                                                                                                                                    |                                                            |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |         
|Cash paid during the period for:                                                   |                                                                                                                                    |                                                            |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |         
|                                                                                   | Interest, net of the amounts capitalized shown
    below                                                                           |                                                            | $                                                  | 28,660               |        |                    | $       | 1,589  |       |         | $       | 31,132   |          |         | $       | 73,131   |        
|                                                                                   | Interest capitalized                                                                                                               |                                                            |                                                    | 1,181                |        |                    |         | 149    |       |         |         | 365      |          |         |         | 861      |        
|                                                                                   | Income taxes, net of refunds                                                                                                       |                                                            |                                                    | 237                  |        |                    |         |        |       |         |         | (302     | )        |         |         | 120      |        
|Supplemental disclosure of non-cash investing and
    financing activities:        |                                                                                                                                    |                                                            |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |         
|                                                                                   | Issuance of preferred stock on emergence from
    Chapter 11                                                                       |                                                            |                                                    |                     |        |                    |         |       |       |         |         | 125,000  |          |         |         |         |        
|                                                                                   | Issuance of other securities on emergence from
    Chapter 11                                                                      |                                                            |                                                    |                     |        |                    |         |       |       |         |         | 89,293   |          |         |         |         |        
|                                                                                   | Net non-cash debt increase                                                                                                         |                                                            |                                                    | 4,678                |        |                    |         | 16     |       |         |         | 137      |          |         |         |          |        
|Operating cash receipts and payments resulting
    from Chapter 11 proceedings:    |                                                                                                                                    |                                                            |                                                    |                      |        |                    |         |        |       |         |         |          |          |         |         |         
|                                                                                   | Professional fees paid                                                                                                             |                                                            |                                                    | (455                 | )      |                    |         |       |       |         |         | (11,184  | )        |         |         | (3,772   | )      
|                                                                                   | Loan extension fee                                                                                                                 |                                                            |                                                    | (1,500               | )      |                    |         |       |       |         |         |         |          |         |         |         |        
|                                                                                   | Other reorganization payments                                                                                                      |                                                            | $                                                  | (90                  | )      |                    | $       |       |       |         | $       | (908     | )        |         | $       | (24      | )      

Upon emergence from Chapter 11, the Company
adopted fresh start reporting. As a result, all assets and
liabilities were restated to reflect their fair values. The
consolidated financial statements of the new reporting entity
(the Successor) are not comparable to the reporting
entity prior to the Companys emergence from
Chapter 11 (the Predecessor).

See notes to consolidated financial statements.

F-6



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003




|   |                                               
|-- | ----------------------------------------------
|1. | Summary of Significant Accounting
    Policies

Description
of Business

On December 11, 1998, Servico, Inc.
(Servico) merged with Impac Hotel Group, LLC (Impac), pursuant
to which Servico and Impac formed a new company, Lodgian, Inc.
(Lodgian or the Company). This
transaction (the Merger) was accounted for under the
purchase method of accounting, whereby Servico was considered
the acquiring company. On December 20, 2001, the Company
and substantially all of its subsidiaries that owned hotel
properties filed for voluntary reorganization under
Chapter 11 of the Bankruptcy Code. At the time of the
Chapter 11 filing, the Companys portfolio of hotels
consisted of 106 hotel properties. The Company emerged from
Chapter 11 with 97 hotels since eight of the hotels were
conveyed to the lender in satisfaction of outstanding debt
obligations and one hotel was returned to the lessor of a
capital lease. Of the portfolio of 97 hotels, 78 hotels emerged
from Chapter 11 on November 25, 2002, 18 hotels
emerged from Chapter 11 on May 22, 2003 and one hotel
never filed under Chapter 11.

In 2003, the Company developed a strategy of
owning and operating a portfolio of profitable, well-maintained
and appealing hotels at superior locations in strong markets. We
are implementing this strategy by:



| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | renovating and repositioning certain of its
    existing hotels to improve performance;                                        
|
| |  | divesting hotels that do not fit this strategy or
    that are unlikely to do so without significant effort or
    expense; and
|
| |  | acquiring selected hotels that better fit this
    strategy.                                                                   

In accordance with this strategy and our efforts
to reduce debt and interest, in 2003 we identified
19 hotels, our only office building and three land parcels
for sale. One of the 19 hotels was sold in November 2003,
bringing the hotel portfolio to 96 at December 31, 2003.
The office building was sold in December 2003.

Fresh Start
Reporting

Effective November 22, 2002, the Company
adopted fresh start reporting. As a result, all assets and
liabilities were restated to reflect their fair values. The
Consolidated Financial Statements after emergence are those of a
new reporting entity (the Successor) and are not
comparable to the financial statements prior to
November 22, 2002 (the Predecessor). See
Note 4.

Principles of
Consolidation

The financial statements consolidate the accounts
of Lodgian, its wholly-owned subsidiaries and four joint
ventures in which Lodgian has a controlling financial interest
and exercises control. Lodgian believes it has control of the
joint ventures when the Company manages and has control of the
joint ventures assets and operations. The four joint
ventures in which the Company exercises control are as follows:

Melbourne Hospitality Associates, Limited
Partnership (which owns the Holiday Inn Melbourne,
Florida) This joint
venture is in the form of a limited partnership, in which a
Lodgian subsidiary serves as the general partner and has a 50%
voting interest.

New Orleans Airport Motel Associates, Ltd.
(which owns the New Orleans Airport Plaza Hotel and Conference
Center, Louisiana) This
joint venture is in the form of a limited partnership, in which
a Lodgian subsidiary serves as the general partner and has an
82% voting interest.

Servico Centre Associates,
Ltd.(which owns the Crowne Plaza West
Palm Beach, Florida)  This joint venture is in the
form of a limited partnership, in which a Lodgian subsidiary
serves as the general partner and has a 50% voting interest.

F-7



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Macon Hotel Associates, L.L.C. (which owns the
Crowne Plaza Macon,
Georgia) This joint
venture is in the form of a limited liability company, in which
a Lodgian subsidiary serves as the managing member and has a 60%
voting interest.

An unconsolidated entity owning one hotel,
Columbus Hospitality Associates LP, in which the Company has a
30% non-controlling equity interest, is accounted for under the
equity method. When the Company accounts for an entity under the
equity method, its share of the investment is recorded on the
Consolidated Balance Sheet and its share of the net income or
loss is recorded in the Consolidated Statement of Operations.
The Companys share of this investment is included in other
assets on the Consolidated Balance Sheet. Its share of the net
income or loss is shown in interest income and other
in the Consolidated Statements of Operations. The Companys
investment in this entity at December 31, 2003 was
$0.2 million and its share of the loss was $20,000.

All significant intercompany accounts and
transactions have been eliminated in consolidation.

Inventories

Inventories consist primarily of food and
beverage, linens, china, tableware and glassware and are valued
at the lower of cost (computed on the first-in, first-out
method) or market.

Minority
Interests  Preferred Redeemable
Securities

Minority interests-preferred redeemable
securities, represents Convertible Redeemable Equity Structure
Trust Securities (CRESTS). In connection with the
Companys emergence from Chapter 11, the CRESTS were
exchanged for common stock (868,000 shares), Class A
warrants (1,258,815) and Class B warrants (251,062).
Previously, the CRESTS bore interest at the rate of 7% per
annum and were convertible into shares of the Companys
common stock.

Minority
Interests  Other

Minority interests represent the minority
interests proportionate share of equity of joint ventures
that are accounted for by the Company on a consolidated basis.
The Company generally allocates to minority interests their
share of any profits or losses in accordance with the provisions
of the applicable agreements. However, if the loss applicable to
a minority interest exceeds its total investment and advances,
such excess is charged to the Company.

Property and
Equipment

Property and equipment is stated at depreciated
cost, less adjustments for impairment, where applicable. Capital
improvements are capitalized when they extend the useful life of
the related asset. All repair and maintenance items are expensed
as incurred. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets. Effective
November 22, 2002, the Company restated the recorded values
of all property and equipment to reflect their fair values.

F-8



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company capitalizes interest costs incurred
during the renovation and construction of capital assets.
Interest costs capitalized, for the periods listed below, were
as follows:

|                                                            |  |                  |       |              |  |            |     |  |  |   |       | 
|----------------------------------------------------------- |  | ---------------- | ----- | ------------ |  | ---------- | --- |  |  | - | ----- | 
|                                                            |  | Continuing       |       | Discontinued |  | Total     
|                                                            |  | operations       |       | operations   |  | operations
|                                                            |  |                  |       |              |  |           
|                                                            |  |                 
|                                                            |  | ($ in thousands)
|Predecessor year ended December 31, 2001                    |  | $                | 739   |              |  | $          | 122 |  |  | $ | 861   | 
|Predecessor period January 1, 2002 to
    November 22, 2002 |  |                  | 317   |              |  |            | 48  |  |  |   | 365   | 
|Successor period November 23, 2002 to
    December 31, 2002 |  |                  | 127   |              |  |            | 22  |  |  |   | 149   | 
|Successor year ended December 31, 2003                      |  |                  | 1,171 |              |  |            | 10  |  |  |   | 1,181 | 

Management periodically evaluates the
Companys property and equipment to determine whether
events or changes in circumstances indicate that a possible
impairment in the carrying value of the assets has occurred. The
carrying value of long-lived assets is considered impaired when
the undiscounted cash flows estimated to be generated by those
assets are less than the assets carrying amounts. If it is
determined that an impairment has occurred, the excess of the
assets carrying value over its estimated fair value is
charged to operating expenses. Impairment losses for assets held
for sale are recognized when the assets carrying values
are greater than the fair value less estimated selling costs.
See Note 8 for further discussion of the Companys
charges for asset impairment.



| |               
| | --------------
| | Deferred Costs

Deferred franchise costs and deferred financing
costs at December 31, 2003 and 2002, are included in other
assets, net of accumulated amortization. Deferred franchise
costs are amortized using the straight-line method over the
terms of the related franchise agreements while deferred
financing costs are amortized using the effective interest
method over the related term of the debt. These deferrals are
presented below for and as of the year ended December 31,
2003 along with the comparative period.

|                         |  |                              |        |                              |  |     |        |      |  |              |        |     |  |   |        |  |  |   |      |   |  |   |        | 
|------------------------ |  | ---------------------------- | ------ | ---------------------------- |  | --- | ------ | ---- |  | ------------ | ------ | --- |  | - | ------ |  |  | - | ---- | - |  | - | ------ | 
|                         |  |                              |        |                             
|                         |  | Year Ended December 31, 2003 |        | Year Ended December 31, 2002
|                         |  |                              |        |                             
|                         |  |                              |        | Accumulated                  |  |     |        |      |  | Accumulated  |        |    
|                         |  | Cost                         |        | amortization                 |  | Net |        | Cost |  | amortization |        | Net
|                         |  |                              |        |                              |  |     |        |      |  |              |        |    
|                         |  |                             
|                         |  | ($ in thousands)            
|Deferred financing costs |  | $                            | 13,314 |                              |  | $   | (4,107 | )    |  | $            | 9,207  |     |  | $ | 7,656  |  |  | $ | (223 | ) |  | $ | 7,433  | 
|Deferred franchise fees  |  |                              | 3,369  |                              |  |     | (1,011 | )    |  |              | 2,358  |     |  |   | 4,670  |  |  |   | (389 | ) |  |   | 4,281  | 
|                         |  |                              |        |                              |  |     |        |      |  |              |        |     |  |   |        |  |  |   |      |   |  |   |        | 
|                         |  | $                            | 16,683 |                              |  | $   | (5,118 | )    |  | $            | 11,565 |     |  | $ | 12,326 |  |  | $ | (612 | ) |  | $ | 11,714 | 
|                         |  |                              |        |                              |  |     |        |      |  |              |        |     |  |   |        |  |  |   |      |   |  |   |        | 

Based on the balances at December 31, 2003,
the five year amortization schedule for deferred financing and
deferred loan costs is as follows:

|                         |  |                  |        |      |  |      |       |      |  |      |       |      |  |            |     |  |  |   |     |  |  |   |     |  |  |   |     | 
|------------------------ |  | ---------------- | ------ | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---------- | --- |  |  | - | --- |  |  | - | --- |  |  | - | --- | 
|                         |  | Total            |        | 2004 |  | 2005 |       | 2006 |  | 2007 |       | 2008 |  | After 2008
|                         |  |                  |        |      |  |      |       |      |  |      |       |      |  |           
|                         |  |                 
|                         |  | ($ in thousands)
|Deferred financing costs |  | $                | 9,207  |      |  | $    | 5,425 |      |  | $    | 3,739 |      |  | $          | 22  |  |  | $ | 21  |  |  | $ |    |  |  | $ |    | 
|Deferred franchise fees  |  |                  | 2,358  |      |  |      | 559   |      |  |      | 504   |      |  |            | 405 |  |  |   | 332 |  |  |   | 231 |  |  |   | 327 | 
|                         |  |                  |        |      |  |      |       |      |  |      |       |      |  |            |     |  |  |   |     |  |  |   |     |  |  |   |     | 
|                         |  | $                | 11,565 |      |  | $    | 5,984 |      |  | $    | 4,243 |      |  | $          | 427 |  |  | $ | 353 |  |  | $ | 231 |  |  | $ | 327 | 
|                         |  |                  |        |      |  |      |       |      |  |      |       |      |  |            |     |  |  |   |     |  |  |   |     |  |  |   |     | 



| |                          
| | -------------------------
| | Cash and Cash Equivalents

The Company considers all highly liquid
investments with an original maturity of three months or less
when purchased to be cash equivalents. Restricted cash as of
December 31, 2003 consisted of amounts reserved for letter
of credit collateral, a deposit required by the Companys
bankers and cash reserved pursuant to loan agreements.

F-9



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                         
| | ----------------------------------------
| | Fair Values of Financial
    Instruments

The fair value of financial instruments is
estimated using market trading information. Where published
market values are not available, management estimates fair
values based upon quotations received from broker/ dealers or
interest rate information for similar instruments. Changes in
fair value are recognized in earnings.

The fair values of current assets and current
liabilities are assumed equal to their reported carrying
amounts. The fair values of the Companys fixed rate
long-term debt are estimated using discounted cash flow
analyses, based on the Companys current incremental
borrowing rates for similar types of borrowing arrangements.



| |                             
| | ----------------------------
| | Concentration of Credit Risk

Concentration of credit risk associated with cash
and cash equivalents is considered low due to the credit quality
of the issuers of the financial instruments held by the Company
and due to their short duration to maturity. Accounts receivable
are primarily from major credit card companies, airlines and
other travel-related companies. The Company performs ongoing
evaluations of its significant customers and generally does not
require collateral. The Company maintains an allowance for
doubtful accounts at a level which management believes is
sufficient to cover potential credit losses. At
December 31, 2003 and 2002, allowances were $797,000
($689,000 relating to assets held for use) and $1,594,000,
respectively.



| |             
| | ------------
| | Income Taxes

The Company accounts for income taxes under
Statement of Financial Accounting Standards (SFAS)
109, Accounting for Income Taxes, which requires the
use of the liability method of accounting for deferred income
taxes. See Note 15 for the components of the Companys
deferred taxes. As a result of the Companys history of
losses, the Company has provided a full valuation allowance
against its deferred tax asset as it is more likely than not
that the deferred tax asset will not be realized.



| |                                                    
| | ---------------------------------------------------
| | Earnings Per Common and Common Equivalent
    Share

Basic earnings per share is calculated based on
the weighted average number of common shares outstanding during
the periods and include common stock (if any) contributed by the
Company to its employee 401(k) Plan. Dilutive earnings per
common share include the Companys outstanding stock
options, restricted stock, warrants to acquire common stock
(A and B class), if dilutive. See
Note 17 for computation of basic and diluted earnings per
share.

As more fully discussed in Note 4, upon the
Companys emergence from reorganization proceedings, the
Companys previous equity securities were cancelled and new
equity securities were issued. Because the Company is assumed to
be a new entity for financial reporting purposes subsequent to
the application of fresh start reporting, prior periods have not
been restated.



| |                         
| | ------------------------
| | Stock Based Compensation

The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued
to Employees and related interpretations. Under APB
No. 25, if the exercise price of the Companys
employee stock options is equal to the market price of the
underlying stock on the date of grant, no compensation expense
is recognized. Under SFAS No. 123, Accounting
for Stock-Based Compensation, compensation cost is
measured at the grant date based on the estimated value of the
award and is recognized over the service (or vesting) period.

F-10



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company grants stock options for a fixed
number of shares to employees with an exercise price equal to
the fair value of the shares at the date of grant.

In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.
SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide
alternative methods of transition for an entity that voluntarily
changes to the fair-value-based method of accounting for
stock-based employee compensation. It also amends the disclosure
provisions of SFAS No. 123 to require prominent
disclosure about the effects on reported net income and earnings
per share and the entitys accounting policy decisions with
respect to stock-based employee compensation. The Company
continues to account for stock issued to employees, using the
intrinsic value method in accordance with the recognition and
measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees. The
disclosures required by SFAS No. 148 are reflected in
Note 2.



| |                    
| | -------------------
| | Revenue Recognition

Revenues are recognized when the services are
rendered. Revenues are comprised of room, food and beverage and
other revenues. Room revenues are derived from guest room
rentals, whereas food and beverage revenues primarily include
sales from hotel restaurants, room service and hotel catering
and meeting rentals. Other revenues include charges for
guests long-distance telephone service, laundry service
and parking services, in-room movie services, vending machine
commissions, leasing of hotel space and other miscellaneous
revenues.

Advertising
Expense

The cost of advertising is expensed as incurred.
Advertising costs incurred, for the periods listed below, were
as follows:

|                                                            |  |                |       |              |  |            |     |  |  |   |       | 
|----------------------------------------------------------- |  | -------------- | ----- | ------------ |  | ---------- | --- |  |  | - | ----- | 
|                                                            |  | Continuing     |       | Discontinued |  | Total     
|                                                            |  | operations     |       | operations   |  | operations
|                                                            |  |                |       |              |  |           
|                                                            |  |               
|                                                            |  | (In thousands)
|Predecessor year ended December 31, 2001                    |  | $              | 1,834 |              |  | $          | 850 |  |  | $ | 2,684 | 
|Predecessor period January 1, 2002 to
    November 22, 2002 |  |                | 1,641 |              |  |            | 390 |  |  |   | 2,031 | 
|Successor period November 23, 2002 to
    December 31, 2002 |  |                | 170   |              |  |            | 50  |  |  |   | 220   | 
|Successor year ended December 31, 2003                      |  |                | 1,906 |              |  |            | 416 |  |  |   | 2,322 | 

Foreign
Currency Translation

The financial statements of foreign subsidiaries
have been translated into U.S. dollars in accordance with
SFAS No. 52, Foreign Currency Translation.
All balance sheet accounts have been translated using the
exchange rates in effect at the balance sheet dates. Income
statement amounts have been translated using the average rate
for the year. The gains and losses resulting from the changes in
exchange rates from year to year are reported in other
comprehensive income. The effects on the statements of
operations of transaction gains and losses are insignificant for
all years presented.

Operating
Segments

The Companys only operating segment is the
ownership and management of hotels.

Use of
Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the

F-11



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.

Self-insurance

The Company is self-insured up to certain limits
with respect to employee medical, employee dental, property
insurance, general liability insurance, personal injury claims,
workers compensation and auto liability. Liabilities for
these self-insured obligations are established annually, based
on actuarial valuations and the Companys history of
claims. As of December 31, 2003 and December 31, 2002,
the Company had approximately $10.0 million and
$9.1 million, respectively, accrued for such liabilities.

New
Accounting Pronouncements

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46), to address perceived
weaknesses in accounting for entities commonly known as
special-purpose or off-balance-sheet. In addition to numerous
FASB Staff Positions written to clarify and improve the
application of FIN 46, the FASB recently announced a
deferral for certain entities, and an amendment to FIN 46
entitled FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities
(FIN 46R). FIN 46 establishes
consolidation criteria for entities for which
control is not easily discernible under Accounting
Research Bulletin 51, Consolidated Financial Statements,
which is based on the premise that holders of the equity of an
entity, control the entity by virtue of voting rights.
FIN 46 provides guidance for identifying the party with a
controlling financial interest resulting from arrangements or
financial interests rather than from voting interests.
FIN 46 defines the term variable interest
entity (VIE) and is based on the premise that
if a business enterprise absorbs a majority of the VIEs
expected losses and/or receives a majority of its expected
residual returns (measure of risk and reward), that enterprise
(the primary beneficiary) has a controlling financial interest
in the VIE. The assets, liabilities, and results of the
activities of the VIE should be included in the consolidated
financial statements of the primary beneficiary. The Company was
required to adopt the provisions of FIN 46R relating to any
interests in special-purpose entities (SPEs) as of
December 31, 2003. In addition, during the first quarter of
2004, the Company is required to apply the provisions of
FIN 46R to any other entities falling within its scope.
Adoption of FIN 46 and the counterpart revision
(FIN 46R) has not had and is not expected to have a
material impact on the Companys financial position and
results of operations.

