Highland Hospitality (HIH) 8-K/A Highland Hospitality Corporation Announces Acquisition of

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K/A

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): September 1, 2004

HIGHLAND HOSPITALITY CORPORATION

(Exact name of registrant as specified in its charter)

Maryland	001-31906	57-1183293
(State or Other Jurisdiction of Incorporation or Organization)	(Commission File No.)	(IRS Employer Identification No.)

8405 Greensboro Drive, Suite 500, McLean, Virginia 22102

(Address of principal executive offices, including Zip Code)

Registrant’s telephone number, including area code: (703) 336-4901

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act

This Form 8-K/A amends and supplements the registrant’s Form 8-Ks, as filed on September 8, 2004, September 17, 2004 and September 21, 2004, to include the historical financial statements and pro forma financial information required by Item 9.01(a) and 9.01(b).

ITEM 2.01 COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS

On September 1, 2004, Highland Hospitality Corporation (the “Company”), a lodging real estate investment trust, or REIT, acquired the 283-room Radisson Mount Laurel hotel for approximately $14.5 million. The Company entered into a long-term agreement with Sage Hospitality Resources to manage the property.

On September 15, 2004, the Company acquired the 299-room Omaha Marriott hotel for approximately $29.1 million. The Company entered into a long-term agreement with Crestline Hotels & Resorts, Inc. to manage the property.

On September 17, 2004, the Company acquired the 202-room Courtyard Denver Airport hotel for approximately $18.1 million, which included the assumption of mortgage debt that encumbers the hotel property of approximately $11.3 million, net of discount. The Company assumed the existing management contract under which Marriott International, Inc. will continue to operate the hotel.

The accompanying pro forma financial information, listed in Item 9.01(b) below, also include the effects of certain other hotel property acquisitions that the Company consummated during the periods presented.

ITEM 2.03 CREATION OF A DIRECT FINANCIAL OBLIGATION OR AN OBLIGATION UNDER AN OFF-BALANCE SHEET ARRANGEMENT OF A REGISTRANT

On September 9, 2004, the Company completed a $38 million financing secured by the Dallas/Fort Worth Airport Marriott hotel. The loan bears a fixed annual interest rate of 5.8% and matures on October 1, 2011. Principal payments will commence in October 2004 and will be based on a 25-year amortization period. The loan agreement contains a standard provision that requires the loan servicer to maintain an escrow account over the term of the loan for real estate taxes.

The Company assumed an $11.6 million mortgage loan as part of the acquisition of the Courtyard Denver Airport hotel. The loan bears an interest rate of LIBOR, plus 1.75%, and matures on November 1, 2008. The loan agreement provides for monthly principal and interest payments, with principal payments being based on a 20-year amortization period. The Company also assumed an interest rate swap agreement that terminates on November 1, 2008 and has a notional amount equal to the outstanding loan principal balance. The effect of the interest rate swap is to fix the interest rate on the mortgage loan to an annual rate of 7.34%.

ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS

(a) Financial statements of businesses acquired

Radisson Hotel Mount Laurel

Report of Independent Certified Public Accountants

Combined Balance Sheets as of June 30, 2004 (unaudited) and December 31, 2003 and 2002

Combined Statements of Operations for the six months ended June 30, 2004 and 2003 (unaudited) and for the years ended December 31, 2003, 2002 and 2001

Combined Statements of Equity for the six months ended June 30, 2004 (unaudited) and for the years ended December 31, 2003, 2002 and 2001

Combined Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (unaudited) and for the years ended December 31, 2003, 2002 and 2001

Notes to Combined Financial Statements

Omaha Marriott

Independent Auditors’ Report

Balance Sheets as of June 18, 2004 (unaudited), January 2, 2004, and January 3, 2003.

Statements of Operations for the periods ended June 18, 2004 and June 20, 2003 (unaudited), and Fiscal Years ended January 2, 2004, and January 3, 2003.

Statement of Net Assets for the periods ended June 18, 2004 and June 20, 2003 (unaudited), and Fiscal Years ended January 2, 2004 and January 3, 2003.

Statements of Cash Flows for the periods ended June 18, 2004 and June 20, 2003 (unaudited), and Fiscal Years ended January 2, 2004 and January 3, 2003.

Notes to Financial Statements

6901 Tower, LLC

Report of Independent Registered Public Accounting Firm

Balance Sheets as of January 2, 2004, January 3, 2003 and June 30, 2004 (unaudited).

