##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

FORM 10-Q

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|  
|   |  | For the Period ended March 31,
    2004                                                     
|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

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              |  | 30326                                   
|(Address of principal executive
    offices)                       |  | (Zip Code)                              

Registrants telephone number, including
area code

(404) 364-9400


(Former name, former address and former fiscal
year, if changed since last report):Not applicable

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

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

Indicate the number of shares outstanding of each
of the issuers classes of common stock as of the latest
practicable date.

|       |  |                              
|------ |  | -----------------------------
|Class  |  | Outstanding as of May 5, 2004
|       |  |                              
|Common |  | 2,304,121                    



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LODGIAN, INC. AND SUBSIDIARIES

INDEX


|                                                   |  |                                                                                                                                  |    |      |    | 
|-------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                                   |  |                                                                                                                                  |    | Page
|                                                   |  |                                                                                                                                  |    |     
|PART I. FINANCIAL
    INFORMATION                  |  |                                                                                                                                  |    |     
|Item 1.                                            |  | Financial Statements:                                                                                                            |    |      |    | 
|                                                   |  | Condensed Consolidated
    Balance Sheets as of March 31, 2004 and December 31,
    2003 (unaudited)                             |    |      | 2  | 
|                                                   |  | Condensed Consolidated
    Statements of Operations for the Three Months Ended
    March 31, 2004 and March 31, 2003 (unaudited) |    |      | 3  | 
|                                                   |  | Condensed Consolidated
    Statement of Stockholders Equity for the Three Months
    Ended March 31, 2004 (unaudited)           |    |      | 4  | 
|                                                   |  | Condensed Consolidated
    Statements of Cash Flows for the Three Months Ended
    March 31, 2004 and March 31, 2003 (unaudited) |    |      | 5  | 
|                                                   |  | Notes to Condensed
    Consolidated Financial Statements (unaudited)                                                             |    |      | 6  | 
|Item 2.                                            |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                                        |    |      | 19 | 
|Item 3.                                            |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                                   |    |      | 36 | 
|Item 4.                                            |  | Controls and Procedures                                                                                                          |    |      | 36 | 
|PART II. OTHER
    INFORMATION                     |  |                                                                                                                                  |    |     
|Item 1.                                            |  | Legal Proceedings                                                                                                                |    |      | 37 | 
|Item 2.                                            |  | Changes in Securities                                                                                                            |    |      | 37 | 
|Item 4.                                            |  | Submission of Matters to a
    Vote of Security Holders                                                                          |    |      | 38 | 
|Item 6.                                            |  | Exhibits and Reports on
    Form 8-K                                                                                             |    |      | 39 | 
|Signatures                                         |  |                                                                                                                                  | 40 |     
|EX-10.3 AMENDMENT NO.1 TO LODGIAN 401(K) PLAN     
|EX-10.4 EMPLOYMENT AGREEMENT / DANIEL ELLIS       
|EX-10.5 EMPLOYMENT AGREEMENT / MANUEL ARTIME      
|EX-10.6 EMPLOYMENT AGREEMENT / MICHAEL AMARAL     
|EX-31.1 SECTION 302 CERTIFICATION OF THE CEO      
|EX-31.2 SECTION 302 CERTIFICATION OF THE CFO      
|EX-32 SECTION 906 CERTIFICATION OF THE CEO AND CFO



1



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##### Table of Contents






PART I  FINANCIAL
INFORMATION






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

LODGIAN, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                         |                                                                                                                                                                              |                            |         |                   |         |   |         |         |         | 
|---------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ----------------- | ------- | - | ------- | ------- | ------- | 
|                                         |                                                                                                                                                                              | March 31, 2004             |         | December 31, 2003
|                                         |                                                                                                                                                                              |                            |         |                  
|                                         |                                                                                                                                                                              |                           
|                                         |                                                                                                                                                                              | (Unaudited in thousands,  
|                                         |                                                                                                                                                                              | except share data)        
|ASSETS                                  
|Current assets:                          |                                                                                                                                                                              |                            |         |                   |         |   |         |        
|                                         | Cash and cash equivalents                                                                                                                                                    |                            | $       | 12,662            |         |   | $       | 10,897  |        
|                                         | Cash, restricted                                                                                                                                                             |                            |         | 7,447             |         |   |         | 7,084   |        
|                                         | Accounts receivable (net of allowances:
    2004  $730; 2003  $689)                                                                                                        |                            |         | 11,483            |         |   |         | 8,169   |        
|                                         | Inventories                                                                                                                                                                  |                            |         | 5,666             |         |   |         | 5,609   |        
|                                         | Prepaid expenses and other current assets                                                                                                                                    |                            |         | 16,670            |         |   |         | 17,068  |        
|                                         | Assets held for sale                                                                                                                                                         |                            |         | 55,788            |         |   |         | 68,567  |        
|                                         |                                                                                                                                                                              |                            |         |                   |         |   |         |        
|                                         |                                                                                                                                                                              | Total current assets       |         |                   | 109,716 |   |         |         | 117,394 | 
|Property and equipment, net              |                                                                                                                                                                              |                            | 561,461 |                   |         |   | 563,818 |        
|Deposits for capital expenditures        |                                                                                                                                                                              |                            | 13,577  |                   |         |   | 15,782  |        
|Other assets, net                        |                                                                                                                                                                              |                            | 11,039  |                   |         |   | 12,180  |        
|                                         |                                                                                                                                                                              |                            |         |                   |         |   |         |        
|                                         |                                                                                                                                                                              | $                          | 695,793 |                   |         | $ | 709,174 |        
|                                         |                                                                                                                                                                              |                            |         |                   |         |   |         |        
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                                              |                            |         |                   |         |   |         |        
|                                         | Accounts payable                                                                                                                                                             |                            | $       | 7,456             |         |   | $       | 7,131   |        
|                                         | Other accrued liabilities                                                                                                                                                    |                            |         | 32,401            |         |   |         | 31,432  |        
|                                         | Advance deposits                                                                                                                                                             |                            |         | 3,133             |         |   |         | 1,882   |        
|                                         | Current portion of long-term debt                                                                                                                                            |                            |         | 18,971            |         |   |         | 16,563  |        
|                                         | Liabilities related to assets held for sale                                                                                                                                  |                            |         | 47,340            |         |   |         | 57,948  |        
|                                         |                                                                                                                                                                              |                            |         |                   |         |   |         |        
|                                         |                                                                                                                                                                              | Total current liabilities  |         |                   | 109,301 |   |         |         | 114,956 | 
|Long-term debt:                          |                                                                                                                                                                              |                            |         |                   |         |   |         |        
|                                         | 12.25% Cumulative preferred shares subject to
    mandatory redemption                                                                                                       |                            |         | 146,462           |         |   |         | 142,177 |        
|                                         | Long-term obligations                                                                                                                                                        |                            |         | 404,044           |         |   |         | 409,115 |        
|                                         |                                                                                                                                                                              |                            |         |                   |         |   |         |        
|                                         |                                                                                                                                                                              | Total long-term debt       |         |                   | 550,506 |   |         |         | 551,292 | 
|                                         |                                                                                                                                                                              |                            |         |                   |         |   |         |        
|                                         |                                                                                                                                                                              | Total liabilities          |         |                   | 659,807 |   |         |         | 666,248 | 
|Minority interests                       |                                                                                                                                                                              |                            | 2,467   |                   |         |   | 2,320   |        
|Commitments and contingencies            |                                                                                                                                                                              |                            |         |                   |         |   |         |        
|Stockholders equity:                    |                                                                                                                                                                              |                            |         |                   |         |   |         |        
|                                         | Common stock, $.01 par value,
    30,000,000 shares authorized; 2,333,832 and 2,333,591
    issued and outstanding at March 31, 2004 and
    December 31, 2003, respectively |                            |         | 23                |         |   |         | 23      |        
|                                         | Additional paid-in capital                                                                                                                                                   |                            |         | 89,878            |         |   |         | 89,874  |        
|                                         | Unearned stock compensation                                                                                                                                                  |                            |         | (458              | )       |   |         | (508    | )      
|                                         | Accumulated deficit                                                                                                                                                          |                            |         | (57,193           | )       |   |         | (50,107 | )      
|                                         | Accumulated other comprehensive income                                                                                                                                       |                            |         | 1,269             |         |   |         | 1,324   |        
|                                         |                                                                                                                                                                              |                            |         |                   |         |   |         |        
|                                         |                                                                                                                                                                              | Total stockholders equity |         |                   | 33,519  |   |         |         | 40,606  | 
|                                         |                                                                                                                                                                              |                            |         |                   |         |   |         |        
|                                         |                                                                                                                                                                              | $                          | 695,793 |                   |         | $ | 709,174 |        
|                                         |                                                                                                                                                                              |                            |         |                   |         |   |         |        

See notes to condensed consolidated financial
statements.

2



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                          |                                                           |                                                                                                                                                       |        |                |        |   |         |        |        |  
|------------------------------------------------------------------------- | --------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | ------ | -------------- | ------ | - | ------- | ------ | ------ | -
|                                                                          |                                                           |                                                                                                                                                      
|                                                                          |                                                           | Three Months Ended                                                                                                                                   
|                                                                          |                                                           |                                                                                                                                                      
|                                                                          |                                                           | March 31, 2004                                                                                                                                        |        | March 31, 2003
|                                                                          |                                                           |                                                                                                                                                       |        |               
|                                                                          |                                                           |                                                                                                                                                      
|                                                                          |                                                           | (Unaudited in thousands, except                                                                                                                      
|                                                                          |                                                           | per share data)                                                                                                                                      
|Revenues:                                                                 |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|                                                                          | Rooms                                                     |                                                                                                                                                       | $      | 57,563         |        |   | $       | 53,914 |       
|                                                                          | Food and beverage                                         |                                                                                                                                                       |        | 16,488         |        |   |         | 16,607 |       
|                                                                          | Other                                                     |                                                                                                                                                       |        | 2,754          |        |   |         | 2,858  |       
|                                                                          |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|                                                                          |                                                           |                                                                                                                                                       | 76,805 |                |        |   | 73,379  |       
|                                                                          |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|Operating expenses:                                                       |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|                                                                          | Direct:                                                   |                                                                                                                                                       |        |                |        |   |         |        |       
|                                                                          |                                                           | Rooms                                                                                                                                                 |        |                | 16,018 |   |         |        | 15,363 |  
|                                                                          |                                                           | Food and beverage                                                                                                                                     |        |                | 11,534 |   |         |        | 11,734 |  
|                                                                          |                                                           | Other                                                                                                                                                 |        |                | 1,972  |   |         |        | 1,938  |  
|                                                                          |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|                                                                          |                                                           |                                                                                                                                                       | 29,524 |                |        |   | 29,035  |       
|                                                                          |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|                                                                          |                                                           |                                                                                                                                                       | 47,281 |                |        |   | 44,344  |       
|Other operating expenses:                                                 |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|                                                                          | General, administrative and other                         |                                                                                                                                                       |        | 34,236         |        |   |         | 35,106 |       
|                                                                          | Depreciation and amortization                             |                                                                                                                                                       |        | 6,805          |        |   |         | 7,422  |       
|                                                                          |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|                                                                          |                                                           | Other operating expenses                                                                                                                              |        |                | 41,041 |   |         |        | 42,528 |  
|                                                                          |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|                                                                          |                                                           |                                                                                                                                                       | 6,240  |                |        |   | 1,816   |       
|Other income (expenses):                                                  |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|                                                                          | Interest income and other                                 |                                                                                                                                                       |        | 43             |        |   |         | 83     |       
|                                                                          | Interest expense:                                         |                                                                                                                                                       |        |                |        |   |         |        |       
|                                                                          |                                                           | Preferred stock dividend                                                                                                                              |        |                | (4,285 | ) |         |        |       |  
|                                                                          |                                                           | Other interest expense (contractual interest:
    $8.2 million and $6.8 million for the three months
    ended March 31, 2004 and 2003, respectively) |        |                | (8,159 | ) |         |        | (6,279 | )
|                                                                          |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|Loss before income taxes, reorganization items
    and minority interests |                                                           |                                                                                                                                                       | (6,161 | )              |        |   | (4,380  | )     
|Reorganization items                                                      |                                                           |                                                                                                                                                       |       |                |        |   | (1,237  | )     
|                                                                          |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|Loss before income taxes and minority interest                            |                                                           |                                                                                                                                                       | (6,161 | )              |        |   | (5,617  | )     
|Minority interests                                                        |                                                           |                                                                                                                                                       | (147   | )              |        |   | (148    | )     
|                                                                          |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|Loss before income taxes  continuing
    operations                      |                                                           |                                                                                                                                                       | (6,308 | )              |        |   | (5,765  | )     
|Provision for income taxes  continuing
    operations                    |                                                           |                                                                                                                                                       | (76    | )              |        |   | (76     | )     
|                                                                          |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|Loss  continuing operations                                              |                                                           |                                                                                                                                                       | (6,384 | )              |        |   | (5,841  | )     
|                                                                          |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|Discontinued operations:                                                  |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|                                                                          | Loss from discontinued operations before income
    taxes |                                                                                                                                                       |        | (702           | )      |   |         | (3,243 | )     
|                                                                          | Income tax provision                                      |                                                                                                                                                       |        |               |        |   |         |       |       
|                                                                          |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|                                                                          | Loss from discontinued operations                         |                                                                                                                                                       |        | (702           | )      |   |         | (3,243 | )     
|                                                                          |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|Net loss                                                                  |                                                           |                                                                                                                                                       | (7,086 | )              |        |   | (9,084  | )     
|Preferred stock dividend                                                  |                                                           |                                                                                                                                                       |       |                |        |   | (3,776  | )     
|                                                                          |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|Net loss attributable to common stock                                     |                                                           | $                                                                                                                                                     | (7,086 | )              |        | $ | (12,860 | )     
|                                                                          |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|Basic and diluted loss per common share:                                  |                                                           |                                                                                                                                                       |        |                |        |   |         |       
|                                                                          | Net loss attributable to common stock                     |                                                                                                                                                       | $      | (3.04          | )      |   | $       | (5.51  | )     
|                                                                          |                                                           |                                                                                                                                                       |        |                |        |   |         |       

See notes to condensed consolidated financial
statements.

3



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENT OF
STOCKHOLDERS EQUITY


|                                            |                                                                       |                                   |           |            |  |          |    |              |  |               |        |                   |  |        |      |   |  |   |         |        |   |   |       |     |   |   |        |        |  
|------------------------------------------- | --------------------------------------------------------------------- | --------------------------------- | --------- | ---------- |  | -------- | -- | ------------ |  | ------------- | ------ | ----------------- |  | ------ | ---- | - |  | - | ------- | ------ | - | - | ----- | --- | - | - | ------ | ------ | -
|                                            |                                                                       |                                   |           |            |  |          |    |              |  | Accumulated   |        |                  
|                                            |                                                                       | Common Stock                      |           | Additional |  | Unearned |    |              |  | Other         |        | Total            
|                                            |                                                                       |                                   |           | Paid-in    |  | Stock    |    | Accumulated  |  | Comprehensive |        | Stockholders    
|                                            |                                                                       | Shares                            |           | Amount     |  | Capital  |    | Compensation |  | Deficit       |        | Loss (Net of Tax) |  | Equity
|                                            |                                                                       |                                   |           |            |  |          |    |              |  |               |        |                   |  |       
|                                            |                                                                       |                                  
|                                            |                                                                       | (In thousands, except share data)
|Balance December 31, 2003                   |                                                                       |                                   | 2,333,591 |            |  | $        | 23 |              |  | $             | 89,874 |                   |  | $      | (508 | ) |  | $ | (50,107 | )      |   | $ | 1,324 |     |   | $ | 40,606 |       
|Amortization of unearned stock compensation |                                                                       |                                   |          |            |  |          |   |              |  |               |       |                   |  |        | 50   |   |  |   |        |        |   |   |      |     |   |   | 50     |       
|Exercise of stock options                   |                                                                       |                                   | 241       |            |  |          |   |              |  |               | 4      |                   |  |        |     |   |  |   |        |        |   |   |      |     |   |   | 4      |       
|Comprehensive loss:                         |                                                                       |                                   |           |            |  |          |    |              |  |               |        |                   |  |        |      |   |  |   |         |        |   |   |       |     |   |   |        |       
|                                            | Net loss                                                              |                                   |           |           |  |          |    |             |  |               |        |                  |  |        |      |  |  |   |         | (7,086 | ) |   |       |    |   |   |        | (7,086 | )
|                                            | Currency translation adjustments (related taxes
    estimated at nil) |                                   |           |           |  |          |    |             |  |               |        |                  |  |        |      |  |  |   |         |       |   |   |       | (55 | ) |   |        | (55    | )
|                                            |                                                                       |                                   |           |            |  |          |    |              |  |               |        |                   |  |        |      |   |  |   |         |        |   |   |       |     |   |   |        |       
|Total comprehensive loss                    |                                                                       |                                   |           |            |  |          |   |              |  |               |       |                   |  |        |     |   |  |   |        |        |   |   |      |     |   |   | (7,141 | )     
|                                            |                                                                       |                                   |           |            |  |          |    |              |  |               |        |                   |  |        |      |   |  |   |         |        |   |   |       |     |   |   |        |       
|Balance March 31, 2004                      |                                                                       |                                   | 2,333,832 |            |  | $        | 23 |              |  | $             | 89,878 |                   |  | $      | (458 | ) |  | $ | (57,193 | )      |   | $ | 1,269 |     |   | $ | 33,519 |       
|                                            |                                                                       |                                   |           |            |  |          |    |              |  |               |        |                   |  |        |      |   |  |   |         |        |   |   |       |     |   |   |        |       

The comprehensive loss for the three months
ended March 31, 2003 was $8.7 million.