On April 30, 2003, the FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities which amends
and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts and
hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities.
SFAS No. 149 requires that contracts with comparable
characteristics be accounted for similarly. In particular,
SFAS No. 149 clarifies the circumstances under which a
contract with an initial net investment meets the
characteristics of a derivative as discussed in SFAS No.
133. In addition, SFAS No. 149 clarifies when a
derivative contains a financing component that warrants special
reporting in the statement of cash flows. SFAS No. 149
amends certain other existing pronouncements, resulting in more
consistent reporting of contracts that are derivatives in their
entirety or that contain embedded derivatives that warrant
separate accounting. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003.
The Company adopted SFAS No. 149 on July 1, 2003.
The adoption did not have a material impact on its financial
position and results of operations.

On May 15, 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity which aims to eliminate diversity in practice by
requiring that certain types of freestanding instruments be
reported as liabilities by their issuers including mandatorily
redeemable instruments issued in the form of shares which
unconditionally obligate the issuer to redeem the

F-12



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

shares for cash or by transferring other assets.
These instruments were previously presented in various ways, as
part of liabilities, as part of equity, or between the
liabilities and equity sections (sometimes referred to as
mezzanine reporting). The provisions of
SFAS No. 150, which also include a number of new
disclosure requirements, were effective for instruments entered
into or modified after May 31, 2003. For pre-existing
instruments, SFAS No. 150 was effective as of the
beginning of the first interim period which commenced after
June 15, 2003 (July 1, 2003 for the Company). The
Company adopted SFAS No. 150 on July 1, 2003. The
adoption impacted the treatment of its Mandatorily Redeemable
12.25% Cumulative Preferred Stock (Preferred Stock),
previously presented between total liabilities and
stockholders equity. As a result of the adoption of
SFAS No. 150, the Preferred Stock has been included as
part of long-term debt in the accompanying Consolidated
Financial Statements and the Preferred Stock dividends for the
period July 1, 2003 to December 31, 2003 has been
included in interest expense. The preferred stock dividends for
the period January 1, 2003 to June 30, 2003
($7.6 million) continues to be shown as a deduction from
retained earnings. On October 29, 2003, the FASB decided to
defer the effective date of SFAS No. 150 related to
non-controlling interests. As a result, until the FASB
establishes further guidance, the Company will not have to
measure the mandatorily redeemable minority interests at fair
value.

If the Company were to be required to comply with
the provisions of paragraphs 9 and 10 of SFAS No. 150
as currently drafted, the Company would be required to
reclassify certain amounts currently included in minority
interest to the liability section of the accompanying
consolidated balance sheet. In addition, the minority
partners interests would be recorded at the estimated
current liquidation amounts. If this treatment of the minority
interests was effected in the current fiscal period, the
Companys earnings would have been impacted. Under the
proposed standard, the liability would require quarterly review
and changes to the current liquidation amounts would be recorded
as interest expense.

In November 2002, the FASB issued Interpretation
No. 45 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45).
FIN 45 requires that a liability be recognized at fair
value at the inception of certain guarantees for the obligations
undertaken by the guarantor. FIN 45 also requires
additional disclosures for certain guarantee contracts. The
disclosure provisions of FIN 45 were effective for
financial statements ending after December 15, 2002, while
the recognition and initial measurement provisions were
applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of
FIN 45 was not material to our financial position and
results of operations.

On December 23, 2003, the FASB issued
SFAS No. 132 (Revised 2003), Employers
Disclosures about Pensions and Other Postretirement
Benefits. This revised standard increases existing
disclosures by requiring more details about plan assets, benefit
obligations, cash flows, benefit costs and related information.
The revised standard also requires companies to disclose various
elements of pension and postretirement benefit costs in interim
period financial statements for the quarters beginning after
December 15, 2003. The adoption of this revised statement
is not expected to materially impact the Companys current
disclosures.



|   |                         
|-- | ------------------------
|2. | Stock-Based Compensation

Prior to the Companys Chapter 11
filing, the Company had adopted the Lodgian, Inc. Stock Option
Plan, as amended, (the Option Plan) whereby, options
to acquire up to 3,250,000 shares of common stock were
granted to employees, directors, independent contractors and
agents as determined by a committee appointed by the Board of
Directors. Options could not be granted at an exercise price
which was less than the fair market value on the date of grant.
These options vested over five years. In addition, in June 2001
and October 2000, each non-employee director was awarded an
option to acquire 5,000 shares of common stock at an
exercise price equal to the fair market price on the date of
grant. Such options became exercisable upon the date of grant
and were granted under the Companys Non-Employee
Directors Stock Plan. However, in

F-13



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

connection with the Companys emergence from
Chapter 11, the previous common shares were cancelled along
with the options to acquire these shares.

On November 25, 2002, the Company adopted a
new Stock Incentive Plan (the Stock Incentive Plan)
which replaced the Option Plan previously in place. In
accordance with the Stock Incentive Plan, awards to acquire up
to 1,060,000 shares of common stock could be granted to
officers or other key employees or consultants of the Company as
determined by a committee appointed by the Board of Directors.
Awards may consist of stock options, stock appreciation rights,
stock awards, performance share awards, section 162(m)
awards or other awards determined by the committee. Stock
options granted pursuant to the Stock Incentive Plan cannot be
granted at an exercise price which is less than 100% of the fair
market value per share on the date of the grant. Vesting,
exercisability, payment and other restrictions pertaining to any
awards made pursuant to the Stock Incentive Plan are determined
by the committee. The income tax benefit, if any, associated
with the exercise of stock options is credited to additional
paid-in capital.

Pursuant to the Stock Incentive Plan, the
committee made the following awards during the year ended
December 31, 2003:

|                           |  |                |         |      |  |                        |  |  |           | 
|-------------------------- |  | -------------- | ------- | ---- |  | ---------------------- |  |  | --------- | 
|                           |  | Issued under   |         |      |  | Available for issuance
|                           |  | the Stock      |         |      |  | under the Stock       
|                           |  | Incentive Plan |         | Type |  | Incentive Plan        
|                           |  |                |         |      |  |                       
|Total, December 31, 2002   |  |                |        |      |  |                        |  |  | 1,060,000 | 
|Issued  July 15, 2003     |  |                | 100,000 | (1)  |  | stock option           |  |  | 960,000   | 
|Issued  July 15, 2003     |  |                | 200,000 | (1)  |  | restricted stock       |  |  | 760,000   | 
|Issued  September 5, 2003 |  |                | 352,000 | (2)  |  | stock option           |  |  | 408,000   | 
|Issued  October 13, 2003  |  |                | 21,500  | (3)  |  | stock option           |  |  | 386,500   | 
|                           |  |                |         |      |  |                        |  |  |           | 
|Total, December 31, 2003   |  |                | 673,500 |      |  |                        |  |  |           | 
|                           |  |                |         |      |  |                        |  |  |           | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | July 15, 2003  W. Thomas
    Parrington, the Companys Chief Executive Officer, was
    awarded 200,000 shares of restricted stock. These vest
    equally over three years commencing on July 15, 2004.
    Mr. Parrington was also granted incentive stock options to
    acquire 100,000 shares of the Companys common stock
    at an exercise price of $3.00 per share. The options also
    vest equally over three years commencing on July 15, 2004.
    In addition, pursuant to our employment agreement with
    Mr. Parrington, our chief executive officer, we have
    committed to grant him options to purchase 150,000 additional
    shares of common stock. After taking into account the
    outstanding options and shares of restricted stock granted under
    the Stock Incentive Plan, as well as our contractual commitment
    to Mr. Parrington, we have 236,500 shares of common stock
    available for grant under the Stock Incentive Plan.
|   
|(2) | September 5, 2003  Other awards
    were made to certain of the Companys employees and to
    members of the Audit Committee of the Board of Directors. The
    employees received incentive stock options to acquire
    337,000 shares of the Companys common stock while
    each of the three members of the Audit Committee received
    non-qualified options to acquire 5,000 shares of the
    Companys common stock. The exercise price of the awards
    granted on September 5, 2003 was $5.07. One-third of the
    options granted on September 5, 2003 vested at the date of
    grant, one-third will vest on September 5, 2004 and the
    remaining one-third will vest on September 5, 2005.                                                                                                                                                                                                                                                           
|   
|(3) | October 13, 2003  Manuel Artime,
    the Companys Chief Financial Officer, was granted
    incentive stock options to acquire 21,500 shares of the
    Companys common stock at an exercise price of $5.22.
    One-third of the options granted on October 13, 2003 vested
    at the date of grant, one-third will vest on October 13,
    2004 and the remaining one-third will vest on October 13,
    2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

All options expire ten years from the date of
grant.

F-14



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Presented below is a summary of the stock option
plan and restricted stock activity for the years shown:

|                           |           |         |           |                  |   |   |      |      | 
|-------------------------- | --------- | ------- | --------- | ---------------- | - | - | ---- | ---- | 
|                           |           |         |           | Weighted Average
|                           |           | Options |           | Exercise Price  
|                           |           |         |           |                 
|Balance, December 31, 2001 |           |         | 1,504,600 | (1)              |   | $ | 5.44 |     
|                           | Cancelled |         |           | (1,504,600       | ) |   |      |      | 
|                           |           |         |           |                  |   |   |      |     
|Balance, November 22, 2002 |           |         |          |                  |   |   |     |     
|                           | Granted   |         |           |                 |   |   |      |     | 
|                           |           |         |           |                  |   |   |      |     
|Balance, December 31, 2002 |           |         |          |                  |   |   |      |     
|                           | Granted   |         |           | 473,500          |   |   |      | 4.64 | 
|                           | Exercised |         |           | (774             | ) |   |      | 5.07 | 
|                           | Forfeited |         |           |                 |   |   |      |     | 
|                           |           |         |           |                  |   |   |      |     
|Balance, December 31, 2003 |           |         | 472,726   |                  |   | $ | 4.64 |     
|                           |           |         |           |                  |   |   |      |     

|                           |           |            |         |         | 
|-------------------------- | --------- | ---------- | ------- | ------- | 
|                           |           | Restricted
|                           |           | stock     
|                           |           |           
|Balance, December 31, 2002 |           |            |        |        
|                           | Granted   |            |         | 200,000 | 
|                           | Exercised |            |         |        | 
|                           | Forfeited |            |         |        | 
|                           |           |            |         |        
|Balance, December 31, 2003 |           |            | 200,000 | (2)    
|                           |           |            |         |        



---



|    |                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------
|(1) | At December 31, 2001, there were also
    112,500 Stock Appreciation Rights exercisable at $6.13 per
    right.
|   
|(2) | At December 31, 2003, none of the restricted
    stock had vested.                                             

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

|                |                |                     |  |                           |         |                  |  |        |     |                  |  |   |      |  |  |  |         |  |  |   |      | 
|--------------- | -------------- | ------------------- |  | ------------------------- | ------- | ---------------- |  | ------ | --- | ---------------- |  | - | ---- |  |  |  | ------- |  |  | - | ---- | 
|                |                |                     |  |                          
|                |                | Options outstanding |  | Options exercisable      
|                |                |                     |  |                          
|                |                |                     |  | Weighted average          |         | Weighted average |  |        |     | Weighted average
|Range of prices |                | Number              |  | remaining life (in years) |         | exercise prices  |  | Number |     | exercise prices 
|                |                |                     |  |                           |         |                  |  |        |     |                 
|                | $3.00 to $3.50 |                     |  |                           | 100,000 |                  |  |        | 9.5 |                  |  | $ | 3.00 |  |  |  |        |  |  | $ | 3.00 | 
|                | $3.51 to $5.07 |                     |  |                           | 351,226 |                  |  |        | 9.7 |                  |  | $ | 5.07 |  |  |  | 116,559 |  |  | $ | 5.07 | 
|                | $5.08 to $5.22 |                     |  |                           | 21,500  |                  |  |        | 9.8 |                  |  | $ | 5.22 |  |  |  | 7,167   |  |  | $ | 5.22 | 
|                |                |                     |  |                           |         |                  |  |        |     |                  |  |   |      |  |  |  |         |  |  |   |      | 
|                |                |                     |  |                           | 472,726 |                  |  |        | 9.7 |                  |  | $ | 4.64 |  |  |  | 123,726 |  |  | $ | 5.08 | 
|                |                |                     |  |                           |         |                  |  |        |     |                  |  |   |      |  |  |  |         |  |  |   |      | 

Options exercisable and the weighted average
exercise price of the options at December 31, 2001 were
1,341,200 and $5.21, respectively.

Had the compensation cost of the Stock Option
Plan been recognized under SFAS No. 123, based on the
fair market value at the grant dates, the compensation cost
recognized would have been $0.6 million for the year ended
December 31, 2003 and nil for the periods November 22,
2002 to December 31, 2002, January 1, 2002 to
November 22, 2002 and the year ended December 31, 2001.

F-15



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Also, had the compensation cost of the Stock
Option Plan been recognized under SFAS No. 123, based
on the fair market value at the grant dates, the Companys
pro forma net income (loss) and net earnings (loss) per share
would have been as follows:

|                                                                                                          |             |                   |   |                      |   |                   |   |                   |   |  |   |        |   |  |   |          |  
|--------------------------------------------------------------------------------------------------------- | ----------- | ----------------- | - | -------------------- | - | ----------------- | - | ----------------- | - |  | - | ------ | - |  | - | -------- | -
|                                                                                                          |             |                   |   |                     
|                                                                                                          |             | Successor         |   | Predecessor         
|                                                                                                          |             |                   |   |                     
|                                                                                                          |             | Year ended        |   | November 23, 2002 to |   | January 1 to      |   | Year ended       
|                                                                                                          |             | December 31, 2003 |   | December 31, 2002    |   | November 22, 2002 |   | December 31, 2001
|                                                                                                          |             |                   |   |                      |   |                   |   |                  
|Loss  continuing operations:                                                                             |             |                   |   |                      |   |                   |   |                   |   |  |   |        |   |  |   |         
|                                                                                                          | As reported |                   | $ | (27,074              | ) |                   | $ | (6,745            | ) |  | $ | 16,999 |   |  | $ | (87,537  | )
|                                                                                                          | Pro forma   |                   |   | (27,687              | ) |                   |   | (6,745            | ) |  |   | 16,999 |   |  |   | (87,537  | )
|Loss from discontinued operations, net of taxes:                                                          |             |                   |   |                      |   |                   |   |                   |   |  |   |        |   |  |   |         
|                                                                                                          | As reported |                   |   | (4,603               | ) |                   |   | (2,581            | ) |  |   | (4,633 | ) |  |   | (55,227  | )
|                                                                                                          | Pro forma   |                   |   | (4,603               | ) |                   |   | (2,581            | ) |  |   | (4,633 | ) |  |   | (55,227  | )
|Net loss:                                                                                                 |             |                   |   |                      |   |                   |   |                   |   |  |   |        |   |  |   |         
|                                                                                                          | As reported |                   |   | (31,677              | ) |                   |   | (9,326            | ) |  |   | 12,366 |   |  |   | (142,764 | )
|                                                                                                          | Pro forma   |                   |   | (32,290              | ) |                   |   | (9,326            | ) |  |   | 12,366 |   |  |   | (142,764 | )
|Net loss attributable to common stock:                                                                    |             |                   |   |                      |   |                   |   |                   |   |  |   |        |   |  |   |         
|                                                                                                          | As reported |                   |   | (39,271              | ) |                   |   | (10,836           | ) |  |   | 12,366 |   |  |   | (142,764 | )
|                                                                                                          | Pro forma   |                   |   | (39,884              | ) |                   |   | (10,836           | ) |  |   | 12,366 |   |  |   | (142,764 | )
|(Loss) income from continuing operations
    attributable to common stock before discontinued operations: |             |                   |   |                      |   |                   |   |                   |   |  |   |        |   |  |   |         
|                                                                                                          | As reported |                   |   | (34,668              | ) |                   |   | (8,255            | ) |  |   | 16,999 |   |  |   | (87,537  | )
|                                                                                                          | Pro forma   |                   |   | (35,281              | ) |                   |   | (8,255            | ) |  |   | 16,999 |   |  |   | (87,537  | )
|Basic and diluted earnings (loss) per common
    share:                                                   |             |                   |   |                      |   |                   |   |                   |   |  |   |        |   |  |   |         
|(Loss) income continuing operations:                                                                      |             |                   |   |                      |   |                   |   |                   |   |  |   |        |   |  |   |         
|                                                                                                          | As reported |                   | $ | (3.87                | ) |                   | $ | (0.96             | ) |  | $ | 0.60   |   |  | $ | (3.09    | )
|                                                                                                          | Pro forma   |                   |   | (3.96                | ) |                   |   | (0.96             | ) |  |   | 0.60   |   |  |   | (3.09    | )
|Loss from discontinued operations, net of taxes:                                                          |             |                   |   |                      |   |                   |   |                   |   |  |   |        |   |  |   |         
|                                                                                                          | As reported |                   |   | (0.66                | ) |                   |   | (0.37             | ) |  |   | (0.17  | ) |  |   | (1.95    | )
|                                                                                                          | Pro forma   |                   |   | (0.66                | ) |                   |   | (0.37             | ) |  |   | (0.17  | ) |  |   | (1.95    | )
|Net (loss) income:                                                                                        |             |                   |   |                      |   |                   |   |                   |   |  |   |        |   |  |   |         
|                                                                                                          | As reported |                   |   | (4.53                | ) |                   |   | (1.33             | ) |  |   | 0.43   |   |  |   | (5.04    | )
|                                                                                                          | Pro forma   |                   |   | (4.62                | ) |                   |   | (1.33             | ) |  |   | 0.43   |   |  |   | (5.04    | )
|Net (loss) income attributable to common stock:                                                           |             |                   |   |                      |   |                   |   |                   |   |  |   |        |   |  |   |         
|                                                                                                          | As reported |                   |   | (5.61                | ) |                   |   | (1.55             | ) |  |   | 0.43   |   |  |   | (5.04    | )
|                                                                                                          | Pro forma   |                   |   | (5.70                | ) |                   |   | (1.55             | ) |  |   | 0.43   |   |  |   | (5.04    | )
|(Loss) income from continuing operations
    attributable to common stock before discontinued operations: |             |                   |   |                      |   |                   |   |                   |   |  |   |        |   |  |   |         

F-16



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|            |  |                   |       |                      |  |                   |       |                   |  |  |      |  |  |  |       |  
|----------- |  | ----------------- | ----- | -------------------- |  | ----------------- | ----- | ----------------- |  |  | ---- |  |  |  | ----- | -
|            |  |                   |       |                     
|            |  | Successor         |       | Predecessor         
|            |  |                   |       |                     
|            |  | Year ended        |       | November 23, 2002 to |  | January 1 to      |       | Year ended       
|            |  | December 31, 2003 |       | December 31, 2002    |  | November 22, 2002 |       | December 31, 2001
|            |  |                   |       |                      |  |                   |       |                  
|As reported |  |                   | (4.95 | )                    |  |                   | (1.18 | )                 |  |  | 0.60 |  |  |  | (3.09 | )
|Pro forma   |  |                   | (5.04 | )                    |  |                   | (1.18 | )                 |  |  | 0.60 |  |  |  | (3.09 | )

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions:

|                        |  |                   |          |                      |  |                   |   |                   |  |  |   |  |  |  |         | 
|----------------------- |  | ----------------- | -------- | -------------------- |  | ----------------- | - | ----------------- |  |  | - |  |  |  | ------- | 
|                        |  |                   |          |                     
|                        |  | Successor         |          | Predecessor         
|                        |  |                   |          |                     
|                        |  | Year Ended        |          | November 23, 2002 to |  | January 1 to      |   | Year ended       
|                        |  | December 31, 2003 |          | December 31, 2002    |  | November 22, 2002 |   | December 31, 2001
|                        |  |                   |          |                      |  |                   |   |                  
|                        |  |                   |          | (1)                  |  | (1)               |   |                  
|Expected life of option |  |                   | 10 years |                      |  |                   |  |                   |  |  |  |  |  |  | 5 years | 
|Risk free interest rate |  |                   | 4.09%    |                      |  |                   |  |                   |  |  |  |  |  |  | 4.56%   | 
|Expected volatility     |  |                   | 55.75%   |                      |  |                   |  |                   |  |  |  |  |  |  | 81.60%  | 
|Expected dividend yield |  |                   |         |                      |  |                   |  |                   |  |  |  |  |  |  |        | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company filed for Chapter 11 on
    December 20, 2001. The fair value of the options was
    estimated to be nil while the Company was in Chapter 11. On
    its emergence from Chapter 11 on November 25, 2002
    (November 22, 2002 for accounting) all stock options were
    cancelled. No options were granted between January 1, 2002
    and December 31, 2002.