Statement of Operations and Comprehensive Income for the 52 Weeks Ended January 2, 2004, 53 Weeks Ended January 3, 2003, and 52 Weeks Ended December 28, 2001, and the periods ended June 30, 2004 and 2003 (unaudited).

Statement of Change in Members’ Equity from December 29, 2000 through January 2, 2004 and through June 30, 2004 (unaudited).

Statements of Cash Flows for the 52 Weeks Ended January 2, 2004, 53 Weeks Ended January 3, 2003, and 52 Weeks Ended December 28, 2001, and the periods ended June 30, 2004 and 2003 (unaudited).

Notes to Financial Statements

(b) Pro forma financial information

Highland Hospitality Corporation

Pro Forma Consolidated Balance Sheet as of June 30, 2004

Pro Forma Consolidated Statement of Operations for the six months ended June 30, 2004

Pro Forma Consolidated Statement of Operations for the year ended December 31, 2003

(c) Exhibits

The following exhibits are filed as part of this Form 8-K/A:

Exhibit Number	Description of Exhibit
23.1	Consent of Grant Thornton LLP
23.2	Consent of KPMG LLP
23.3	Consent of Hein & Associates LLP
99.1	Press release dated September 2, 2004 announcing the acquisition of the Radisson Mount Laurel hotel.
99.2	Press release dated September 10, 2004 announcing the issuance of a $38 million fixed-rate mortgage loan.
99.3	Press release dated September 15, 2004 announcing the acquisition of the Omaha Marriott hotel.
99.4	Press release dated September 20, 2004 announcing the acquisition of the Courtyard Denver Airport hotel.

SIGNATURE

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

	HIGHLAND HOSPITALITY CORPORATION
Date: November12, 2004	By:	/s/ Douglas W. Vicari
		Douglas W. Vicari
		Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

2

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors

Boykin Lodging Company

We have audited the accompanying combined balance sheets of RadBoy Mt. Laurel, L.L.C. and Mt. Laurel Leasing, LLC. (collectively, the “Company”) (see Notes 1 and 2 to the combined financial statements) as of December 31, 2003 and 2002, and the related combined statements of operations, equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

/s/ GRANT THORNTON LLP

Cleveland, Ohio

June 18, 2004

RADISSON HOTEL MOUNT LAUREL

COMBINED BALANCE SHEETS

June 30, 2004 (unaudited),

December 31, 2003 and 2002

	June 30, 2004		December 31,
			2003		2002
	(unaudited)
ASSETS
Investment in hotel property, net	$	13,605,821	$	14,031,223	$	14,552,757
Cash and cash equivalents		1,417,785		1,044,488		620,685
Accounts receivable, net of allowance for doubtful accounts ($1,463 at June 30, 2004 (unaudited), $4,564 in 2003 and $0 in 2002)		173,010		209,436		237,234
Accounts receivable - related party		—		—		1,183
Prepaid expenses and other assets		106,116		103,460		88,085
Total assets	$	15,302,732	$	15,388,607	$	15,499,944
LIABILITIES AND EQUITY
Liabilities:
Accounts payable - related party	$	31,932	$	28,090	$	—
Accounts payable and accrued expenses		608,682		490,233		544,867
Total liabilities		640,614		518,323		544,867
Equity		14,662,118		14,870,284		14,955,077
Total Liabilities and Equity	$	15,302,732	$	15,388,607	$	15,499,944

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

RADISSON HOTEL MOUNT LAUREL

COMBINED STATEMENTS OF OPERATIONS

Six Months Ended June 30, 2004 and June 30, 2003 (unaudited)