See notes to condensed consolidated financial
statements.

4



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                                            |                                                                                                            |                                                            |                                                    |           |       |        |        |         |       |        |  
|--------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | -------------------------------------------------- | --------- | ----- | ------ | ------ | ------- | ----- | ------ | -
|                                                                            |                                                                                                            |                                                           
|                                                                            |                                                                                                            | Three Months Ended                                        
|                                                                            |                                                                                                            |                                                           
|                                                                            |                                                                                                            | March 31,                                                  |                                                    | March 31,
|                                                                            |                                                                                                            | 2004                                                       |                                                    | 2003     
|                                                                            |                                                                                                            |                                                            |                                                    |          
|                                                                            |                                                                                                            |                                                           
|                                                                            |                                                                                                            | (Unaudited in                                             
|                                                                            |                                                                                                            | thousands)                                                
|Operating activities:                                                       |                                                                                                            |                                                            |                                                    |           |       |        |        |        
|                                                                            | Net loss                                                                                                   |                                                            | $                                                  | (7,086    | )     |        | $      | (9,084  | )    
|                                                                            | Less: loss from discontinued operations                                                                    |                                                            |                                                    | 702       |       |        |        | 3,243   |      
|                                                                            |                                                                                                            |                                                            |                                                    |           |       |        |        |        
|                                                                            | Loss  continuing operations                                                                               |                                                            |                                                    | (6,384    | )     |        |        | (5,841  | )    
|                                                                            | Adjustments to reconcile loss from continuing
    operations to net cash provided by operating activities: |                                                            |                                                    |           |       |        |        |         |      
|                                                                            |                                                                                                            | Depreciation and amortization                              |                                                    |           | 6,805 |        |        |         | 7,422 |       
|                                                                            |                                                                                                            | Amortization of unearned stock compensation                |                                                    |           | 50    |        |        |         |      |       
|                                                                            |                                                                                                            | Preferred stock dividends                                  |                                                    |           | 4,285 |        |        |         |      |       
|                                                                            |                                                                                                            | Minority interests                                         |                                                    |           | 147   |        |        |         | 148   |       
|                                                                            |                                                                                                            | Write-off and amortization of deferred financing
    costs |                                                    |           | 1,457 |        |        |         | 594   |       
|                                                                            |                                                                                                            | Other                                                      |                                                    |           | 209   |        |        |         | 184   |       
|                                                                            |                                                                                                            | Changes in operating assets and liabilities:               |                                                    |           |       |        |        |         |       |       
|                                                                            |                                                                                                            |                                                            | Accounts receivable, net of allowances             |           |       | (3,314 | )      |         |       | (2,275 | )
|                                                                            |                                                                                                            |                                                            | Inventories                                        |           |       | (57    | )      |         |       | 20     |  
|                                                                            |                                                                                                            |                                                            | Prepaid expenses, other assets and restricted cash |           |       | 422    |        |         |       | 10,833 |  
|                                                                            |                                                                                                            |                                                            | Accounts payable                                   |           |       | 594    |        |         |       | (55    | )
|                                                                            |                                                                                                            |                                                            | Other accrued liabilities                          |           |       | 2,894  |        |         |       | (3,508 | )
|                                                                            |                                                                                                            |                                                            | Advance deposits                                   |           |       | 1,251  |        |         |       | 1,062  |  
|                                                                            |                                                                                                            |                                                            |                                                    |           |       |        |        |        
|Net cash provided by operating activities from
    continuing operations    |                                                                                                            |                                                            | 8,359                                              |           |       |        | 8,584  |        
|Net cash used in operating activities from
    discontinued operations      |                                                                                                            |                                                            | (2,246                                             | )         |       |        | (2,269 | )      
|                                                                            |                                                                                                            |                                                            |                                                    |           |       |        |        |        
|Net cash provided by operating activities                                   |                                                                                                            |                                                            | 6,113                                              |           |       |        | 6,315  |        
|                                                                            |                                                                                                            |                                                            |                                                    |           |       |        |        |        
|Investing activities:                                                       |                                                                                                            |                                                            |                                                    |           |       |        |        |        
|                                                                            | Capital improvements                                                                                       |                                                            |                                                    | (5,001    | )     |        |        | (10,309 | )    
|                                                                            | Net proceeds from disposition of discontinued
    operations                                               |                                                            |                                                    | 13,983    |       |        |        |        |      
|                                                                            | Withdrawals of deposits for capital expenditures                                                           |                                                            |                                                    | 2,205     |       |        |        | 6,176   |      
|                                                                            | Other                                                                                                      |                                                            |                                                    | (42       | )     |        |        | (357    | )    
|                                                                            |                                                                                                            |                                                            |                                                    |           |       |        |        |        
|Net cash provided by (used in) investing
    activities                     |                                                                                                            |                                                            | 11,145                                             |           |       |        | (4,490 | )      
|                                                                            |                                                                                                            |                                                            |                                                    |           |       |        |        |        
|Financing activities:                                                       |                                                                                                            |                                                            |                                                    |           |       |        |        |        
|                                                                            | Proceeds from exercise of stock options                                                                    |                                                            |                                                    | 4         |       |        |        |        |      
|                                                                            | Principal payments on long-term debt                                                                       |                                                            |                                                    | (14,936   | )     |        |        | (2,396  | )    
|                                                                            | Payments of deferred financing costs                                                                       |                                                            |                                                    | (561      | )     |        |        | (352    | )    
|                                                                            |                                                                                                            |                                                            |                                                    |           |       |        |        |        
|Net cash used in financing activities                                       |                                                                                                            |                                                            | (15,493                                            | )         |       |        | (2,748 | )      
|                                                                            |                                                                                                            |                                                            |                                                    |           |       |        |        |        
|Effect of exchange rate changes on cash                                     |                                                                                                            |                                                            |                                                   |           |       |        |       |        
|Net increase in cash and cash equivalents                                   |                                                                                                            |                                                            | 1,765                                              |           |       |        | (923   | )      
|Cash and cash equivalents at beginning of period                            |                                                                                                            |                                                            | 10,897                                             |           |       |        | 10,875 |        
|                                                                            |                                                                                                            |                                                            |                                                    |           |       |        |        |        
|                                                                            |                                                                                                            | $                                                          | 12,662                                             |           |       | $      | 9,952  |        
|                                                                            |                                                                                                            |                                                            |                                                    |           |       |        |        |        
|Supplemental cash flow information:                                         |                                                                                                            |                                                            |                                                    |           |       |        |        |        
|Cash paid during the period for:                                            |                                                                                                            |                                                            |                                                    |           |       |        |        |        
|                                                                            | Interest, net of the amounts capitalized shown
    below                                                   |                                                            | $                                                  | 7,561     |       |        | $      | 6,432   |      
|                                                                            | Interest capitalized                                                                                       |                                                            |                                                    | 75        |       |        |        | 216     |      
|                                                                            | Income taxes, net of refunds                                                                               |                                                            |                                                    | 234       |       |        |        |        |      
|Supplemental disclosure of non-cash investing and
    financing activities: |                                                                                                            |                                                            |                                                    |           |       |        |        |        
|                                                                            | Net non-cash debt increase (decrease)                                                                      |                                                            |                                                    | 44        |       |        |        | (15,922 | )    
|                                                                            | Issuance of promissory notes as consideration for
    taxation liabilities                                 |                                                            |                                                    | 2,369     |       |        |        |        |      

See notes to consolidated financial statements.

5



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##### Table of Contents






LODGIAN, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(Unaudited)


(Throughout this Form 10-Q, we will use
the terms Lodgian, we, our, and
us, to refer to Lodgian, Inc. and unless the
context otherwise requires or expressly states, our
subsidiaries).



|   |                 
|-- | ----------------
|1. | Business 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
May 10, 2004, we operated 88 hotels with an aggregate of
16,627 rooms, located in 30 states and Canada. Of the 88
hotels, 78 hotels, with an aggregate of 14,348 rooms, are part
of our continuing operations, while 10 hotels, with an aggregate
of 2,279 rooms, are held for sale. Our portfolio of 88 hotels
consists of:



| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | 83 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 hotels in our
financial statements, other than the one hotel in which we hold
a non-controlling equity interest and which we account for 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. As of May 10, 2004, we
operated all but three of our hotels under franchises obtained
from nationally recognized hospitality franchisors. We operated
60 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 operated
15 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.



|   |        
|-- | -------
|2. | General

Our condensed consolidated financial statements
include the accounts of Lodgian, Inc., its wholly-owned
subsidiaries and four joint ventures in which Lodgian, Inc.
has a controlling financial interest (owns a 50% or greater
voting equity interest and exercises control). We believe we
have control of the joint ventures when we manage and have
control of the joint ventures assets and operations. We
report the third party partners share of the net income or
loss of these joint ventures and their share of the joint
ventures equity as minority interest. We include in other
assets our investment in the hotel in which we hold a minority
interest and which we account for under the equity method. We
report our share of the income or loss of this minority-owned
hotel as part of interest income and other. All significant
intercompany accounts and transactions have been eliminated in
consolidation.

The accounting policies which we follow for
quarterly financial reporting are the same as those which we
disclosed in Note 1 of the Notes to Consolidated Financial
Statements included in our Annual Report on Form 10-K
(Form 10-K) for the year ended
December 31, 2003.

During 2003, we developed a portfolio improvement
strategy which was consistent with our goals of operating a
portfolio of profitable, well-maintained and appealing hotels at
superior locations in strong markets. In accordance with this
strategy and our efforts to reduce debt and interest costs, we
identified 19 hotels, one office building and three land
parcels for sale.

6



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Between November 1, 2003 and May 10,
2004, we sold the office building and nine of the nineteen
hotels. As of May 10, 2004, our portfolio consisted of 88
hotels, 78 of which represent our continuing portfolio
(including one hotel in which we have a non-controlling equity
interest which we do not consolidate).

In our opinion, the accompanying unaudited
condensed consolidated financial statements contain all
adjustments, consisting primarily of normal recurring
adjustments, necessary to present fairly our financial position
as of March 31, 2004, the results of our operations for the
three months ended March 31, 2004 and 2003 and our cash
flows for the three months ended March 31, 2004 and 2003.
Our results for interim periods are not necessarily indicative
of our results for the entire year. You should read these
financial statements in conjunction with our consolidated
financial statements and related notes included in our Annual
Report on Form 10-K for the year ended December 31,
2003.

As we prepare our financial statements in
accordance with accounting principles generally accepted in the
United States of America (GAAP), we reclassify certain prior
period amounts to conform to the current periods
presentation. We also make estimates and assumptions which
affect:



| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | the reported amounts of assets and liabilities;                                                  
|
| |  | the reported amounts of revenues and expenses
    during the reporting period; and               
|
| |  | the disclosures of contingent assets and
    liabilities at the date of our financial statements.

Our actual results could differ from our
estimates.



| |                    
| | -------------------
| | Reverse Stock Split

On April 27, 2004, our Board of Directors
authorized a reverse stock split of our common stock in a ratio
of one-for-three (1:3). The reverse split affected all of our
issued and outstanding common shares, warrants and stock
options. The record date for the reverse split was
April 29, 2004 and our new common stock began trading under
the split adjustment on April 30, 2004.

Fractional shares which resulted from the reverse
stock split are payable in cash. Each holder of a fractional
share of common stock after the effective date of the reverse
split has been or will be paid cash equal to the product of
(i) the average of the closing prices of the common stock
for the last ten trading days prior to April 30, 2004,
multiplied by (ii) the fraction of a share of common stock
held by such holder.

All amounts for common stock, warrants, stock
options, and all earnings per share computations have been
retroactively adjusted to reflect this change in our capital
structure.



|   |                         
|-- | ------------------------
|3. | Stock-based Compensation

As disclosed in Note 2 above, on
April 27, 2004, our Board of Directors authorized a reverse
stock split of our common stock in a ratio of one-for-three
(1:3). All stock option disclosures below have been
retroactively adjusted to reflect the reverse stock split.

As we previously disclosed in our Annual Report
on Form 10-K for the year ended December 31, 2003, on
November 25, 2002, we adopted a new stock incentive plan
which replaced the Option Plan previously in place. In
accordance with the Stock Incentive Plan, we can grant awards to
acquire up to 353,333 shares of common stock to our
directors, officers, or other key employees or consultants as
determined by a committee appointed by our 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. We cannot
grant stock options pursuant to the Stock Incentive Plan at an
exercise price which is less than 100% of the fair market value
per share on the date of the grant. Vesting,

7



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

exercisability, payment and other restrictions
pertaining to any awards made pursuant to the Stock Incentive
Plan are determined by the Committee. At our 2004 annual
meeting, stockholders approved an amendment and restatement of
the Stock Incentive Plan to, among other things, increase the
number of shares of common stock available for issuance
thereunder by 29,667 immediately and, in the event we consummate
a firm commitment, underwritten public offering of our common
stock, by an additional amount to be determined pursuant to a
formula.

We present below a summary of our stock option
plan and the restricted stock units activity under the plan for
the three months ended March 31, 2004:

|                           |           |         |         |                  |   |   |       |       | 
|-------------------------- | --------- | ------- | ------- | ---------------- | - | - | ----- | ----- | 
|                           |           |         |         | Weighted Average
|                           |           | Options |         | Exercise Price  
|                           |           |         |         |                 
|Balance, December 31, 2003 |           |         | 157,529 |                  |   | $ | 13.92 |      
|                           | Exercised |         |         | (241             | ) |   |       | 15.21 | 
|                           | Forfeited |         |         | (3,164           | ) |   |       | 15.21 | 
|                           |           |         |         |                  |   |   |       |      
|Balance, March 31, 2004    |           |         | 154,124 |                  |   | $ | 13.91 |      
|                           |           |         |         |                  |   |   |       |      

|                           |           |             |        |     | 
|-------------------------- | --------- | ----------- | ------ | --- | 
|                           |           | Restricted 
|                           |           | Stock Units
|                           |           |            
|Balance, December 31, 2003 |           |             | 66,666 |    
|                           | Issued    |             |        |    | 
|                           | Forfeited |             |        |    | 
|                           |           |             |        |    
|Balance, March 31, 2004    |           |             | 66,666 | (1)
|                           |           |             |        |    



---



|    |                                                                
|--- | ---------------------------------------------------------------
|(1) | At March 31, 2004, none of the restricted
    stock had vested.