The fair values of options granted (net of
forfeitures) were as follows:

|                                               |  |              |           |                   |  |              |   |              |  |  |   |  |  |   |        | 
|---------------------------------------------- |  | ------------ | --------- | ----------------- |  | ------------ | - | ------------ |  |  | - |  |  | - | ------ | 
|                                               |  |              |           |                  
|                                               |  | Successor    |           | Predecessor      
|                                               |  |              |           |                  
|                                               |  | Year Ended   |           | November 23, 2002 |  | January 1 to |   | Year Ended  
|                                               |  | December 31, |           | to December 31,   |  | November 22, |   | December 31,
|                                               |  | 2003         |           | 2002              |  | 2002         |   | 2001        
|                                               |  |              |           |                   |  |              |   |             
|Weighted average fair value of options granted |  | $            | 3.22      |                   |  |              |  |              |  |  |  |  |  | $ | 0.50   | 
|Total number of options granted                |  |              | 473,500   |                   |  |              |  |              |  |  |  |  |  |   | 55,000 | 
|Total fair value of all options granted        |  | $            | 1,524,367 |                   |  |              |  |              |  |  |  |  |  | $ | 27,500 | 



|   |                        
|-- | -----------------------
|3. | Discontinued Operations

Pursuant to the terms of the plan of
reorganization approved by the Bankruptcy Court, the Company
conveyed eight wholly-owned hotels to the lender in January 2003
in satisfaction of outstanding debt obligations and one
wholly-owned hotel was returned to the lessor of a capital
lease. The results of operations of these nine hotels are
reported in Discontinued Operations in the Consolidated
Statement of Operations. Due primarily to the application of
fresh start reporting in November 2002, in which these and other
assets were adjusted to their respective fair values, there was
no gain or loss on these transactions.

F-17



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following combined condensed table summarizes
the assets and liabilities of the nine hotels as of
December 31, 2002:

|                                      |                                           |                           |                           |     |       |        | 
|------------------------------------- | ----------------------------------------- | ------------------------- | ------------------------- | --- | ----- | ------ | 
|                                      |                                           | December 31, 2002        
|                                      |                                           |                          
|                                      |                                           | ($ in thousands)         
|ASSETS                               
|Current assets:                       |                                           |                           |                           |    
|                                      | Cash and cash equivalents                 |                           | $                         | 177 |      
|                                      | Accounts receivable, net                  |                           |                           | 517 |      
|                                      | Inventories                               |                           |                           | 570 |      
|                                      | Prepaid expenses and other current assets |                           |                           | 432 |      
|                                      |                                           |                           |                           |    
|                                      |                                           |                           | Total current assets      |     |       | 1,696  | 
|Property and equipment, net           |                                           |                           | 15,649                    |    
|Deposits for capital expenditures     |                                           |                           | 904                       |    
|Other assets                          |                                           |                           | 20                        |    
|                                      |                                           |                           |                           |    
|                                      |                                           | $                         | 18,269                    |    
|                                      |                                           |                           |                           |    
|LIABILITIES                          
|Liabilities not subject to compromise |                                           |                           |                           |    
|                                      | Current liabilities:                      |                           |                           |     |      
|                                      |                                           | Accounts payable          |                           | $   | 330   |       
|                                      |                                           | Other accrued liabilities |                           |     | 1,267 |       
|                                      |                                           | Advance deposits          |                           |     | 60    |       
|                                      |                                           |                           |                           |    
|                                      |                                           |                           | Total current liabilities |     |       | 1,657  | 
|Long-term debt subject to compromise  |                                           |                           | 15,922                    |    
|                                      |                                           |                           |                           |    
|                                      |                                           |                           | Total liabilities         |     | $     | 17,579 | 
|                                      |                                           |                           |                           |    

There were no material changes to the Combined
Balance sheet of the nine hotels between December 31, 2002
and the date they were conveyed to the lender, in the case of
the eight hotels, and the lessor, in the case of the leased
property.

The Companys strategy is to own and operate
a portfolio of profitable, well-maintained and appealing hotels
at superior locations in strong markets. In 2003, the Company
developed a portfolio improvement strategy to accomplish this by:



| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | renovating and repositioning certain of its
    existing hotels to improve performance;                                        
|
| |  | divesting hotels that do not fit this strategy or
    that are unlikely to do so without significant effort or
    expense; and
|
| |  | acquiring selected hotels that better fit this
    strategy.                                                                   

In accordance with this strategy and the
Companys efforts to reduce debt and interest costs, in
2003 the Company identified 19 hotels, the Companys only
office building property and three land parcels for sale.

At December 31, 2003, 18 hotels and three
land parcels were held for sale. One hotel and an office
building were sold during 2003 while four hotels were sold
between January 1, 2004 and March 1, 2004. The net
proceeds of sale of the hotel and office building sold in 2003
was approximately $12.3 million. In accordance with
SFAS No. 144, all assets sold during 2003 and held for
sale at December 31, 2003 (including

F-18



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

any related impairment charges) are included in
Discontinued Operations in the Consolidated Statement of
Operations. The assets held for sale at December 31, 2003
and the liabilities related to these assets are separately
disclosed in the Consolidated Balance Sheet. In connection with
this strategy, where the carrying values of the assets exceeded
the estimated fair values, net of selling costs, the carrying
values were reduced and impairment charges were recorded. Fair
value is determined using quoted market prices, when available,
or other accepted valuation techniques. The impairment charges
recorded on assets held for sale, during the year ended
December 31, 2003 were $5.4 million. Where the
estimated selling prices, net of selling costs, exceeded the
carrying values, no adjustments were recorded. In addition to
the other criteria specified by SFAS No. 144, management
classifies an asset as held for sale if it expects to dispose of
it within one year. In accordance with SFAS No. 144, the
results of operations of all assets identified as held for sale
(including the related impairment charges) are reported in
Discontinued Operations. The assets held for sale and the
liabilities related to these assets are separately disclosed on
the face of the Consolidated Balance Sheet as of
December 31, 2003. See Note 20.

The following combined condensed table summarizes
the assets and liabilities relating to the properties identified
as held for sale as of December 31, 2003:

|                                          |                   |                   |        |        | 
|----------------------------------------- | ----------------- | ----------------- | ------ | ------ | 
|                                          |                   | December 31, 2003
|                                          |                   |                  
|                                          |                   | (In thousands)   
|ASSETS                                    |                   |                   |        |       
|Accounts receivable, net                  |                   | $                 | 1,252  |       
|Inventories                               |                   |                   | 1,377  |       
|Prepaid expenses and other current assets |                   |                   | 1,039  |       
|Property and equipment, net               |                   |                   | 61,624 |       
|Other assets                              |                   |                   | 3,275  |       
|                                          |                   |                   |        |       
|                                          |                   | $                 | 68,567 |       
|                                          |                   |                   |        |       
|LIABILITIES                               |                   |                   |        |       
|Accounts payable                          |                   | $                 | 1,234  |       
|Other accrued liabilities                 |                   |                   | 3,120  |       
|Advance deposits                          |                   |                   | 390    |       
|Current portion of long-term debt         |                   |                   | 771    |       
|Long-term debt                            |                   |                   | 52,433 |       
|                                          |                   |                   |        |       
|                                          | Total liabilities |                   | $      | 57,948 | 
|                                          |                   |                   |        |       

The condensed combined results of operations
included in Discontinued Operations for the Successor year ended
December 31, 2003, the Successor period November 23,
2002 to December 31, 2002, the

F-19



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Predecessor period January 1, 2002 to
November 22, 2002 and the Predecessor year ended
December 31, 2001 were as follows:

|                                                  |                          |                   |        |                      |        |                    |        |       |       |   |        |        |        |   |         |         |        | 
|------------------------------------------------- | ------------------------ | ----------------- | ------ | -------------------- | ------ | ------------------ | ------ | ----- | ----- | - | ------ | ------ | ------ | - | ------- | ------- | ------ | 
|                                                  |                          |                   |        |                     
|                                                  |                          | Successor         |        | Predecessor         
|                                                  |                          |                   |        |                     
|                                                  |                          |                   |        | November 23, 2002 to |        | January 1, 2002 to |        |      
|                                                  |                          | 2003              |        | December 31, 2002    |        | November 22, 2002  |        | 2001 
|                                                  |                          |                   |        |                      |        |                    |        |      
|                                                  |                          |                  
|                                                  |                          | (In thousands)   
|Revenues:                                         |                          |                   |        |                      |        |                    |        |       |       |   |        |        |        |   |         |        
|                                                  | Rooms                    |                   | $      | 46,451               |        |                    | $      | 4,311 |       |   | $      | 59,549 |        |   | $       | 71,752  |       
|                                                  | Food and beverage        |                   |        | 11,264               |        |                    |        | 1,596 |       |   |        | 15,113 |        |   |         | 19,020  |       
|                                                  | Other                    |                   |        | 3,422                |        |                    |        | 534   |       |   |        | 4,095  |        |   |         | 5,712   |       
|                                                  |                          |                   |        |                      |        |                    |        |       |       |   |        |        |        |   |         |        
|                                                  |                          |                   | 61,137 |                      |        |                    | 6,441  |       |       |   | 78,757 |        |        |   | 96,484  |        
|                                                  |                          |                   |        |                      |        |                    |        |       |       |   |        |        |        |   |         |        
|Operating expenses:                               |                          |                   |        |                      |        |                    |        |       |       |   |        |        |        |   |         |        
|                                                  | Direct:                  |                   |        |                      |        |                    |        |       |       |   |        |        |        |   |         |         |       
|                                                  |                          | Rooms             |        |                      | 14,439 |                    |        |       | 1,822 |   |        |        | 18,960 |   |         |         | 22,158 | 
|                                                  |                          | Food and beverage |        |                      | 8,905  |                    |        |       | 1,409 |   |        |        | 12,107 |   |         |         | 15,206 | 
|                                                  |                          | Other             |        |                      | 2,483  |                    |        |       | 280   |   |        |        | 2,795  |   |         |         | 3,662  | 
|                                                  |                          |                   |        |                      |        |                    |        |       |       |   |        |        |        |   |         |        
|                                                  |                          |                   | 25,827 |                      |        |                    | 3,511  |       |       |   | 33,862 |        |        |   | 41,026  |        
|                                                  |                          |                   |        |                      |        |                    |        |       |       |   |        |        |        |   |         |        
|                                                  |                          |                   | 35,310 |                      |        |                    | 2,930  |       |       |   | 44,895 |        |        |   | 55,458  |        
|                                                  |                          |                   |        |                      |        |                    |        |       |       |   |        |        |        |   |         |        
|                                                 
|General, administrative and other                 |                          |                   | 29,643 |                      |        |                    | 4,471  |       |       |   | 36,007 |        |        |   | 40,515  |        
|Depreciation and amortization                     |                          |                   | 3,367  |                      |        |                    | 857    |       |       |   | 12,701 |        |        |   | 16,480  |        
|Impairment of long-lived assets                   |                          |                   | 5,387  |                      |        |                    |       |       |       |   |       |        |        |   | 46,837  |        
|                                                  |                          |                   |        |                      |        |                    |        |       |       |   |        |        |        |   |         |        
|                                                  | Other operating expenses |                   |        | 38,397               |        |                    |        | 5,328 |       |   |        | 48,708 |        |   |         | 103,832 |       
|                                                  |                          |                   |        |                      |        |                    |        |       |       |   |        |        |        |   |         |        
|                                                  |                          |                   | (3,087 | )                    |        |                    | (2,398 | )     |       |   | (3,813 | )      |        |   | (48,374 | )      
|Interest expense                                  |                          |                   | (3,953 | )                    |        |                    | (183   | )     |       |   | (3,672 | )      |        |   | (3,509  | )      
|Gain on asset dispositions                        |                          |                   | 3,085  |                      |        |                    |       |       |       |   |       |        |        |   |        |        
|                                                  |                          |                   |        |                      |        |                    |        |       |       |   |        |        |        |   |         |        
|Loss before income taxes and reorganization items |                          |                   | (3,955 | )                    |        |                    | (2,581 | )     |       |   | (7,485 | )      |        |   | (51,883 | )      
|Reorganization items                              |                          |                   | (648   | )                    |        |                    |       |       |       |   | 1,652  |        |        |   | (3,344  | )      
|                                                  |                          |                   |        |                      |        |                    |        |       |       |   |        |        |        |   |         |        
|Loss before income taxes                          |                          |                   | (4,603 | )                    |        |                    | (2,581 | )     |       |   | (5,833 | )      |        |   | (55,227 | )      
|Benefit for income taxes                          |                          |                   |       |                      |        |                    |       |       |       |   | 1,200  |        |        |   |        |        
|                                                  |                          |                   |        |                      |        |                    |        |       |       |   |        |        |        |   |         |        
|Net loss                                          |                          | $                 | (4,603 | )                    |        | $                  | (2,581 | )     |       | $ | (4,633 | )      |        | $ | (55,227 | )      
|                                                  |                          |                   |        |                      |        |                    |        |       |       |   |        |        |        |   |         |        



|   |                                                     
|-- | ----------------------------------------------------
|4. | Bankruptcy Proceedings and Fresh Start
    Reporting

On December 20, 2001, the Company and
substantially all of its subsidiaries which owned hotel
properties filed for voluntary reorganization under
Chapter 11 of the Bankruptcy Code in the Southern District
of New York.

At a Confirmation Hearing held on
November 5, 2002, the Bankruptcy Court confirmed the
Companys First Amended Joint Plan of Reorganization (the
Joint Plan of Reorganization) and, on
November 25, 2002, the Company and entities owning 78
hotels officially emerged from Chapter 11. Pursuant to the
terms of the Joint Plan of Reorganization, eight other
wholly-owned hotels were conveyed to a lender in January 2003 in
satisfaction of outstanding debt obligations and one hotel was
returned to the lessor of a capital lease.

F-20



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Of the Companys 97 hotel portfolio, 18
hotels, previously owned by two subsidiaries (Impac
Hotels II, L.L.C. and Impac Hotels III, L.L.C.), were
not part of the Joint Plan of Reorganization. On April 24,
2003, the Bankruptcy Court confirmed the plan of reorganization
relating to these eighteen hotels (the Impac Plan of
Reorganization). These eighteen hotels remained in
Chapter 11 until May 22, 2003, the date on which the
Company, through eighteen newly-formed subsidiaries (one for
each hotel), finalized an $80.0 million financing with
Lehman Brothers Holdings, Inc. (the Lehman
Financing). The Lehman Financing was primarily used to
settle the remaining amount due to the secured lender of these
hotels (See Note 11 of the accompanying financial
statements). The Impac Plan of Reorganization also provided for
a pool of funds of approximately $0.3 million to be paid to
the general unsecured creditors of the eighteen hotels.

Pursuant to the Joint Plan of Reorganization, the
following significant events took effect in November 2002:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 5,000,000 shares of Preferred Stock, par
    value $0.01, initial liquidation value $25 per share, were
    issued or reserved for issuance in satisfaction of outstanding
    debt and other obligations;                                                                                                                                                                                                                             
|
| |  | 7,000,000 shares of common stock, par value
    $0.01 per share, were issued or reserved for issuance in
    satisfaction of outstanding debt and other obligations;                                                                                                                                                                                                                                                                   
|
| |  | Class A warrants to purchase an aggregate of
    1,510,638 shares of common stock at $18.29 per share
    were made available for issuance in satisfaction of outstanding
    debt and other obligations;                                                                                                                                                                                                                              
|
| |  | Class B warrants to purchase an aggregate of
    1,029,366 shares of common stock at $25.44 per share
    were made available for issuance in satisfaction of outstanding
    debt and other obligations;                                                                                                                                                                                                                              
|
| |  | Previous equity, consisting of an aggregate of
    28,479,837 shares, was cancelled, and in exchange the
    stockholders received their pro rata share of
    207,900 shares of common stock, plus class A warrants
    to purchase an aggregate of 251,823 shares of common stock
    and class B warrants to purchase an aggregate of
    778,304 shares of common stock;                                                           
|
| |  | The CRESTS were cancelled and the holders
    received their pro rata share of 868,000 shares of the
    common stock, plus class A warrants to purchase
    1,258,815 shares of common stock and class B warrants
    to purchase 251,062 shares of common stock;                                                                                                                                                                     
|
| |  | The 12.25% Senior Subordinated Notes were
    cancelled and the holders of the notes received their pro rata
    share of 4,690,600 shares of Preferred Stock and
    5,557,511 shares of common stock;                                                                                                                                                                                                                                
|
| |  | The holders of allowed general unsecured claims
    became entitled to 309,400 shares of Preferred Stock and
    366,589 shares of common stock, referred to as the
    disputed claims reserve. Until distributed, these
    shares form part of the disputed claims reserve for the
    pre-bankruptcy petition general unsecured creditors. These
    shares are periodically distributed as the disputed claims are
    resolved;
|
| |  | The Company closed on $302.7 million of exit
    financing arrangements with Merrill Lynch Mortgage Lending, Inc.
    (Merrill Lynch Mortgage) which was used to repay
    previous debt obligations, fund payments of certain allowed
    claims and fund portions of certain required cash escrows. This
    financing was secured by 56 of its hotels;                                                                            
|
| |  | The Company closed on a $6.3 million exit
    financing arrangement with Computershare Trust Company of
    Canada, secured by one of its hotels;                                                                                                                                                                                                                                                                                      
|
| |  | Loans from lenders approximating
    $86.0 million, secured by 21 of our hotels, were reinstated
    on their previous terms, except for the extension of certain
    maturities; and in the case of certain loans, a new interest
    rate; and                                                                                                                                                                                       

In accordance with AICPA, Statement of Position
(SOP) 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code, the Company
implemented fresh start reporting effective

F-21



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

November 22, 2002 (the date on which the
exit financing agreement was signed). As a result, assets and
liabilities were recorded based on fair values. The Consolidated
Financial Statements subsequent to the Companys emergence
from Chapter 11 are those of a new reporting entity (the
Successor) and are not comparable with the financial
statements of the Company prior to the effective date of the
Joint Plan of Reorganization (the Predecessor).

As discussed above, in November 2002, the general
unsecured creditors became entitled to receive
309,400 shares of Preferred Stock and 366,589 shares
of common stock. These shares are being distributed as claims
are resolved.

The status of the distribution to these creditors
as of December 31, 2003 was as follows:

|                                                                                    |  |        |          |                 |  |  |          |  
|----------------------------------------------------------------------------------- |  | ------ | -------- | --------------- |  |  | -------- | -
|                                                                                    |  | Common |          |                
|                                                                                    |  | Stock  |          | Preferred Stock
|                                                                                    |  |        |          |                
|Entitlement on emergence from Chapter 11                                            |  |        | 366,589  |                 |  |  | 309,400  |  
|First distribution  March 20, 2003                                                 |  |        | (49,256  | )               |  |  | (41,560  | )
|Second distribution 
    September 30, 2003                                        |  |        | (141,724 | )               |  |  | (119,503 | )
|Other distributions, net of shares surrendered
    from the first two distributions |  |        | (6,618   | )               |  |  | (5,586   | )
|                                                                                    |  |        |          |                 |  |  |          |  
|Undistributed as of December 31, 2003                                               |  |        | 168,991  |                 |  |  | 142,751  |  
|                                                                                    |  |        |          |                 |  |  |          |  

The entire entitlement of shares is considered
issued and outstanding for accounting purposes. As claims of
creditors are resolved, the Company will continue to make
periodic distributions of Preferred Stock and common stock to
these creditors.

The effects of the reorganization plan were
recorded in accordance with the American Institute of Certified
Public Accountants Statement of Position (SOP)
90-7, Financial Reporting by Entities in Reorganization
under the Bankruptcy Code. Fresh start reporting was
applicable because the previous stockholders received less than
50% of the new voting shares and the reorganization value of the
Predecessor Company was less than the sum of the pre-petition
liabilities allowed and post-petition liabilities.

Fresh start reporting principles require that the
reorganization value be allocated to the entitys assets
and that liabilities be stated at the fair value of amounts to
be paid.

The reorganization value in respect of the
entities included in the Joint Plan of Reorganization was
determined by the Company, the Official Committee of Unsecured
Creditors and their respective financial advisers. The
reorganization value reflects the midpoint of a range of values
arrived at by applying various valuation techniques including,
among others:



| |                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) A comparable company analysis, involving
    the analysis of enterprise values of public companies deemed
    generally comparable to the operating business of the Company
    and applying the earnings before interest, taxes, depreciation
    and amortization (EBITDA) provided by this analysis
    to the applicable Lodgian entities;
|
| | b) A discounted cash flow analysis utilizing
    a weighted average cost of capital to compute the present value
    of free cash flows and terminal value of the applicable Lodgian
    entities; and                                                                                                                                             
|
| | c) A comparable transaction analysis
    involving the analysis of the financial terms of certain
    acquisitions of companies and sales of assets which were deemed
    to be comparable to the operating businesses of the Company and
    then applying these EBITDA multiples to the applicable Lodgian
    entities.                         

F-22



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The projections utilized in the determination of
reorganization value were based on a variety of estimates and
assumptions. These estimates and assumptions are subject to
uncertainties and contingencies and may not be realized. The
projections should, therefore, not be seen as guarantees of
actual results.

In accordance with SOP 90-7, the effects or
adjustments on reported amounts of individual assets and
liabilities resulting from the adoption of fresh start reporting
and the effects of the forgiveness of debt are reflected in the
Predecessors Statement of Operations. All fresh start
reporting adjustments are included in reorganization items.

