<PAGE>
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                        
                                  ___________
                                        
                                  FORM 10-K/A

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                    For fiscal year ended December 31, 1997

                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

                   For the transition period from ______ to

                         Commission File Number 1-12017

                             CAPSTAR HOTEL COMPANY
               (Exact name of issuer as specified in its charter)

                DELAWARE                            52-1979383
    (State or other jurisdiction of              (I.R.S. Employer
    incorporation or organization)              Identification Number)
     1010 WISCONSIN AVENUE, N.W.,                       20007
          WASHINGTON, D.C.                           (Zip code)
(Address of principal executive offices)


Registrant's telephone number, including area code: (202) 965-4455

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

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

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

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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.  ___

     Based on the average sale price at April 27, 1998, the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$764,805,000.
<PAGE>
 
     The number of shares of the Registrant's common stock outstanding as of
April 27, 1998 was 24,900,155.

EXPLANATORY NOTE:

     For Part III of the Registrant's Form 10-K for the year ended December 31,
1997, the Registrant proposed incorporating by reference certain portions of its
Proxy Statement to be filed with the Securities and Exchange Commission not
later than 120 days after the end of the 1997.   The Proxy Statement will not be
filed within the 120 day period and this amendment is being filed by the
Registrant before the expiration of the 120 day period to report the information
required by Part III of Form 10-K.
 
                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

                             THE BOARD OF DIRECTORS

<TABLE>
<CAPTION>
                                         NAME, PRINCIPAL OCCUPATION                                             SERVED AS A     AGE
                                          AND BUSINESS EXPERIENCE                                              DIRECTOR SINCE   ---
                                         --------------------------                                            --------------
<S>                                                                                                            <C>              <C>
BRADFORD E. BERNSTEIN                                                                                                    1996    31
  Bradford E. Bernstein has served as a Principal and Vice President of Oak Hill Partners, Inc., the
     investment advisor to several private investment funds (including Acadia Partners, L.P.), since 1992.
     From 1991 until 1992, Mr. Bernstein worked at Patricof & Co. Ventures. Prior to that, from 1989 to 1991,
     he worked at Merrill, Lynch & Co. Mr. Bernstein serves as a director of Pinnacle Brands, Inc., Payroll
     Transfers, Inc. and Caliber Collision Centers, Inc.
EDWIN T. BURTON, III                                                                                                     1996    55
  Edwin T. Burton, III has served as President of Windermere Consulting Company since April 1995 and
     Chairman of the Commonwealth of Virginia Retirement System since March 1997 and Trustee since 1994. From
     1994 to April 1995, he served as Managing Director and a member of the Board of Interstate Johnson Lane,
     Inc. Prior to that, from 1987 to 1993, he was President of Rothschild Financial Services, Inc. Mr.
     Burton is a Visiting Professor of Economics at the University of Virginia in Charlottesville, Virginia.
EDWARD L. COHEN                                                                                                          1996    52
  Edward L. Cohen has served as an Executive Officer of Lerner Corporation, a real estate management and
     leasing company located in Bethesda, Maryland, since 1985. Mr. Cohen is also a Principal of Lerner
     Enterprises, a real estate development and investment company. Prior to his participation with the
     Lerner organization, he was a lawyer in private practice in Washington, D.C.
DANIEL L. DOCTOROFF                                                                                                      1996    39
  Daniel L. Doctoroff has been Managing Director of Oak Hill Partners, Inc., the investment advisor to
     several private investment funds (including Acadia Partners, L.P.), and its predecessor since August
     1987; Vice President and Director of Acadia Partners MGP, Inc. since March 1992; Vice President of
     Keystone, Inc. since March 1992; and a Managing Partner of Insurance Partners Advisors, L.P. since
     February 1994. All of such entities are affiliates of Acadia Partners. Mr. Doctoroff is also a Director
     of Bell & Howell Holdings Company, Kemper Corporation and Specialty Foods Corporation.
EDWARD P. DOWD                                                                                                           1996    55
  Edward P. Dowd has served as a Senior Vice President of John Hancock Real Estate Investment Group of John
     Hancock Financial Services since 1992. Prior to that, from 1970 to 1992, Mr. Dowd served in various
     capacities at John Hancock Realty. Mr. Dowd serves as Director of John Hancock Realty Investors, Inc.,
     John Hancock Realty Services Inc. and Maritime Life Assurance Co.
WILLIAM S. JANES                                                                                                         1996    44
  William S. Janes has served as a Principal and Director of RMB Realty, Inc. since 1990. Prior to that,
     from 1984 to 1989, Mr. Janes served as Regional General Partner of Lincoln Property Company. Mr. Janes
     serves as a Director of Brazos Asset Management, Brazos Fund, Carr Real Estate Services, Bowdoin 
</TABLE> 

                                       2
<PAGE>
 
<TABLE> 
<S>                                                                                                                   <C>     <C>
     