In the following table, we summarize information
for options outstanding and exercisable at March 31, 2004:

|                 |  |                     |         |                           |  |                  |     |        |  |                  |       |  |  |  |        |  |  |   |       | 
|---------------- |  | ------------------- | ------- | ------------------------- |  | ---------------- | --- | ------ |  | ---------------- | ----- |  |  |  | ------ |  |  | - | ----- | 
|                 |  |                     |         |                          
|                 |  | Options Outstanding |         | Options Exercisable      
|                 |  |                     |         |                          
|                 |  |                     |         | Weighted Average          |  | Weighted Average |     |        |  | Weighted Average
|Range of Prices  |  | Number              |         | Remaining Life (in Years) |  | Exercise Prices  |     | Number |  | Exercise Prices 
|                 |  |                     |         |                           |  |                  |     |        |  |                 
|$9.00 to $10.50  |  |                     | 33,333  |                           |  |                  | 9.3 |        |  | $                | 9.00  |  |  |  |       |  |  | $ | 9.00  | 
|$10.53 to $15.21 |  |                     | 113,625 |                           |  |                  | 9.4 |        |  | $                | 15.21 |  |  |  | 37,924 |  |  | $ | 15.21 | 
|$15.24 to $15.66 |  |                     | 7,166   |                           |  |                  | 9.5 |        |  | $                | 15.66 |  |  |  | 2,389  |  |  | $ | 15.66 | 
|                 |  |                     |         |                           |  |                  |     |        |  |                  |       |  |  |  |        |  |  |   |       | 
|                 |  |                     | 154,124 |                           |  |                  | 9.4 |        |  | $                | 13.89 |  |  |  | 40,313 |  |  | $ | 15.24 | 
|                 |  |                     |         |                           |  |                  |     |        |  |                  |       |  |  |  |        |  |  |   |       | 

We account 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 our employee stock options
is equal to the market price of the underlying stock on the date
of grant, no compensation expense is recognized. Under Statement
of Financial Accounting Standard (SFAS)
No. 123, Accounting for Stock-Based
Compensation, (as amended by SFAS No. 148)
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. The income tax benefit, if any, associated
with the exercise of stock options is credited to additional
paid-in capital.

8



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Had the compensation cost of our Stock Option
Plan been recognized under SFAS No. 123, based on the
fair market value at the grant dates, our pro forma net loss and
net loss per share would have been as follows:

|                                                                                                |             |                    |   |                   |   |  |   |         |  
|----------------------------------------------------------------------------------------------- | ----------- | ------------------ | - | ----------------- | - |  | - | ------- | -
|                                                                                                |             |                   
|                                                                                                |             | Three Months Ended
|                                                                                                |             |                   
|                                                                                                |             | March 31, 2004     |   | March 31, 2003(1)
|                                                                                                |             |                    |   |                  
|Loss  continuing operations                                                                    |             |                    |   |                   |   |  |   |        
|                                                                                                | As reported |                    | $ | (6,384            | ) |  | $ | (5,841  | )
|                                                                                                | Pro forma   |                    |   | (6,509            | ) |  |   | (5,841  | )
|Loss from discontinued operations, net of taxes                                                 |             |                    |   |                   |   |  |   |        
|                                                                                                | As reported |                    |   | (702              | ) |  |   | (3,243  | )
|                                                                                                | Pro forma   |                    |   | (702              | ) |  |   | (3,243  | )
|Net loss:                                                                                       |             |                    |   |                   |   |  |   |        
|                                                                                                | As reported |                    |   | (7,086            | ) |  |   | (9,084  | )
|                                                                                                | Pro forma   |                    |   | (7,211            | ) |  |   | (9,084  | )
|Net loss attributable to common stock                                                           |             |                    |   |                   |   |  |   |        
|                                                                                                | As reported |                    |   | (7,086            | ) |  |   | (12,860 | )
|                                                                                                | Pro forma   |                    |   | (7,211            | ) |  |   | (12,860 | )
|Loss from continuing operations attributable to
    common stock before discontinued operations |             |                    |   |                   |   |  |   |        
|                                                                                                | As reported |                    |   | (6,384            | ) |  |   | (9,617  | )
|                                                                                                | Pro forma   |                    |   | (6,509            | ) |  |   | (9,617  | )
|Basic and diluted loss per common share:                                                        |             |                    |   |                   |   |  |   |        
|Loss  continuing operations                                                                    |             |                    |   |                   |   |  |   |        
|                                                                                                | As reported |                    | $ | (2.74             | ) |  | $ | (2.50   | )
|                                                                                                | Pro forma   |                    |   | (2.78             | ) |  |   | (2.50   | )
|Loss from discontinued operations, net of taxes                                                 |             |                    |   |                   |   |  |   |        
|                                                                                                | As reported |                    |   | (0.30             | ) |  |   | (1.39   | )
|                                                                                                | Pro forma   |                    |   | (0.30             | ) |  |   | (1.39   | )
|Net loss                                                                                        |             |                    |   |                   |   |  |   |        
|                                                                                                | As reported |                    |   | (3.04             | ) |  |   | (3.89   | )
|                                                                                                | Pro forma   |                    |   | (3.08             | ) |  |   | (3.89   | )
|Net loss attributable to common stock                                                           |             |                    |   |                   |   |  |   |        
|                                                                                                | As reported |                    |   | (3.04             | ) |  |   | (5.51   | )
|                                                                                                | Pro forma   |                    |   | (3.08             | ) |  |   | (5.51   | )
|Loss from continuing operations attributable to
    common stock before discontinued operations |             |                    |   |                   |   |  |   |        
|                                                                                                | As reported |                    |   | (2.74             | ) |  |   | (4.12   | )
|                                                                                                | Pro forma   |                    |   | (2.78             | ) |  |   | (4.12   | )



---



|    |                                                                                  
|--- | ---------------------------------------------------------------------------------
|(1) | There were no options outstanding between
    January 1, 2003 and March 31, 2003.

9



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                        
|-- | -----------------------
|4. | Discontinued Operations

As discussed above, during 2003, we identified 19
hotels, one office building and three land parcels for sale as
part of our portfolio improvement strategy, and in our efforts
to reduce debt and interest costs. Between November 1, 2003
and May 10, 2004, we sold nine of the nineteen hotels and
the office building for an aggregate sales price of
$48.3 million. From the sale of these assets, we paid down
debt of approximately $35.5 million.

In accordance with SFAS No. 144, we
have included the assets sold during 2003 and 2004 as well as
the assets held for sale at March 31, 2004 (including any
related impairment charges) in Discontinued Operations in the
Consolidated Statements of Operations. The assets held for sale
at March 31, 2004 and December 31, 2003 and the
liabilities related to these assets are separately disclosed in
the Condensed Consolidated Balance Sheets. Where the carrying
values of the assets held for sale exceeded the estimated fair
values, net of selling costs, we reduced the carrying values and
recorded impairment charges. We determine fair values using
quoted market prices, when available, or other accepted
valuation techniques. During the three months ended
March 31, 2004, we recorded impairment charges of
$2.2 million on assets held for sale. Where the estimated
selling prices, net of selling costs, of assets held for sale
exceeded the carrying values, we did not increase the carrying
values of the assets. Among other criteria, we classify an asset
as held for sale if we expect to dispose of it within one year.

At March 31, 2004, 13 hotels and three
land parcels were held for sale. At December 31, 2003,
18 hotels and three land parcels were held for sale. The
following condensed combined table summarizes the assets and
liabilities relating to the properties identified as held for
sale as of March 31, 2004 and December 31, 2003:

|                                          |                   |                          |        |              |  |   |        |        | 
|----------------------------------------- | ----------------- | ------------------------ | ------ | ------------ |  | - | ------ | ------ | 
|                                          |                   | March 31,                |        | December 31,
|                                          |                   | 2004                     |        | 2003        
|                                          |                   |                          |        |             
|                                          |                   |                         
|                                          |                   | (Unaudited in thousands)
|ASSETS                                   
|Accounts receivable, net of allowances    |                   | $                        | 1,066  |              |  | $ | 1,252  |       
|Inventories                               |                   |                          | 1,076  |              |  |   | 1,377  |       
|Prepaid expenses and other current assets |                   |                          | 1,733  |              |  |   | 1,039  |       
|Property and equipment, net               |                   |                          | 49,582 |              |  |   | 61,624 |       
|Other assets                              |                   |                          | 2,331  |              |  |   | 3,275  |       
|                                          |                   |                          |        |              |  |   |        |       
|                                          |                   | $                        | 55,788 |              |  | $ | 68,567 |       
|                                          |                   |                          |        |              |  |   |        |       
|                                         
|LIABILITIES                              
|Accounts payable                          |                   | $                        | 1,199  |              |  | $ | 1,234  |       
|Other accrued liabilities                 |                   |                          | 2,276  |              |  |   | 3,120  |       
|Advance deposits                          |                   |                          | 571    |              |  |   | 390    |       
|Current portion of long-term debt         |                   |                          | 567    |              |  |   | 771    |       
|Long-term debt                            |                   |                          | 42,727 |              |  |   | 52,433 |       
|                                          |                   |                          |        |              |  |   |        |       
|                                          | Total liabilities |                          | $      | 47,340       |  |   | $      | 57,948 | 
|                                          |                   |                          |        |              |  |   |        |       

10



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The condensed combined results of operations of
the properties classified as Discontinued Operations as of
March 31, 2004 were as follows:

|                           |                                   |                          |        |           |       |   |        |       |       | 
|-------------------------- | --------------------------------- | ------------------------ | ------ | --------- | ----- | - | ------ | ----- | ----- | 
|                           |                                   |                         
|                           |                                   | Three Months Ended      
|                           |                                   |                         
|                           |                                   | March 31,                |        | March 31,
|                           |                                   | 2004                     |        | 2003     
|                           |                                   |                          |        |          
|                           |                                   |                         
|                           |                                   | (Unaudited in           
|                           |                                   | thousands)              
|Revenues:                  |                                   |                          |        |           |       |   |        |      
|                           |                                   | Rooms                    |        | $         | 7,944 |   |        | $     | 9,134 | 
|                           |                                   | Food and beverage        |        |           | 2,318 |   |        |       | 2,359 | 
|                           |                                   | Other                    |        |           | 478   |   |        |       | 793   | 
|                           |                                   |                          |        |           |       |   |        |      
|                           |                                   |                          | 10,740 |           |       |   | 12,286 |      
|                           |                                   |                          |        |           |       |   |        |      
|Operating expenses:        |                                   |                          |        |           |       |   |        |      
|                           | Direct:                           |                          |        |           |       |   |        |       |      
|                           |                                   | Rooms                    |        |           | 2,696 |   |        |       | 3,196 | 
|                           |                                   | Food and beverage        |        |           | 1,834 |   |        |       | 2,028 | 
|                           |                                   | Other                    |        |           | 385   |   |        |       | 598   | 
|                           |                                   |                          |        |           |       |   |        |      
|                           |                                   |                          | 4,915  |           |       |   | 5,822  |      
|                           |                                   |                          |        |           |       |   |        |      
|                           |                                   |                          | 5,825  |           |       |   | 6,464  |      
|Other operating expenses:  |                                   |                          |        |           |       |   |        |      
|                           | General, administrative and other |                          |        | 6,063     |       |   |        | 7,750 |      
|                           | Depreciation and amortization     |                          |        | 133       |       |   |        | 1,447 |      
|                           | Impairment of long-lived assets   |                          |        | 2,153     |       |   |        |      |      
|                           |                                   |                          |        |           |       |   |        |      
|                           |                                   | Other operating expenses |        |           | 8,349 |   |        |       | 9,197 | 
|                           |                                   |                          |        |           |       |   |        |      
|                           |                                   |                          | (2,524 | )         |       |   | (2,733 | )    
|Interest expense           |                                   |                          | (1,185 | )         |       |   | (510   | )    
|Gain on asset dispositions |                                   |                          | 3,007  |           |       |   |       |      
|                           |                                   |                          |        |           |       |   |        |      
|Loss before income taxes   |                                   |                          | (702   | )         |       |   | (3,243 | )    
|Provision for income taxes |                                   |                          |       |           |       |   |       |      
|                           |                                   |                          |        |           |       |   |        |      
|Net loss                   |                                   | $                        | (702   | )         |       | $ | (3,243 | )    
|                           |                                   |                          |        |           |       |   |        |      



|   |                 
|-- | ----------------
|5. | Cash, Restricted

Our restricted cash as of March 31, 2004
consists of amounts reserved for letter of credit collateral, a
deposit required by our bankers and cash reserved pursuant to
certain loan agreements.

11



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |               
|-- | --------------
|6. | Loss Per Share

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

|                                  |                                          |                                                                                                 |  |           |        |   |  |   |         |  
|--------------------------------- | ---------------------------------------- | ----------------------------------------------------------------------------------------------- |  | --------- | ------ | - |  | - | ------- | -
|                                  |                                          |                                                                                                
|                                  |                                          | Three Months Ended                                                                             
|                                  |                                          |                                                                                                
|                                  |                                          | March 31,                                                                                       |  | March 31,
|                                  |                                          | 2004                                                                                            |  | 2003     
|                                  |                                          |                                                                                                 |  |          
|                                  |                                          |                                                                                                
|                                  |                                          | (Unaudited in                                                                                  
|                                  |                                          | thousands, except per                                                                          
|                                  |                                          | share data)                                                                                    
|Basic and diluted loss per share: |                                          |                                                                                                 |  |           |        |   |  |  
|                                  | Numerator:                               |                                                                                                 |  |           |        |   |  |   |        
|                                  |                                          | Loss  continuing operations                                                                    |  | $         | (6,384 | ) |  | $ | (5,841  | )
|                                  |                                          | Loss from discontinued operations, net of taxes                                                 |  |           | (702   | ) |  |   | (3,243  | )
|                                  |                                          |                                                                                                 |  |           |        |   |  |  
|                                  |                                          | Net loss                                                                                        |  |           | (7,086 | ) |  |   | (9,084  | )
|                                  |                                          | Preferred stock dividend                                                                        |  |           |       |   |  |   | (3,776  | )
|                                  |                                          |                                                                                                 |  |           |        |   |  |  
|                                  |                                          | Net loss attributable to common stock                                                           |  |           | (7,086 | ) |  |   | (12,860 | )
|                                  |                                          |                                                                                                 |  |           |        |   |  |  
|                                  |                                          | Loss  continuing operations                                                                    |  |           | (6,384 | ) |  |   | (5,841  | )
|                                  |                                          | Preferred stock dividend                                                                        |  |           |       |   |  |   | (3,776  | )
|                                  |                                          |                                                                                                 |  |           |        |   |  |  
|                                  |                                          | Loss from continuing operations attributable to
    common stock before discontinued operations |  | $         | (6,384 | ) |  | $ | (9,617  | )
|                                  |                                          |                                                                                                 |  |           |        |   |  |  
|                                  | Denominator:                             |                                                                                                 |  |           |        |   |  |   |        
|                                  |                                          | Denominator for basic and diluted loss per
    share  weighted-average shares                  |  |           | 2,334  |   |  |   | 2,333   |  
|                                  |                                          |                                                                                                 |  |           |        |   |  |  
|                                  | Basic and diluted loss per common share: |                                                                                                 |  |           |        |   |  |   |        
|                                  |                                          | Loss  continuing operations                                                                    |  | $         | (2.74  | ) |  | $ | (2.50   | )
|                                  |                                          | Loss from discontinued operations, net of taxes                                                 |  |           | (0.30  | ) |  |   | (1.39   | )
|                                  |                                          |                                                                                                 |  |           |        |   |  |  
|                                  |                                          | Net loss                                                                                        |  |           | (3.04  | ) |  |   | (3.89   | )
|                                  |                                          |                                                                                                 |  |           |        |   |  |  
|                                  |                                          | Net loss attributable to common stock                                                           |  |           | (3.04  | ) |  |   | (5.51   | )
|                                  |                                          |                                                                                                 |  |           |        |   |  |  
|                                  |                                          | Loss from continuing operations attributable to
    common stock before discontinued operations |  | $         | (2.74  | ) |  | $ | (4.12   | )
|                                  |                                          |                                                                                                 |  |           |        |   |  |  

We did not include the shares associated with the
assumed conversion of the restricted stock units
(66,666 shares) or the exercise of stock options (options
to acquire 154,124 shares of common stock) and A and
B warrants (rights to acquire 503,546 and
343,122 shares of common stock, respectively) in the
computation of diluted loss per share for the period ended
March 31, 2004 because their inclusion would have been
antidilutive. We did not include the shares associated with the
exercise of the A and B warrants (rights to acquire 503,546
and 343,122 shares of common stock, respectively) in the
computation of diluted loss per share for the period ended
March 31, 2003 because their inclusion would have been
antidilutive.