The application of fresh start reporting on the
Predecessors balance sheet is as follows (amounts in
thousands):

|                                                           |                                           |                                   |                           |                |        |             |          |               |        |                   |         |     |   |   |          |         |        |        |         |         |        |        | 
|---------------------------------------------------------- | ----------------------------------------- | --------------------------------- | ------------------------- | -------------- | ------ | ----------- | -------- | ------------- | ------ | ----------------- | ------- | --- | - | - | -------- | ------- | ------ | ------ | ------- | ------- | ------ | ------ | 
|                                                           |                                           |                                   |                           |                |        |             |          |               |        | Successor        
|                                                           |                                           | Predecessor                       |                           |                |        |             |          |               |        |                  
|                                                           |                                           |                                   |                           |                |        |             |          | Fresh Start & |        | Reorganized      
|                                                           |                                           | Before Fresh Start                |                           | Extinguishment |        | Exchange of |          | Exit          |        | Balance Sheet    
|                                                           |                                           | November 22, 2002                 |                           | of Debt        |        | Stock       |          | Financing     |        | November 22, 2002
|                                                           |                                           |                                   |                           |                |        |             |          |               |        |                  
|Current assets:                                            |                                           |                                   |                           |                |        |             |          |               |        |                   |         |     |   |   |          |         |        |        |         |        
|                                                           | Cash and cash equivalents                 |                                   | $                         | 26,211         |        |             | $        | (541          | )(a)   |                   | $       |    |   |   | $        |        |        |        | $       | 25,670  |       
|                                                           | Cash, restricted                          |                                   |                           | 8,399          |        |             |          |              |        |                   |         |    |   |   |          | 99      |        |        |         | 8,498   |       
|                                                           | Accounts receivable, net of allowances    |                                   |                           | 14,392         |        |             |          |              |        |                   |         |    |   |   |          | 110     |        |        |         | 14,502  |       
|                                                           | Inventories                               |                                   |                           | 7,323          |        |             |          |              |        |                   |         |    |   |   |          |        |        |        |         | 7,323   |       
|                                                           | Prepaid expenses and other current assets |                                   |                           | 8,540          |        |             |          |              |        |                   |         |    |   |   |          | 32,259  |        |        |         | 40,799  |       
|                                                           |                                           |                                   |                           |                |        |             |          |               |        |                   |         |     |   |   |          |         |        |        |         |        
|                                                           |                                           | Total current assets              |                           |                | 64,865 |             |          |               | (541   | )                 |         |     |  |   |          |         | 32,468 | (d)    |         |         | 96,792 |       
|Property and equipment, net                                |                                           |                                   | 884,278                   |                |        |             |         |               |        |                   |        |     |   |   | (222,071 | )(d)    |        |        | 662,207 |        
|Deposits for capital expenditures                          |                                           |                                   | 14,665                    |                |        |             |         |               |        |                   |        |     |   |   | (1,012   | )(d)    |        |        | 13,653  |        
|Other assets                                               |                                           |                                   | 3,323                     |                |        |             |         |               |        |                   |        |     |   |   | 9,051    | (d)     |        |        | 12,374  |        
|                                                           |                                           |                                   |                           |                |        |             |          |               |        |                   |         |     |   |   |          |         |        |        |         |        
|                                                           |                                           | $                                 | 967,131                   |                |        | $           | (541     | )             |        | $                 |        |     |   | $ | (181,564 | )       |        | $      | 785,026 |        
|                                                           |                                           |                                   |                           |                |        |             |          |               |        |                   |         |     |   |   |          |         |        |        |         |        
|Liabilities Not Subject to Compromise                      |                                           |                                   |                           |                |        |             |          |               |        |                   |         |     |   |   |          |         |        |        |         |        
|                                                           | Current liabilities:                      |                                   |                           |                |        |             |          |               |        |                   |         |     |   |   |          |         |        |        |         |         |       
|                                                           |                                           | Accounts payable                  |                           | $              | 12,736 |             |          | $             |       |                   |         | $   |  |   |          | $       |       |        |         | $       | 12,736 |       
|                                                           |                                           | Other accrued liabilities         |                           |                | 41,989 |             |          |               | 12,466 | (a)               |         |     |  |   |          |         | 695    | (d)    |         |         | 55,150 |       
|                                                           |                                           | Advance deposits                  |                           |                | 2,089  |             |          |               |       |                   |         |     |  |   |          |         |       |        |         |         | 2,089  |       
|                                                           |                                           | Current portion of long-term debt |                           |                | 266    |             |          |               |       |                   |         |     |  |   |          |         | 14,284 | (d)    |         |         | 14,550 |       
|                                                           |                                           |                                   |                           |                |        |             |          |               |        |                   |         |     |   |   |          |         |        |        |         |        
|                                                           |                                           |                                   | Total current liabilities |                |        | 57,080      |          |               |        | 12,466            |         |     |   |  |          |         |        | 14,979 |         |         |        | 84,525 | 
|                                                           | Long-term debt                            |                                   |                           | 7,215          |        |             |          | 86,038        | (a)    |                   |         |    |   |   |          | 294,776 | (d)    |        |         | 388,029 |       
|Deferred income taxes                                      |                                           |                                   |                           |                |        |             |          |               |        |                   |         |     |   |   |          |         |        |        |         |        
|Liabilities subject to compromise                          |                                           |                                   | 926,387                   |                |        |             | (562,276 | )(a)          |        |                   |        |     |   |   | (269,695 | )(d)    |        |        | 94,416  |        
|Minority interests                                         |                                           |                                   | 5,290                     |                |        |             |         |               |        |                   |        |     |   |   | (1,527   | )(d)    |        |        | 3,763   |        
|Commitments and contingencies                              |                                           |                                   |                           |                |        |             |          |               |        |                   |         |     |   |   |          |         |        |        |         |        
|Mandatory redeemable 12.25% cumulative preferred
    stock |                                           |                                   |                           |                |        |             |          |               |        |                   | 125,000 | (e) |   |   |          |         |        |        | 125,000 |        

F-23



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                       |                                  |                                      |                                      |                |        |             |      |               |     |                   |   |          |       |          |          |          |      |          |         |        |   |        | 
|---------------------- | -------------------------------- | ------------------------------------ | ------------------------------------ | -------------- | ------ | ----------- | ---- | ------------- | --- | ----------------- | - | -------- | ----- | -------- | -------- | -------- | ---- | -------- | ------- | ------ | - | ------ | 
|                       |                                  |                                      |                                      |                |        |             |      |               |     | Successor        
|                       |                                  | Predecessor                          |                                      |                |        |             |      |               |     |                  
|                       |                                  |                                      |                                      |                |        |             |      | Fresh Start & |     | Reorganized      
|                       |                                  | Before Fresh Start                   |                                      | Extinguishment |        | Exchange of |      | Exit          |     | Balance Sheet    
|                       |                                  | November 22, 2002                    |                                      | of Debt        |        | Stock       |      | Financing     |     | November 22, 2002
|                       |                                  |                                      |                                      |                |        |             |      |               |     |                  
|Stockholders deficit: |                                  |                                      |                                      |                |        |             |      |               |     |                   |   |          |       |          |          |          |      |          |         |       
|                       | Common stock (new)               |                                      |                                      |               |        |             |      |              |     |                   |   | 70       | (e)   |          |          |         |      |          |         | 70     |  
|                       | Additional paid-in capital (new) |                                      |                                      |               |        |             |      | 206,801       | (b) |                   |   | (119,284 | )(e)  |          |          | 1,706    |      |          |         | 89,223 |  
|                       | Common stock (old)               |                                      |                                      | 284            |        |             |      |              |     |                   |   | (284     | )(e)  |          |          |         |      |          |         |       |  
|                       | Additional paid-in capital (old) |                                      |                                      | 263,320        |        |             |      |              |     |                   |   | (263,320 | )(e)  |          |          |         |      |          |         |       |  
|                       | Accumulated deficit              |                                      |                                      | (290,567       | )      |             |      | 256,430       | (c) |                   |   | 255,940  | (e)   |          |          | (221,803 | )(d) |          |         |       |  
|                       |                                  | Accumulated other comprehensive loss |                                      |                | (1,878 | )           |      |               |    |                   |   |          | 1,878 | (e)      |          |          |     |          |         |        |  |       
|                       |                                  |                                      |                                      |                |        |             |      |               |     |                   |   |          |       |          |          |          |      |          |         |       
|                       |                                  |                                      | Total stockholders equity (deficit) |                |        | (28,841     | )    |               |     | 463,231           |   |          |       | (125,000 | )        |          |      | (220,097 | )       |        |   | 89,293 | 
|                       |                                  |                                      |                                      |                |        |             |      |               |     |                   |   |          |       |          |          |          |      |          |         |       
|                       |                                  | $                                    | 967,131                              |                |        | $           | (541 | )             |     | $                 |  |          |       | $        | (181,564 | )        |      | $        | 785,026 |       
|                       |                                  |                                      |                                      |                |        |             |      |               |     |                   |   |          |       |          |          |          |      |          |         |       



---

(a) The reduction of pre-petition
liabilities was achieved through:

|                       |  |                |         | 
|---------------------- |  | -------------- | ------- | 
|                       |  | (In thousands)
|Settlement in shares   |  | $              | 206,801 | 
|Cancellation of debt   |  |                | 256,430 | 
|Reinstated debt        |  |                | 86,038  | 
|Allowed claims accrued |  |                | 12,466  | 
|Claims paid in cash    |  |                | 541     | 
|                       |  |                |         | 
|                       |  | $              | 562,276 | 
|                       |  |                |         | 



|    |                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------
|(b) | Issuance of new shares to the Senior Subordinated
    Note Holders, the CREST holders and the general unsecured
    creditors.
|   
|(c) | Gain on cancellation of debt, calculated as
    follows:                                                                      

|                                                                                                      |  |                |          |  
|----------------------------------------------------------------------------------------------------- |  | -------------- | -------- | -
|                                                                                                      |  | (In thousands)
|Liabilities subject to compromise (pre-emergence)                                                     |  | $              | 926,987  |  
|Liabilities settled and to be settled in cash and
    shares                                          |  |                | (490,103 | )
|Reinstated debt                                                                                       |  |                | (86,038  | )
|Remaining liabilities subject to compromise (for
    subsidiaries in Chapter 11 at December 31, 2002) |  |                | (94,416  | )
|                                                                                                      |  |                |          |  
|                                                                                                      |  | $              | 256,430  |  
|                                                                                                      |  |                |          |  



|    |                                                                                                                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(d) | Represents the recording of the exit financing of
    $309 million (used to repay previous obligations, fund
    certain allowed claims and portions of certain required cash
    escrows) and fair value adjustments (primarily net write-down of
    fixed assets of $222.1 million).
|   
|(e) | Elimination of old equity                                                                                                                                                                                                                                                              

F-24



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The approximate allocation of the Companys
reorganization value as of November 22, 2002 is shown below:

|                                                                          |  |                |         | 
|------------------------------------------------------------------------- |  | -------------- | ------- | 
|                                                                          |  | (In thousands)
|Long- term debt                                                           |  | $              | 388,000 | 
|Liabilities subject to compromise                                         |  |                | 94,400  | 
|Post-petition liabilities including current
    portion of long-term debt |  |                | 84,500  | 
|Mandatorily redeemable 12.25% cumulative
    preferred stock              |  |                | 125,000 | 
|New equity including minority interest                                    |  |                | 93,100  | 
|                                                                          |  |                |         | 
|                                                                          |  | $              | 785,000 | 
|                                                                          |  |                |         | 



|   |                                  
|-- | ---------------------------------
|5. | Liabilities Subject to Compromise

Liabilities subject to compromise at
December 31, 2002 refer to known liabilities incurred prior
to the commencement of the Chapter 11 cases, including
those considered by the Bankruptcy Court to be pre-petition
claims. These liabilities consisted primarily of amounts
outstanding under long-term debt and also included accounts
payable, accrued interest, and other accrued expenses.

The principal categories of claims classified as
liabilities subject to compromise in the Chapter 11 Cases
as of December 31, 2002 are identified below:

|                                             |  |                |        | 
|-------------------------------------------- |  | -------------- | ------ | 
|                                             |  | (In thousands)
|Long-term debt and capital lease obligations |  | $              | 91,422 | 
|Accounts Payable                             |  |                | 2,394  | 
|                                             |  |                |        | 
|                                             |  | $              | 93,816 | 
|                                             |  |                |        | 

The Company recorded all transactions incurred as
a result of the Chapter 11 filing and the implementation of
fresh start reporting as reorganization items and classified
these separately in its Statement of Operations. Though the
Company continues to incur expenses related to its
reorganization proceedings only those incurred while the
entities were in reorganization are classified as reorganization
items. Reorganization items relating to the period subsequent to
Chapter 11 are included in general, administrative and
other expenses.

F-25



---



##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Reorganization items were as follows:

|                                                            |                             |                  |        |                |   |              |   |              |  |   |          |         |   |   |         |        |  
|----------------------------------------------------------- | --------------------------- | ---------------- | ------ | -------------- | - | ------------ | - | ------------ |  | - | -------- | ------- | - | - | ------- | ------ | -
|                                                            |                             |                 
|                                                            |                             | ($ in thousands)
|                                                            |                             |                  |        |               
|                                                            |                             | Successor        |        | Predecessor   
|                                                            |                             |                  |        |               
|                                                            |                             | Year ended       |        | November 23 to |   | January 1 to |   | Year ended  
|                                                            |                             | December 31,     |        | November 22,   |   | November 22, |   | December 31,
|                                                            |                             | 2003             |        | 2002           |   | 2002         |   | 2001        
|                                                            |                             |                  |        |                |   |              |   |             
|                                                            |                             | (1)              |        | (1)            |   |              |   |             
|Net write-down of fixed assets (fresh start
    write-down) |                             |                  |       |                |   | $            |  |              |  | $ | (222,071 | )       |   | $ |        |       
|Gain on cancellation of debt                                |                             |                  |       |                |   |              |  |              |  |   | 256,430  |         |   |   |        |       
|Fresh start adjustments  other                             |                             |                  |       |                |   |              |  |              |  |   | 3,938    |         |   |   |        |       
|Write-off of deferred financing costs                       |                             |                  |       |                |   |              |  |              |  |   |         |         |   |   | (21,517 | )     
|Other reorganization items:                                 |                             |                  |        |                |   |              |   |              |  |   |          |         |   |   |         |       
|                                                            | Legal and professional fees |                  |        | (455           | ) |              |   |             |  |   |          | (22,315 | ) |   |         | (3,179 | )
|                                                            | Loan extension fees         |                  |        | (1,500         | ) |              |   |             |  |   |          |        |   |   |         |       |  
|                                                            | Other                       |                  |        | (90            | ) |              |   |             |  |   |          | (3,292  | ) |   |         | (320   | )
|                                                            |                             |                  |        |                |   |              |   |              |  |   |          |         |   |   |         |       
|                                                            |                             | $                | (2,045 | )              |   | $            |  |              |  | $ | 12,690   |         |   | $ | (25,016 | )     
|                                                            |                             |                  |        |                |   |              |   |              |  |   |          |         |   |   |         |       
|Continuing operations(2)                                    |                             | $                | (1,397 | )              |   | $            |  |              |  | $ | 11,038   |         |   | $ | (21,672 | )     
|Discontinued operations(2)                                  |                             |                  | (648   | )              |   |              |  |              |  |   | 1,652    |         |   |   | (3,344  | )     
|                                                            |                             |                  |        |                |   |              |   |              |  |   |          |         |   |   |         |       
|                                                            |                             | $                | (2,045 | )              |   | $            |  |              |  | $ | 12,690   |         |   | $ | (25,016 | )     
|                                                            |                             |                  |        |                |   |              |   |              |  |   |          |         |   |   |         |       



---



|    |                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Reorganization expenses, shown in the table
    above, represent only those expenses relating to the
    Chapter 11 proceedings while the related hotels were in
    Chapter 11.                                                    
|   
|(2) | Reorganization expenses were allocated between
    Continuing Operations and Discontinued Operations, based on the
    values assigned to the respective entities subsequent to the
    consummation of the plans of reorganization.



|   |                    
|-- | -------------------
|6. | Accounts Receivable

Accounts receivable, net of allowances are
comprised of:

|                                |  |                   |       |                   |  |   |        |  
|------------------------------- |  | ----------------- | ----- | ----------------- |  | - | ------ | -
|                                |  | December 31, 2003 |       | December 31, 2002
|                                |  |                   |       |                  
|                                |  |                  
|                                |  | ($ in thousands) 
|Trade accounts receivable       |  | $                 | 8,287 |                   |  | $ | 11,684 |  
|Allowance for doubtful accounts |  |                   | (689  | )                 |  |   | (1,594 | )
|Other receivables               |  |                   | 571   |                   |  |   | 591    |  
|                                |  |                   |       |                   |  |   |        |  
|                                |  | $                 | 8,169 |                   |  | $ | 10,681 |  
|                                |  |                   |       |                   |  |   |        |  

F-26



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Allowances for doubtful accounts:

|                                     |      |                  |   |            |   |                |   |            |   |  |   |       |  |  |   |        |  
|------------------------------------ | ---- | ---------------- | - | ---------- | - | -------------- | - | ---------- | - |  | - | ----- |  |  | - | ------ | -
|                                     |      | Balance at       |   |            |   |                |   | Balance at
|                                     |      | Beginning of     |   | Charged to |   | Write-offs and |   | End of    
|Description                          |      | Period           |   | Expenses   |   | Recoveries     |   | Period    
|                                     |      |                  |   |            |   |                |   |           
|                                     |      |                 
|                                     |      | ($ in thousands)
|Provision for uncollectible accounts |      |                  |   |            |   |                |   |            |   |  |   |       |  |  |   |       
|Year ended December 31,              |      |                  |   |            |   |                |   |            |   |  |   |       |  |  |   |       
|                                     | 2003 |                  | $ | (1,594     | ) |                | $ | 377        |   |  | $ | 528   |  |  | $ | (689   | )
|                                     | 2002 |                  |   | (1,237     | ) |                |   | (1,467     | ) |  |   | 1,110 |  |  |   | (1,594 | )
|                                     | 2001 |                  |   | (1,400     | ) |                |   | (204       | ) |  |   | 367   |  |  |   | (1,237 | )

Of the $1,467 charged to expense during 2002,
$1,195 related to the Predecessor period (January 1, 2002
to November 22, 2002) and $272 related to the Successor
period (November 23, 2002 to December 31, 2002).



|   |                                              
|-- | ---------------------------------------------
|7. | Prepaid Expenses and Other Current
    Assets

Prepaid expenses and other current assets are
comprised of:

|                                    |  |                   |        |                   |  |   |        | 
|----------------------------------- |  | ----------------- | ------ | ----------------- |  | - | ------ | 
|                                    |  | December 31, 2003 |        | December 31, 2002
|                                    |  |                   |        |                  
|                                    |  |                  
|                                    |  | ($ in thousands) 
|Deposit for property taxes          |  | $                 | 4,862  |                   |  | $ | 9,100  | 
|Prepaid insurance                   |  |                   | 5,718  |                   |  |   | 3,107  | 
|Lender-required insurance deposits  |  |                   | 2,774  |                   |  |   | 1,184  | 
|Deposits and other prepaid expenses |  |                   | 3,714  |                   |  |   | 1,727  | 
|                                    |  |                   |        |                   |  |   |        | 
|                                    |  | $                 | 17,068 |                   |  | $ | 15,118 | 
|                                    |  |                   |        |                   |  |   |        | 



|   |                       
|-- | ----------------------
|8. | Property and Equipment

At December 31, 2003 and 2002, property and
equipment consisted of the following:

|                              |  |         |       |                  |  |              |         |   |  |   |         |  
|----------------------------- |  | ------- | ----- | ---------------- |  | ------------ | ------- | - |  | - | ------- | -
|                              |  | Useful  |       |                  |  |             
|                              |  | Lives   |       | December 31,     |  | December 31,
|                              |  | (Years) |       | 2003             |  | 2002        
|                              |  |         |       |                  |  |             
|                              |  |         |       |                 
|                              |  |         |       | ($ in thousands)
|Land                          |  |         |      |                  |  | $            | 76,624  |   |  | $ | 100,033 |  
|Buildings and improvements    |  |         | 10-40 |                  |  |              | 437,418 |   |  |   | 485,400 |  
|Furnishings and equipment     |  |         | 3-10  |                  |  |              | 58,817  |   |  |   | 69,763  |  
|                              |  |         |       |                  |  |              |         |   |  |   |         |  
|                              |  |         |       |                  |  |              | 572,859 |   |  |   | 655,196 |  
|Less accumulated depreciation |  |         |       |                  |  |              | (31,860 | ) |  |   | (3,891  | )
|Construction in progress      |  |         |       |                  |  |              | 22,819  |   |  |   | 13,260  |  
|                              |  |         |       |                  |  |              |         |   |  |   |         |  
|                              |  |         |       |                  |  | $            | 563,818 |   |  | $ | 664,565 |  
|                              |  |         |       |                  |  |              |         |   |  |   |         |  

As discussed in Note 3, the Company conveyed
eight wholly-owned hotels to the lender in January 2003 in
satisfaction of outstanding debt obligations and one
wholly-owned hotel was returned to the lessor of a capital
lease. In addition, at December 31, 2003, 18 hotels and
three land parcels were held for sale. One hotel and an office
building were sold during 2003 while four hotels were sold
between January 1, 2004 and March 1, 2004, as noted in
Note 3 and Note 20 of the accompanying consolidated
financial statements. During 2003, impairment charges of
$5.4 million were recorded on assets held for sale while
$12.7 million of impairment charges were recorded on assets
held for use. No depreciation is computed on assets held for
sale.