     College and the Washington National Cathedral. Mr. Janes maintains professional affiliations as a member 
     of the National Association of Real Estate Investment Trusts, the Society of Industrial and Office 
     Realtors and the Urban Land Institute.
MAHMOOD KHIMJI                                                                                                           1997    37
  Mahmood Khimji has served as Senior Vice President of Highgate Hotels, Inc., an owner and operator of
     hotel and commercial properties throughout North America, since 1988. Prior to that, from 1986 to 1988,
     Mr. Khimji was an associate at the law firm of Paul, Weiss, Rifkind, Wharton & Garrison. Mr. Khimji
     serves as a Director of the Texas Hotel/Motel Association.
JOSEPH MCCARTHY                                                                                                          1996    65
  Joseph McCarthy has been retired since 1994. From 1993 to 1994 he has served as Chairman of the Board for
     Motel 6. From 1985 to 1993, he served as President and Chief Executive Officer for Motel 6. From 1980 to
     1985, he served as President and Chief Executive Officer of Lincoln Hotels. From 1976 to 1980, he served
     as President and Chief Executive Officer of Quality Inns International. Prior to that, from 1971 to
     1976, he served as Senior Vice President of the Sheraton Corporation.
DAVID E. MCCASLIN                                                                                                        1996    41
  David E. McCaslin has served as Chief Operating Officer of the Company since 1994. Mr. McCaslin joined
     the Company in 1987 as a General Manager and was named Vice President of Operations in 1988. From 1985
     to 1987, Mr. McCaslin served as General Manager for Lincoln Hotels. Prior to that, from 1979 to 1985, he
     worked for Westin Hotels in various capacities, including Assistant General Manager, Rooms Division
     Manager and Food & Beverage Manager.
PAUL W. WHETSELL                                                                                                         1996    47
  Paul W. Whetsell has served as President and Chief Executive Officer of the Company and its predecessors
     since its founding in 1987. From 1981 to 1986, Mr. Whetsell served as Vice President of Development for
     Lincoln Hotels in Dallas, Texas. Prior to that, from 1973 to 1981, Mr. Whetsell worked for Quality Inns
     in various capacities in its franchise division, culminating in Vice President of Franchise.
</TABLE>

     During the year ended December 31, 1997, the full Board met ten times. Each
director attended all meetings of the Board held while he was a director.

BOARD COMMITTEES

     The Board currently has three committees - an Audit Committee, a
Compensation Committee and an Investment Committee.

     The Audit Committee consists of three directors who are not employees of
the Company ("Independent Directors"). The Audit Committee is responsible for
making recommendations concerning the engagement of independent auditors,
reviewing with the independent auditors the plans and results of the audit
engagement, approving professional services provided by the independent
auditors, reviewing the independence of the independent auditors, considering
the range of audit and non-audit fees and reviewing the adequacy of the
Company's internal accounting controls. During 1997, the Audit Committee met two
times. The current members of the Audit Committee are Messrs. Bernstein, Burton
and Cohen.

     The Compensation Committee consists of four Independent Directors. The
Compensation Committee is responsible for the determination of compensation of
the Company's executive officers and the administration of the Equity Incentive
Plan (as defined herein). The Compensation Committee met once during 1997. The
current members of the Compensation Committee are Messrs. Bernstein, Doctoroff,
Janes and McCarthy.

     The Investment Committee consists of the Chairman of the Board and two
Independent Directors. The Investment Committee is responsible for the review
and approval of investments proposed to be made by the Company. The Investment
Committee met sixteen times during 1997. The current members of this committee
are Messrs. Doctoroff, Dowd, and Whetsell.

                                       3
<PAGE>
 
COMPENSATION OF DIRECTORS

     Independent Directors are paid an annual fee of $12,000. In addition, each
Independent Director is paid $750 for attendance at each meeting of the Board
and $500 for attendance at each meeting of a committee of the Board of which
such director is a member. Directors who are employees of the Company do not
receive any fees for their service on the Board or a committee thereof. The
Company reimburses directors for their out-of-pocket expenses in connection with
their service on the Board.  On the date of each of the Company's Annual Meeting
of Stockholders, each Independent Director is granted options to purchase 5,000
shares of Common Stock at the then current market price. All options granted to
directors will vest in equal installments over a three year period from the date
of grant. Any Independent Director who ceases to be a director will forfeit the
right to receive any options not previously vested or granted.

                       MANAGEMENT-THE EXECUTIVE OFFICERS

     The names of the executive officers of the Company as of April 30, 1998,
other than Messrs. Whetsell and McCaslin, who are also members of the Board (see
"Election of Directors" above), their positions and offices, business
experience, terms of office and ages are as follows:

<TABLE>
<CAPTION>
                                         NAMES, POSITIONS AND OFFICES,                                 SERVED AS AN EXECUTIVE  
                                            AND BUSINESS EXPERIENCE                                        OFFICER SINCE       AGE
                                         ----------------------------                                  ----------------------  --- 
<S>                                                                                                   <C>                      <C>
JOHN EMERY                                                                                                        1995          34
  John Emery has served as Chief Financial Officer of the Company since June 1997.  From March 1996 
     to June 1997, Mr Emery served as Treasurer and Secretary of the Company. From September 1995 
     to March 1996, he served as Director of Finance of the Company. Prior to that, from January 
     1987 to September 1995, he worked for Deloitte & Touche LLP in various capacities, culminating 
     with Senior Manager for the hotel and real estate industries.
ROBERT GAUTHIER                                                                                                   1993          44
  Robert Gauthier has served as Senior Vice President, Operations since 1996.  From 1993 to 1996, 
     he served as Vice President, Operations and General Manager of various CapStar hotels.  From 
     1987 to 1993, Mr. Gauthier served as Area Operations Manager and General Manager for Drexel 
     Burnham Lambert Realty, Inc.  Mr Gauthier also serves as a Director of the ITT Sheraton 
     Marketing Board.
D. SCOTT LIVCHAK                                                                                                  1990          43
  D. Scott Livchak has served as Senior Vice President, Operations since 1990. From 1985 to 1989, 
     Mr. Livchak served as a General Manager for The Adam's Mark Hotel in Philadelphia, owned by 
     HBE Corporation. From 1977 to 1985, Mr. Livchak served in various capacities with Sheraton 
     Corporation in New York, Atlanta, Ohio and Florida.
JOHN E. PLUNKET                                                                                                   1993          42
  John E. Plunket has served as Executive Vice President, Finance and Development since November      
     1993. From September 1991 to October 1993, Mr. Plunket served as Vice President and Principal 
     Broker for CIG International, an investment and hotel asset management company. From February 
     1988 to August 1991, Mr. Plunket served as Managing Director of Cassidy & Pinkard Inc., a 
     commercial real estate services company. From 1985 to 1987, Mr. Plunket served as Senior Vice 
     President for Oxford Development Corporation. Prior to that, from December 1979 to April 1985, 
     Mr. Plunket worked for Marriott Corporation in various capacities, culminating in Director of 
     Project Finance.
</TABLE>