and Years Ended December 31, 2003, 2002 and 2001

	Six Months Ended				Years ended December 31
	June 30, 2004		June 30, 2003		2003		2002		2001
	(unaudited)
Revenue:
Hotel operations:
Rooms	$	2,211,310	$	2,530,030	$	4,698,311	$	5,044,481	$	4,345,591
Food and beverage		998,977		1,042,843		2,122,253		2,245,849		2,127,089
Other hotel operations		113,274		148,310		267,258		253,570		266,163
Total revenue		3,323,561		3,721,183		7,087,822		7,543,900		6,738,843
Hotel operating expenses:
Rooms		562,725		634,561		1,251,791		1,222,263		1,121,178
Food and beverage		725,685		655,878		1,373,377		1,422,575		1,489,854
Other direct		78,695		85,113		167,085		158,369		157,127
Indirect		1,029,853		1,153,221		2,254,912		2,569,219		2,430,382
Management fees to related party		103,503		115,685		220,735		232,210		207,996
Hotel operating expenses		2,500,461		2,644,458		5,267,900		5,604,636		5,406,537
Depreciation		437,750		440,690		889,750		864,572		981,266
Impairment of real estate		—		—		—		—		3,700,000
Property taxes, insurance & other		205,540		184,691		389,318		385,510		302,331
Operating income (loss)		179,810		451,344		540,854		689,182		(3,651,291	)
Interest income		—		—		—		172		7,718
Income (loss) before income taxes		179,810		451,344		540,854		689,354		(3,643,573	)
Income taxes		—		—		—		—		—
NET INCOME (LOSS)	$	179,810	$	451,344	$	540,854	$	689,354	$	(3,643,573	)

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

RADISSON HOTEL MOUNT LAUREL

COMBINED STATEMENTS OF EQUITY

Six Months Ended June 30, 2004 (unaudited)

and Years Ended December 31, 2003, 2002 and 2001

Balance at January 1, 2001	$	19,753,816
Net distributions		(600,000	)
Net loss		(3,643,573	)
Balance at December 31, 2001		15,510,243
Net distributions		(1,244,520	)
Net income		689,354
Balance at December 31, 2002		14,955,077
Net distributions		(625,647	)
Net income		540,854
Balance at December 31, 2003		14,870,284
Net distributions (unaudited)		(387,976	)
Net income (unaudited)		179,810
Balance at June 30, 2004 (unaudited)	$	14,662,118

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

RADISSON HOTEL MOUNT LAUREL

COMBINED STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2004 and June 30, 2003 (unaudited)

and Years Ended December 31, 2003, 2002 and 2001

	Six Months Ended June 30,						Year Ended December 31,
	2004			2003			2003			2002			2001
	(unaudited)
Operating activities:
Net income (loss)	$	179,810		$	451,344		$	540,854		$	689,354		$	(3,643,573	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		437,750			440,690			889,750			864,572			981,266
Impairment of real estate		—			—			—			—			3,700,000
Changes in operating assets and liabilities:
Prepaid expenses and other assets		(2,656	)		(8,148	)		(15,375	)		2,126			(33,901	)
Accounts receivable		36,426			48,821			27,797			156,331			7,941
Related party receivable/payable		3,842			44,926			29,273			(33,158	)		(4,908	)
Accounts payable and accrued expenses		118,449			(55,476	)		(54,633	)		34,458			213,545
Net cash provided by operating activities		773,621			922,157			1,417,666			1,713,683			1,220,370
Investing activities:
Investment in hotel property, net		(12,348	)		(125,828	)		(368,216	)		(147,366	)		(432,885	)
Net cash used in investing activities		(12,348	)		(125,828	)		(368,216	)		(147,366	)		(432,885	)
Financing activities:
Net contributions (distributions)		(387,976	)		(411,452	)		(625,647	)		(1,244,520	)		(600,000	)
Net cash provided by (used in) in financing activities		(387,976	)		(411,452	)		(625,647	)		(1,244,520	)		(600,000	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		373,297			384,877			423,803			321,797			187,485
Cash and cash equivalents, beginning of period		1,044,488			620,685			620,685			298,888			111,403
Cash and cash equivalents, end of period	$	1,417,785		$	1,005,562		$	1,044,488		$	620,685		$	298,888

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

RADISSON HOTEL MOUNT LAUREL

NOTES TO COMBINED FINANCIAL STATEMENTS

June 30, 2004 (unaudited), and

December 31, 2003 and 2002

NOTE 1 – BACKGROUND

The Radisson Hotel Mount Laurel (the “Hotel”) is a full-service hotel with 283 rooms located in Mount Laurel, New Jersey. The hotel is owned by RadBoy Mt. Laurel, L.L.C, (“RadBoy”) a wholly-owned subsidiary of Boykin Hotel Properties, L.P. (the “Partnership”), the operating partnership of Boykin Lodging Company (“Boykin”), a real estate investment trust (“REIT”). Effective January 1, 2002, Mt. Laurel Leasing, LLC, through Bellboy, Inc., a taxable REIT subsidiary (the “TRS”) wholly-owned by the Partnership, leases the Hotel from RadBoy and records the results of the Hotel’s operations. Prior to 2002, the hotel was operated by RadBoy under REIT tax regulations related to foreclosure properties.