F-27



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In connection with the Companys emergence
from Chapter 11 on November 25, 2002, the Company
implemented fresh start reporting effective November 22,
2002. As a result, the Companys assets and liabilities
were based on their respective fair values. In this regard, the
Company recorded a net write-down of its fixed assets of
$222.1 million at November 22, 2002. This net
write-down is reflected in reorganization items.

In addition, the Company had evaluated the
recoverability of its long-lived assets in accordance with
SFAS No. 121 as of December 31, 2001 and had
recorded impairment losses for assets held for use, where the
estimated future undiscounted cash flows were insufficient to
recover the carrying value of those assets.

Impairment of long-lived assets was
$67.3 million in 2001 ($20.5 million relating to
Continuing Operations and $46.8 million relating to
Discontinued Operations). The charge for the 2001 period was
comprised of $6.6 million related to revised estimates of
fair value for properties held for sale, $4.0 million
related to one property which was identified as held for sale
and also sold in 2001 and $69.0 million relating to a
charge to reduce the carrying value of certain of the
Companys hotels held for future use, offset by a recapture
of $12.3 million of impairment charges related to six
hotels that were previously considered held for sale that were
no longer being actively marketed for sale. Of the impairment
charges in the 2001 period, $69.0 million of the impairment
charges and the recapture of $8.5 million of previously
recognized impairment reserves were recorded in the fourth
quarter of 2001. In connection with its bankruptcy petition on
December 20, 2001, the Company determined that 29 of
its hotels were significantly overleveraged. Therefore, with the
approval of the Bankruptcy Court, the Company ceased paying
interest to the secured lenders of these properties from the
date of the bankruptcy petition. The Company also concluded that
it no longer had the ability to hold these hotels for a period
sufficient for their estimated future undiscounted cash flows to
cover their carrying values. Therefore in accordance with the
provisions of SFAS No. 121, the Company determined
that an impairment charge of $69.0 million was necessary to
reduce the carrying value of these assets. In connection with
the bankruptcy petition, the Company also ceased marketing for
sale, four operating properties that were previously classified
as held for sale. Since these assets were not considered
impaired as the estimated future cash flows from the use of
these properties exceeded their carrying values, the Company
recaptured $8.5 million of impairment reserves previously
recorded in 1999, 2000 and 2001.



|   |             
|-- | ------------
|9. | Other Assets

|                           |  |                   |        |                   |  |   |        | 
|-------------------------- |  | ----------------- | ------ | ----------------- |  | - | ------ | 
|                           |  | December 31, 2003 |        | December 31, 2002
|                           |  |                   |        |                  
|                           |  |                  
|                           |  | ($ in thousands) 
|Deferred financing costs   |  | $                 | 9,207  |                   |  | $ | 7,433  | 
|Deferred franchise fees    |  |                   | 2,358  |                   |  |   | 4,281  | 
|Utility and other deposits |  |                   | 615    |                   |  |   | 281    | 
|                           |  |                   |        |                   |  |   |        | 
|                           |  | $                 | 12,180 |                   |  | $ | 11,995 | 
|                           |  |                   |        |                   |  |   |        | 

F-28



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                          
|--- | -------------------------
|10. | Other Accrued Liabilities

At December 31, 2003 and 2002, other accrued
liabilities consisted of the following:

|                                 |  |                   |        |                   |  |   |        | 
|-------------------------------- |  | ----------------- | ------ | ----------------- |  | - | ------ | 
|                                 |  | December 31, 2003 |        | December 31, 2002
|                                 |  |                   |        |                  
|                                 |  |                  
|                                 |  | ($ in thousands) 
|Salaries and related costs       |  | $                 | 16,211 |                   |  | $ | 17,293 | 
|Property and sales taxes         |  |                   | 9,427  |                   |  |   | 14,606 | 
|Professional fees                |  |                   | 570    |                   |  |   | 807    | 
|Provision for state income taxes |  |                   | 2,361  |                   |  |   | 2,219  | 
|Franchise fee accrual            |  |                   | 1,115  |                   |  |   | 1,388  | 
|Accrued interest                 |  |                   | 526    |                   |  |   | 1,524  | 
|Accrual for allowed claims       |  |                   | 186    |                   |  |   | 1,749  | 
|Other                            |  |                   | 1,036  |                   |  |   | 1,711  | 
|                                 |  |                   |        |                   |  |   |        | 
|                                 |  | $                 | 31,432 |                   |  | $ | 41,297 | 
|                                 |  |                   |        |                   |  |   |        | 

F-29



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                       
|--- | ----------------------
|11. | Long-Term Debt  Other

Set forth below, by debt pool, is a summary of
the Companys long-term debt (including the current
portion) along with the applicable interest rates and the
related carrying values of the property, plant and equipment
which collateralize the long-term debt (amounts in thousands).

|                                                                  |  |           |     |                     |  |                |         |                |  |   |         |   |  |                                    
|----------------------------------------------------------------- |  | --------- | --- | ------------------- |  | -------------- | ------- | -------------- |  | - | ------- | - |  | -----------------------------------
|                                                                  |  |           |     |                     |  |               
|                                                                  |  |           |     | December 31, 2003   |  |               
|                                                                  |  |           |     |                     |  |               
|                                                                  |  | Number    |     | Property, Plant and |  | Long-Term      |         |               
|                                                                  |  | of Hotels |     | Equipment, Net(1)   |  | Obligations(1) |         | Interest Rates
|                                                                  |  |           |     |                     |  |                |         |               
|                                                                  |  |           |     |                     |  |               
|                                                                  |  |           |     | ($ in thousands)    |  |               
|Exit Financing                                                    |  |           |     |                     |  |                |         |                |  |   |         |   |  |                                    
|Merrill Lynch Mortgage Lending, Inc. 
    Senior                 |  |           |     |                     |  |                |         |                |  | $ | 216,052 |   |  | LIBOR plus 2.36%                   
|Merrill Lynch Mortgage Lending, Inc. 
    Mezzanine              |  |           |     |                     |  |                |         |                |  |   | 83,281  |   |  | LIBOR plus 8.79%                   
|                                                                  |  |           |     |                     |  |                |         |                |  |   |         |   |  |                                    
|Merrill Lynch Mortgage Lending, Inc. 
    Total                  |  |           | 56  |                     |  |                | 401,793 |                |  |   | 299,333 |   |  |                                    
|Computershare Trust Company of Canada                             |  |           | 1   |                     |  |                | 14,106  |                |  |   | 7,521   |   |  | 7.88%                              
|Lehman Financing                                                  |  |           |     |                     |  |                |         |                |  |   |         |   |  |                                    
|Lehman Brothers Holdings, Inc.                                    |  |           | 17  |                     |  |                | 69,539  |                |  |   | 76,449  |   |  | Higher of LIBOR plus 5.25% or 7.25%
|Other Financings                                                  |  |           |     |                     |  |                |         |                |  |   |         |   |  |                                    
|Column Financial, Inc.                                            |  |           | 9   |                     |  |                | 61,681  |                |  |   | 27,300  |   |  | 10.59%                             
|Lehman Brothers Holdings, Inc.                                    |  |           | 5   |                     |  |                | 38,125  |                |  |   | 23,409  |   |  | $16,496 at 9.40%; $6,913 at 8.90%  
|JP Morgan Chase Bank                                              |  |           | 2   |                     |  |                | 8,913   |                |  |   | 10,644  |   |  | 7.25%                              
|DDL Kinser                                                        |  |           | 1   |                     |  |                | 3,188   |                |  |   | 2,385   |   |  | 8.25%                              
|First Union Bank                                                  |  |           | 1   |                     |  |                | 4,297   |                |  |   | 3,359   |   |  | 9.38%                              
|Column Financial, Inc.                                            |  |           | 1   |                     |  |                | 6,491   |                |  |   | 8,943   |   |  | 9.45%                              
|Column Financial, Inc.                                            |  |           | 1   |                     |  |                | 6,120   |                |  |   | 3,206   |   |  | 10.74%                             
|Robb Evans, Trustee                                               |  |           | 1   |                     |  |                | 6,365   |                |  |   | 6,982   |   |  | Prime plus 4.00%                   
|                                                                  |  |           |     |                     |  |                |         |                |  |   |         |   |  |                                    
|Total  Other Financings                                          |  |           | 21  |                     |  |                | 135,180 |                |  |   | 86,228  |   |  |                                    
|                                                                  |  |           |     |                     |  |                |         |                |  |   |         |   |  |                                    
|                                                                  |  |           | 95  |                     |  |                | 620,618 |                |  |   | 469,531 |   |  | 6.33%(2)                           
|Long-term debt 
    other                                        |  |           |     |                     |  |                |         |                |  |   |         |   |  |                                    
|Deferred interest  long-term                                     |  |           |    |                     |  |                |        |                |  |   | 4,337   |   |  |                                    
|Deferred rent on a long-term ground lease                         |  |           |    |                     |  |                |        |                |  |   | 2,506   |   |  |                                    
|Tax notes issued pursuant to our Joint Plan of
    Reorganization |  |           |    |                     |  |                |        |                |  |   | 1,957   |   |  |                                    
|Other                                                             |  |           |    |                     |  |                |        |                |  |   | 551     |   |  |                                    
|                                                                  |  |           |     |                     |  |                |         |                |  |   |         |   |  |                                    
|                                                                  |  |           |    |                     |  |                |        |                |  |   | 9,351   |   |  |                                    
|                                                                  |  |           |     |                     |  |                |         |                |  |   |         |   |  |                                    
|Property, plant and equipment  other                             |  |           |    |                     |  |                | 4,824   |                |  |   |        |   |  |                                    
|                                                                  |  |           |     |                     |  |                |         |                |  |   |         |   |  |                                    
|                                                                  |  |           | 95  |                     |  |                | 625,442 |                |  |   | 478,882 |   |  |                                    
|Held for sale                                                     |  |           | (18 | )                   |  |                | (61,624 | )              |  |   | (53,204 | ) |  |                                    
|                                                                  |  |           |     |                     |  |                |         |                |  |   |         |   |  |                                    
|Total December 31, 2003                                           |  |           | 77  |                     |  | $              | 563,818 |                |  | $ | 425,678 |   |  |                                    
|                                                                  |  |           |     |                     |  |                |         |                |  |   |         |   |  |                                    



---



|    |                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Long-term obligations and property, plant and
    equipment of the hotel in which the Company has a
    non-controlling equity interest and does not consolidate are
    excluded from the table above.
|(2) | Represents the annual weighted average cost at
    December 31, 2003.                                                                                                                                  

The fair value of the fixed rate mortgage debt
(book value $86.8 million) at December 31, 2003 is
estimated at $86.7 million.

All of the Companys property and equipment
related to its hotels are pledged as collateral for long-term
obligations. Certain of the mortgage notes are subject to a
prepayment penalty if repaid prior to their maturity.

F-30



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The maturities of these debt obligations as of
December 31, 2003 are as follows:

|                                                     |  |                   |         |            |  |      |        |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|---------------------------------------------------- |  | ----------------- | ------- | ---------- |  | ---- | ------ | ---- |  | ---- | ------- | ---- |  | ---------- | ----- |  |  | - | ------ |  |  | - | ----- |  |  | - | ------ | 
|                                                     |  |                   |         |           
|                                                     |  | Long-Term         |         | Maturities
|                                                     |  | Obligations       |         |           
|                                                     |  | December 31, 2003 |         | 2004       |  | 2005 |        | 2006 |  | 2007 |         | 2008 |  | After 2008
|                                                     |  |                   |         |            |  |      |        |      |  |      |         |      |  |           
|                                                     |  |                  
|                                                     |  | ($ in thousands) 
|Exit financing:                                      |  |                   |         |            |  |      |        |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|Merrill Lynch Mortgage Lending,
    Inc.  Senior    |  | $                 | 216,052 |            |  | $    | 3,338  |      |  | $    | 212,714 |      |  | $          |      |  |  | $ |       |  |  | $ |      |  |  | $ |       | 
|Merrill Lynch Mortgage Lending,
    Inc.  Mezzanine |  |                   | 83,281  |            |  |      | 1,287  |      |  |      | 81,994  |      |  |            |      |  |  |   |       |  |  |   |      |  |  |   |       | 
|                                                     |  |                   |         |            |  |      |        |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|Merrill Lynch Mortgage Lending,
    Inc.  Total     |  |                   | 299,333 |            |  |      | 4,625  |      |  |      | 294,708 |      |  |            |      |  |  |   |       |  |  |   |      |  |  |   |       | 
|Computershare Trust Company of Canada                |  |                   | 7,521   |            |  |      | 222    |      |  |      | 240     |      |  |            | 259   |  |  |   | 6,800  |  |  |   |      |  |  |   |       | 
|Lehman financing:                                    |  |                   |         |            |  |      |        |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|Lehman Brothers Holdings, Inc.                       |  |                   | 76,449  |            |  |      | 1,084  |      |  |      | 75,365  |      |  |            |      |  |  |   |       |  |  |   |      |  |  |   |       | 
|Other financing:                                     |  |                   |         |            |  |      |        |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|Column Financial, Inc.                               |  |                   | 27,300  |            |  |      | 2,242  |      |  |      | 2,491   |      |  |            | 2,768 |  |  |   | 3,076  |  |  |   | 3,418 |  |  |   | 13,305 | 
|Lehman Brothers Holdings, Inc.                       |  |                   | 23,409  |            |  |      | 482    |      |  |      | 529     |      |  |            | 580   |  |  |   | 21,818 |  |  |   |      |  |  |   |       | 
|JP Morgan Chase Bank                                 |  |                   | 10,644  |            |  |      | 530    |      |  |      | 570     |      |  |            | 615   |  |  |   | 665    |  |  |   | 720   |  |  |   | 7,544  | 
|DDL Kinser                                           |  |                   | 2,385   |            |  |      | 98     |      |  |      | 2,287   |      |  |            |      |  |  |   |       |  |  |   |      |  |  |   |       | 
|First Union Bank                                     |  |                   | 3,359   |            |  |      | 56     |      |  |      | 63      |      |  |            | 69    |  |  |   | 3,171  |  |  |   |       |  |  |   |        | 
|Column Financial, Inc.                               |  |                   | 8,943   |            |  |      | 398    |      |  |      | 437     |      |  |            | 480   |  |  |   | 528    |  |  |   | 580   |  |  |   | 6,520  | 
|Column Financial, Inc.                               |  |                   | 3,206   |            |  |      | 137    |      |  |      | 3,069   |      |  |            |      |  |  |   |       |  |  |   |      |  |  |   |       | 
|Robb Evans, Trustee                                  |  |                   | 6,982   |            |  |      | 6,982  |      |  |      |        |      |  |            |      |  |  |   |       |  |  |   |      |  |  |   |       | 
|                                                     |  |                   |         |            |  |      |        |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|                                                     |  |                   | 86,228  |            |  |      | 10,925 |      |  |      | 9,446   |      |  |            | 4,512 |  |  |   | 29,258 |  |  |   | 4,718 |  |  |   | 27,369 | 
|                                                     |  |                   |         |            |  |      |        |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|                                                     |  |                   | 469,531 |            |  |      | 16,856 |      |  |      | 379,759 |      |  |            | 4,771 |  |  |   | 36,058 |  |  |   | 4,718 |  |  |   | 27,369 | 
|Long-term debt  other                               |  |                   | 9,351   |            |  |      | 478    |      |  |      | 4,755   |      |  |            | 391   |  |  |   | 397    |  |  |   | 382   |  |  |   | 2,948  | 
|                                                     |  |                   |         |            |  |      |        |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|                                                     |  |                   | 478,882 |            |  |      | 17,334 |      |  |      | 384,514 |      |  |            | 5,162 |  |  |   | 36,455 |  |  |   | 5,100 |  |  |   | 30,317 | 
|Held for sale                                        |  |                   | (53,204 | )          |  |      | (771   | )    |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|                                                     |  |                   |         |            |  |      |        |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|                                                     |  | $                 | 425,678 |            |  | $    | 16,563 |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 
|                                                     |  |                   |         |            |  |      |        |      |  |      |         |      |  |            |       |  |  |   |        |  |  |   |       |  |  |   |        | 

The Merrill Lynch Mortgage loan initially matures
on November 24, 2004 and has three one-year extensions that
may be exercised at the Companys option. The first
extension (to November 24, 2005) is available as long as no
events of defaults occur in respect of the payment of principal,
interest and other required payments. The second and third
extension terms are available only if no event of default exists
and are subject to a minimum debt service coverage ratio
requirement and a minimum debt yield requirement. The Lehman
loan initially matures in May 2005, and has a one-year extension
that may be exercised at the Companys option. At maturity,
the Company plans to either exercise these extension options or
refinance these loans with the existing lenders or with new
lenders. The Company also plans to continue to reduce these
loans through property sales and normal principal payments.

F-31



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Long-term obligations at December 31, 2003
and 2002 consisted of the following:

|                                                 |                                                                   |                  |         |       |  |   |         |       | 
|------------------------------------------------ | ----------------------------------------------------------------- | ---------------- | ------- | ----- |  | - | ------- | ----- | 
|                                                 |                                                                   |                 
|                                                 |                                                                   | December 31,    
|                                                 |                                                                   |                 
|                                                 |                                                                   | 2003             |         | 2002 
|                                                 |                                                                   |                  |         |      
|                                                 |                                                                   |                 
|                                                 |                                                                   | ($ in thousands)
|Exit financing:                                  |                                                                   |                  |         |       |  |   |         |      
|Merrill Lynch Mortgage Lending, Inc. 
    Total |                                                                   | $                | 299,333 |       |  | $ | 302,708 |      
|Computershare Trust Company of Canada            |                                                                   |                  | 7,521   |       |  |   | 6,339   |      
|Lehman financing:                                |                                                                   |                  |         |       |  |   |         |      
|Lehman Brothers Holdings, Inc.                   |                                                                   |                  | 76,449  |       |  |   |        |      
|Other financing:                                 |                                                                   |                  |         |       |  |   |         |      
|Column Financial, Inc.                           |                                                                   |                  | 27,300  |       |  |   | 29,317  |      
|Lehman Brothers Holdings, Inc.                   |                                                                   |                  | 23,409  |       |  |   | 23,849  |      
|JP Morgan Chase Bank                             |                                                                   |                  | 10,644  |       |  |   | 11,179  |      
|DDL Kinser                                       |                                                                   |                  | 2,385   |       |  |   | 2,498   |      
|First Union Bank                                 |                                                                   |                  | 3,359   |       |  |   | 3,410   |      
|Column Financial, Inc.                           |                                                                   |                  | 8,943   |       |  |   | 9,305   |      
|Column Financial, Inc.                           |                                                                   |                  | 3,206   |       |  |   | 3,330   |      
|Robb Evans, Trustee                              |                                                                   |                  | 6,982   |       |  |   | 7,447   |      
|                                                 |                                                                   |                  |         |       |  |   |         |      
|Total  other financing                          |                                                                   |                  | 86,228  |       |  |   | 90,335  |      
|                                                 |                                                                   |                  |         |       |  |   |         |      
|Liabilities subject to compromise                |                                                                   |                  |        |       |  |   | 91,421  |      
|                                                 |                                                                   |                  |         |       |  |   |         |      
|                                                 |                                                                   |                  | 469,531 |       |  |   | 490,803 |      
|Long-term debt  other:                          |                                                                   |                  |         |       |  |   |         |      
|                                                 | Deferred interest  long-term                                     |                  |         | 4,337 |  |   |         |      | 
|                                                 | Deferred rent on a long-term ground lease                         |                  |         | 2,506 |  |   |         | 2,342 | 
|                                                 | Tax notes issued pursuant to our Joint Plan of
    Reorganization |                  |         | 1,957 |  |   |         | 2,061 | 
|                                                 | Other                                                             |                  |         | 551   |  |   |         | 518   | 
|                                                 |                                                                   |                  |         |       |  |   |         |      
|                                                 |                                                                   |                  | 9,351   |       |  |   | 4,921   |      
|                                                 |                                                                   |                  |         |       |  |   |         |      
|                                                 |                                                                   |                  | 478,882 |       |  |   | 495,724 |      
|Long-term debt related to assets held for sale   |                                                                   |                  | (53,204 | )     |  |   |        |      
|                                                 |                                                                   |                  |         |       |  |   |         |      
|Total                                            |                                                                   | $                | 425,678 |       |  | $ | 495,724 |      
|                                                 |                                                                   |                  |         |       |  |   |         |      

Exit
financing:

On emergence from Chapter 11 on
November 25, 2002, the Company received exit financing of
$309.0 million comprised of three separate components as
follows:



| |   |                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Senior debt of $224.0 million from Merrill
    Lynch Mortgage, accruing interest at the rate of LIBOR plus
    2.24%, secured by, among other things, first mortgage liens on
    the fee simple or leasehold interests in 55 of the
    Companys hotels;         
|
| |  | Mezzanine debt of $78.7 million from Merrill
    Lynch Mortgage, accruing interest at the rate of LIBOR plus
    9.00%, secured by the equity interest in the subsidiaries of 56
    hotels (the 55 which secure the senior debt and one additional
    hotel); and

F-32



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |   |                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Debt provided through Computershare Trust Company
    of Canada, a Canadian lender, of $10.0 million Canadian
    dollars (equated to approximately $6.3 million
    U.S. dollars at inception) maturing in December 2007,
    accruing interest at the rate of 7.88% secured by a mortgage on
    the property located in Windsor, Canada.