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     Section 16(a) of the Exchange Act requires directors and executive officers
of the Company, and persons who own more than 10% of the issued and outstanding
shares of Common Stock, to file reports of beneficial ownership and changes in
beneficial ownership with the Securities and Exchange Commission ("SEC").
Directors, executive officers and greater than 10% stockholders are required by
SEC regulation to furnish the Company copies of all Section 16(a) forms they
file.

                                       4
<PAGE>
 
     Based on a review of the copies of the forms furnished to the Company or
representations by reporting persons, all of the filing requirements applicable
to its officers, directors and greater than 10% stockholders were met for fiscal
year 1997.


ITEM 11:   EXECUTIVE COMPENSATION.

     The following table sets forth all compensation paid by the Company during
1997 with respect to the Chief Executive Officer and the four most highly
compensated executive officers (the "Named Executive Officers").

<TABLE>
<CAPTION>
                                                                                      ANNUAL                       OPTIONS
                                                                                   COMPENSATION                    GRANTED
                                                                                   -------------                 ------------
                                                                                                  OTHER ANNUAL     LONG-TERM
NAME AND PRINCIPAL POSITION                                  YEAR        SALARY         BONUS     COMPENSATION    COMPENSATION
---------------------------                                  ---         ------         -----     ------------    ------------  
<S>                                                          <C>    <C>            <C>             <C>           <C>
Paul W. Whetsell..........................................   1997       $251,988        $251,988   $206,412(1)        100,000
President, Chief Executive Officer
and Chairman of the Board
David E. McCaslin.........................................   1997        220,938         145,200      8,400            50,000
Chief Operating Officer
and Director
John Emery................................................   1997        165,715         132,000      4,200            85,000
Chief Financial Officer and Secretary
John E. Plunket...........................................   1997        156,720          54,756    457,244(1)         35,000
Executive Vice President, Finance
and Development
D. Scott Livchak..........................................   1997        134,471          83,000          0            15,000
Senior Vice President, Operations
</TABLE>
___________

(1)  Mr. Whetsell and  Mr. Plunket received an additional bonus based upon the
     number of acquisitions made by the Company during the fiscal year.

STOCK OPTION GRANTS

     The following table sets forth certain information with respect to the
options granted to the Named Executive Officers during 1997.

                                      OPTION GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
                                                                                              POTENTIAL VALUE AT
                                                                                           ASSUMED ANNUAL RATES OF
                                                                                           STOCK PRICE APPRECIATION
                                                                                             FOR OPTION TERM (1)
                         NUMBER OF          % OF TOTAL                                   ----------------------------
                        SECURITIES        OPTIONS GRANTED     EXERCISE
                        UNDERLYING        TO EMPLOYEES IN        OR        EXPIRATION
NAME                      OPTIONS        1997 FISCAL YEAR    BASE PRICE       DATE              5%            10%
----                      -------        -----------------   -----------   -----------         ---           ----     
<S>                  <C>                 <C>                 <C>           <C>           <C>             <C> 
Paul W. Whetsell..          100,000                  11.7%      $33.875      12/11/07       $2,130,500     $5,398,500
David E. McCaslin.           50,000                   5.8        33.875      12/11/07        1,065,250      2,699,250
John Emery........           85,000(2)                9.9            (2)           (2)       1,661,425      4,210,225
John E. Plunket...           35,000                   4.1        33.875      12/11/07          745,675      1,889,475  
D. Scott Livchak..           15,000                   1.8        33.875      12/11/07          319,575        809,775
</TABLE>

                                       5
<PAGE>

___________

(1)  In accordance with rules of the Securities and Exchange Commission, these
     amounts are the hypothetical gains or "options spreads" that would exist
     for the respective options based on assumed rates of annual compound stock
     price appreciation of 5% and 10% from the date the options were granted
     over the full option term.
(2)  In connection with becoming the Chief Financial Officer of the Company, Mr.
     Emery received 50,000 options expiring on May 28, 2007 at an exercise price
     of $29.125 per share.  In addition, at the end of 1997, Mr. Emery received
     35,000 options expiring on December 11, 2007 at an exercise price of
     $33.875 per share.

COMPENSATION PLANS

Management Bonus Plan.  The Company has established a management bonus plan
(the "Management Bonus Plan") under which certain officers and employees of the
Company, including the Named Executive Officers, are eligible to receive cash
bonuses based upon the achievement of predetermined corporate and individual
goals. Bonuses awarded under the Management Bonus Plan may not exceed 100% of
the officer or employee's annual base salary. The Management Bonus Plan is
administered by the Compensation Committee.

Stock Purchase Plan.  Each employee of the Company customarily employed at least
20 hours or more per week by the Company or an affiliate (as defined in the
Company's stock purchase plan (the "Stock Purchase Plan")), other than an
employee who owns beneficially 5% or more of the outstanding Common Stock, is
eligible to participate in the Stock Purchase Plan. Under the Stock Purchase
Plan, participating employees may elect to authorize the Company to withhold a
minimum of $200 per quarter and a maximum of 8% or $25,000 (whichever is less)
of the participating employee's base pay, which amounts will be used to purchase
Common Stock from the Company on a monthly basis. The purchase price of Common
Stock will equal a designated percentage from 85% to 100% of the closing sales
price for Common Stock as reported on the Composite Transactions Tape of the
NYSE (except as described below) on the first trading day of the month or on the
last trading day of the month, whichever is less. The designated percentage will
be established annually by the Compensation Committee which is responsible for
the administration of the Stock Purchase Plan.