The Hotel is managed by a subsidiary of Boykin Management Company Limited Liability Company (“BMC”) through an agreement with the TRS. BMC is owned by the Chairman and Chief Executive Officer of Boykin and his brother.

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The financial statements related to 2002 and beyond combine RadBoy’s ownership of the hotel property and the operations of the Hotel as recorded by the TRS since both parties are controlled by the Partnership. Transactions conducted between the two companies, including lease payments, are eliminated when combined. Prior to 2002, the financial statements are solely those of RadBoy. Management believes that the results of operations contained within the combined financial statements reflect all costs of the Hotel doing business.

The operations of the Hotel have historically been seasonal, maintaining higher occupancy rates during the second and third quarters.

Boykin provides certain corporate administrative functions, which indirectly benefit all hotels in its portfolio, including corporate legal services, corporate finance services, and asset management. The costs associated with these functions cannot be specifically identified with any individual hotel in Boykin’s portfolio, therefore, no amounts have been allocated to the Hotel.

Additionally, interest expense is not allocated to the Hotel as there is no debt directly related to RadBoy and Boykin has not historically allocated interest expense to each of its individual hotels.

Effective January 1, 2002, the Hotel’s cash generated from operations is included in a corporate level concentration account. Interest income generated on the cash is not allocated to each of the individual hotels.

RADISSON HOTEL MOUNT LAUREL

NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED

June 30, 2004 (unaudited), and

December 31, 2003 and 2002

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES - Continued

Use of Estimates

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

Investment in Hotel Property

Investment in hotel property is stated at cost, net of any impairment charges, and is depreciated using the straight-line method over the estimated useful lives of the assets. The estimated life of the building and improvements is 30 years, while furniture and fixtures have lives ranging from five to 20 years.

Investment in hotel property consisted of the following as of June 30, 2004, December 31, 2003 and 2002:

	2004			2003			2002
Land	$	2,000,000		$	2,000,000		$	2,000,000
Building and improvements		14,109,052			14,101,826			13,992,480
Furniture and fixtures		3,089,823			3,084,700			2,825,829
		19,198,875			19,186,526			18,818,309
Accumulated depreciation		(5,593,054	)		(5,155,303	)		(4,265,552	)
	$	13,605,821		$	14,031,223		$	14,552,757

Boykin reviews the Hotel for impairment whenever events or changes in circumstances indicate the carrying value of the Hotel property may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the property due to declining national or local economic conditions, new hotel construction in the market where the hotel is located or changes in the expected holding period of the property. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of the hotel property exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the Hotel property’s estimated fair market value is recorded and an impairment loss recognized.

In 2001, Boykin identified changes in circumstances, namely the local economic conditions and the impact of the events of September 11, 2001 on the hospitality and travel industry, which indicated that the carrying value of the Hotel was impaired and accordingly recorded an impairment charge of $3,700,000.

RADISSON HOTEL MOUNT LAUREL

NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED

June 30, 2004 (unaudited), and

December 31, 2003 and 2002

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES - Continued

Fair market values of hotel properties are estimated through a combination of comparable property sales, replacement cost and a discounted cash flow analysis taking into account each property’s expected cash flow generated from operations, holding period and ultimate proceeds from disposition. In projecting the expected cash flows from operations of the asset, the estimates are based on future projected earnings before interest expense, income taxes, depreciation and amortization, or EBITDA, and deduct expected capital expenditure requirements. Growth assumptions are applied to project these amounts over the expected holding period of the asset. The growth assumptions are based on estimated inflationary increases in room rates and expenses and the demand for lodging at the properties, as impacted by local and national economic conditions and estimated or known future new hotel supply. The estimated proceeds from disposition are judgmentally determined based on a combination of anticipated cash flow in the year of disposition, capitalization rate, ratio of selling price to gross hotel revenues and selling price per room.

If actual conditions differ from the assumptions, the actual results of the Hotel’s future operations and fair market value could be significantly different from the estimated results and value used in the analysis.

The Hotel was not considered as held for sale as of June 30, 2004, December 31, 2003, and 2002 as defined within the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144Accounting for the Impairment or Disposal of Long-Lived Assets. Boykin considers assets to be “held for sale” when they are under contract, significant non-refundable deposits have been made by the potential buyer and the assets are immediately available to be sold.