In March 2003, as permitted by the terms of the
senior and mezzanine debt agreements, Merrill Lynch Mortgage
exercised the right to resize (as defined) the
senior and mezzanine debt amounts, prior to the securitization
of the mortgage loan. As a result, the principal amount of the
senior debt was decreased from $223.7 million (initially
$224.0 less $0.3 million of principal payments) to
$218.1 million, and the principal amount of the mezzanine
debt was increased from $78.6 (initially $78.7 million less
$0.1 million of principal payments) to $84.1 million.
Though the blended interest rate on the Merrill Lynch Mortgage
debt remained at LIBOR plus 4.00% at the date of the resizing,
the interest rate on the senior debt was modified to LIBOR plus
2.36% and the interest rate on the mezzanine debt was modified
to LIBOR plus 8.25%. The interest rate on the mezzanine debt
increased to 8.79% as of December 1, 2003. Therefore, the
new blended rate on the Merrill Lynch Mortgage debt is LIBOR
plus 4.15%. Furthermore, as a result of the securitization of
the mortgage loan, Merrill Lynch Mortgage no longer has the
right to amend or waive provisions thereunder.

The senior and mezzanine debt matures on
November 24, 2004. There are, however, three one-year
options to renew which could extend the maturity for an
additional three years. The first option to extend the maturity
date of the senior and mezzanine debt by up to one year (i.e. to
November 2005) is available as long as no events of default
occur in respect of the payment of principal, interest and other
required amounts. Because the Company intends to extend the
maturity date and believes it will be eligible for that
extension, the Company has reported the senior and mezzanine
debt as maturing in 2005. The second and third extension terms
are available only if no events of default of any kind exist and
are subject to a minimum debt service coverage ratio of 1.20x
and a debt yield requirement of 13.25% which the Company did not
satisfy as of December 31, 2003. Payments of principal and
interest on all three portions of the facility are due monthly.
At maturity the Company plans to either exercise the extension
options or seek to refinance the loans with a new lender.

The senior and mezzanine debt agreements provide
that when either (i) the debt yield for the trailing
12-month period is below 13.25% during the year ending November
2004 (and if the loan is extended, 13.50%, 13.75% and 14.00%
during each of the next three years of the loan, respectively)
or (ii) the debt service coverage ratio is below 1.20x,
excess cash flows of the mortgaged hotels (after payment of
operating expenses, management fees, required reserves, service
fees, principal and interest) must be deposited in a restricted
cash account. These funds can be used for the prepayment of
aggregate outstanding borrowings, capital expenditures
reasonably approved by the lender, and up to an aggregate of
$3.0 million of scheduled principal and interest payments due
under these agreements. Funds will no longer be deposited into
the restricted cash account when the debt yield and the debt
service coverage ratio are sustained above the minimum
requirements for three consecutive months. On March 31,
2003, the debt yield, for the hotels securing this debt fell
below the then applicable 12.75% minimum threshold and,
therefore, the excess cash flow produced by the hotels securing
the Merrill Lynch Mortgage debt was retained in the restricted
cash account starting on May 1, 2003. The restricted cash
balance in this account as of December 31, 2003 was
$0.9 million. During 2003, $7.5 million was released
from the restricted cash account for capital expenditures and
scheduled interest and principal payments. As of March 1,
2004, no cash was being retained in the restricted cash account.
At December 31, 2003, the debt yield and debt service coverage
ratio remained below the minimum requirements. Further, the
mezzanine debt agreement with Merrill Lynch Mortgage requires
the Company to maintain a minimum net worth of at least $10.0
million.

F-33



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                 
| | ----------------
| | Lehman Financing

On May 22, 2003, the Company completed an
$80.0 million financing underwritten by Lehman Brothers
Holdings, Inc. (Lehman) which was primarily utilized
to settle debts secured by the 18 hotels previously owned by
Impac Hotels II, L.L.C. and Impac Hotels III, L.L.C. (both
Lodgian subsidiaries). The Lehman Financing, provided to
eighteen newly-formed subsidiaries (one for each hotel), is a
two-year term loan with an optional one-year extension and bears
interest at the higher of 7.25% or LIBOR plus 5.25%. The
one-year extension is only available if, at the time of electing
to extend and at the initial maturity date, there are no events
of default. If the Company opts for the one-year extension, an
extension fee of $3.0 million is payable. Pursuant to the
terms of the agreement, additional interest of $4.4 million
is also payable upon the maturity date (May 22, 2005 or the
new maturity date, if the Company opts for the extension).
Payments of principal and interest on the Lehman Facility are
due monthly. If an event of default occurs, the rate increases
by 325 basis points or 3.25% for the period of the default. At
maturity, the Company plans to exercise the extension option or
seek to refinance the loan with a new lender.

The documents governing the terms of both the
Merrill Lynch Mortgage debt and the Lehman Financing contain
covenants that place restrictions on the Company and certain of
its subsidiaries activities, including acquisitions,
mergers and consolidations, the sale of assets, and the
incurrence of liens. Failure to comply with the covenants under
our loan agreements would constitute an event of default that
would permit acceleration by the lender.



| |                 
| | ----------------
| | Other Financings

On November 25, 2002, the effective date of
the Joint Plan of Reorganization, loans approximating
$83.5 million, secured by 20 hotels, were substantially
reinstated on their original terms, except for the extension of
certain maturities. The terms of one other loan, in the amount
of $2.5 million and secured by one hotel, were amended to
provide for a new interest rate and a new maturity date.

The Company through its wholly-owned subsidiaries
owes approximately $10.6 million under Industrial Revenue Bonds
issued on the Holiday Inn Lawrence and Holiday Inn Manhattan,
both Kansas properties. The Industrial Revenue Bonds require a
minimum debt service coverage ratio, calculated as of the end of
each calendar year. For the year ended December 31, 2003,
the cash flows of both hotels were insufficient to meet the
minimum debt service coverage ratio requirements. The trustee of
the Industrial Revenue Bonds may give notice of default, at
which time the Company could remedy the default by depositing
with the trustee an amount currently estimated at approximately
$0.4 million. In the event a default is declared and not
cured, the properties would be subject to foreclosure and the
Company would be obligated pursuant to a partial guaranty of
approximately $1.4 million. In addition, the Company could
be obligated to pay our franchisor liquidated damages in the
amount of $1.3 million. Total revenues for these two hotels
for the years ended December 31, 2003 and the comparative
periods were as follows:

|                                                            |  |                |       | 
|----------------------------------------------------------- |  | -------------- | ----- | 
|                                                            |  | (In thousands)
|Predecessor year ended December 31, 2001                    |  | $              | 9,148 | 
|Predecessor period January 1, 2002 to
    November 22, 2002 |  |                | 6,486 | 
|Successor period November 23, 2002 to
    December 31, 2002 |  |                | 684   | 
|Successor year ended December 31, 2003                      |  |                | 8,003 | 

On September 30, 2003, first mortgage debt
of approximately $7.0 million of Macon Hotel Associates,
L.L.C. (MHA) became due. MHA was not included in the
entities that filed for reorganization under Chapter 11.
The Company owns 60% of MHA, and MHAs sole asset is the
Crowne Plaza Hotel in Macon, Georgia. The lender agreed to
extend the term of the debt to December 31, 2003 and then
to June 30, 2004, while the Company explores alternative
financing opportunities. The Company has escrowed foreclosure
documents that will allow the lender to foreclose on the
property on June 30, 2004 if the mortgage debt is not

F-34



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

repaid at that time. If the Company is not able
to refinance the debt and the lender does not grant further
extensions, the property would be subject to foreclosure. A
foreclosure on the property would constitute a default of the
franchise agreement; therefore the Company could be liable for
$0.9 million in liquidation damages under the franchise
agreement. Total revenues for the Crowne Plaza Hotel in Macon,
Georgia for the year ended December 31, 2003 and the
comparative periods were as follows:

|                                                            |  |                |       | 
|----------------------------------------------------------- |  | -------------- | ----- | 
|                                                            |  | (In thousands)
|Predecessor year ended December 31, 2001                    |  | $              | 5,973 | 
|Predecessor period January 1, 2002 to
    November 22, 2002 |  |                | 5,507 | 
|Successor period November 23, 2002 to
    December 31, 2002 |  |                | 437   | 
|Successor year ended December 31, 2003                      |  |                | 5,595 | 

The debt of approximately $7.0 million is
included in the current portion of long-term debt in the
accompanying consolidated balance sheet.

On May 20, 2001, promissory notes of
approximately $3.9 million secured by the pledge of 100% of
the equity interests of MHA were due. MHA did not make this
payment on May 20, 2001. On April 19, 2002, MHA and
the lenders entered into a Satisfaction and Release Agreement
whereby the lenders agreed to fully discharge the indebtedness
under the promissory note of $3.9 million plus related
accrued interest approximating $0.7 million in exchange for
payment by MHA of $0.2 million. The resulting gain on
extinguishment of this indebtedness of $4.4 million was
recorded in the financial statements for the year ended
December 31, 2001, within interest income and other on the
consolidated statement of operations.



| |                                        
| | ---------------------------------------
| | Working Capital/ Related Party
    Loan

On September 18, 2003, the Company drew down
the full availability of $2.0 million under a revolving loan
agreement with OCM Real Estate Opportunities Fund II, L.P.
(OCM Fund II). Borrowings under the facility
bear interest at the fixed rate of 10% per annum and were repaid
in full in December 2003 out of the proceeds received from the
sale of an office building. During 2003, the Company paid
interest to OCM Fund II of approximately $42,000. The
facility is secured by two land parcels located in California
and New Jersey and matures on May 1, 2004.

Oaktree Capital Management, LLC
(Oaktree) may be deemed to be the beneficial owner
of 1,664,752 shares of the Companys common stock,
including 1,578,611 shares owned by OCM Fund II. Oaktree is
the general partner of the OCM Fund II; accordingly,
Oaktree may be deemed to beneficially own the shares owned by
OCM Fund II. Oaktree disclaims any such beneficial
ownership.

Russel S. Bernard, a Principal of Oaktree, and
Sean F. Armstrong, a Managing Director of Oaktree, are also
directors of Lodgian.



| |                           
| | --------------------------
| | Loan/ Franchise agreements

The Company is subject to certain property
maintenance and quality standard compliance requirements under
its franchise agreements. The Company periodically receives
notifications from its franchisors of events of non-compliance
with such agreements. In the past, management has cured most
cases of non-compliance within the applicable cure periods and
the events of non-compliance did not result in events of default
under the respective loan agreements. However, in selected
situations and based on economic evaluations, management may
elect to not comply with the franchisor requirements. In such
situations, the Company will either select an alternative
franchisor or operate the property independent of any franchisor
(see Note 18).

F-35



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

12.     12.25%
Cumulative Preferred Shares Subject to Mandatory
Redemption

On November 25, 2002, we issued 5,000,000
shares of Preferred Stock (Preferred Stock) with a
par value of $0.01 at $25.00 per share. Each share of
Preferred Stock has a liquidation preference over our common
stock. The dividend is cumulative, compounded annually and is
payable at the rate of 12.25% per annum on November 21 of
each year. As provided by the terms of the Preferred Stock, the
first dividend was paid on November 21, 2003 by means of
the issuance of additional shares of Preferred Stock, with
fractional shares paid in cash. We thus issued 594,299 shares of
Preferred Stock as dividends and paid cash dividends of
approximately $18,500 for fractional shares. Preferred shares
outstanding as of December 31, 2003 were 5,611,760. Changes
in fair value of Lodgians common stock do not affect the
settlement costs of the Preferred Stock. We expect to issue an
additional 17,461 shares of Preferred Stock as dividends to
those general unsecured creditors who have not yet received
their shares of Preferred Stock. If any Preferred Stock is then
outstanding, the board of directors will determine whether the
dividends due November 21, 2004 and 2005 will be paid in
cash or in kind via the issuance of additional shares of
Preferred Stock. The Preferred Stock is subject to redemption at
any time, at our option and to mandatory redemption on
November 21, 2012. If we redeem the Preferred Stock prior
to November 21, 2004, the redemption price will be 104% of
the liquidation value per share of the Preferred Stock. The
liquidation value will be $25.00 per share plus accrued
dividends. The redemption price is reduced by 1% for each
succeeding twelve-month period through November 20, 2007,
after which the Preferred Stock is redeemable for the
liquidation value. See Note 4.

On July 1, 2003, in accordance with SFAS
No. 150, the Company reclassified the Preferred Stock to
the liability section of its consolidated balance sheet and
began presenting the related dividends in interest expense which
totaled $8.1 million for the period July 1, 2003 to
December 31, 2003. Prior to the adoption of SFAS
No. 150, the Company presented the Preferred Stock between
liabilities and equity in its consolidated balance sheet (called
the mezzanine section) and reported the Preferred
Stock dividend as a deduction from retained earnings with no
effect on its results of operations. In accordance with SFAS
No. 150, the Preferred Stock and the dividends for the
period prior to July 1, 2003, have not been reclassified.

13.     Stockholders
Equity

Pursuant to the Joint Plan of Reorganization, in
addition to the Preferred Stock, the following securities became
available for issuance in November 2002:



| |   |                                                 
| | - | ------------------------------------------------
| |  | Common stock, 7,000,000 shares, par value $0.01.
|
| |  | Class A and B warrants                          

The common stock is subject to dilution by the
Class A & Class B warrants, any incentive shares
and any future shares (See Note 4).

The Class A warrants initially provide for
the purchase of an aggregate of 1,510,638 shares of the common
stock at an exercise price of $18.29 per share and expire on
November 25, 2007.

The Class B warrants initially provide for
the purchase of an aggregate of 1,029,366 shares of the common
stock at an exercise price of $25.44 per share and expire on
November 25, 2009. See Note 2 for stock based
compensation awards made during the year ended December 31,
2003.

14.     Derivative
Transactions

In order to manage its exposure to fluctuations
in interest rates on its variable rate debt, the Company entered
into three interest rate cap agreements as follows:



| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Two related to the exit financing obtained from
    Merrill Lynch Mortgage ($299.3 million and
    $302.7 million at December 31, 2003 and
    December 31, 2002, respectively), and

F-36



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | One related to the financing obtained from Lehman
    ($76.4 million at December 31, 2003).

The two interest rate cap agreements related to
the Merrill Lynch Mortgage financing allowed the Company to
obtain exit financing at floating rates and effectively cap
those rates at LIBOR of 6.44% plus 2.36%, in the case of the
senior debt, and LIBOR plus 8.25%, in the case of the mezzanine
debt. When LIBOR exceeds 6.44%, the contracts require settlement
of net interest receivable at specified intervals, which
generally coincide with the dates on which interest is payable
on the underlying debt. When LIBOR is below 6.44%, there is no
settlement from the interest rate caps. The Company is exposed
to interest rate risks on the exit financing debt for increases
in LIBOR up to 6.44%. The one-month LIBOR as of
December 31, 2003 was 1.13%. The notional principal amount
of the interest rate caps outstanding was $302.2 million
and $302.8 million at December 31, 2003 and
December 31, 2002, respectively.

The interest rate cap agreement related to the
Lehman financing allowed the Company to obtain financing at a
partial floating rate and effectively caps the interest rate at
LIBOR of 5.00% plus 5.25%. When LIBOR exceeds 5%, the contracts
require settlement of net interest receivable at specified
intervals, which generally coincide with the dates on which
interest is payable on the underlying debt. When LIBOR is below
5.00%, there is no settlement from the interest rate cap. The
Company is exposed to interest rate risks on the Lehman
Financing for LIBOR of between 2% and 5%. The notional principal
amount of the interest rate cap outstanding was $80 million
at December 31, 2003.

These derivative financial instruments are viewed
as risk management tools and are entered into for hedging
purposes only. The Company does not use derivative financial
instruments for trading or speculative purposes. However, the
Company has not elected to follow the hedging requirements of
SFAS No. 133.

The aggregate fair value of the three interest
rate caps as of December 31, 2003 and the two interest rate
caps at December 31, 2002 were approximately $15,000 and
$100,000, respectively. The fair values of the interest rate
caps are recognized in the accompanying balance sheet in other
assets. Adjustments to the carrying values of the interest rate
caps are reflected in interest expense.

The notional amounts of the two interest rate
caps and their termination dates match the principal amounts and
maturities of the outstanding amounts on these loans.

15.     INCOME
TAXES

Provision (benefit) for income taxes for the
Company is as follows:

|                              |  |                         |     |                  |  |                    |   |            |  |          |     |       |  |         |        |          |  |       |   |  |  |   |        |   |  |   |       |  |  |   |   |  |  |   |       | 
|----------------------------- |  | ----------------------- | --- | ---------------- |  | ------------------ | - | ---------- |  | -------- | --- | ----- |  | ------- | ------ | -------- |  | ----- | - |  |  | - | ------ | - |  | - | ----- |  |  | - | - |  |  | - | ----- | 
|                              |  |                        
|                              |  | Year Ended December 31,
|                              |  |                        
|                              |  |                         |     |                  |  |                   
|                              |  | 2003  Successor        |     | 2002  See below |  | 2001  Predecessor
|                              |  |                         |     |                  |  |                   
|                              |  | Current                 |     | Deferred         |  | Total              |   | Current(1) |  | Deferred |     | Total |  | Current |        | Deferred |  | Total
|                              |  |                         |     |                  |  |                    |   |            |  |          |     |       |  |         |        |          |  |      
|                              |  |                        
|                              |  | ($ in thousands)       
|Federal                       |  | $                       |    |                  |  | $                  |  |            |  | $        |    |       |  | $       | (430   | )        |  | $     |  |  |  | $ | (430   | ) |  | $ |      |  |  | $ |  |  |  | $ |      | 
|State and local               |  |                         | 178 |                  |  |                    |  |            |  |          | 178 |       |  |         | (898   | )        |  |       |  |  |  |   | (898   | ) |  |   | 2,829 |  |  |   |  |  |  |   | 2,829 | 
|                              |  |                         |     |                  |  |                    |   |            |  |          |     |       |  |         |        |          |  |       |   |  |  |   |        |   |  |   |       |  |  |   |   |  |  |   |       | 
|                              |  |                         | 178 |                  |  |                    |  |            |  |          | 178 |       |  |         | (1,328 | )        |  |       |  |  |  |   | (1,328 | ) |  |   | 2,829 |  |  |   |  |  |  |   | 2,829 | 
|Less: Discontinued operations |  |                         |    |                  |  |                    |  |            |  |          |    |       |  |         | 1,200  |          |  |       |  |  |  |   | 1,200  |   |  |   |      |  |  |   |  |  |  |   |      | 
|                              |  |                         |     |                  |  |                    |   |            |  |          |     |       |  |         |        |          |  |       |   |  |  |   |        |   |  |   |       |  |  |   |   |  |  |   |       | 
|                              |  | $                       | 178 |                  |  | $                  |  |            |  | $        | 178 |       |  | $       | (128   | )        |  | $     |  |  |  | $ | (128   | ) |  | $ | 2,829 |  |  | $ |  |  |  | $ | 2,829 | 
|                              |  |                         |     |                  |  |                    |   |            |  |          |     |       |  |         |        |          |  |       |   |  |  |   |        |   |  |   |       |  |  |   |   |  |  |   |       | 



---



|    |                                             
|--- | --------------------------------------------
|(1) | This is comprised of (amounts in thousands):

F-37



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                        |  |                   |    |                   |  |   |        |  
|----------------------- |  | ----------------- | -- | ----------------- |  | - | ------ | -
|                        |  | Successor         |    | Predecessor      
|                        |  |                   |    |                  
|                        |  | November 23, to   |    | January 1, to    
|                        |  | December 31, 2002 |    | November 22, 2002
|                        |  |                   |    |                  
|Federal                 |  | $                 |   |                   |  | $ | (430   | )
|State and local         |  |                   | 32 |                   |  |   | (930   | )
|                        |  |                   |    |                   |  |   |        |  
|                        |  |                   | 32 |                   |  |   | (1,360 | )
|Less:                   |  |                   |    |                   |  |   |        |  
|Discontinued operations |  |                   |   |                   |  |   | 1,200  |  
|                        |  |                   |    |                   |  |   |        |  
|                        |  | $                 | 32 |                   |  | $ | (160   | )
|                        |  |                   |    |                   |  |   |        |  