     Common Stock purchased under the Stock Purchase Plan is held in custodial
accounts until sold or distributed at the participant's request. The custodian
may charge a fee for the execution of any such sale or for the delivery of share
certificates. The participant may not elect to purchase stock under the Stock
Purchase Plan for three months after a withdrawal or sale of Common Stock under
the Stock Purchase Plan. Shares purchased under the Stock Purchase Plan may not
be sold for six months after their purchase. Any cash dividends paid on Common
Stock held in a participant's account will be reinvested in additional Common
Stock (at 100% of fair market value). Non-cash distributions on Common Stock
held in a participant's account will be distributed to the participant.

     The Company has reserved 500,000 shares of Common Stock for issuance under
the Stock Purchase Plan. Such shares may be from authorized and unissued shares,
treasury shares or a combination thereof. The Stock Purchase Plan will remain in
effect until terminated by the Board, or until all shares authorized for
issuance thereunder have been issued. The Stock Purchase Plan may be amended
from time to time by the Board. No amendment will increase the aggregate number
of shares of Common Stock that may be issued and sold under the Stock Purchase
Plan (except for authorizations pursuant to the anti-dilution provisions of the
Stock Purchase Plan) without further approval by the Company's shareholders.

Equity Incentive Plan.  The Company's Equity Incentive Plan (the "Equity
Incentive Plan") is designed to attract and retain qualified directors, officers
and other key employees of the Company and its affiliates (as defined in the
Equity Incentive Plan). The Equity Incentive Plan authorizes the grant of
options to purchase shares of Common Stock ("Options"), stock appreciation
rights ("Appreciation Rights") and restricted shares 

                                       6
<PAGE>
 
("Restricted Shares"). The Compensation Committee administers the Equity
Incentive Plan and determines to whom Options, Appreciation Rights and
Restricted Shares are to be granted and the terms and conditions thereof,
including the number of shares relating to each award and the period of
exercisability or restricted period, as the case may be. Notwithstanding the
foregoing, the Board may resolve to administer the Equity Incentive Plan itself,
in which case the term Compensation Committee shall be deemed to mean the Board.

     Subject to adjustment as provided in the Equity Incentive Plan, the number
of shares of Common Stock that may be issued or transferred and covered by
outstanding awards granted under the Equity Incentive Plan may not in the
aggregate exceed 1,740,000 shares. To the extent that an award is canceled,
terminates, expires or lapses for any reason without the payment of
consideration, any shares of Common Stock subject to the award will again be
available for the grant of awards. Common Stock subject to Appreciation Rights
that are settled in cash will thereafter be available for the grant of awards.
Common Stock issued under the Equity Incentive Plan may be from authorized and
unissued shares, treasury shares or a combination thereof. Awards may be granted
to directors, officers or other key employees of the Company or an affiliate, as
determined by the Compensation Committee.

     The Compensation Committee may grant Options at a per share price equal to,
greater than or less than fair market value of the Common Stock on the date of
grant. The exercisability of Options may be conditioned on continued service
and/or the achievement of specified performance objectives ("Management
Objectives"). Subject to adjustment as provided in the Equity Incentive Plan, no
participant shall be granted awards relating to more than 200,000 shares during
any calendar year. The Compensation Committee shall determine the method of
exercising options and the form of payment, which may include, without
limitation, cash, shares of Common Stock that are already owned by the optionee,
other property or "cashless exercise" arrangements. Any grant may provide for
automatic "reload option rights", except that the term of any reload options
shall not extend beyond the term of the Options originally exercised. The
Compensation Committee may specify at the time Options are granted that shares
of Common Stock will not be accepted in payment of the option price until they
have been owned by the optionee for a specified period; however, the Equity
Incentive Plan does not require any such holding period. Options granted under
the Equity Incentive Plan may be intended to qualify as "incentive stock
options" within the meaning of Section 422 of the of the Internal Revenue Code
of 1986, as amended (the "Code"), or Options that are not intended to so
qualify. No incentive stock option may be exercised more than ten years from the
date of grant. Each grant must specify the period, if any, of continuous service
with the Company or any affiliate that is necessary before the Options will
become exercisable and may provide for the earlier exercise of the Options in
the event of a change of control of the Company or other event. More than one
grant may be made to the same optionee.

     Appreciation Rights granted under the Equity Incentive Plan may be either
free-standing Appreciation Rights or Appreciation Rights that are granted in
tandem with Options. An Appreciation Right represents the right to receive from
the Company the difference (the "Spread"), or a percentage thereof not in excess
of 100%, between the base price per share of Common Stock in the case of a free-
standing Appreciation Right, or the option price of the related Option Right in
the case of a tandem Appreciation Right, and the market value of the Common
Stock on the date of exercise of the Appreciation Right. Tandem Appreciation
Rights may only be exercised at a time when the related Option Right is
exercisable and the Spread is positive, and the exercise of a tandem
Appreciation Right requires the surrender of the related Option Right for
cancellation. A free-standing Appreciation Right must specify a base price,
which may be equal to, greater than or less than the fair market value of a
share of Common Stock on the date of grant, must specify the period of
continuous service that is necessary before the Appreciation Right becomes
exercisable (except that it may provide for its earlier exercise in the event of
a change in control of the Company or other event) and, in the case of an
Appreciation Right awarded in tandem with an incentive stock option, may not be
exercised more than ten years from the date of grant. Any grant of Appreciation
Rights may specify that the amount payable by the Company upon exercise may be
paid in cash, Common Stock or a combination thereof. In addition, any grant may
specify that an Appreciation Right may be exercised only in the event of a
change in control of the Company. The Compensation Committee may condition the
award of Appreciation Rights on continued service and/or the achievement of one
or more Management Objectives.