12



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                          
|-- | -------------------------
|7. | Other Accrued Liabilities

At March 31, 2004 and December 31,
2003, other accrued liabilities consisted of the following:

|                                 |  |                          |        |                   |  |   |        | 
|-------------------------------- |  | ------------------------ | ------ | ----------------- |  | - | ------ | 
|                                 |  | March 31, 2004           |        | December 31, 2003
|                                 |  |                          |        |                  
|                                 |  |                         
|                                 |  | (Unaudited in thousands)
|Salaries and related costs       |  | $                        | 17,760 |                   |  | $ | 16,211 | 
|Property and sales taxes         |  |                          | 10,950 |                   |  |   | 9,427  | 
|Professional fees                |  |                          | 420    |                   |  |   | 570    | 
|Provision for state income taxes |  |                          | 320    |                   |  |   | 2,361  | 
|Franchise fee accrual            |  |                          | 1,667  |                   |  |   | 1,115  | 
|Accrued interest                 |  |                          | 491    |                   |  |   | 526    | 
|Accrual for allowed claims       |  |                          | 179    |                   |  |   | 186    | 
|Other                            |  |                          | 614    |                   |  |   | 1,036  | 
|                                 |  |                          |        |                   |  |   |        | 
|                                 |  | $                        | 32,401 |                   |  | $ | 31,432 | 
|                                 |  |                          |        |                   |  |   |        | 



|   |     
|-- | ----
|8. | Debt

Substantially all of our property and equipment
are pledged as collateral for long-term obligations. Certain of
our mortgage notes are subject to a prepayment or yield
maintenance penalty if we repay them prior to their maturity.
Set forth below, by debt pool, is a summary of our debt at
March 31, 2004 along with the applicable interest rates and
the related carrying values of the property, plant and equipment
which collateralize these debts:

|                 |                                                      |           |  |                          |  |             |   |          |  |  |   |         |  |  |                                    
|---------------- | ---------------------------------------------------- | --------- |  | ------------------------ |  | ----------- | - | -------- |  |  | - | ------- |  |  | -----------------------------------
|                 |                                                      |           |  |                          |  |            
|                 |                                                      |           |  | March 31, 2004           |  |            
|                 |                                                      |           |  |                          |  |            
|                 |                                                      | Number    |  | Property, Plant          |  | Debt        |   | Interest
|                 |                                                      | of Hotels |  | and Equipment, net       |  | Obligations |   | Rates   
|                 |                                                      |           |  |                          |  |             |   |         
|                 |                                                      |           |  | (1)                      |  | (1)         |   |         
|                 |                                                      |           |  |                          |  |            
|                 |                                                      |           |  | (Unaudited in thousands) |  |            
|Exit financing   |                                                      |           |  |                          |  |             |   |          |  |  |   |         |  | 
|                 | Merrill Lynch Mortgage Lending, Inc. 
    Senior    |           |  |                          |  |             |   |          |  |  | $ | 210,160 |  |  | LIBOR plus 2.36%                   
|                 | Merrill Lynch Mortgage Lending, Inc. 
    Mezzanine |           |  |                          |  |             |   |          |  |  |   | 81,010  |  |  | LIBOR plus 8.79%                   
|                 |                                                      |           |  |                          |  |             |   |          |  |  |   |         |  | 
|                 | Merrill Lynch Mortgage Lending, Inc. 
    Total     |           |  | 53                       |  |             | $ | 391,249  |  |  |   | 291,170 |  |  |                                    
|                 | Computershare Trust Company of Canada                |           |  | 1                        |  |             |   | 13,874   |  |  |   | 7,391   |  |  | 7.88%                              
|Lehman financing |                                                      |           |  |                          |  |             |   |          |  |  |   |         |  | 
|                 | Lehman Brothers Holdings, Inc.                       |           |  | 15                       |  |             |   | 65,141   |  |  |   | 71,071  |  |  | Higher of LIBOR plus 5.25% or 7.25%
|Other financing  |                                                      |           |  |                          |  |             |   |          |  |  |   |         |  | 
|                 | Column Financial, Inc.                               |           |  | 9                        |  |             |   | 61,505   |  |  |   | 26,761  |  |  | 10.59%                             
|                 | Lehman Brothers Holdings, Inc.                       |           |  | 5                        |  |             |   | 37,976   |  |  |   | 23,292  |  |  | $16,414 at 9.40%; $6,878 at 8.90%  
|                 | JP Morgan Chase Bank                                 |           |  | 2                        |  |             |   | 8,806    |  |  |   | 10,516  |  |  | 7.25%                              
|                 | DDL Kinser                                           |           |  | 1                        |  |             |   | 3,166    |  |  |   | 2,360   |  |  | 8.25%                              
|                 | First Union Bank                                     |           |  | 1                        |  |             |   | 4,353    |  |  |   | 3,345   |  |  | 9.38%                              
|                 | Column Financial, Inc.                               |           |  | 1                        |  |             |   | 7,762    |  |  |   | 8,847   |  |  | 9.45%                              

13



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                      |                                                                   |           |     |                          |  |             |         |               |  |   |         |              |  |  |                 
|------------------------------------- | ----------------------------------------------------------------- | --------- | --- | ------------------------ |  | ----------- | ------- | ------------- |  | - | ------- | ------------ |  |  | ----------------
|                                      |                                                                   |           |     |                          |  |            
|                                      |                                                                   |           |     | March 31, 2004           |  |            
|                                      |                                                                   |           |     |                          |  |            
|                                      |                                                                   | Number    |     | Property, Plant          |  | Debt        |         | Interest     
|                                      |                                                                   | of Hotels |     | and Equipment, net       |  | Obligations |         | Rates        
|                                      |                                                                   |           |     |                          |  |             |         |              
|                                      |                                                                   |           |     | (1)                      |  | (1)         |         |              
|                                      |                                                                   |           |     |                          |  |            
|                                      |                                                                   |           |     | (Unaudited in thousands) |  |            
|                                      | Column Financial, Inc.                                            |           |     | 1                        |  |             |         | 6,082         |  |   |         | 3,173        |  |  | 10.74%          
|                                      | Robb Evans, Trustee                                               |           |     | 1 21                     |  |             |         | 6,661 136,311 |  |   |         | 6,958 85,252 |  |  | Prime plus 4.00%
|                                      | Total  other financing                                           |           |     | 90                       |  |             |         | 606,575       |  |   |         | 454,884      |  |  | 6.4%(2)         
|Long-term debt 
    other            |                                                                   |           |    |                          |  |             |        |               |  |   | 4,288   |              |  | 
|                                      | Deferred interest  long-term                                     |           |     |                          |  |             |         |               |  |   |         |              |  |  |                 
|                                      | Deferred rent on a long-term ground lease                         |           |     |                         |  |             |         |              |  |   |         | 2,549        |  |  |                 
|                                      | Tax notes issued pursuant to our Joint Plan of
    Reorganization |           |     |                        |  |             |         |             |  |   |         | 4,014 574    |  |  |                 
|                                      | Other                                                             |           |     |                         |  |             |         |              |  |   |         | 11,425       |  |  |                 
|                                      |                                                                   |           |    |                          |  |             | 4,468   |               |  |   |        |              |  | 
|Property, plant and equipment  other |                                                                   |           | 90  |                          |  |             | 611,043 |               |  |   | 466,309 |              |  | 
|                                      |                                                                   |           | (13 | )                        |  |             | (49,582 | )             |  |   | (43,294 | )            |  | 
|Held for sale                         |                                                                   |           | 77  |                          |  | $           | 561,461 |               |  | $ | 423,015 |              |  | 
|Total March 31, 2004                  |                                                                   |           |     |                          |  |             |         |               |  |   |         |              |  | 
|                                      |                                                                   |           |     |                          |  |             |         |               |  |   |         |              |  | 



---



|    |                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Debt obligations and property, plant and
    equipment of one hotel in which we have a non-controlling equity
    interest that we do not consolidate are excluded from the table
    above.
|   
|(2) | The 6.4% in the table above represents our annual
    weighted average cost of debt at March 31, 2004.                                                                                      



| |               
| | --------------
| | Exit Financing

The Merrill Lynch Mortgage senior and mezzanine
debt agreements provide that when either (i) the debt yield
for the trailing 12-month period is below 13.25% during 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, loan 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 would no
longer be deposited into the restricted cash account if 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 the
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. Between the inception date of the
loan and May 10, 2004, $9.1 million was released from
the restricted cash account for capital expenditures and
scheduled interest and principal payments. As of May 10,
2004, $3.4 million was being retained in the restricted
cash account. At March 31, 2004, the debt yield and debt
service coverage ratios 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 which we currently meet.

14



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

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 this hotel were $1.4 million
for the three months ended March 31, 2004 and also for the
three months ended March 31, 2003. The debt of
approximately $7.0 million is included in the current
portion of long-term debt in our consolidated balance sheet as
of March 31, 2004.



|   |                              
|-- | -----------------------------
|9. | Commitments and Contingencies



| |                                                 
| | ------------------------------------------------
| | Franchise Agreement 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 program 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. The franchise
agreements typically authorize us to operate the hotel under the
franchise name, at a specific location or within a specified
area, and require that we operate a 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 4.0% 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
12.0% of gross room revenues.

These costs vary with revenues and are not fixed
commitments. Franchise fees incurred for the three months ended
March 31, 2004 and 2003 were as follows:

|                        |  |                          |       |                |  |   |       | 
|----------------------- |  | ------------------------ | ----- | -------------- |  | - | ----- | 
|                        |  |                         
|                        |  | Three Months Ended      
|                        |  |                         
|                        |  | March 31, 2004           |       | March 31, 2003
|                        |  |                          |       |               
|                        |  |                         
|                        |  | (Unaudited in thousands)
|Continuing operations   |  | $                        | 5,250 |                |  | $ | 4,780 | 
|Discontinued operations |  |                          | 588   |                |  |   | 725   | 
|                        |  |                          |       |                |  |   |       | 
|                        |  | $                        | 5,838 |                |  | $ | 5,505 | 
|                        |  |                          |       |                |  |   |       | 

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 5, 13 and 9 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,

15



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

increased royalty and other recurring fees and
substantial renovation of the facilities, or the franchisor may
elect not to renew the franchise. The costs incurred in
connection with these agreements are primarily monthly payments
due to the franchisors based on a percentage of room revenues.

If we do not comply with the terms of a franchise
agreement, following notice and an opportunity to cure, the
franchisor has the right to terminate the agreement, which could
lead to a default under one or more of our loan agreements which
could materially and adversely affect us. Prior to terminating a
franchise agreement, franchisors are required to notify us of
the areas of non-compliance and give us the opportunity to cure
the non-compliance. In the past, we have been able to cure most
cases of non-compliance and most defaults within the cure
periods, and those events of non-compliance and defaults did not
cause termination of our franchises or defaults on our loan
agreements. If we perform an economic analysis of the hotel and
determine that it is not economically feasible to comply with a
franchisors requirements, we will either select an
alternative franchisor or operate the hotel without a franchise
affiliation.

As of May 10, 2004, we have been notified
that we were not in compliance with some of the terms of eight
of our franchise agreements and have received default and
termination notices from franchisors with respect to an
additional three hotels. We cannot assure you that we will be
able to complete our action plans (which we estimate will cost
approximately $3.8 million) to cure the alleged defaults
prior to the specified termination dates or be granted
additional time in which to cure any defaults. We are not aware
of any other instances of non-compliance with our 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 May 10, 2004, we have not completed the
required capital expenditures for 32 hotels in accordance
with the stipulations and estimate that completing those
improvements will cost $24.6 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.

We believe that we will cure the non-compliance
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 improvement
program in 2004.



| |                  
| | -----------------
| | Letters of Credit

As of March 31, 2004, we 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 fully collateralized by our cash
(classified as restricted cash in the accompanying Condensed
Consolidated Balance Sheets).



| |               
| | --------------
| | Self-insurance

We are 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. We establish
liabilities for these self-insured obligations annually, based
on actuarial valuations and our history of claims. Should
unanticipated events cause these claims to escalate beyond
normal expectations, our financial condition and results of operations
would be negatively impacted.

16



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

As of March 31, 2004, and
December 31, 2003, we had approximately $10.3 million
and $10.0 million accrued for these liabilities,
respectively.

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.



| |           
| | ----------
| | 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 protection are limited to the amounts approved
by the Bankruptcy Court for settlement of such claims and are
payable out of the disputed claims reserves provided for in our
plans of reorganization, 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 $0.1 million
of cash as of March 31, 2004. We have reserved for all
claims approved by the Bankruptcy Court which have not yet been
paid.



|    |                              
|--- | -----------------------------
|10. | New Accounting Pronouncements

On July 1, 2003, in accordance with
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity, we reclassified the Preferred Stock to the
liability section of the consolidated balance sheet and began
presenting the related dividends in interest expense. 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. Thus the
Preferred Stock dividend for the three months ended
March 31, 2004 of $4.3 million is presented as part of
interest expense while the Preferred Stock dividend for the
three months ended March 31, 2003 of $3.8 million is
presented as a deduction from retained earnings.

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.

17



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##### Table of Contents



LODGIAN, INC. AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

We were 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, we were required to apply the
provisions of FIN 46R to any other entities falling within its
scope. The adoption of FIN 46 and the counterpart revision
(FIN 46R) has not had and is not expected to have a
material impact on our financial position and results of
operations.



|    |                           
|--- | --------------------------
|11. | Related Party Transactions

Richard Cartoon, our Executive Vice President and
Chief Financial Officer between October 4, 2001 and
October 13, 2003, is a principal in a business which we
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 Chief Financial Officer, we were
billed $28,000 and $52,000, including expenses, for other
support and services provided by associates of Richard Cartoon,
LLC for the three months ended March 31, 2004 and 2003,
respectively. Richard Cartoon, LLC may continue to provide
restructuring support and services in the short-term.



|    |                  
|--- | -----------------
|12. | Subsequent Events

As previously discussed, between November 1,
2003 and May 10, 2004, we sold an office building and nine
of the hotels identified for sale. One of these hotels was sold
in 2003, five were sold in the first quarter of 2004 and three
were sold subsequent to the first quarter 2004. Summarized below
is certain financial data relating to the three hotels sold
between April 1, 2004 and May 10, 2004:

|                                                                                                                                     |  |                          |        | 
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------ | ------ | 
|                                                                                                                                     |  | (Unaudited in thousands)
|                                                                                                                                     |  |                         
|Aggregate sales price                                                                                                                |  | $                        | 20,678 | 
|Carrying value of property, plant and equipment
    at March 31, 2004                                                                |  |                          | 14,553 | 
|Debt paid down from sales proceeds                                                                                                   |  |                          | 18,141 | 
|Total revenues for the three months ended
    March 31, 2004 ($2.6 million for the three months
    ended March 31, 2003)            |  |                          | 2,793  | 
|Direct operating expenses for the three months
    ended March 31, 2004 ($1.2 million for the three
    months ended March 31, 2003) |  |                          | 1,153  | 

18



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

You should read the discussion below in
conjunction with the unaudited condensed consolidated financial
statements and accompanying notes, set forth in
Item I. Financial Statements included in this
Form 10-Q. 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 in our
Form 10-K for the year ended December 31,
2003.

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
May 10, 2004, we operated 88 hotels with an aggregate of
16,627 rooms, located in 30 states and Canada. Of the 88
hotels, 78 hotels, with an aggregate of 14,348 rooms, are part
of our continuing operations, while 10 hotels, with an aggregate
of 2,279 rooms, are held for sale. Our portfolio of 88 hotels
consists of:



| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | 83 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 hotels in our
financial statements, other than the one hotel in which we hold
a minority interest and which we account for on the equity
method.