The components of the cumulative effect of
temporary differences in the deferred income tax
(liability) and asset balances at December 31, 2003
and 2002 are as follows:

|                                         |                          |                  |         |          |   |             |       |        |   |         |         |             |   |   |        |          |   |   |        |        |   |   |        |          |  
|---------------------------------------- | ------------------------ | ---------------- | ------- | -------- | - | ----------- | ----- | ------ | - | ------- | ------- | ----------- | - | - | ------ | -------- | - | - | ------ | ------ | - | - | ------ | -------- | -
|                                         |                          |                  |         |         
|                                         |                          | 2003             |         | 2002    
|                                         |                          |                  |         |         
|                                         |                          | Total            |         | Current  |   | Non-current |       | Total  |   | Current |         | Non-current
|                                         |                          |                  |         |          |   |             |       |        |   |         |         |            
|                                         |                          |                 
|                                         |                          | ($ in thousands)
|Property and equipment                   |                          | $                | 21,807  |          |   | $           |      |        |   | $       | 21,807  |             |   | $ | 40,609 |          |   | $ |       |        |   | $ | 40,609 |         
|Net operating loss carry forwards        |                          |                  | 104,911 |          |   |             |       |        |   |         | 104,911 |             |   |   | 79,909 |          |   |   |       |        |   |   | 79,909 |         
|Loan costs                               |                          |                  | 1,224   |          |   |             |       |        |   |         | 1,224   |             |   |   |       |          |   |   |       |        |   |   |       |         
|Legal and workers compensation reserves |                          |                  | 2,896   |          |   |             | 2,896 |        |   |         |         |             |   |   | 2,918  |          |   |   | 2,918  |        |   |   |       |         
|AMT and FICA credit carry forwards       |                          |                  | 2,342   |          |   |             |       |        |   |         | 2,342   |             |   |   | 2,092  |          |   |   |       |        |   |   | 2,092  |         
|Other operating accruals                 |                          |                  | 1,506   |          |   |             | 1,506 |        |   |         |        |             |   |   | 2,301  |          |   |   | 2,301  |        |   |   |       |         
|COD reduction in other asset basis       |                          |                  |        |          |   |             |      |        |   |         |        |             |   |   | (7,362 | )        |   |   | (7,362 | )      |   |   |       |         
|Other                                    |                          |                  | 5,316   |          |   |             |       |        |   |         | 5,316   |             |   |   | 7,157  |          |   |   | 7,157  |        |   |   |       |         
|                                         |                          |                  |         |          |   |             |       |        |   |         |         |             |   |   |        |          |   |   |        |        |   |   |        |         
|                                         | Total                    |                  |         | 140,002  |   |             |       | 4,402  |   |         |         | 135,600     |   |   |        | 127,624  |   |   |        | 5,014  |   |   |        | 122,610  |  
|                                         | Less valuation allowance |                  |         | (140,002 | ) |             |       | (4,402 | ) |         |         | (135,600    | ) |   |        | (127,624 | ) |   |        | (5,014 | ) |   |        | (122,610 | )
|                                         |                          |                  |         |          |   |             |       |        |   |         |         |             |   |   |        |          |   |   |        |        |   |   |        |         
|                                         |                          | $                |        |          |   | $           |      |        |   | $       |        |             |   | $ |       |          |   | $ |       |        |   | $ |       |         
|                                         |                          |                  |         |          |   |             |       |        |   |         |         |             |   |   |        |          |   |   |        |        |   |   |        |         

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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The difference between income taxes using the
effective income tax rate and the federal income tax statutory
rate of 34% is as follows:

|                                                                     |  |                  |         |                   |  |                   |        |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------- |  | ---------------- | ------- | ----------------- |  | ----------------- | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                     |  |                  |         |                  
|                                                                     |  | Successor        |         | Predecessor      
|                                                                     |  |                  |         |                  
|                                                                     |  |                  |         | November 23 to    |  | January 1 to      |        |     
|                                                                     |  | 2003             |         | December 31, 2002 |  | November 22, 2002 |        | 2001
|                                                                     |  |                  |         |                   |  |                   |        |     
|                                                                     |  |                 
|                                                                     |  | ($ in thousands)
|Federal income tax provision (benefit) at
    statutory federal rate |  | $                | (13,292 | )                 |  | $                 | (3,160 | )    |  | $ | 3,742   |   |  | $ | (47,578 | )
|State income tax (benefit), net                                      |  |                  | (1,876  | )                 |  |                   | (732   | )    |  |   | (12,929 | ) |  |   | (6,717  | )
|Effect of cancellation of debt                                       |  |                  |        |                   |  |                   |       |      |  |   | (40,848 | ) |  |   |        |  
|Non-deductible items                                                 |  |                  | 2,968   |                   |  |                   | (74    | )    |  |   | (1,932  | ) |  |   | 177     |  
|Change in valuation allowance                                        |  |                  | 12,378  |                   |  |                   | 3,998  |      |  |   | 50,607  |   |  |   | 56,947  |  
|                                                                     |  |                  |         |                   |  |                   |        |      |  |   |         |   |  |   |         |  
|                                                                     |  |                  | 178     |                   |  |                   | 32     |      |  |   | (1,360  | ) |  |   | 2,829   |  
|Less discontinued operations                                         |  |                  |        |                   |  |                   |       |      |  |   | 1,200   |   |  |   |        |  
|                                                                     |  |                  |         |                   |  |                   |        |      |  |   |         |   |  |   |         |  
|                                                                     |  | $                | 178     |                   |  | $                 | 32     |      |  | $ | (160    | ) |  | $ | 2,289   |  
|                                                                     |  |                  |         |                   |  |                   |        |      |  |   |         |   |  |   |         |  

At December 31, 2003, the Company had
established a valuation allowance of $140.0 million to
fully offset its net deferred tax asset. As a result of the
Companys history of losses, the Company believed that it
was more likely than not that its net deferred tax asset would
not be realized and, therefore, provided a valuation allowance
to fully reserve against these amounts. Of this
$140.0 million, $12.4 million and $54.6 million
was generated in 2003 and 2002, respectively.

At December 31, 2003, the Company had
available net operating loss carry forwards of approximately
$270 million for federal income tax purposes, which will
expire in 2004 through 2023. Under the Joint Plan of
Reorganization and the Impac Plan of Reorganization, substantial
amounts of net operating loss carryforwards were utilized to
offset income from debt cancellations in 2002. Also, the
Companys reorganization under Chapter 11, resulted in
an ownership change, as defined in Section 382 of the
Internal Revenue Code. Consequently, the Companys ability
to use the net operating loss carryforwards to offset future
income is subject to certain limitations. Due to these and other
limitations, a portion or all of these net operating loss
carryforwards could expire unused.

16.     Related Party
Transactions

Richard Cartoon, the Companys Executive
Vice President and Chief Financial Officer between
October 4, 2001 and October 13, 2003, is a principal
in a business that the Company retained in October 2001 to
provide Richard Cartoons services as Chief Financial
Officer and other restructuring support and services. In
addition to amounts paid for Richard Cartoons services as
Executive Vice President and Chief Financial Officer, the
Company was billed as follows, for other support and services
provided by associates of Richard Cartoon, LLC:

|                                                            |  |                |     | 
|----------------------------------------------------------- |  | -------------- | --- | 
|                                                            |  | (In thousands)
|Predecessor year ended December 31, 2001                    |  | $              | 90  | 
|Predecessor period January 1, 2002 to
    November 22, 2002 |  |                | 357 | 
|Successor period November 23, 2002 to
    December 31, 2002 |  |                | 22  | 
|Successor year ended December 31, 2003                      |  |                | 225 | 

Richard Cartoon, LLC continues to provide
restructuring and other support to the Company.

See Note 11 regarding the $2.0 million
revolving loan from OCM Fund II to the Company.

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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

17.     Earnings Per
Share

The following table sets forth the computation of
basic and diluted earnings per common share:

|                                         |                                                                                                          |                                         |   |                      |   |                    |   |         |   |  |   |        |   |  |   |          |  
|---------------------------------------- | -------------------------------------------------------------------------------------------------------- | --------------------------------------- | - | -------------------- | - | ------------------ | - | ------- | - |  | - | ------ | - |  | - | -------- | -
|                                         |                                                                                                          |                                         |   |                     
|                                         |                                                                                                          | Successor                               |   | Predecessor         
|                                         |                                                                                                          |                                         |   |                     
|                                         |                                                                                                          |                                         |   | November 23, 2002 to |   | January 1, 2002 to |   |        
|                                         |                                                                                                          | 2003                                    |   | December 31, 2002    |   | November 2002      |   | 2001   
|                                         |                                                                                                          |                                         |   |                      |   |                    |   |        
|                                         |                                                                                                          |                                        
|                                         |                                                                                                          | ($ in thousands, except per share data)
|Basic and diluted loss per share:        |                                                                                                          |                                         |   |                      |   |                    |   |         |   |  |   |        |   |  |   |         
|Numerator:                               |                                                                                                          |                                         |   |                      |   |                    |   |         |   |  |   |        |   |  |   |         
|                                         | (Loss) income  continuing operations                                                                    |                                         | $ | (27,074              | ) |                    | $ | (6,745  | ) |  | $ | 16,999 |   |  | $ | (87,537  | )
|                                         | Loss from discontinued operations, net of taxes                                                          |                                         |   | (4,603               | ) |                    |   | (2,581  | ) |  |   | (4,633 | ) |  |   | (55,227  | )
|                                         |                                                                                                          |                                         |   |                      |   |                    |   |         |   |  |   |        |   |  |   |         
|                                         | Net (loss) income                                                                                        |                                         |   | (31,677              | ) |                    |   | (9,326  | ) |  |   | 12,366 |   |  |   | (142,764 | )
|                                         | Preferred stock dividend                                                                                 |                                         |   | (7,594               | ) |                    |   | (1,510  | ) |  |   |       |   |  |   |         |  
|                                         |                                                                                                          |                                         |   |                      |   |                    |   |         |   |  |   |        |   |  |   |         
|                                         | Net (loss) income attributable to common
    stock                                                       |                                         |   | (39,271              | ) |                    |   | (10,836 | ) |  |   | 12,366 |   |  |   | (142,764 | )
|                                         |                                                                                                          |                                         |   |                      |   |                    |   |         |   |  |   |        |   |  |   |         
|                                         | (Loss) income  continuing operations                                                                    |                                         |   | (27,074              | ) |                    |   | (6,745  | ) |  |   | 16,999 |   |  |   | (87,537  | )
|                                         | Preferred stock dividend                                                                                 |                                         |   | (7,594               | ) |                    |   | (1,510  | ) |  |   |       |   |  |   |         |  
|                                         |                                                                                                          |                                         |   |                      |   |                    |   |         |   |  |   |        |   |  |   |         
|                                         | (Loss) income from continuing operations
    attributable to common stock before discontinued operations |                                         | $ | (34,668              | ) |                    | $ | (8,255  | ) |  | $ | 16,999 |   |  | $ | (87,537  | )
|                                         |                                                                                                          |                                         |   |                      |   |                    |   |         |   |  |   |        |   |  |   |         
|Denominator:                             |                                                                                                          |                                         |   |                      |   |                    |   |         |   |  |   |        |   |  |   |         
|                                         | Denominator for basic and diluted loss per
    share  weighted-average shares                           |                                         |   | 7,000                |   |                    |   | 7,000   |   |  |   | 28,480 |   |  |   | 28,350   |  
|                                         |                                                                                                          |                                         |   |                      |   |                    |   |         |   |  |   |        |   |  |   |         
|Basic and diluted loss per common share: |                                                                                                          |                                         |   |                      |   |                    |   |         |   |  |   |        |   |  |   |         
|                                         | (Loss) income  continuing operations                                                                    |                                         | $ | (3.87                | ) |                    | $ | (0.96   | ) |  | $ | 0.60   |   |  | $ | (3.09    | )
|                                         | Loss from discontinued operations, net of taxes                                                          |                                         |   | (0.66                | ) |                    |   | (0.37   | ) |  |   | (0.17  | ) |  |   | (1.95    | )
|                                         |                                                                                                          |                                         |   |                      |   |                    |   |         |   |  |   |        |   |  |   |         
|                                         | Net (loss) income                                                                                        |                                         |   | (4.53                | ) |                    |   | (1.33   | ) |  |   | 0.43   |   |  |   | (5.04    | )
|                                         |                                                                                                          |                                         |   |                      |   |                    |   |         |   |  |   |        |   |  |   |         
|                                         | Net (loss) income attributable to common
    stock                                                       |                                         |   | (5.61                | ) |                    |   | (1.55   | ) |  |   | 0.43   |   |  |   | (5.04    | )
|                                         |                                                                                                          |                                         |   |                      |   |                    |   |         |   |  |   |        |   |  |   |         
|                                         | (Loss) income from continuing operations
    attributable to common stock before discontinued operations |                                         | $ | (4.95                | ) |                    | $ | (1.18   | ) |  | $ | 0.60   |   |  | $ | (3.09    | )
|                                         |                                                                                                          |                                         |   |                      |   |                    |   |         |   |  |   |        |   |  |   |         

F-40



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The computation of diluted loss per share for the
Successor year ended December 31, 2003, as calculated
above, did not include the shares associated with the assumed
conversion of the restricted stock (200,000 shares), stock
options (options to acquire 472,726 shares of common
stock), and Class A and Class B warrants (rights to
acquire 1,510,638 and 1,029,366 shares of common stock,
respectively) because their inclusion would have been
antidilutive.

The computation of diluted loss per share for the
Successor period November 23, 2002 to December 31,
2002, as calculated above, did not include the shares associated
with the assumed conversion of the Class A and Class B
warrants (rights to acquire 1,510,638 and 1,029,366 shares
of common stock, respectively) because their inclusion would
have been antidilutive.

The computation of diluted loss per share for the
Predecessor periods January 1, 2002 to November 22,
2002, and year ended December 31, 2001, as calculated
above, did not include shares associated with the assumed
conversion of the CRESTS (8,169,935 shares) or stock
options because their inclusion would also have been
antidilutive.

18.     Commitments
and Contingencies

Fourteen of the Companys hotels are subject
to long-term ground leases, parking and other leases expiring
from 2004 through 2075 which provide for minimum payments as
well as incentive rent payments. In addition, most of the
Companys hotels have non-cancellable operating leases,
mainly for operating equipment. Lease expense for the
non-cancellable ground, parking and other leases were as follows:

|                                                            |  |                |       |              |  |            |     |  |  |   |       | 
|----------------------------------------------------------- |  | -------------- | ----- | ------------ |  | ---------- | --- |  |  | - | ----- | 
|                                                            |  | Continuing     |       | Discontinued |  | Total     
|                                                            |  | Operations     |       | Operations   |  | Operations
|                                                            |  |                |       |              |  |           
|                                                            |  |               
|                                                            |  | (In thousands)
|Predecessor year ended December 31, 2001                    |  | $              | 3,609 |              |  | $          | 743 |  |  | $ | 4,352 | 
|Predecessor period January 1, 2002 to
    November 22, 2002 |  |                | 3,079 |              |  |            | 618 |  |  |   | 3,697 | 
|Successor period November 23, 2002 to
    December 31, 2002 |  |                | 378   |              |  |            | 124 |  |  |   | 502   | 
|Successor year ended December 31, 2003                      |  |                | 4,002 |              |  |            | 696 |  |  |   | 4,698 | 

At December 31, 2003, the future minimum
commitments for non-cancellable ground and parking leases were
as follows (amounts in thousands):

|     |            |   |         |        | 
|---- | ---------- | - | ------- | ------ | 
|2004 |            | $ | 3,320   |       
|2005 |            |   | 3,339   |       
|2006 |            |   | 3,355   |       
|2007 |            |   | 3,361   |       
|2008 |            |   | 3,398   |       
|     | Thereafter |   |         | 98,012 | 
|     |            |   |         |       
|     |            | $ | 114,785 |       
|     |            |   |         |       

The Company has entered into franchise agreements
with various hotel chains which require annual payments for
license fees, reservation services and advertising fees. The
license agreements generally have original terms of between 10
and 20 years. The franchisors may require the Company to
upgrade its facilities at any time to comply with its then
current standards. Upon the expiration of the term of a
franchise, the Company may apply for a franchise renewal. In
connection with the renewal of a franchise, the franchisor may
require payment of a renewal fee, increase license, reservation
and advertising fees, as well as substantial

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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

renovation of the facility. Costs incurred in
connection with these agreements for the year ended
December 31, 2003 and the comparative periods were:

|                                                            |  |                  |        |              |  |            |       |  |  |   |        | 
|----------------------------------------------------------- |  | ---------------- | ------ | ------------ |  | ---------- | ----- |  |  | - | ------ | 
|                                                            |  | Continuing       |        | Discontinued |  | Total     
|                                                            |  | operations       |        | operations   |  | operations
|                                                            |  |                  |        |              |  |           
|                                                            |  |                 
|                                                            |  | ($ in thousands)
|Predecessor year ended December 31, 2001                    |  | $                | 22,531 |              |  | $          | 6,053 |  |  | $ | 28,584 | 
|Predecessor period January 1, 2002 to
    November 22, 2002 |  |                  | 19,398 |              |  |            | 4,926 |  |  |   | 24,324 | 
|Successor period November 23, 2002 to
    December 31, 2002 |  |                  | 1,598  |              |  |            | 377   |  |  |   | 1,975  | 
|Successor year ended December 31, 2003                      |  |                  | 20,569 |              |  |            | 3,816 |  |  |   | 24,385 | 

As of March 1, 2004, the Company had been
notified that it was not in compliance with some of the terms of
ten of its franchise agreements and had received default and
termination notices from franchisors with respect to an
additional five hotels.

In addition, as part of its bankruptcy
reorganization proceedings, the Company entered into
stipulations with each of its major franchisors setting forth a
timeline for completion of capital expenditures for some of its
hotels. The Company has not completed the required capital
expenditures for 35 hotels in accordance with the
stipulations and estimates that completing those improvements
will cost $26.1 million. Under the stipulations, the
applicable franchisors could therefore seek to declare certain
franchise agreements in default and, in certain circumstances,
seek to terminate the franchise agreement.

With the exception of one hotel held for sale,
the Company believes that it will cure the noncompliance and
defaults on these hotels before the applicable termination
dates. If a franchise agreement is terminated, The Company
generally will either select an alternative franchisor or
operate the hotel independently of any franchisor. However,
terminating or changing the franchise affiliation of a hotel
could require the Company to incur significant expenses,
including liquidated damages, and capital expenditures.

The franchise agreements are subject to
termination in the event of a default, including the failure to
operate the hotel in accordance with the quality standards and
specification of the licensors. The Company believes that the
loss of a franchise for any individual hotel would not have a
material adverse effect on its financial condition and results
of operations.

The Company has maintenance agreements, primarily
on a one to three year basis, which resulted in the following
expenses:

|                                                            |  |                  |       |              |  |            |       |  |  |   |       | 
|----------------------------------------------------------- |  | ---------------- | ----- | ------------ |  | ---------- | ----- |  |  | - | ----- | 
|                                                            |  | Continuing       |       | Discontinued |  | Total     
|                                                            |  | operations       |       | operations   |  | operations
|                                                            |  |                  |       |              |  |           
|                                                            |  |                 
|                                                            |  | ($ in thousands)
|Predecessor year ended December 31, 2001                    |  | $                | 3,260 |              |  | $          | 1,249 |  |  | $ | 4,509 | 
|Predecessor period January 1, 2002 to
    November 22, 2002 |  |                  | 2,130 |              |  |            | 874   |  |  |   | 3,004 | 
|Successor period November 23, 2002 to
    December 31, 2002 |  |                  | 221   |              |  |            | 96    |  |  |   | 317   | 
|Successor year ended December 31, 2003                      |  |                  | 3,690 |              |  |            | 932   |  |  |   | 4,622 | 

As of December 31, 2003, the Company had
issued two irrevocable letters of credit totaling
$3.6 million as guarantees to Zurich American Insurance
Company and Donlen Fleet Management Services. These letters of
credit will expire in November 2004 but may require renewal
beyond that date. All letters of credit are backed by the
Companys cash (classified as restricted cash in the
accompanying Consolidated Balance Sheet).

The Company is self-insured up to certain limits
with respect to employee medical, employee dental, property
insurance, general liability insurance, personal injury claims,
workers compensation and auto liability. The Company
establishes liabilities for these self-insured obligations
annually, based on actuarial valuations and its history of
claims. If these claims escalate beyond the Companys
expectations, this could

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LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

cause a negative impact on its future financial
condition and results of operations. As of December 31,
2003 and December 31, 2002, the Company had accrued
approximately $10.0 million and $9.1 million for these
liabilities.

The Company is party to legal proceedings arising
in the ordinary course of business. The outcome of these matters
is uncertain. However, management believes that these matters
will be resolved without a material adverse effect on the
Companys financial position or results of operations.
Certain of these claims are limited to the amounts available
under the Companys disputed claims reserve.