     The Compensation Committee may award Restricted Shares to participants in
such amounts and subject to such terms and conditions as may be determined by
the Compensation Committee. The participant 

                                       7
<PAGE>
 
may be entitled to voting, dividend and other ownership rights prior to the
vesting of the shares. The Compensation Committee may condition the vesting of
an award on the achievement of specified management objectives.

     No Options, Appreciation Rights or other awards are transferable by a
participant except by will or the laws of descent and distribution. Options and
Appreciation Rights may not be exercised during a participant's lifetime except
by the participant or, in the event of the participant's incapacity, by the
participant's guardian or legal representative acting in a fiduciary capacity on
behalf of the participant under state law and court supervision.

     In the event of certain stock dividends, stock splits, combinations of
shares, recapitalizations, mergers, consolidations, spin-offs, reorganizations,
liquidations, issuances of rights or warrants, and similar transactions or
events, the Compensation Committee, in its sole discretion, may adjust (i) the
maximum number of shares that may be issued or transferred under the Equity
Incentive Plan, (ii) the number of shares covered by outstanding awards, (iii)
the exercise price of outstanding options and (iv) base prices of outstanding
SARs. The Compensation Committee may also, as it determines to be appropriate in
order to reflect any such transaction or event, make or provide for such
adjustments in the number of shares that may be issued or transferred and
covered by outstanding awards granted under the Equity Incentive Plan and the
number of shares permitted to be covered by Options and Appreciation Rights
granted to any one participant during any calendar year.

     In connection with its administration of the Equity Incentive Plan, the
Compensation Committee is authorized to interpret the Equity Incentive Plan,
related agreements and other documents. With the approval of the Board, the
Equity Incentive Plan may be amended from time to time by the Compensation
Committee but, without further approval by the shareholders of the Company, no
such amendment may (i) increase the total number of shares of Common Stock that
may be issued under the Equity Incentive Plan (except as otherwise provided in
the plan), (ii) modify the Equity Incentive Plan's eligibility requirements or
(iii) materially increase the benefits accruing to participants under the Equity
Incentive Plan.

EMPLOYMENT AGREEMENTS

     Each of Paul W. Whetsell, David E. McCaslin, John Emery and John E. Plunket
are parties to employment agreements with the Company which will expire on
December 31, 1999. Mr. Whetsell's and Mr. McCaslin's agreements provide for
automatic one year extensions thereafter unless either the executive or the
Company gives notice to the other at least 120 days prior to the end of any such
period that he or it, as the case may be, does not wish to extend the agreement
for an additional period. The employment agreements provide for annual base
salaries of $225,000, in the case of Mr. Whetsell, $215,000, in the case of Mr.
McCaslin, $200,000, in the case of Mr. Emery, and $150,000, in the case of Mr.
Plunket, subject, in each such case, to periodic increases. Each executive will
be eligible to receive annual bonuses and will be entitled to participate in all
existing or future plans for the benefit of the Company's employees and
management, on the same basis as other senior executive officers of the Company.

     Under the employment agreements of Messrs. Whetsell and McCaslin, each is
entitled to receive (i) a lump sum payment equal to the product of (a) his total
cash compensation for the previous fiscal year and (b) the greater of (1) the
number of full and fractional years remaining in the agreement and (2) the
number two, if his employment is terminated by the Company without Cause (as
defined below) or is terminated by the executive for Good Reason (as defined
below), or (ii) a lump sum payment equal to two times his total cash
compensation for the previous fiscal year if the Company elects not to extend
his contract for an additional year at the end of its initial term (which ends
December 31, 1999) or any subsequent term. The events constituting "Good Reason"
include the assignment to the executive of duties materially inconsistent with
his position and a material breach of the employment agreement by the Company.
As used in the employment agreements of Messrs. Whetsell and McCaslin, the term
"Cause" includes (i) the executive's willful and intentional failure or refusal
to perform or observe any of his material duties set forth in his employment
agreement, if such breach is not cured within 30 days of notice from the
Company; (ii) any willful and intentional act of the executive involving theft,
fraud, embezzlement or dishonesty affecting the Company; and (iii) the
executive's conviction of an offense which is a felony in the jurisdiction
involved. 

                                       8
<PAGE>
 
Messrs. Whetsell's and McCaslin's employment agreements also provide that if (i)
the executive elects to terminate his employment within six months of a Change
in Control (as defined below) of the Company or (ii) within one year of any such
change in control, the executive is terminated without Cause or the executive
terminates his employment for Good Reason, the executive is entitled to receive
a lump sum payment equal to the product of (a) his total cash compensation for
the previous fiscal year and (b) the greater of (1) the number of full and
fractional years remaining in the agreement and (2) the number three. As used in
the employment agreements of Messrs. Whetsell and McCaslin, the term "Change in
Control" means the occurrence of one of the following events: (i) any person or
entity other than Acadia Partners becoming beneficial owner of greater than 35%
of the Common Stock; (ii) the Company adopts a plan of liquidation; (iii) the
Company merges or combines with another company and, immediately thereafter, the
stockholders of the Company prior to the merger or combination hold 50% or less
of the Common Stock; (iv) the Company sells all or substantially all of its
assets; or (v) the Company ceases to act as general partner of CapStar
Management Company, L.P. Amounts received by the executive upon termination of
employment will increase to compensate the executive for any excise tax payable
by him under the Code. These employment agreements prohibit the executives from
using or disclosing any confidential information about the Company and its
operations for a period of three years after the term of employment and from
engaging in any competitive hotel business for a period of one year after the
term of employment.