During 2003, we developed a portfolio improvement
strategy which was consistent with our goals of operating a
portfolio of profitable, well-maintained and appealing hotels at
superior locations in strong markets. In accordance with this
strategy and our efforts to reduce debt and interest costs, we
identified 19 hotels, one office building and three land
parcels for sale. Between November 1, 2003 and May 10,
2004, we sold the office building and nine of the nineteen
hotels. As of May 10, 2004, our portfolio consisted of 88
hotels, 78 of which represent our continuing portfolio
(including one hotel in which we have a non-controlling equity
interest and which we do not consolidate).



| |                    
| | -------------------
| | Reverse Stock Split

On April 27, 2004, our Board of Directors
authorized a reverse stock split of our common stock in a ratio
of one-for-three (1:3). The reverse split affected all of our
issued and outstanding common shares, warrants and stock
options. The record date for the reverse split was
April 29, 2004 and our new common stock began trading under
the split adjustment on April 30, 2004.

Fractional shares which resulted from the reverse
stock split are payable in cash. Each holder of a fractional
share of common stock after the effective date of the reverse
split has been or will be paid cash equal to the product of
(i) the average of the closing prices of the common stock
for the last ten trading days prior to April 30, 2004,
multiplied by (ii) the fraction of a share of common stock
held by such holder.

All share disclosures, warrants, stock options
and earnings per share computations have been retroactively
adjusted to reflect this change in our capital structure.

19



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##### Table of Contents



Operating Summary

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



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenues increased as a result of an increase in
    leisure and business travel as the hospitality industry and the
    economy showed signs of recovery in the first quarter 2004. In
    addition, some of our hotels which were undergoing renovation in
    the first quarter 2003 experienced improved occupancy levels
    with the completion of renovation activities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Operating expenses including direct hotel
    operating expenses, decreased approximately $1.0 million in
    the first quarter 2004 as compared to the first quarter 2003.
    Our hotels were negatively affected by increased benefit costs
    for 401k, workers compensation, union costs, group medical
    and state unemployment rate increases, higher utilities,
    advertising and repairs and maintenance costs. The hotels,
    however, benefited from stabilization in the insurance premium
    markets, successful appeals on property tax assessments, an
    adjustment to the additional base rent calculation for one hotel
    and reduced corporate overhead costs primarily due to reduced
    post emergence bankruptcy costs. Depreciation and amortization
    charges also decreased due to a reduced asset base as a result
    of impairment charges recorded after the first quarter of 2003.
|
| |  | Interest expense increased as a result of the
    Lehman Financing received in May 2003. This financing replaced
    debt on which we were not required to pay interest while the
    hotels collateralizing the debt were in Chapter 11.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Net loss attributable to common stock was
    $7.1 million for the first quarter 2004 and
    $12.9 million for the first quarter 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

Summary of Discontinued Operations

As discussed above, during 2003, we identified 19
hotels, one office building and three land parcels for sale as
part of our portfolio improvement strategy and our efforts to
reduce debt and interest costs. Between November 1, 2003
and May 10, 2004, we sold nine of the nineteen hotels and
the office building. Summarized below is certain financial data
related to the nine hotels and one office building sold between
November 1, 2003 and May 10, 2004:

|                                                                   |  |                          |        | 
|------------------------------------------------------------------ |  | ------------------------ | ------ | 
|                                                                   |  | (Unaudited in thousands)
|                                                                   |  |                         
|Aggregate sales price                                              |  | $                        | 48,263 | 
|Debt pay down (principal only)                                     |  |                          | 35,513 | 
|Total revenues for the year ended
    December 31, 2003            |  |                          | 23,755 | 
|Direct operating expenses for the year ended
    December 31, 2003 |  |                          | 10,779 | 

In accordance with SFAS No. 144, we have
included the assets sold during 2003 and 2004 as well as the
assets held for sale at March 31, 2004 (including any
related impairment charges) in Discontinued Operations in the
Consolidated Statement of Operations. The assets held for sale
at March 31, 2004 and December 31, 2003 and the
liabilities related to these assets are separately disclosed in
the Condensed Consolidated Balance Sheets. Where the carrying
values of the assets held for sale exceeded the estimated fair
values, net of selling costs, we reduced the carrying values and
recorded impairment charges. We determine fair values using
quoted market prices, when available, or other accepted
valuation techniques. During the three months ended
March 31, 2004, we recorded impairment charges of
$2.2 million on assets held for sale. Where the estimated
selling prices, net of selling costs, of assets held for sale
exceeded the carrying values, we did not increase the carrying
values of the assets. Among other criteria, we classify an asset
as held for sale if we expect to dispose of it within one year.

While we believe that 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.

20



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##### Table of Contents



The results of operations of the other 77 hotels
that we consolidate in our financial statements 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.

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 is included in
Note 1 of the notes to our consolidated financial statements
included in our Annual Report on Form 10-K for the year
ended December 31, 2003. Also, our critical accounting
policies and estimates are discussed in our Annual Report on
Form 10-K for the year ended December 31, 2003, and we
believe no changes have occurred.

Income Statement Overview

The discussion below focuses primarily on our
continuing operations. In the continuing operations discussions,
we compare the results of operations for the 77 consolidated
hotels which we plan to retain in our portfolio for the
foreseeable future, for the three months ended March 31,
2004 with the results of operations for the three months ended
March 31, 2003. See Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Income Statement Overview in our
Annual Report on Form 10-K for the fiscal year ended
December 31, 2003 for a general description of the
categorization of our revenues and expenses.

Results of Operations  Continuing
Operations



| |                                                      
| | -----------------------------------------------------
| | First Quarter 2004 Compared to First
    Quarter 2003



| |                                     
| | ------------------------------------
| | Revenues  Continuing
    Operations

|                                   |                   |                    |       |                |  |                     |       |        |  |   |      |       |   |  |     |      |   
|---------------------------------- | ----------------- | ------------------ | ----- | -------------- |  | ------------------- | ----- | ------ |  | - | ---- | ----- | - |  | --- | ---- | --
|                                   |                   |                    |       |                |  |                    
|                                   |                   | Three Months Ended |       |                |  |                    
|                                   |                   |                    |       |               
|                                   |                   | March 31, 2004     |       | March 31, 2003 |  | Increase (Decrease)
|                                   |                   |                    |       |                |  |                    
|                                   |                   |                    |       |                |  |                     |       |       
|Revenues (unaudited in thousands): |                   |                    |       |                |  |                     |       |        |  |   |      |       |   |  |     |     
|                                   | Rooms             |                    | $     | 57,563         |  |                     | $     | 53,914 |  |   | $    | 3,649 |   |  |     | 6.8  | % 
|                                   | Food and beverage |                    |       | 16,488         |  |                     |       | 16,607 |  |   |      | (119  | ) |  |     | (0.7 | )%
|                                   | Other             |                    |       | 2,754          |  |                     |       | 2,858  |  |   |      | (104  | ) |  |     | (3.6 | )%
|                                   |                   |                    |       |                |  |                     |       |        |  |   |      |       |   |  |     |     
|                                   | Total revenues    |                    | $     | 76,805         |  |                     | $     | 73,379 |  |   | $    | 3,426 |   |  |     | 4.7  | % 
|                                   |                   |                    |       |                |  |                     |       |        |  |   |      |       |   |  |     |     
|Occupancy                          |                   |                    | 59.2  | %              |  |                     | 56.8  | %      |  |   |      |       |   |  | 4.3 | %   
|ADR                                |                   | $                  | 75.74 |                |  | $                   | 74.78 |        |  | $ | 0.96 |       |   |  | 1.3 | %   
|RevPAR                             |                   | $                  | 44.84 |                |  | $                   | 42.45 |        |  | $ | 2.39 |       |   |  | 5.6 | %   

The 6.8% increase in room revenues is a result of
a 5.6% increase in RevPAR and the impact of the leap year.
RevPAR increased as a result of a 4.3% increase in occupancy and
a 1.3% increase in ADR. The increase in occupancy reflects an
increase in both leisure and business travel in the first
quarter 2004 as the economy strengthened. In addition, some of
our hotels which were undergoing renovation during 2003 have now
begun to realize a benefit from the renovations as well as the
recovery in the economy. Some of our hotels are still being
renovated or are in need of renovation and are therefore not
achieving their full earning potential. As we renovate these
hotels, we expect to see further improvements in occupancy which
we believe should lead to improvements in room rates if business
and leisure travel continue to improve.

Food and beverage revenues were negatively
affected by a reduction in group banquet and catering functions.
Other revenues declined by 3.6% and were affected by a 21.8%
decline in telephone revenues as

21



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##### Table of Contents



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. The reduction in
telephone revenues was, however, offset by a 3.2% increase in
other revenue activities such as in-room movies, parking
services, laundry services and vending machine commission and
sales, which increased as a result of the increase in hotel
occupancy.


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 March 31, 2004 which:



| |   |                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Were not held for sale;                                                                                                                                                 
|
| |  | Were not undergoing major renovation during 2003
    or 2004 (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 2003 or
    2004.                                                                                                              

The table below presents data on our stabilized
hotels:

|                            |  |                    |        |                |  |            |        |   |  |  |     |  
|--------------------------- |  | ------------------ | ------ | -------------- |  | ---------- | ------ | - |  |  | --- | -
|                            |  |                    |        |               
|                            |  | Three Months Ended |        |               
|                            |  |                    |        | % Increase    
|                            |  | March 31, 2004     |        | March 31, 2003 |  | (Decrease)
|                            |  |                    |        |                |  |           
|Number of stabilized hotels |  |                    | 63     |                |  |            | 63     |   |  |  |     |  
|Number of rooms             |  |                    | 11,558 |                |  |            | 11,558 |   |  |  |     |  
|Occupancy                   |  |                    | 58.7   | %              |  |            | 57.2   | % |  |  | 2.6 | %
|ADR                         |  | $                  | 74.43  |                |  | $          | 73.29  |   |  |  | 1.6 | %
|RevPAR                      |  | $                  | 43.66  |                |  | $          | 41.91  |   |  |  | 4.2 | %

Of the 14 hotels included in continuing
operations that are not considered stabilized hotels, 3 hotels
went from independent to branded hotels and saw increases in
occupancy ranging from 29.5% to 75.0% as compared to the first
quarter 2003. Additionally, 4 hotels underwent renovations in
2003 that contributed to increases in occupancy ranging from
15.4% to 54.8% as compared to the first quarter 2003. These
hotels helped drive the occupancy results for our hotels
classified in continuing operations. As a result, the occupancy
increase for our continuing operations group of hotels was
stronger than the stabilized group of hotels, some of which are
still in need of renovation.

The 1.6% increase in ADR for our stabilized
hotels compared to the 1.3% increase for our hotels classified
in continuing operations was primarily due to an improved
exchange rate between the U.S. and Canadian dollar, which
enabled our Canadian hotel to report an increase in ADR of 13%.



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

|                           |                   |                          |        |                |      |            |        |        |      |   |     |      |   |  |     |      |    | 
|-------------------------- | ----------------- | ------------------------ | ------ | -------------- | ---- | ---------- | ------ | ------ | ---- | - | --- | ---- | - |  | --- | ---- | -- | 
|                           |                   |                          |        |                |      |           
|                           |                   | Three Months Ended       |        |               
|                           |                   |                          |        | Increase      
|                           |                   | March 31, 2004           |        | March 31, 2003 |      | (Decrease)
|                           |                   |                          |        |                |      |           
|                           |                   |                          |        |                |      |            |        |       
|                           |                   |                          |        |                |      |           
|                           |                   | (Unaudited in thousands) |        |                |      |           
|Direct operating expenses: |                   |                          |        |                |      |            |        |        |      |   |     |      |   |  |     |     
|                           | Rooms             |                          | $      | 16,018         |      |            | $      | 15,363 |      |   | $   | 655  |   |  |     | 4.3  | % 
|                           | Food and beverage |                          |        | 11,534         |      |            |        | 11,734 |      |   |     | (200 | ) |  |     | (1.7 | )%
|                           | Other             |                          |        | 1,972          |      |            |        | 1,938  |      |   |     | 34   |   |  |     | 1.8  | % 
|                           |                   |                          |        |                |      |            |        |        |      |   |     |      |   |  |     |     
|                           |                   | $                        | 29,524 |                |      | $          | 29,035 |        |      | $ | 489 |      |   |  | 1.7 | %   
|                           |                   |                          |        |                |      |            |        |        |      |   |     |      |   |  |     |     
|                           |                   | % of total revenues      |        |                | 38.4 | %          |        |        | 39.6 | % |     |      |   |  |     |      |    | 

Rooms expenses, which vary with room revenues,
were higher due to increased revenues. However, room expenses
did not increase proportionately as room revenues increased due
to the moderating effect of the fixed portion of our room
expenses. Room expenses as a percentage of room revenues for the
first quarter 2004 were 27.8% as compared to 28.5% for the first
quarter 2003. Payroll and related benefits, on an actual cost
per occupied room basis, were $13.48 for the first quarter 2004
as compared to $13.86 for the first quarter 2003. Other room
expenses, on an actual cost per occupied room basis, increased
from

22



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##### Table of Contents



$7.45 in the first quarter 2003 to $7.59 for the
first quarter 2004 primarily driven by increases in guest
loyalty programs and credit card commissions.


Although food and beverage revenues fell by 0.7%,
food and beverage department expenses declined 1.7% in the first
quarter 2004 compared with the first quarter 2003. Food and
beverage costs as a percentage of revenues were lower in the
first quarter 2004 as a result of our improved purchasing
program and stronger inventory controls.

Other direct operating expenses include telephone
service expenses and the costs of providing ancillary services
to our guests such as in-room movies, parking, laundry and
vending machine sales. Other direct operating expenses for the
first quarter 2004 increased 1.8% as compared to the first
quarter 2003 while other revenues declined 3.6%. Telephone
expenses for the first quarter 2004 declined 11.3% as compared
to first quarter 2003 while ancillary service costs for the
first quarter 2004 increased 8.5% as compared to first quarter
2003 primarily due to a 27.6% increase in movie costs.



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

|                          |                                   |                          |        |                |      |            |        |        |      |   |        |      |   |  |      |      |    | 
|------------------------- | --------------------------------- | ------------------------ | ------ | -------------- | ---- | ---------- | ------ | ------ | ---- | - | ------ | ---- | - |  | ---- | ---- | -- | 
|                          |                                   |                          |        |                |      |           
|                          |                                   | Three Months Ended       |        |               
|                          |                                   |                          |        | Increase      
|                          |                                   | March 31, 2004           |        | March 31, 2003 |      | (Decrease)
|                          |                                   |                          |        |                |      |           
|                          |                                   |                          |        |                |      |            |        |       
|                          |                                   |                          |        |                |      |           
|                          |                                   | (Unaudited in thousands) |        |                |      |           
|Other operating expenses: |                                   |                          |        |                |      |            |        |        |      |   |        |      |   |  |      |     
|                          | General, administrative and other |                          | $      | 34,236         |      |            | $      | 35,106 |      |   | $      | (870 | ) |  |      | (2.5 | )%
|                          | Depreciation and amortization     |                          |        | 6,805          |      |            |        | 7,422  |      |   |        | (617 | ) |  |      | (8.3 | )%
|                          |                                   |                          |        |                |      |            |        |        |      |   |        |      |   |  |      |     
|                          |                                   | $                        | 41,041 |                |      | $          | 42,528 |        |      | $ | (1,487 | )    |   |  | (3.5 | )%  
|                          |                                   |                          |        |                |      |            |        |        |      |   |        |      |   |  |      |     
|                          |                                   | % of total revenues      |        |                | 53.4 | %          |        |        | 58.0 | % |        |      |   |  |      |      |    | 

Included in general, administrative and other are
the following categories of expenses:



| |   |                                                 
| | - | ------------------------------------------------
| |  | Hotel operating costs;                          
|
| |  | Property and other taxes, insurance, leases; and
|
| |  | Corporate expenses.                             