19.     Employee
Retirement Plans

The Company makes contributions to several
multi-employer pension plans for employees of various
subsidiaries covered by collective bargaining agreements. These
plans are not administered by the Company and contributions are
determined in accordance with provisions of negotiated labor
contracts. Certain withdrawal penalties may exist, the amount of
which are not determinable at this time. The cost of pension
contributions (for unionized and one group of non-union
employees) were:

|                                                            |  |                  |     |              |  |            |   |  |  |   |     | 
|----------------------------------------------------------- |  | ---------------- | --- | ------------ |  | ---------- | - |  |  | - | --- | 
|                                                            |  | Continuing       |     | Discontinued |  | Total     
|                                                            |  | Operations       |     | Operations   |  | Operations
|                                                            |  |                  |     |              |  |           
|                                                            |  |                 
|                                                            |  | ($ in thousands)
|Predecessor year ended December 31, 2001                    |  | $                | 269 |              |  | $          |  |  |  | $ | 269 | 
|Predecessor period January 1, 2002 to
    November 22, 2002 |  |                  | 185 |              |  |            |  |  |  |   | 185 | 
|Successor period November 23, 2002 to
    December 31, 2002 |  |                  | 27  |              |  |            |  |  |  |   | 27  | 
|Successor year ended December 31, 2003                      |  |                  | 260 |              |  |            |  |  |  |   | 260 | 

The Company adopted a 401(k) plan for the benefit
of its non-union and one group of union employees under which
participating employees may elect to contribute up to 10%
(increased to 15% as of January 1, 2003) of their
compensation. The Company matches an employees elective
contributions to the 401(k) plan, subject to certain conditions.
These employer contributions vest immediately. Contributions to
the 401(K) plan made by the Company were:

|                                                            |  |                  |     |              |  |            |    |  |  |   |     | 
|----------------------------------------------------------- |  | ---------------- | --- | ------------ |  | ---------- | -- |  |  | - | --- | 
|                                                            |  | Continuing       |     | Discontinued |  | Total     
|                                                            |  | Operations       |     | Operations   |  | Operations
|                                                            |  |                  |     |              |  |           
|                                                            |  |                 
|                                                            |  | ($ in thousands)
|Predecessor year ended December 31, 2001                    |  | $                | 410 |              |  | $          |   |  |  | $ | 410 | 
|Predecessor period January 1, 2002 to
    November 22, 2002 |  |                  | 254 |              |  |            | 76 |  |  |   | 330 | 
|Successor period November 23, 2002 to
    December 31, 2002 |  |                  | 35  |              |  |            | 10 |  |  |   | 45  | 
|Successor year ended December 31, 2003                      |  |                  | 601 |              |  |            | 76 |  |  |   | 677 | 

20.     Subsequent
Event

Of the 18 hotels which were held for sale at
December 31, 2003, four were sold between January 1,
2004 and March 1, 2004. Summarized below is certain
financial data related to these four hotels:

|                                                                           |  |                  |        | 
|-------------------------------------------------------------------------- |  | ---------------- | ------ | 
|                                                                           |  | ($ in thousands)
|Aggregate sales price                                                      |  | $                | 11,525 | 
|Carrying values of property, plant &
    equipment as of December 31, 2003 |  |                  | 7,325  | 
|Long-term debt as of December 31, 2003                                     |  |                  | 7,187  | 
|Total revenues for the year ended
    December 31, 2003                    |  |                  | 9,639  | 
|Total operating expenses for the year ended
    December 31, 2003          |  |                  | 9,571  | 

F-43



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

21.     Selected
Quarterly Financial Data, Unaudited

The following table summarizes unaudited
quarterly financial data (amounts have been restated, as
appropriate, to give effect to discontinued operations):

|                                                             |                                                              |                                         |         |         |   |         |        |         |   |   |        |       |   |   |         |       |  
|------------------------------------------------------------ | ------------------------------------------------------------ | --------------------------------------- | ------- | ------- | - | ------- | ------ | ------- | - | - | ------ | ----- | - | - | ------- | ----- | -
|                                                             |                                                              |                                        
|                                                             |                                                              | Successor                              
|                                                             |                                                              |                                        
|                                                             |                                                              | First                                   |         | Second  |   | Third   |        | Fourth 
|                                                             |                                                              | Quarter                                 |         | Quarter |   | Quarter |        | Quarter
|                                                             |                                                              |                                         |         |         |   |         |        |        
|                                                             |                                                              |                                        
|                                                             |                                                              | ($ in thousands, except per share data)
|Year Ended December 31, 2003:                                |                                                              |                                         |         |         |   |         |        |         |   |   |        |       |   |   |         |      
|Revenues  continuing operations                             |                                                              | $                                       | 73,292  |         |   | $       | 82,738 |         |   | $ | 81,699 |       |   | $ | 73,685  |      
|Operating expenses  continuing
    operations               |                                                              |                                         | 71,414  |         |   |         | 75,418 |         |   |   | 73,740 |       |   |   | 82,213  |      
|Loss  continuing operations                                 |                                                              |                                         | (5,521  | )       |   |         | (330   | )       |   |   | (3,597 | )     |   |   | (17,626 | )    
|(Loss) income from discontinued operations, net
    of taxes |                                                              |                                         | (3,563  | )       |   |         | (2,111 | )       |   |   | (49    | )     |   |   | 1,120   |      
|Net loss                                                     |                                                              |                                         | (9,084  | )       |   |         | (2,441 | )       |   |   | (3,646 | )     |   |   | (16,506 | )    
|Net loss attributable to common stock                        |                                                              |                                         | (12,860 | )       |   |         | (6,259 | )       |   |   | (3,646 | )     |   |   | (16,506 | )    
|Basic and diluted income (loss) per common
    share:        |                                                              |                                         |         |         |   |         |        |         |   |   |        |       |   |   |         |      
|                                                             | Loss  continuing operations                                 |                                         | $       | (0.79   | ) |         | $      | (0.05   | ) |   | $      | (0.51 | ) |   | $       | (2.52 | )
|                                                             | (Loss) income from discontinued operations, net
    of taxes |                                         |         | (0.51   | ) |         |        | (0.30   | ) |   |        | (0.01 | ) |   |         | 0.16  |  
|                                                             | Net loss                                                     |                                         |         | (1.30   | ) |         |        | (0.35   | ) |   |        | (0.52 | ) |   |         | (2.36 | )
|                                                             | Net loss attributable to common stock                        |                                         |         | (1.84   | ) |         |        | (0.89   | ) |   |        | (0.52 | ) |   |         | (2.36 | )

|                                                          |                                                              |                                         |         |           |   |         |        |                   |   |                   |        |       |   |   |        |      |  |   |         |       |  
|--------------------------------------------------------- | ------------------------------------------------------------ | --------------------------------------- | ------- | --------- | - | ------- | ------ | ----------------- | - | ----------------- | ------ | ----- | - | - | ------ | ---- |  | - | ------- | ----- | -
|                                                          |                                                              |                                         |         |          
|                                                          |                                                              | Predecessor                             |         | Successor
|                                                          |                                                              |                                         |         |          
|                                                          |                                                              | First                                   |         | Second    |   | Third   |        | October 1, to     |   | November 23 to   
|                                                          |                                                              | Quarter                                 |         | Quarter   |   | Quarter |        | November 22, 2002 |   | December 31, 2002
|                                                          |                                                              |                                         |         |           |   |         |        |                   |   |                  
|                                                          |                                                              |                                        
|                                                          |                                                              | ($ in thousands, except per share data)
|Year Ended December 31, 2002:                             |                                                              |                                         |         |           |   |         |        |                   |   |                   |        |       |   |   |        |      |  |   |         |      
|Revenues  continuing operations                          |                                                              | $                                       | 76,615  |           |   | $       | 89,532 |                   |   | $                 | 83,508 |       |   | $ | 49,612 |      |  | $ | 25,306  |      
|Operating expenses  continuing
    operations            |                                                              |                                         | 73,416  |           |   |         | 78,394 |                   |   |                   | 76,720 |       |   |   | 44,241 |      |  |   | 29,668  |      
|(Loss) income  continuing operations                     |                                                              |                                         | (10,569 | )         |   |         | 4,008  |                   |   |                   | (3,990 | )     |   |   | 27,550 |      |  |   | (6,745  | )    
|(Loss) income  discontinued
    operations, net of taxes |                                                              |                                         | (3,861  | )         |   |         | (545   | )                 |   |                   | (567   | )     |   |   | 340    |      |  |   | (2,581  | )    
|Net (loss) income                                         |                                                              |                                         | (14,430 | )         |   |         | 3,463  |                   |   |                   | (4,557 | )     |   |   | 27,890 |      |  |   | (9,326  | )    
|Net (loss) income attributable to common
    stock        |                                                              |                                         | (14,430 | )         |   |         | 3,463  |                   |   |                   | (4,557 | )     |   |   | 27,890 |      |  |   | (10,836 | )    
|Basic and diluted income (loss) per common
    share:     |                                                              |                                         |         |           |   |         |        |                   |   |                   |        |       |   |   |        |      |  |   |         |      
|                                                          | (Loss) income  continuing operations                        |                                         | $       | (0.37     | ) |         | $      | 0.14              |   |                   | $      | (0.14 | ) |   | $      | 0.97 |  |   | $       | (0.96 | )
|                                                          | (Loss) income from discontinued operations, net
    of taxes |                                         |         | (0.14     | ) |         |        | (0.02             | ) |                   |        | (0.02 | ) |   |        | 0.01 |  |   |         | (0.37 | )
|                                                          | Net (loss) income                                            |                                         |         | (0.51     | ) |         |        | 0.12              |   |                   |        | (0.16 | ) |   |        | 0.98 |  |   |         | (1.33 | )
|                                                          | Net (loss) income attributable to common
    stock           |                                         |         | (0.51     | ) |         |        | 0.12              |   |                   |        | (0.16 | ) |   |        | 0.98 |  |   |         | (1.55 | )

F-44



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##### Table of Contents






INDEX TO EXHIBITS

|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1          |  | Restated Certificate of Incorporation of Lodgian,
    Inc.                                                                                                                                                                                                                                                                                                                                                                                          
|        | 3  | .2          |  | Amendment to Restated Certificate of
    Incorporation of Lodgian, Inc.                                                                                                                                                                                                                                                                                                                                                                             
|        | 3  | .3          |  | Certificate of Designation for Preferred Stock of
    Lodgian, Inc.                                                                                                                                                                                                                                                                                                                                                                                 
|        | 3  | .4          |  | Amended Restated Bylaws of Lodgian, Inc.                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10 | .1.1        |  | Loan Agreement, dated as of January 31,
    1995, by and among Column Financial, Inc., Servico Fort Wayne,
    Inc., Washington Motel Enterprises, Inc., Servico Hotels I,
    Inc., Servico Hotels II, Inc., Servico Hotels III,
    Inc., Servico Hotels IV, Inc., New Orleans Airport Motels
    Associates, Ltd., Wilpen, Inc., Hilton Head Motels Enterprises,
    Inc. and Moon Airport Hotel Inc.                                            
|        | 10 | .1.2        |  | Promissory Note, in original amount of
    $60.5 million, dated as of January 31, 1995, by
    Servico Fort Wayne, Inc., Washington Motel Enterprises, Inc.,
    Servico Hotels I, Inc., Servico Hotels II, Inc.,
    Servico Hotels III, Inc., Servico Hotels IV, Inc., New
    Orleans Airport Motels Associates, Ltd., Wilpen, Inc., Hilton
    Head Motels Enterprises, Inc. and Moon Airport Hotel Inc., in
    favor of Column Financial, Inc.
|        | 10 | .2.1        |  | Loan and Security Agreement, dated as of
    November 25, 2002, by and between certain Lodgian
    subsidiaries and Merrill Lynch Mortgage Lending, Inc.                                                                                                                                                                                                                                                                                            
|        | 10 | .2.2        |  | Promissory Note in original amount of
    $224,036,325, dated as of November 25, 2002, between
    certain Lodgian subsidiaries and Merrill Lynch Mortgage Lending,
    Inc.                                                                                                                                                                                                                                                                        
|        | 10 | .2.3        |  | Modification of Loan Agreement and Other Loan
    Documents, dated as of March 31, 2003, by and between
    certain Lodgian subsidiaries and Merrill Lynch Mortgage Lending,
    Inc.                                                                                                                                                                                                                                                               
|        | 10 | .2.4        |  | Note Severance Agreement, dated as of
    March 31, 2003, between Merrill Lynch Mortgage Lending,
    Inc. and certain Lodgian, Inc. subsidiaries.                                                                                                                                                                                                                                                                                                  
|        | 10 | .2.5        |  | $218,217,000 Amended and Restated Promissory
    Note A, dated as of March 31, 2003, between Merrill
    Lynch Mortgage Lending, Inc. and certain Lodgian, Inc.
    subsidiaries.                                                                                                                                                                                                                                                                   
|        | 10 | .2.6        |  | $5,539,275 Promissory Note B, dated as of
    March 31, 2003, between Merrill Lynch Mortgage Lending,
    Inc. and certain Lodgian, Inc. subsidiaries.                                                                                                                                                                                                                                                                                              
|        | 10 | .3.1        |  | Mezzanine Loan Agreement, dated as of
    November 25, 2002, by and between Impac Hotel Group
    Mezzanine, LLC, Servico Operations Mezzanine, LLC, Lodgian
    Financing Mezzanine, LLC, Island Motel Enterprises, Inc. and
    Penmoco, Inc. and Merrill Lynch Mortgage Lending, Inc.                                                                                                                                                            
|        | 10 | .3.2        |  | Promissory Note, in original amount of
    $78,671,201, dated as of November 25, 2002, between Impac
    Hotel Group Mezzanine, LLC, Servico Operations Mezzanine, LLC,
    Lodgian Financing Mezzanine, LLC, Island Motel Enterprises,
    Inc., Penmoco, Inc. and Merrill Lynch Mortgage Lending, Inc.                                                                                                                                            
|        | 10 | .3.3        |  | Guaranty of Resource Obligations, dated as of
    November 25, 2002, by Lodgian, Inc. and Merrill Lynch
    Mortgage Lending, Inc.                                                                                                                                                                                                                                                                                                                  
|        | 10 | .3.4        |  | Modification of Loan Agreement and Other Loan
    Documents, dated as of March 31, 2003, by and between Impac
    Hotel Group Mezzanine, LLC, Servico Operations Mezzanine, LLC,
    Lodgian Financing Mezzanine, LLC, Island Motel Enterprises,
    Inc., Penmoco, Inc. and Merrill Lynch Mortgage Lending, Inc.                                                                                                                                   
|        | 10 | .3.5        |  | $84,080,526 Amended, Restated and Consolidated
    Mezzanine Note, dated as of March 31, 2003, by certain
    Lodgian, Inc. subsidiaries and Merrill Lynch Mortgage Lending,
    Inc.                                                                                                                                                                                                                                                               
|        | 10 | .3.6        |  | Assignment and Assumption Agreement, dated as of
    March 31, 2003, by and among the Assignors thereto and
    certain Lodgian, Inc. subsidiaries.                                                                                                                                                                                                                                                                                                 
|        | 10 | .4.1        |  | Loan Agreement, dated as of May 22, 2003,
    between Lehman Brothers Holdings Inc. and certain Lodgian
    subsidiaries.                                                                                                                                                                                                                                                                                                                           
|        | 10 | .4.2        |  | $80,000,000 Consolidated, Amended and Restated
    Mortgage Note, dated as of May 22, 2003, made by certain
    Lodgian subsidiaries and Lehman Brothers Holdings Inc.                                                                                                                                                                                                                                                                              
|        | 10 | .4.3        |  | $5,000,000 GAP Mortgage Note, dated as of
    May 22, 2003, made by certain Lodgian subsidiaries and
    Lehman Brothers Holdings Inc.                                                                                                                                                                                                                                                                                                              
|        | 10 | .4.4        |  | Principals Agreement, dated as of
    May 22, 2003, by Lodgian, Inc. to and for the benefit of
    Lehman Brothers Holdings Inc.                                                                                                                                                                                                                                                                                                                   



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##### Table of Contents



|        |    |             |  |                                                                                                                                                                                                                                                         
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .4.5        |  | Security Agreement and LockBox Agreement, dated
    as of May 22, 2003, by Lodgian, Inc., Lehman Brothers
    Holdings Inc. and Trimont Real Estate Advisors, Inc.                                                                                     
|        | 10 | .4.6        |  | First Amendment to Loan Documents, dated as of
    November 11, 2003, among certain Lodgian, Inc.
    subsidiaries, Lodgian, Inc., as Guarantor, and Lehman Brothers
    Holdings Inc.                                                                  
|        | 10 | .5          |  | 2002 Stock Incentive Plan of Lodgian, Inc.                                                                                                                                                                                                              
|        | 10 | .6          |  | Disclosure Statement for Joint Plan of
    Reorganization of Lodgian, Inc., et al(other than the
    CCA Debtors), Together with the Official Committee of Unsecured
    Creditors under Chapter 11 of the Bankruptcy Code, dated
    September 26, 2002
|        | 10 | .7          |  | First Amended Joint Plan of Reorganization of
    Lodgian, Inc., et al(other than the CCA Debtors),
    Together with the Official Committee of Unsecured Creditors
    under Chapter 11 of the Bankruptcy Code, dated
    November 5, 2002             
|        | 10 | .8          |  | Order Confirming the First Amended Joint Plan of
    Reorganization of Lodgian, Inc., et al., issued on
    November 5, 2002 by the United States Bankruptcy Court for
    the Southern District of New York                                            
|        | 10 | .9          |  | Class A Warrant Agreement, dated as of
    November 25, 2002, between Lodgian, Inc. and Wachovia Bank,
    N.A.                                                                                                                                         
|        | 10 | .10         |  | Class B Warrant Agreement, dated as of
    November 25, 2002, between Lodgian, Inc. and Wachovia Bank,
    N.A.                                                                                                                                         
|        | 10 | .11         |  | Registration Rights Agreement, dated as of
    November 25, 2002, between Lodgian, Inc. and the other
    signatories thereto.                                                                                                                          
|        | 10 | .12         |  | Employment Agreement with W. Thomas
    Parrington, dated as of December 18, 2003.                                                                                                                                                                      
|        | 10 | .13.1       |  | Disclosure Statement for Joint Plan of
    Reorganization of Impac Hotels II, L.L.C. and Impac
    Hotel III, LLC. Together with the Official Committee of
    Unsecured Creditors Under Chapter 11 of the Bankruptcy Code                              
|        | 10 | .13.2       |  | Joint Plan of Reorganization of Impac
    Hotels II, L.L.C. and Impac Hotels III, L.L.C.
    Together with the Official Committee of Unsecured Creditors
    Under Chapter 11 of the Bankruptcy Code                                                    
|        | 10 | .13.3       |  | Order Confirming Joint Plan of Reorganization of
    Impac Hotels II, L.L.C. and Impac Hotels III, L.L.C.
    Together with the Official Committee of Unsecured Creditors
    Under Chapter 11 of the Bankruptcy Code                                   
|        | 10 | .13.4       |  | Post Confirmation Order and Notice for Joint Plan
    of Reorganization of Impac Hotels III, L.L.C. Together with
    the Official Committee of Unsecured Creditors Under
    Chapter 11 of the Bankruptcy Code                                         
|        | 10 | .14.1       |  | Lease Agreement, dated as of April 7, 1997,
    by and between CSB-Georgia Limited Partnership and Impac Hotel
    Group, L.L.C.                                                                                                                        
|        | 10 | .14.2       |  | First Amendment to Lease Agreement, dated as of
    May 8, 1998, by and between Cousins LORET Venture, L.L.C.
    and Impac Hotel Group, L.L.C.                                                                                                         
|        | 10 | .14.3       |  | Second Amendment to Lease Agreement, dated as of
    June 7, 2000, by and between Cousins LORET Venture, L.L.C.
    and Lodgian, Inc.                                                                                                                   
|        | 10 | .14.4       |  | Third Amendment to Lease Agreement, dated as of
    April 1, 2002, by and between Cousins LORET Venture, L.L.C.
    and Lodgian, Inc.                                                                                                                   
|        | 10 | .14.5       |  | Fourth Amendment to Lease Agreement, dated as of
    April 28, 2003, by and between Cousins LORET Venture,
    L.L.C. and Lodgian, Inc.                                                                                                                 
|        | 10 | .14.6       |  | Fifth Amendment to Lease Agreement, dated as of
    December 23, 2003, by and between Cousins LORET Venture,
    L.L.C. and Lodgian, Inc.                                                                                                               
|        | 21 | .1          |  | Subsidiaries of Lodgian, Inc.                                                                                                                                                                                                                           
|        | 31 | .1          |  | Sarbanes-Oxley Section 302 Certification by
    the CEO                                                                                                                                                                                                 
|        | 31 | .2          |  | Sarbanes-Oxley Section 302 Certification by
    the CFO                                                                                                                                                                                                 
|        | 32 |             |  | Sarbanes-Oxley Section 906 Certification by
    the CEO and CFO