     Under the employment agreements of Messrs. Emery and Plunket, each is
entitled to receive a lump sum payment equal to his annual base salary for the
greater of one year or the remaining unexpired term of employment, if his
employment is terminated by the Company without Cause (as defined below). Each
of these executives will be entitled to receive his annual base salary for a
period of two years if his employment is terminated by the executive as a result
of the occurrence of a Material Adverse Change (as defined below) or likely
occurrence of a Material Adverse Change following a Change in Control (as
defined below). The events constituting "Cause" under the employment agreements
of Messrs. Emery and Plunket include: (i) the executive's inability to perform
his duties under the agreement for more than a 120-day period, whether or not
continuous, during any 365-day period; (ii) acts of willful misfeasance or gross
negligence in connection with the executive's employment; (iii) the executive's
conviction of (or plea of no contest to) an offense which is a felony in the
jurisdiction involved; (iv) repeated failure, after written notice thereof, by
the executive to perform any of his duties under the employment agreement; and
(v) a breach of a specific provision of the employment agreement and, if such
breach is curable, failure to cure same within 30 days of written notice
thereof. As used in the employment agreements of Messrs. Emery and Plunket, the
term "Change in Control" means: any person or entity, other than Acadia
Partners, becoming beneficial owner of greater than 35% of the Common Stock, so
long as no Change in Control will be deemed to have occurred if the executive
continues to report to Paul W. Whetsell. As used in the employment agreements of
Messrs. Emery and Plunket, the term "Material Adverse Change" means a material
reduction or material adverse change in the executive's working conditions if,
after such reduction or change, the executive's authority or working conditions
are not commensurate with those of executives holding chief financial officer
positions at companies comparable to the Company in the lodging industry.

                             COMPENSATION COMMITTEE
                        REPORT ON EXECUTIVE COMPENSATION

     The Company's executive compensation program provides competitive levels of
compensation designed to integrate pay with the Company's annual and long-term
performance goals. Underlying this objective are the following concepts:
supporting an individual pay-for-performance policy that differentiates
compensation levels based on corporate and individual performance; motivating
key senior officers to achieve strategic business objectives and rewarding them
for that achievement; providing compensation opportunities which are competitive
to those offered in the marketplace, thus allowing the Company to compete for
and retain talented executives who are critical to the Company's long term
success; and, aligning the interest of executives with the long-term interests
of the Company's stockholders.

     In the interest of balancing all key stockholder interests, the
Compensation Committee believes that the compensation of the executive officers
of the Company, along with the compensation of other officers, should be
comprised of a combination of base salary, short-term annual incentive bonus
under the Management Bonus Plan and long-term stock options under the Equity
Incentive Plan. While these elements 

                                       9
<PAGE>
 
are balanced in total in comparison to other comparable organizations, the
Compensation Committee believes that potential compensation in the form of
performance-related variable compensation should be emphasized. Variable
compensation will be both short-term and long-term based. The resulting total
package has been designed to reward officers for the creation of long-term
stockholder value in excess of other comparable organizations.

BASE SALARY

     In determining the appropriate amount of fixed base pay for officers, the
Compensation Committee compared the officers' base salaries with those paid to
other executives in the hotel industry.

INCENTIVE BONUS

     Under the Management Bonus Plan, certain officers and employees of the
Company are eligible to receive cash bonuses upon fulfillment of predetermined
corporate and individual goals. The executive officers  received bonuses for
fiscal 1997 of between 35% and 100%, in accordance with the Management Bonus
Plan. Annual bonus payouts in 1998 to other officers will range up to 100% of
base salary, in accordance with the Management Bonus Plan. Full bonus payouts
will be made only if the Company's performance goals are exceeded. Bonuses will
not be available if minimum performance goals are not met.
 
     In addition to bonuses paid under the Management Bonus Plan, certain
officers and employees of the Company are eligible to receive cash compensation
based on meeting certain criteria for achieving a specified volume of
acquisitions of hotel properties during a fiscal year.  In connection with the
acquisition activity conducted during 1997, Mr. Whetsell and Mr. Plunket were
paid compensation of $198,012 and $457,244, respectively.

STOCK OPTIONS

     Stock options, stock appreciation rights and restricted shares are granted
to officers and other key employees of the Company under the Equity Incentive
Plan as incentives to promote long-term growth and to increase stockholder
value. The Compensation Committee believes that the grant of options focuses
attention on managing the Company from the perspective of an owner with an
equity stake in the business. The Company granted certain executive officers and
other members of management options to purchase up to 855,050 shares of Common
Stock. All options granted were at the fair market value as of the date of
grant. Since the value of an option bears a direct relationship to the Company's
stock price, it serves as an effective long-term incentive, which is highly
compatible with the interests of stockholders, and is therefore an important
element of the Company's compensation policy.

CHIEF EXECUTIVE OFFICER COMPENSATION

     Mr. Whetsell's compensation as Chairman of the Board and Chief Executive
Officer for 1997 was $251,988 per year, which is below comparable compensation
for other chief executive officers in the hotel industry. This compensation was
established by the Compensation Committee. Mr. Whetsell's compensation for 1998
will be $360,000 per year, which is commensurate with other chief executive
officers in the hotel industry. This compensation was established by the
Compensation Committee. See "Management-The Executive Officers-Employment
Agreements."