The hotel operating cost component of general,
administrative and other increased due to the following:



| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Hotel administration costs increased
    $0.2 million, primarily as a result of salary and employee
    benefit increases;                                                                             
|
| |  | Advertising and promotion costs increased $0.4
    million, also primarily due to salary and employee benefit
    increases;                                                                           
|
| |  | Franchise fees increased $0.5 million as a
    result of the increase in revenues as substantially all
    franchise fees are revenue-based;                                                           
|
| |  | Repairs and maintenance costs increased
    $0.3 million primarily as a result of our continuing
    preventative maintenance program and maintenance costs related
    to our renovation projects; and
|
| |  | Utility costs increased $0.3 million as a
    result of rate and consumption increases.                                                                                                                

Property and other taxes, insurance and leases
fell as a result of stabilization in the insurance markets and
improved loss experience, successful appeals related to property
tax assessments, and an adjustment for the recalculation of
additional base rent on one of our hotels.

Corporate expenses fell as a result of the
significant reduction in post-emergence legal, professional and
other costs related to the Chapter 11 proceedings. For the
first quarter 2004, these costs totaled $0.2 million
compared to $2.2 million for the first quarter 2003 (not
including the $1.2 million of reorganization items).

23



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Depreciation and amortization expense declined as
a result of our reduced asset base on the continuing operations
hotels. The asset base on these hotels fell as a result of
$12.7 million of impairment charges recorded after the
first quarter 2003 on assets held for use.



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

|                                 |                           |                          |   |                |        |                     |   |        |        |   |   |        |       |  |  |        |      |  
|-------------------------------- | ------------------------- | ------------------------ | - | -------------- | ------ | ------------------- | - | ------ | ------ | - | - | ------ | ----- |  |  | ------ | ---- | -
|                                 |                           |                          |   |                |        |                    
|                                 |                           | Three Months Ended       |   |                |        |                    
|                                 |                           |                          |   |               
|                                 |                           | March 31, 2004           |   | March 31, 2003 |        | Increase (Decrease)
|                                 |                           |                          |   |                |        |                    
|                                 |                           |                          |   |                |        |                     |   |       
|                                 |                           |                          |   |                |        |                    
|                                 |                           | (Unaudited in thousands) |   |                |        |                    
|Non-operating income (expenses): |                           |                          |   |                |        |                     |   |        |        |   |   |        |       |  |  |       
|                                 | Interest income and other |                          | $ | 43             |        |                     | $ | 83     |        |   | $ | (40    | )     |  |  | (48.2  | )%  
|                                 | Interest expense:         |                          |   |                |        |                     |   |        |        |   |   |        |       |  |  |        |     
|                                 |                           | Preferred stock dividend |   |                | (4,285 | )                   |   |        |       |   |   |        | 4,285 |  |  |        | n/m  |  
|                                 |                           | Other interest expense   |   |                | (8,159 | )                   |   |        | (6,279 | ) |   |        | 1,880 |  |  |        | 29.9 | %
|                                 | Reorganization items      |                          |   |               |        |                     |   | (1,237 | )      |   |   | (1,237 | )     |  |  | (100.0 | )%  
|                                 | Minority interests        |                          |   | (147           | )      |                     |   | (148   | )      |   |   | (1     | )     |  |  | (0.7   | )%  

The Preferred Stock dividend relates to dividends
on the Preferred Stock issued on November 25, 2002.
Dividends for the period January 1, 2004 to March 31,
2004 totaled $4.3 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 $4.3 million dividend accrued for the period
January 1, 2004 to March 31, 2004 is reported in
interest expense while the $3.8 million dividend accrued
for the period January 1, 2003 to March 31, 2003 is
shown as a deduction from retained earnings.

Other interest expense for the first quarter 2004
increased primarily as result of costs associated with the
Lehman Financing obtained in May 2003. Though the Lehman
Financing replaced previous debt, we paid no interest during the
first quarter 2003 on the debt which it replaced, as approved by
the Bankruptcy Court. In addition, included in other interest
expense for the first quarter 2004 and 2003 are amortization of
loan fees of $1.5 and $0.6 million, respectively. The
increase in amortization of loan fees is also related to the
Lehman Financing.

Reorganization items for the first quarter 2003
of $1.2 million represent Chapter 11 expenses incurred
between January 1, 2003 and March 31, 2003 relating to
the 18 hotels which 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 generally accepted accounting principles
(GAAP), all Chapter 11 expenses incurred in the
first quarter 2003 and related to the 18 hotels were reported as
reorganization items.

Minority interests represent the third party
owners share of the net income of the four joint ventures
in which we have a controlling equity interest. The aggregate
results of these joint ventures for the first quarter 2004 were
similar to the results for the first quarter 2003 and hence our
share of the joint ventures income for the first quarter
2004 was flat compared to the first quarter 2003.

Results of Operations  Discontinued
Operations

Discontinued operations the include results of
operations for both assets sold during the reporting period and
assets that have been identified for sale. Consequently, the
13 hotels and three land parcels which were held for sale
at March 31, 2004, as well as the 15 hotels and the
office building that were disposed of between January 1,
2003 and March 31, 2004, are included in discontinued
operations. We present the current quarters results of
these hotels as discontinued operations as well as the
comparative results for the prior quarter.

24



---



##### Table of Contents



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

|                          |                                      |                          |        |           |        |            |        |        |        |   |       |        |        |  
|------------------------- | ------------------------------------ | ------------------------ | ------ | --------- | ------ | ---------- | ------ | ------ | ------ | - | ----- | ------ | ------ | -
|                          |                                      |                          |        |          
|                          |                                      | Three Months Ended       |        |          
|                          |                                      |                          |        |          
|                          |                                      | March 31,                |        | March 31, |        | Increase  
|                          |                                      | 2004                     |        | 2003*     |        | (Decrease)
|                          |                                      |                          |        |           |        |           
|                          |                                      |                         
|                          |                                      | (Unaudited in thousands)
|Revenues:                 |                                      |                          |        |           |        |            |        |        |        |   |       |       
|                          |                                      | Rooms                    |        | $         | 7,944  |            |        | $      | 9,134  |   |       | $      | (1,190 | )
|                          |                                      | Food and beverage        |        |           | 2,318  |            |        |        | 2,359  |   |       |        | (41    | )
|                          |                                      | Other                    |        |           | 478    |            |        |        | 793    |   |       |        | (315   | )
|                          |                                      |                          |        |           |        |            |        |        |        |   |       |       
|                          |                                      |                          |        |           | 10,740 |            |        |        | 12,286 |   |       |        | (1,546 | )
|                          |                                      |                          |        |           |        |            |        |        |        |   |       |       
|Operating expenses:       |                                      |                          |        |           |        |            |        |        |        |   |       |       
|                          | Direct:                              |                          |        |           |        |            |        |        |        |   |       |        |       
|                          |                                      | Rooms                    |        |           | 2,696  |            |        |        | 3,196  |   |       |        | (500   | )
|                          |                                      | Food and beverage        |        |           | 1,834  |            |        |        | 2,028  |   |       |        | (194   | )
|                          |                                      | Other                    |        |           | 385    |            |        |        | 598    |   |       |        | (213   | )
|                          |                                      |                          |        |           |        |            |        |        |        |   |       |       
|                          |                                      |                          |        |           | 4,915  |            |        |        | 5,822  |   |       |        | (907   | )
|                          |                                      |                          |        |           |        |            |        |        |        |   |       |       
|                          |                                      |                          | 5,825  |           |        |            | 6,464  |        |        |   | (639  | )     
|                          |                                      |                          |        |           |        |            |        |        |        |   |       |       
|Other operating expenses: |                                      |                          |        |           |        |            |        |        |        |   |       |       
|                          | General, administrative and other    |                          |        | 6,063     |        |            |        | 7,750  |        |   |       | (1,687 | )     
|                          | Depreciation and amortization        |                          |        | 133       |        |            |        | 1,447  |        |   |       | (1,314 | )     
|                          | Impairment of long-lived assets      |                          |        | 2,153     |        |            |        |       |        |   |       | 2,153  |       
|                          |                                      |                          |        |           |        |            |        |        |        |   |       |       
|                          |                                      | Other operating expenses |        |           | 8,349  |            |        |        | 9,197  |   |       |        | (848   | )
|                          |                                      |                          |        |           |        |            |        |        |        |   |       |       
|                          |                                      |                          | (2,524 | )         |        |            | (2,733 | )      |        |   | 209   |       
|Other income (expense):   |                                      |                          |        |           |        |            |        |        |        |   |       |       
|                          | Interest expense                     |                          |        | (1,185    | )      |            |        | (510   | )      |   |       | (675   | )     
|                          | Gain on asset dispositions           |                          |        | 3,007     |        |            |        |       |        |   |       | 3,007  |       
|                          |                                      |                          |        |           |        |            |        |        |        |   |       |       
|                          | Loss before income taxes             |                          |        | (702      | )      |            |        | (3,243 | )      |   |       | 2,541  |       
|                          | Benefit (provision) for income taxes |                          |        |          |        |            |        |       |        |   |       |       |       
|                          |                                      |                          |        |           |        |            |        |        |        |   |       |       
|Net loss                  |                                      | $                        | (702   | )         |        | $          | (3,243 | )      |        | $ | 2,541 |       
|                          |                                      |                          |        |           |        |            |        |        |        |   |       |       



---



|  |                                                                                                                                                                                                                                                         
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | The first quarter 2003 revenues and expenses in
    the table above includes de minimus amounts for 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.

First quarter 2004 revenues and expenses
reflected in discontinued operations above are not fully
comparable with the first quarter 2003 revenues and expenses as
a result of the following:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | For the first quarter 2004 there are no revenues
    and expenses in the table for the hotel and office building sold
    during 2003. The hotel was sold in November 2003 and the
    office building was sold in December 2003. Hence, the first
    quarter 2003 results reflect the full quarters operations
    for these two properties. For the first quarter 2003, revenues
    for these two properties were $0.8 million and direct
    operating expenses were $0.3 million in aggregate.
|
| |  | Less than a quarters revenues and expenses
    are included in the results for the first quarter 2004 for the
    five hotels sold at various intervals during the quarter.                                                                                                                                                                                                                                                                                                                         

25



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##### Table of Contents



Additionally the following factors affected the
results of the hotels included in discontinued operations:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Depreciation on these hotels was suspended by our
    classification of these assets as held for sale. All nineteen
    hotels identified for sale during 2003 were identified
    subsequent to the first quarter 2003 and hence the full
    quarters depreciation would have been recorded in the
    first quarter 2003 with no depreciation on these assets being
    recorded during the first quarter 2004. Impairment charges of
    $2.2 million recorded in the first quarter 2004 represent
    the excess of the carrying values of assets held for sale over
    the revised estimated selling prices less estimated selling
    costs.
|
| |  | Interest expense increased as a result of the
    Lehman Financing which was executed in May 2003 and which
    replaced debt on which we were not required to pay interest
    while the related hotels were in Chapter 11.                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | The gain on asset dispositions of
    $3.0 million represents the gain on sale of four of the
    five hotels sold during the first quarter 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

Income taxes

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. 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 and other 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.

EBITDA

We use earnings before interest, taxes,
depreciation and amortization (EBITDA) to measure
our performance and to assist us in the assessment of hotel
property values. EBITDA is also a widely-used industry measure.
However, 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 also believe that EBITDA provides
pertinent information to investors as an additional indicator of
our operating performance.

The following table presents EBITDA, a non-GAAP
measure, for the first quarter 2004 and 2003 and provides a
reconciliation with loss from continuing operations, a GAAP
measure:

|                       |                                                        |                          |   |                |   |  |   |        |  
|---------------------- | ------------------------------------------------------ | ------------------------ | - | -------------- | - |  | - | ------ | -
|                       |                                                        |                         
|                       |                                                        | Three Months Ended      
|                       |                                                        |                         
|                       |                                                        | March 31, 2004           |   | March 31, 2003
|                       |                                                        |                          |   |               
|                       |                                                        |                         
|                       |                                                        | (Unaudited in thousands)
|Continuing operations: |                                                        |                          |   |                |   |  |   |       
|                       | Loss  continuing operations                           |                          | $ | (6,384         | ) |  | $ | (5,841 | )
|                       | Depreciation and amortization                          |                          |   | 6,805          |   |  |   | 7,422  |  
|                       | Interest income and other                              |                          |   | (43            | ) |  |   | (83    | )
|                       | Other interest expense                                 |                          |   | 8,159          |   |  |   | 6,279  |  
|                       | Preferred stock dividends                              |                          |   | 4,285          |   |  |   |       |  
|                       | Provision for income taxes  continuing
    operations |                          |   | 76             |   |  |   | 76     |  
|                       |                                                        |                          |   |                |   |  |   |       
|                       | EBITDA                                                 |                          | $ | 12,898         |   |  | $ | 7,853  |  
|                       |                                                        |                          |   |                |   |  |   |       



---

Loss  continuing operations is after
deducting post-emergence Chapter 11 expenses, included in
general, administrative and other on the consolidated statement
of operations, of $0.2 million and $2.2 million for
the first quarter 2004 and 2003, respectively, and is after
deducting $1.2 million of reorganization expenses for the
first quarter 2003.

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##### Table of Contents





| |                                            
| | -------------------------------------------
| | 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
March 31, 2004, by market segment for the first quarter
2004 and the first quarter of 2003. From January 1, 2004
through May 10, 2004, we sold eight of the hotels included
in the following table as part of our discontinued operations.



| |                                                                
| | ---------------------------------------------------------------
| | Combined Continuing and Discontinued
    Operations  91 hotels

|                                 |                      |                      |   |                    |  |                |   |        |   |  |   |        |  
|-------------------------------- | -------------------- | -------------------- | - | ------------------ |  | -------------- | - | ------ | - |  | - | ------ | -
|                                 |                      | Capital expenditures |   |                   
|                                 |                      | Three Months         |   | Three Months Ended
|                                 |                      | Ended                |   |                   
|                                 |                      | March 31, 2004       |   | March 31, 2004     |  | March 31, 2003
|                                 |                      |                      |   |                    |  |               
|                                 |                      | ($ in thousands)     |   |                    |  |               
|Upper Upscale                    |                      |                      |   |                    |  |                |   |        |   |  |   |       
|                                 | Number of properties |                      | $ | 447                |  |                |   | 4      |   |  |   | 4      |  
|                                 | Number of rooms      |                      |   |                    |  |                |   | 825    |   |  |   | 825    |  
|                                 | Occupancy            |                      |   |                    |  |                |   | 64.0   | % |  |   | 61.5   | %
|                                 | Average daily rate   |                      |   |                    |  |                | $ | 94.24  |   |  | $ | 92.50  |  
|                                 | RevPAR               |                      |   |                    |  |                | $ | 60.31  |   |  | $ | 56.90  |  
|Upscale                          |                      |                      |   |                    |  |                |   |        |   |  |   |       
|                                 | Number of properties |                      |   | 1,673              |  |                |   | 18     |   |  |   | 18     |  
|                                 | Number of rooms      |                      |   |                    |  |                |   | 3,156  |   |  |   | 3,156  |  
|                                 | Occupancy            |                      |   |                    |  |                |   | 67.2   | % |  |   | 66.0   | %
|                                 | Average daily rate   |                      |   |                    |  |                | $ | 88.05  |   |  | $ | 86.41  |  
|                                 | RevPAR               |                      |   |                    |  |                | $ | 59.14  |   |  | $ | 57.06  |  
|Midscale with Food & Beverage    |                      |                      |   |                    |  |                |   |        |   |  |   |       
|                                 | Number of properties |                      |   | 2,612              |  |                |   | 55     |   |  |   | 55     |  
|                                 | Number of rooms      |                      |   |                    |  |                |   | 11,198 |   |  |   | 11,048 |  
|                                 | Occupancy            |                      |   |                    |  |                |   | 53.0   | % |  |   | 51.5   | %
|                                 | Average daily rate   |                      |   |                    |  |                | $ | 69.48  |   |  | $ | 68.75  |  
|                                 | RevPAR               |                      |   |                    |  |                | $ | 36.80  |   |  | $ | 35.42  |  
|Midscale without Food & Beverage |                      |                      |   |                    |  |                |   |        |   |  |   |       
|                                 | Number of properties |                      |   | 121                |  |                |   | 9      |   |  |   | 7      |  
|                                 | Number of rooms      |                      |   |                    |  |                |   | 1,067  |   |  |   | 833    |  
|                                 | Occupancy            |                      |   |                    |  |                |   | 57.0   | % |  |   | 45.1   | %
|                                 | Average daily rate   |                      |   |                    |  |                | $ | 61.27  |   |  | $ | 60.41  |  
|                                 | RevPAR               |                      |   |                    |  |                | $ | 34.95  |   |  | $ | 27.23  |  
|Independent Hotels               |                      |                      |   |                    |  |                |   |        |   |  |   |       
|                                 | Number of properties |                      |   | 2                  |  |                |   | 5      |   |  |   | 7      |  
|                                 | Number of rooms      |                      |   |                    |  |                |   | 957    |   |  |   | 1,341  |  
|                                 | Occupancy            |                      |   |                    |  |                |   | 35.1   | % |  |   | 38.8   | %
|                                 | Average daily rate   |                      |   |                    |  |                | $ | 87.21  |   |  | $ | 73.40  |  
|                                 | RevPAR               |                      |   |                    |  |                | $ | 30.64  |   |  | $ | 28.45  |  
|All Hotels                       |                      |                      |   |                    |  |                |   |        |   |  |   |       
|                                 | Number of properties |                      |   | 4,855              |  |                |   | 91     |   |  |   | 91     |  
|                                 | Number of rooms      |                      |   |                    |  |                |   | 17,203 |   |  |   | 17,203 |  
|                                 | Occupancy            |                      |   |                    |  |                |   | 55.4   | % |  |   | 53.4   | %
|                                 | Average daily rate   |                      |   |                    |  |                | $ | 75.09  |   |  | $ | 73.99  |  
|                                 | RevPAR               |                      |   |                    |  |                | $ | 41.57  |   |  | $ | 39.48  |  