TAX DEDUCTIBILITY OF COMPENSATION

     Section 162(m) of the Code, generally limits the deductibility on the
Company's tax return of compensation over $1 million to any of the officers of
the Company unless the compensation is paid pursuant to a plan which is
performance-related, non-discriminatory and has been approved by the Company's
stockholders. The Compensation Committee's policy with respect to Section 162(m)
is to make every reasonable effort to ensure that compensation is deductible to
the extent permitted, while simultaneously providing the Company's officers with
appropriate rewards for their performance. The Company did not pay any
compensation during 1997 that would be subject to Section 162(m).

                                       10
<PAGE>
 
THE COMPENSATION COMMITTEE
                                    Bradford E. Bernstein
                                    Daniel L. Doctoroff
                                    William S. Janes
                                    Joseph McCarthy


                               PERFORMANCE GRAPH

     The following graph compares the cumulative annual return of the Common
Stock since August 20, 1996, the date of the Company's initial public offering,
with the cumulative total return of the New York Stock Exchange Market Value
Index ("NYSE Index") and the Company's peer group (the "Peer Group") index over
the same period, assuming an initial investment of $100 on August 20, 1996, with
all dividends reinvested. The Peer Group consists of Bristol Hotel Company,
Interstate Hotels Company, Wyndham Hotel Corp., Prime Hospitality Corporation
and Servico Inc. The Company believes that the Peer Group represents the
Company's principal competitors in the hotel ownership and management segment of
the hospitality industry. In addition, the Peer Group is comprised of publicly
traded Companies whose market capitalizations and principal lines of business
are comparable to those of the Company.

                         [Performance Graph Shown Here]

     The foregoing graph is based upon the following data:
<TABLE>
<CAPTION>
 
                                 8/20/96    12/31/96    12/31/97
                                 -------    --------    --------
<S>                              <C>       <C>         <C>
The Company...............       $100.00     $109.03     $190.63
Peer Group Index...........       100.00      112.36      150.44
NYSE Index.................       100.00      111.89      147.20
</TABLE>


                                       11
<PAGE>

ITEM 12:  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS.

     The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of February 15, 1998 by (i) all persons known by
the Company to own beneficially more than 5% of the Common Stock, (ii) each
director who is a stockholder, (iii) each of the Named Executive Officers, and
(iv) all directors and executive officers as a group.

<TABLE>
<CAPTION>
NAME & ADDRESS OF BENEFICIAL OWNER                                                                      NUMBER         PERCENTAGE
----------------------------------                                                                      ------         ----------
                                                                                                           SHARES BENEFICIALLY
                                                                                                                   OWNED
                                                                                                                   -----
<S>                                                                                                  <C>              <C>
Franklin Resources, Inc.(1).......................................................................        2,082,637          8.4%
Pilgrim Baxter & Associates, Ltd.(2)..............................................................        1,828,020          7.3
Morgan Stanley, Dean Witter, Discover & Co.(3)....................................................        1,608,275          6.5
Massachusetts Financial Services Company(4).......................................................        1,431,512          5.7
Dresdner RCM Global Investors LLC(5)..............................................................        1,427,800          5.7
Paul W. Whetsell..................................................................................          454,407          1.8
David E. McCaslin.................................................................................           63,203            *
John E. Plunket...................................................................................           32,719            *
John Emery........................................................................................           43,348            *
D. Scott Livchak..................................................................................           19,457            *
Robert Gauthier...................................................................................            9,000            *
Daniel L. Doctoroff...............................................................................           84,998            *
Bradford E. Bernstein.............................................................................           33,770            *
William S. Janes..................................................................................            9,151            *
Joseph McCarthy...................................................................................           17,388            *
Edward L. Cohen...................................................................................                0            *
Edwin T. Burton, III..............................................................................                0            *
Edward P. Dowd....................................................................................                0            *
Mahmood Khimji....................................................................................          267,226          1.1
All directors and executive officers as a group (14 persons)......................................        1,034,667          4.2
</TABLE>

-----------
*    Represents less than 1% of the class.

(1)  The business address of Franklin Resources, Inc. ("FRI") is 777 Mariners
     Island Blvd., San Mateo, CA 94404. Such shares are owned by one or more
     open or closed-ended investment companies or other managed accounts which
     are advised by direct or indirect advisory subsidiares of FRI. Such
     advisory subsidiaries may be deemed to beneficially own such shares.
     Charles B. Johnson and Rupert H. Johnson, Jr. each own in excess of 10% of
     FRI and, as such, also may be deemed to own such shares held, directly or
     indirectly, by FRI.

(2)  The business address of Pilgrim Baxter & Associates, Ltd. Is 825 Duportail
     Road, Wayne, Pennsylvania 19087.

(3)  The business address of Morgan Stanley, Dean Witter, Discover & Co. is 1585
     Broadway, New York, New York 10036.  Such shares are owned by accounts
     managed on a discretionary basis by Morgan Stanley, Dean Witter, Discover &
     Co.  No such account holds more than 5% of the class.

(4)  The business address of Massacusetts Financial Services Company is 500
     Boylston Street, Boston, Massachusetts 02116.

(5)  The business address of Dresdner RCM Global Investors LLC is Four Embarcado
     Center, San Francisco, California 94111. Dresdner RCM Global Investors LLC
     ("Dresdner RCM") is an investment advisor.  RCM Limited L.P. ("RCM
     Limited") is the Managing Agent of Dresdner RCM.  RCM Limited has
     beneficial ownership of such shares only to the extent that RCM Limited may
     be deemed to have beneficial ownership of securities beneficially owned by
     Dresdner RCM.  RCM General Corporation ("RCM General") is the General
     Partner of RCM Limited.  RCM General has beneficial ownership of such
     shares only to the extent RCM General may be deemed to have beneficial
     ownership of securities beneficially owned by Dresdner RCM.