27



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##### Table of Contents





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

|                                 |                      |                      |   |                    |  |                |   |       |   |  |   |       |  
|-------------------------------- | -------------------- | -------------------- | - | ------------------ |  | -------------- | - | ----- | - |  | - | ----- | -
|                                 |                      | Capital Expenditures |   |                   
|                                 |                      | Three Months         |   | Three Months Ended
|                                 |                      | Ended                |   |                   
|                                 |                      | March 31, 2004       |   | March 31, 2004     |  | March 31, 2003
|                                 |                      |                      |   |                    |  |               
|                                 |                      | ($ in thousands)     |   |                    |  |               
|Upper Upscale                    |                      |                      |   |                    |  |                |   |       |   |  |   |      
|                                 | Number of properties |                      | $ | 447                |  |                |   | 4     |   |  |   | 4     |  
|                                 | Number of rooms      |                      |   |                    |  |                |   | 825   |   |  |   | 825   |  
|                                 | Occupancy            |                      |   |                    |  |                |   | 64.0  | % |  |   | 61.5  | %
|                                 | Average daily rate   |                      |   |                    |  |                | $ | 94.24 |   |  | $ | 92.50 |  
|                                 | RevPAR               |                      |   |                    |  |                | $ | 60.31 |   |  | $ | 56.90 |  
|Upscale                          |                      |                      |   |                    |  |                |   |       |   |  |   |      
|                                 | Number of properties |                      |   | 1,609              |  |                |   | 17    |   |  |   | 17    |  
|                                 | Number of rooms      |                      |   |                    |  |                |   | 3,002 |   |  |   | 3,002 |  
|                                 | Occupancy            |                      |   |                    |  |                |   | 68.7  | % |  |   | 65.9  | %
|                                 | Average daily rate   |                      |   |                    |  |                | $ | 88.52 |   |  | $ | 87.94 |  
|                                 | RevPAR               |                      |   |                    |  |                | $ | 60.78 |   |  | $ | 57.95 |  
|Midscale with Food & Beverage    |                      |                      |   |                    |  |                |   |       |   |  |   |      
|                                 | Number of properties |                      |   | 2,518              |  |                |   | 45    |   |  |   | 44    |  
|                                 | Number of rooms      |                      |   |                    |  |                |   | 8,919 |   |  |   | 8,526 |  
|                                 | Occupancy            |                      |   |                    |  |                |   | 56.9  | % |  |   | 56.7  | %
|                                 | Average daily rate   |                      |   |                    |  |                | $ | 70.84 |   |  | $ | 69.85 |  
|                                 | RevPAR               |                      |   |                    |  |                | $ | 40.30 |   |  | $ | 39.62 |  
|Midscale without Food & Beverage |                      |                      |   |                    |  |                |   |       |   |  |   |      
|                                 | Number of properties |                      |   | 121                |  |                |   | 9     |   |  |   | 7     |  
|                                 | Number of rooms      |                      |   |                    |  |                |   | 1,067 |   |  |   | 833   |  
|                                 | Occupancy            |                      |   |                    |  |                |   | 57.0  | % |  |   | 45.1  | %
|                                 | Average daily rate   |                      |   |                    |  |                | $ | 61.27 |   |  | $ | 60.41 |  
|                                 | RevPAR               |                      |   |                    |  |                | $ | 34.95 |   |  | $ | 27.23 |  
|Independent Hotels               |                      |                      |   |                    |  |                |   |       |   |  |   |      
|                                 | Number of properties |                      |   | 0                  |  |                |   | 3     |   |  |   | 6     |  
|                                 | Number of rooms      |                      |   |                    |  |                |   | 535   |   |  |   | 1,162 |  
|                                 | Occupancy            |                      |   |                    |  |                |   | 34.9  | % |  |   | 36.2  | %
|                                 | Average daily rate   |                      |   |                    |  |                | $ | 58.20 |   |  | $ | 58.38 |  
|                                 | RevPAR               |                      |   |                    |  |                | $ | 20.28 |   |  | $ | 21.11 |  

28



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##### Table of Contents



|           |                      |                      |  |                    |  |                |   |        |   |  |   |        |  
|---------- | -------------------- | -------------------- |  | ------------------ |  | -------------- | - | ------ | - |  | - | ------ | -
|           |                      | Capital Expenditures |  |                   
|           |                      | Three Months         |  | Three Months Ended
|           |                      | Ended                |  |                   
|           |                      | March 31, 2004       |  | March 31, 2004     |  | March 31, 2003
|           |                      |                      |  |                    |  |               
|           |                      | ($ in thousands)     |  |                    |  |               
|All Hotels |                      |                      |  |                    |  |                |   |        |   |  |   |       
|           | Number of properties |                      |  | 4,695              |  |                |   | 78     |   |  |   | 78     |  
|           | Number of rooms      |                      |  |                    |  |                |   | 14,348 |   |  |   | 14,348 |  
|           | Occupancy            |                      |  |                    |  |                |   | 58.9   | % |  |   | 56.6   | %
|           | Average daily rate   |                      |  |                    |  |                | $ | 75.65  |   |  | $ | 74.64  |  
|           | RevPAR               |                      |  |                    |  |                | $ | 44.59  |   |  | $ | 42.23  |  

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.                                                                  

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
March 31, 2004, for the first quarter 2004 and the first
quarter 2003. From January 1, 2004 through May 10,
2004, we sold eight of the hotels included in the following
table as part of our discontinued operations.



| |                                                                
| | ---------------------------------------------------------------
| | Combined Continuing and Discontinued
    Operations  91 hotels

|                 |                      |                      |   |                    |  |                |   |       |   |  |   |       |  
|---------------- | -------------------- | -------------------- | - | ------------------ |  | -------------- | - | ----- | - |  | - | ----- | -
|                 |                      | Capital expenditures |   |                   
|                 |                      | Three Months         |   | Three Months Ended
|                 |                      | Ended March 31,      |   |                   
|                 |                      | 2004                 |   | March 31, 2004     |  | March 31, 2003
|                 |                      |                      |   |                    |  |               
|                 |                      | ($ in thousands)     |   |                    |  |               
|Northeast Region |                      |                      |   |                    |  |                |   |       |   |  |   |      
|                 | Number of properties |                      | $ | 991                |  |                |   | 35    |   |  |   | 35    |  
|                 | Number of rooms      |                      |   |                    |  |                |   | 6,722 |   |  |   | 6,722 |  
|                 | Occupancy            |                      |   |                    |  |                |   | 52.2  | % |  |   | 51.5  | %
|                 | Average daily rate   |                      |   |                    |  |                | $ | 78.34 |   |  | $ | 76.41 |  
|                 | RevPAR               |                      |   |                    |  |                | $ | 40.87 |   |  | $ | 39.33 |  
|Southeast Region |                      |                      |   |                    |  |                |   |       |   |  |   |      
|                 | Number of properties |                      |   | 1,702              |  |                |   | 31    |   |  |   | 31    |  
|                 | Number of rooms      |                      |   |                    |  |                |   | 5,267 |   |  |   | 5,267 |  
|                 | Occupancy            |                      |   |                    |  |                |   | 57.6  | % |  |   | 54.4  | %
|                 | Average daily rate   |                      |   |                    |  |                | $ | 70.28 |   |  | $ | 68.09 |  
|                 | RevPAR               |                      |   |                    |  |                | $ | 40.46 |   |  | $ | 37.04 |  
|Midwest Region   |                      |                      |   |                    |  |                |   |       |   |  |   |      
|                 | Number of properties |                      |   | 321                |  |                |   | 18    |   |  |   | 18    |  
|                 | Number of rooms      |                      |   |                    |  |                |   | 3,895 |   |  |   | 3,895 |  
|                 | Occupancy            |                      |   |                    |  |                |   | 51.5  | % |  |   | 50.4  | %
|                 | Average daily rate   |                      |   |                    |  |                | $ | 70.57 |   |  | $ | 71.23 |  
|                 | RevPAR               |                      |   |                    |  |                | $ | 36.32 |   |  | $ | 35.93 |  

29



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|            |                      |                      |  |                    |  |                |   |        |   |  |   |        |  
|----------- | -------------------- | -------------------- |  | ------------------ |  | -------------- | - | ------ | - |  | - | ------ | -
|            |                      | Capital expenditures |  |                   
|            |                      | Three Months         |  | Three Months Ended
|            |                      | Ended March 31,      |  |                   
|            |                      | 2004                 |  | March 31, 2004     |  | March 31, 2003
|            |                      |                      |  |                    |  |               
|            |                      | ($ in thousands)     |  |                    |  |               
|West Region |                      |                      |  |                    |  |                |   |        |   |  |   |       
|            | Number of properties |                      |  | 1,841              |  |                |   | 7      |   |  |   | 7      |  
|            | Number of rooms      |                      |  |                    |  |                |   | 1,319  |   |  |   | 1,319  |  
|            | Occupancy            |                      |  |                    |  |                |   | 74.2   | % |  |   | 67.4   | %
|            | Average daily rate   |                      |  |                    |  |                | $ | 87.64  |   |  | $ | 89.67  |  
|            | RevPAR               |                      |  |                    |  |                | $ | 65.03  |   |  | $ | 60.45  |  
|All Hotels  |                      |                      |  |                    |  |                |   |        |   |  |   |       
|            | Number of properties |                      |  | 4,855              |  |                |   | 91     |   |  |   | 91     |  
|            | Number of rooms      |                      |  |                    |  |                |   | 17,203 |   |  |   | 17,203 |  
|            | Occupancy            |                      |  |                    |  |                |   | 55.4   | % |  |   | 53.4   | %
|            | Average daily rate   |                      |  |                    |  |                | $ | 75.09  |   |  | $ | 73.99  |  
|            | RevPAR               |                      |  |                    |  |                | $ | 41.57  |   |  | $ | 39.48  |  



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

|                 |                      |                      |   |                    |  |                |   |       |   |  |   |       |  
|---------------- | -------------------- | -------------------- | - | ------------------ |  | -------------- | - | ----- | - |  | - | ----- | -
|                 |                      | Capital expenditures |   |                   
|                 |                      | Three Months         |   | Three Months Ended
|                 |                      | Ended March 31,      |   |                   
|                 |                      | 2004                 |   | March 31, 2004     |  | March 31, 2003
|                 |                      |                      |   |                    |  |               
|                 |                      | ($ in thousands)     |   |                    |  |               
|Northeast Region |                      |                      |   |                    |  |                |   |       |   |  |   |      
|                 | Number of properties |                      | $ | 840                |  |                |   | 28    |   |  |   | 28    |  
|                 | Number of rooms      |                      |   |                    |  |                |   | 5,154 |   |  |   | 5,154 |  
|                 | Occupancy            |                      |   |                    |  |                |   | 58.9  | % |  |   | 57.1  | %
|                 | Average daily rate   |                      |   |                    |  |                | $ | 80.60 |   |  | $ | 79.32 |  
|                 | RevPAR               |                      |   |                    |  |                | $ | 47.45 |   |  | $ | 45.26 |  
|Southeast Region |                      |                      |   |                    |  |                |   |       |   |  |   |      
|                 | Number of properties |                      |   | 1,708              |  |                |   | 27    |   |  |   | 27    |  
|                 | Number of rooms      |                      |   |                    |  |                |   | 4,612 |   |  |   | 4,612 |  
|                 | Occupancy            |                      |   |                    |  |                |   | 58.3  | % |  |   | 55.8  | %
|                 | Average daily rate   |                      |   |                    |  |                | $ | 68.52 |   |  | $ | 66.44 |  
|                 | RevPAR               |                      |   |                    |  |                | $ | 39.92 |   |  | $ | 37.10 |  
|Midwest Region   |                      |                      |   |                    |  |                |   |       |   |  |   |      
|                 | Number of properties |                      |   | 306                |  |                |   | 16    |   |  |   | 16    |  
|                 | Number of rooms      |                      |   |                    |  |                |   | 3,263 |   |  |   | 3,263 |  
|                 | Occupancy            |                      |   |                    |  |                |   | 53.9  | % |  |   | 52.5  | %
|                 | Average daily rate   |                      |   |                    |  |                | $ | 71.31 |   |  | $ | 71.13 |  
|                 | RevPAR               |                      |   |                    |  |                | $ | 38.42 |   |  | $ | 37.32 |  
|West Region      |                      |                      |   |                    |  |                |   |       |   |  |   |      
|                 | Number of properties |                      |   | 1,841              |  |                |   | 7     |   |  |   | 7     |  
|                 | Number of rooms      |                      |   |                    |  |                |   | 1,319 |   |  |   | 1,319 |  
|                 | Occupancy            |                      |   |                    |  |                |   | 74.2  | % |  |   | 67.4  | %
|                 | Average daily rate   |                      |   |                    |  |                | $ | 87.64 |   |  | $ | 89.67 |  
|                 | RevPAR               |                      |   |                    |  |                | $ | 65.03 |   |  | $ | 60.45 |  

30



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|           |                      |                      |  |                    |  |                |   |        |   |  |   |        |  
|---------- | -------------------- | -------------------- |  | ------------------ |  | -------------- | - | ------ | - |  | - | ------ | -
|           |                      | Capital expenditures |  |                   
|           |                      | Three Months         |  | Three Months Ended
|           |                      | Ended March 31,      |  |                   
|           |                      | 2004                 |  | March 31, 2004     |  | March 31, 2003
|           |                      |                      |  |                    |  |               
|           |                      | ($ in thousands)     |  |                    |  |               
|All Hotels |                      |                      |  |                    |  |                |   |        |   |  |   |       
|           | Number of properties |                      |  | 4,695              |  |                |   | 78     |   |  |   | 78     |  
|           | Number of rooms      |                      |  |                    |  |                |   | 14,348 |   |  |   | 14,348 |  
|           | Occupancy            |                      |  |                    |  |                |   | 58.9   | % |  |   | 56.6   | %
|           | Average daily rate   |                      |  |                    |  |                | $ | 75.65  |   |  | $ | 74.64  |  
|           | RevPAR               |                      |  |                    |  |                | $ | 44.59  |   |  | $ | 42.23  |  

The regions in the tables 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.                                                                                     

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 and existing cash balances. 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
March 31, 2004, airline receivables represented
approximately 16% 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. Between November 1,
2003 and May 10, 2004, we sold nine hotels and an office
building with another 10 hotels and three land parcels
classified as assets held for sale, four of which were under
contract as of May 10, 2004. The aggregate sales price from
the sale of the nine hotels and office building sold between
November 1, 2003 and May 10, 2004, was
$48.3 million, $35.5 million of which was used to pay
down debt and $9.4 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 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 macro-economic downturns, are beyond our control.
See Matters Which May Affect Future Results 
Risks Related to Our Business in our Annual Report on
Form 10-K for the year ended December 31, 2003.

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. In connection
with this offering, we will seek to refinance approximately
$370 million of our floating rate mortgage debt in order to extend maturities and to convert a substantial portion of
floating rate debt to fixed rate debt.

31



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##### Table of Contents



We intend to continue to use our cash flow to
make scheduled debt service payments and fund 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
these 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 normal 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 March 31, 2004, 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
$0.4 million compared to $2.4 million at
December 31, 2003. See Managements Discussion
and Analysis of Financial Condition and Results of
Operations  Debt, Contractual Obligations and
Franchise Agreements  Exit Financing in our
Annual Report on Form 10-K for the fiscal year ended
December 31, 2003 with respect to our decision to include the
Merrill Lynch Mortgage debt financing in long-term debt.

During the first quarter 2004, we spent
approximately $4.7 million on renovations and, subject to
completion of our proposed offering of common stock, we expect
to spend an additional $35 million during the remainder of
2004, thereby completing substantially all of our deferred
renovations.

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.

Our ability to meet our long-term cash needs is
dependent on the continuation and extent of the recovery of the
economy and the lodging industry, improvement in our 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. In the
short term, we continue to diligently monitor our costs. 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 more
franchise agreements could lead to defaults and acceleration
under one or more 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 in our Annual Report on
Form 10-K for the year ended December 31, 2003, for
further discussion of conditions that could adversely affect our
estimates of future liquidity needs and sources of working
capital.



| |          
| | ---------
| | Cash Flow



| |                     
| | --------------------
| | Operating Activities

Net cash provided by operating activities was
$6.1 million and $6.3 million for the first quarter 2004
and the first quarter 2003, respectively. Although EBITDA of
$12.9 million for first quarter 2004 was $5.0 million higher than first quarter 2003,
net cash provided by operating activities was $0.2 million
lower in first quarter 2004 primarily as the result of the
release of bankruptcy-related restricted cash during 2003.

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During the first quarter 2003, $7.6 million
of restricted cash was released and made available for our
operations.



| |                     
| | --------------------
| | Investing Activities

Investing activities provided net cash flow of
$11.1 million for the first quarter 2004 while investing
activities accounted for a net cash outflow of approximately
$4.5 million for the first quarter 2003. The increase in
investing activities in the first quarter 2004 as compared to
the first quarter 2003 is primarily a result of cash inflows
from the sale of hotels during the first quarter 2004. Net
proceeds from the sale of five hotels during the first quarter
2004 totaled $14.0 million. Investing activities for the
first quarter 2004 also consisted of withdrawals of deposits
from capital expenditure escrows of $2.2 million and capital
expenditure outlays of $5.0 million. Due primarily to large
scale renovations being performed at some of our hotels during
the first quarter 2003, capital expenditures totaled
$10.3 million, which were partially funded by withdrawals
of $6.2 million from lender-controlled capital expenditure
escrows.



| |                     
| | --------------------
| | Financing activities

Primarily as a result of the sale of the five
hotels, we paid down portions of our debt in the first quarter
2004. Principal payments, including scheduled principal
payments, were approximately $14.9 million for the first
quarter 2004 compared with principal payments of
$2.4 million in the first quarter 2003. Financing
activities also consisted of payments of financing costs of
$0.6 million and $0.4 million for the first quarter
2004 and first quarter 2003, respectively.

On September 18, 2003, we drew down the full
availability of $2.0 million under a revolving credit
facility with OCM Real Estate Opportunities Fund II, L.P. (the
OCM Fund). The facility was secured by two land
parcels located in California and New Jersey and expired on
May 1, 2004. We did not renew the facility on May 1,
2004. Borrowings under the facility bore 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. We
may pursue another working capital facility in the near future
but currently believe that we will be able to fund our
operations from funds generated from operations and from asset
sales.

Debt, Contractual Obligations and Franchise
Agreements

See Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Debt, Contractual Obligations and
Franchise Agreements in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2003
and the Notes to our unaudited condensed consolidated financial
statements included in Item 1. Financial
Statements herein for more information on our debt,
contractual obligations and franchise agreements, including the
following:



| |   |                                                   
| | - | --------------------------------------------------
| |  | Our existing mortgage debt and refinancing plans; 
|
| |  | Encumbrances on our properties;                   
|
| |  | Our Preferred Stock; and                          
|
| |  | Our franchise agreements and capital expenditures.

33



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##### Table of Contents



Off Balance Sheet Arrangements

We have no off balance sheet arrangements.

Market Risk

We are exposed to interest rate risks on our
variable rate debt. At March 31, 2004 and December 31,
2003, we had outstanding variable rate debt of approximately
$369.2 million and $382.8 million, respectively.

In order to manage our exposure to fluctuations
in interest rates with the U.S. portion of the exit financing
received in November 2002 ($291.2 million and
$299.3 million at March 31, 2004 and December 31,
2003, 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. 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. 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 March 31, 2004 was
1.09%. The notional principal amount of the interest rate caps
outstanding was $302.2 million both at March 31, 2004 and
at December 31, 2003, respectively.

On May 22, 2003, we finalized the
$80 million Lehman Financing. 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%, 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 $79.2 million at
March 31, 2004.

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 March 31, 2004 and
December 31, 2003 was minimal. The impact on annual results
of operations of a hypothetical one-point interest rate
reduction on the interest rate caps as of March 31, 2004
would be a reduction in net income of approximately $1,000.
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 the hedging
requirements of SFAS No. 133.

The fair value of the three interest rate caps as
of March 31, 2004 and at December 31, 2003 were
approximately $1,000 and $15,000, 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 March 31, 2004 and December 31, 2003 would
be approximately $2.9 million and $3.0 million,
respectively.

In addition, the hotel business is inherently
capital intensive, as the vast majority of assets are hotels,
which are long-lived. Lodgians exposure to market risk
associated with changes in interest rates relates primarily to
its debt obligations. Approximately 79.2% of the long-term debt
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.

34



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##### Table of Contents



Our outstanding debt was $466.3 million, at
March 31, 2004, including current maturities and long-term
debt related to assets held for sale.


At March 31, 2004, approximately
$369.2 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 LIBOR would be a reduction in income before
income taxes of approximately $0.9 million. The fair value
of the fixed rate debt (book value $85.7 million) at
March 31, 2004 is estimated at $86.9 million.

Forward-looking Statements

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;                                                                                                                                                                 
|
| |  | Our high level of secured debt;                                                                                                                                                                                                                                       
|
| |  | Our ability to complete planned hotel and land
    parcel dispositions;                                                                                                                                                                                               
|
| |  | 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                                                                                                                                                                                     

35



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##### Table of Contents





| |   |                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The risks identified under Risks Related to
    Our Business and Risks Relating to Our Common
    Stock in our Annual Report on Form 10-K for the year ended
    December 31, 2003.

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. Many of these factors are not within
our control and we caution you not to put undue reliance on
forward looking statements.

Inflation

We have not determined the precise impact of
inflation. However, we believe that the rate of inflation has
not had a material effect on our revenues or expenses in recent
years. It is difficult to predict whether inflation will have a
material effect on our results in the long-term.

New Accounting Pronouncements

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

| |               |             |  |                                                                                                      |  |                            |            |                  |  |                                                                                                |  |                                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                          
| | ------------- | ----------- |  | ---------------------------------------------------------------------------------------------------- |  | -------------------------- | ---------- | ---------------- |  | ---------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |               |             |  | Month                                                                                                |  |                            |            | Summary of Major |  |                                                                                               
| |               | Description |  | Issued                                                                                               |  | Effective date for Lodgian |            | Provisions       |  | Effect on Lodgian                                                                             
| |               |             |  |                                                                                                      |  |                            |            |                  |  |                                                                                               
| | 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.  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
    Condensed Consolidated Financial Statements and the related
    dividends for the period January 1, 2004 to March 31,
    2004 has been included in interest expense.






|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk

See Item 2. Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Market Risk.






|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

a) Based on an evaluation of our disclosure
controls and procedures carried out as of March 31, 2004,
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 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.

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##### Table of Contents



b) During the quarter ended March 31,
2004, 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 II  OTHER
INFORMATION






|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

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 protection are limited to the amounts approved
by the Bankruptcy Court for settlement of such claims and are
payable out of the disputed claims reserves provided for in our
plans of reorganization, 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 $0.1 million
of cash as of March 31, 2004. We have reserved for all
claims approved by the Bankruptcy Court which have not yet been
paid.






|        |                      
|------- | ---------------------
|Item 2. | Changes in Securities

On April 27, 2004, our Board of Directors
authorized a reverse stock split of our common stock in a ratio
of one-for-three (1:3). The reverse split affected all of our
issued and outstanding common shares, warrants and stock
options. The record date for the reverse split was
April 29, 2004 and our new common stock began trading under
the split adjustment on April 30, 2004.

At the annual meeting of stockholders on
April 8, 2004, our stockholders authorized us to effect a
reverse split of our common stock at one of the following ratios:



| |   |                 
| | - | ----------------
| |  | 1-for-1 1/2;    
|
| |  | 1-for-2;        
|
| |  | 1-for-2 1/2;    
|
| |  | 1-for-3;        
|
| |  | 1-for-3 1/2; and
|
| |  | 1-for-4         

as determined by the Board of Directors.

Fractional shares which resulted from the reverse
stock split are payable in cash. Each holder of a fractional
share of common stock after the effective date of the reverse
split has been or will be paid in cash equal to the product of
(i) the average of the closing prices of the common stock
for the last ten trading days prior to April 30, 2004,
multiplied by (ii) the fraction of a share of common stock
held by such holder.

Also, at the annual meeting of stockholders on
April 8, 2004, our stockholders authorized an increase in
our authorized share capital from 30 million to 60 million
shares.

We have not declared or paid any cash dividends
on our common stock and our board of directors do 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.

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##### Table of Contents



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, 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.






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

We held our Annual Meeting on April 8, 2004.
The stockholders voted as follows:

1. For the election of eight directors to
hold office until the 2005 Annual Meeting:

|                     |  |     |           |          |  |  |         | 
|-------------------- |  | --- | --------- | -------- |  |  | ------- | 
|                     |  | For |           | Withheld
|                     |  |     |           |         
|Sean F. Armstrong    |  |     | 5,995,987 |          |  |  | 26,815  | 
|Russel S. Bernard    |  |     | 5,995,987 |          |  |  | 26,815  | 
|Stewart J. Brown     |  |     | 5,993,487 |          |  |  | 29,315  | 
|Kenneth A. Caplan    |  |     | 5,995,987 |          |  |  | 26,815  | 
|Stephen P. Grathwohl |  |     | 5,994,987 |          |  |  | 27,815  | 
|Jonathan D. Gray     |  |     | 5,763,908 |          |  |  | 258,894 | 
|Kevin C. McTavish    |  |     | 5,995,987 |          |  |  | 26,815  | 
|W. Thomas Parrington |  |     | 5,994,942 |          |  |  | 27,860  | 

2. For the approval of an amendment and
restatement of the Lodgian, Inc. 2002 Stock Incentive Plan:

|                |  |              |           | 
|--------------- |  | ------------ | --------- | 
|                |  | Common Stock
|                |  |             
|For             |  |              | 4,250,670 | 
|Against         |  |              | 329,265   | 
|Abstain         |  |              | 197       | 
|Broker Non Vote |  |              | 1,442,670 | 

3. For the approval of a capital
restructuring proposal to permit the board of directors, in its
sole discretion, to amend our certificate of incorporation to
implement a reverse stock split of our issued and outstanding
common stock at one of the following ratios: 1-for-1 1/2,
1-for-2, 1-for-2 1/2, 1-for-3, 1-for-3 1/2, and
1-for-4:

|        |  |              |           |                 |  |  |           | 
|------- |  | ------------ | --------- | --------------- |  |  | --------- | 
|        |  | Common Stock |           | Preferred Stock
|        |  |              |           |                
|For     |  |              | 5,727,224 |                 |  |  | 4,528,585 | 
|Against |  |              | 295,023   |                 |  |  | 251,792   | 
|Abstain |  |              | 555       |                 |  |  | 168       | 

4. For the approval of a Second Amended and
Restated Certificate of Incorporation as described in the Proxy
Statement for the Annual Meeting, among other things,
(a) increasing the number of authorized shares of common
stock, (b) providing our stockholders the right to remove
any or all of the members of the board of directors with or
without cause, (c) electing out of the Delaware law
restricting business combinations with interested stockholders,
(d) eliminating the designation of an obsolete series of
preferred stock, and (e) implementing the reverse stock
split (if Proposal 3 is approved):

|                |  |              |           |                 |  |  |           | 
|--------------- |  | ------------ | --------- | --------------- |  |  | --------- | 
|                |  | Common Stock |           | Preferred Stock
|                |  |              |           |                
|For             |  |              | 4,519,598 |                 |  |  | 3,256,680 | 
|Against         |  |              | 59,734    |                 |  |  | 53,126    | 
|Abstain         |  |              | 800       |                 |  |  | 179       | 
|Broker Non Vote |  |              | 1,442,670 |                 |  |  | 1,470,560 | 

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##### Table of Contents



5. To ratify the appointment of Deloitte
& Touche LLP as our independent public auditors:

|        |  |              |           | 
|------- |  | ------------ | --------- | 
|        |  | Common Stock
|        |  |             
|For     |  |              | 5,996,052 | 
|Against |  |              | 1,279     | 
|Abstain |  |              | 25,471    | 






|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) A list of the exhibits required to be
filed as part of this Report on Form 10-Q, is set forth in
the Exhibit Index which immediately precedes
such exhibits, and is incorporated herein by reference.

(b) Reports on Form 8-K

A Form 8-K was filed on March 11, 2004
announcing the filing of a Registration Statement with the
Securities and Exchange Commission regarding a public offering
of $175 million of common stock.

A Form 8-K was filed on February 12,
2004 announcing our annual meeting which was held on
April 8, 2004.

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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.

|                   |  |                                                                      
|------------------ |  | ---------------------------------------------------------------------
|                   |  | LODGIAN, INC.                                                        
|                  
|                   |  | By: /s/ W. THOMAS PARRINGTON                                         
|                   |  |                                                                      
|Date: May 12, 2004 |  | W. Thomas ParringtonPresident and Chief Executive Officer            
|                   |  | By: /s/ MANUEL ARTIME                                                
|                   |  |                                                                      
|Date: May 12, 2004 |  | Manuel ArtimeExecutive Vice President and
    Chief Financial Officer

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##### Table of Contents



INDEX TO EXHIBITS

|        |      |  |  |             |  |                                                                                                                                                                                                                                                                                     
|------- | ---- |  |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |  |  |            
|No.     |      |  |  | Description
|        |      |  |  |            
|        | 10.1 |  |  |            |  | Restricted Unit Award Agreement with W. Thomas
    Parrington, dated as of July 15, 2003 (incorporated by
    reference from Exhibit 10.15.1 of the Companys
    Amendment No. 1 to Form S-1 (Commission File
    No. 333-113410) filed with the Commission on April 23,
    2004).
|        | 10.2 |  |  |            |  | Restricted Unit Award Agreement with W. Thomas
    Parrington, dated as of April 9, 2004 (incorporated by
    reference from Exhibit 10.15.1 of the Companys
    Amendment No. 1 to Form S-1 (Commission File
    No. 333-113410) filed with the Commission on April 23,
    2004).
|        | 10.3 |  |  |            |  | Amendment No. 1 to the Lodgian, Inc. 401(K)
    Plan (As Amended and Restated Effective as of September 1,
    2003)                                                                                                                                                                
|        | 10.4 |  |  |            |  | Employment Agreement between Lodgian, Inc. and
    Daniel E. Ellis dated May 2, 2004.                                                                                                                                                                                               
|        | 10.5 |  |  |            |  | Employment Agreement between Lodgian, Inc. and
    Manuel E. Artime dated May 10, 2004.                                                                                                                                                                                             
|        | 10.6 |  |  |            |  | Employment Agreement between Lodgian, Inc. and
    Michael W. Amaral dated May 4, 2004.                                                                                                                                                                                             
|        | 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