                                       12
<PAGE>

ITEM 13:   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

ACQUISITIONS

     In March 1996, the Company acquired The Latham Hotel in Washington, D.C.
for a purchase price of $12,000,000 from LCP Hotel Ventures, L.P. ("LCP"). At
the time of the acquisition, the general partner of LCP was Latham Hotels, Inc.
("LHI"), a corporation owned 80% by Paul W. Whetsell, President and Chief
Executive Officer of the Company, and 10% by David E. McCaslin, Chief Operating
Officer of the Company. Including their interests in LHI, Mr. Whetsell and Mr.
McCaslin owned, directly or indirectly, 9.18% and 0.52%, respectively, of the
beneficial interest in LCP and received $763,000 and $42,000, respectively, of
the net proceeds of the purchase price paid to LCP. The purchase price for The
Latham Hotel was determined through arm's-length negotiations between the
Company, on the one hand, and representatives of the holders of the majority of
the beneficial interests in LCP, on the other hand; such representatives are not
affiliated with the Company.

     In April 1997, the Company acquired the Holiday Inn in Tinton Falls, New
Jersey and the Holiday Inn Sports Complex in Kansas City, Missouri for an
aggregate purchase price of $10,128,000 from two partnerships in which 
Mr. Whetsell owned, directly or indirectly, 12.0% and 11.0%, respectively, and
Mr. McCaslin owned, directly and indirectly, 1.5% and 1.4%, respectively, of 
the beneficial interest. The purchase price for these hotels was determined
through arm's-length negotiations between the Company, on the one hand, and
representatives of the holders of the majority of the beneficial interests in
the sellers, on the other hand; such representatives are not affiliated with the
Company.

     In April 1997, the Company acquired a portfolio of six hotels from Highgate
Hotels and certain affiliated entities, for consideration consisting of $68
million cash and $32 million of operating partnership units.  Mahmood Khimji, a
director of the Company, is a principal of Highgate Hotels.  At the time of the
acquisition, Mr. Khimji was not a director of the Company.

     Since November 1995, the Company has acquired 88% of the limited
partnership interests in the partnership ("Atlanta Partners") that owns the
Westin Atlanta Airport. In November 1995, the Company acquired, for a purchase
price of $56,000, the 1% general partnership interest in Atlanta Partners
previously held by a corporation in which E. Robert Roskind owned an equity
interest ("LHP"). At the time of such acquisition, Mr. Roskind was a principal
of both CapStar Management and EquiStar Hotel Investors, L.P. LHP was also paid
a fee of $893,000 in connection with the acquisition of the partnership
interests in Atlanta Partners, and is entitled to an additional $161,000 upon
the ultimate disposition of Atlanta Partners. The LCP Group, L.P., in which Mr.
Roskind owns an equity interest is entitled to an annual fee of $30,000 for
providing certain administrative services relating to the outside limited
partners of the Westin Atlanta Airport. All of the compensation paid or payable
to affiliates of Mr. Roskind in connection with the Westin Atlanta Airport
transaction was negotiated between Mr. Roskind, on the one hand, and other
principals of EquiStar, on the other hand, who believed the compensation to have
been at fair market value. Mr. Roskind is no longer associated with the Company.

OWNERSHIP INTERESTS IN CERTAIN MANAGED HOTELS

     As of December 31, 1997, Mr. Whetsell and Mr. McCaslin and corporations
owned by them own, directly or indirectly, (i) a leasehold interest, expiring on
December 31, 2001, in two of the hotels which the Company manages for third
party owners (the "Leased Hotels") and (ii) minority equity interests in four
hotels which the Company manages (together with the Leased Hotels, the
"Affiliated Hotels"). Mr. Whetsell and Mr. McCaslin exercise management control
over the entities that own the above mentioned interests in the Affiliated
Hotels. Such interests were acquired prior to the formation of CapStar
Management and EquiStar. For the year ended December 31, 1997, the Company
received approximately $866,000 in management fees from the Affiliated Hotels.
Under the terms of their employment agreements, Messrs. Whetsell and McCaslin
are prohibited from hereafter acquiring any interests in hotels or hotel
management companies while they serve as officers of the Company. See "The
Executive Officers-Employment Agreements."

INDEBTEDNESS OF CERTAIN MEMBERS OF MANAGEMENT

     In connection with the initial formation and capitalization of EquiStar,
CapStar Management made loans to certain directors and executive officers of the
Company, which loans were used to make capital contributions to EquiStar. Such
loans were made from August 1995 through April 1996 and bore interest at the
prime rate through December 31, 1995 and at a rate of 1.5% above the prime rate
thereafter. The largest aggregate amounts of the loans to such directors and
executive officers outstanding at any time (where such aggregate amount exceeded
$60,000) were $300,000 to Mr. Whetsell and $147,500 to Mr. McCaslin. All such
loans were repaid in September 1996.

SUBORDINATED DEBT

     One member of the syndicate of lenders of the Company's $50 million of
subordinated indebtedness is Oak Hill Securities Fund, L.P. ("Oak Hill
Securities"). The investment advisor to Oak Hill Securities is Oak Hill
Advisors, Inc., one of the principal stockholders of which is Daniel L.
Doctoroff, a director of the Company. Mr. Doctoroff is also a principal
stockholder of Oak Hill Partners which is the investment advisor 

                                       13
<PAGE>
 
to Acadia Partners, L.P., a principal stockholder of the Company. The Company
has borrowed an aggregate of $25 million from Oak Hill Securities. See
"Principal Stockholders."

                                       14
<PAGE>
 
                                  SIGNATURES

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

April 30, 1998


                                CAPSTAR HOTEL COMPANY

                                By: /s/ Paul W. Whetsell
                                    ----------------------------------
                                    Paul W. Whetsell
                                    President, Chief Executive Officer
                                        and Chairman of the Board