Cash and Cash Equivalents

Cash and cash equivalents are defined as cash on hand and in banks plus short-term investments with an original maturity of three months or less.

Fair Value of Financial Instruments

Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, due to their short maturities, are carried at amounts which reasonably approximate fair value.

Revenue Recognition

Hotel revenues, including room, food and beverage and other hotel revenues, are recognized as the related services are delivered. Ongoing credit evaluations are performed and an allowance for potential credit losses is provided against the portion of accounts receivable that is estimated to be uncollectible.

RADISSON HOTEL MOUNT LAUREL

NOTES TO COMBINED FINANCIAL STATEMENTS – CONTINUED

June 30, 2004 (unaudited), and

December 31, 2003 and 2002

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES - Continued

Income Taxes

Boykin qualifies as a REIT under Sections 856-860 of the Internal Revenue Code. As a REIT, Boykin generally will not be subject to federal corporate income tax on that portion of its net income that does not relate to TRS subsidiaries.

Upon the effective date of the establishment of the TRS, the subsidiary became subject to federal and state income taxes. The TRS accounts for income taxes in accordance with the provisions of SFAS No. 109,Accounting for Income Taxes. Boykin performs an analysis of income taxes on the consolidated TRS level, not the individual leasing entities, such as Mt. Laurel Leasing, LLC. The consolidated TRS has a deferred tax asset that has a 100% valuation allowance. As such, no provision or benefit from income taxes has been recorded in the accompanying combined statements of operations.

NOTE 3 – RELATED PARTY TRANSACTIONS

The Hotel is party to a hotel management contract with BMC. The Hotel pays a base management fee calculated as 3% of monthly gross revenue, as defined. The hotel management contract extends through 2005 and is terminable without penalty upon 90 days notice. Management fees earned by BMC during the six months ended June 30, 2004 and the years ended December 31, 2003, 2002 and 2001 totaled $103,503, $220,735, $232,210 and $207,996, respectively.

As of June 30, 2004 and December 31, 2003, there were related party payables to BMC totaling $31,932 and $28,090 related to management fees and reimbursements of expenses on behalf of the Hotel. At December 31, 2002, there were receivables from BMC totaling $1,183.

NOTE 4 – COMMITMENTS

As a part of normal operations, the Hotel enters into operating leases and purchase obligations. Annual obligations to make future payments subject to the operating leases and purchase obligations as of December 31, 2003 were as follows:

2004	$	112,846
2005		10,919
2006		10,919
2007		1,820
2008		—
2009 and thereafter		—
	$	136,504

RADISSON HOTEL MOUNT LAUREL

NOTES TO COMBINED FINANCIAL STATEMENTS - CONTINUED

June 30, 2004 (unaudited), and

December 31, 2003 and 2002

NOTE 4 – COMMITMENTS - Continued

The Hotel is party to a License Agreement with Radisson Hotels International, Inc. The agreement provides for the Hotel to pay an annual royalty fee of $1 along with a percentage of gross room sales, as defined, for marketing and reservation fees. In addition, the Hotel must pay a third party reservation systems fee, as defined. The License Agreement extends through 2020.

The hotel investment property, along with other assets of the Partnership, serve as collateral for a borrowing of the Partnership.

NOTE 5 – QUARTERLY FINANCIAL INFORMATION (Unaudited)

	For the 2003 Quarter Ended
	March 31		June 30		September 30		December 31
Revenues	$	1,671,551	$	2,049,632	$	1,720,553	$	1,646,086
Expenses		1,585,813		1,684,026		1,664,138		1,612,991
Net income	$	85,738	$	365,606	$	56,415	$	33,095
	For the 2002 Quarter Ended
	March 31		June 30		September 30		December 31
Revenues (including interest income)	$	1,585,411	$	2,287,302	$	1,874,384	$	1,796,975
Expenses		1,539,101		1,770,189		1,686,563		1,858,865
Net income (loss)	$	46,310	$	517,113	$	187,821	$	(61,890	)

OMAHA MARRIOTT HOTEL

Financial Statements

June 18, 2004 (Unaudited), January 2, 2004, and January 3, 2003

(With Independent Auditors’ Report Thereon)

Independent Auditors’ Report

The Board of Trustees

LaSalle Hotel Properties:

We have audited the accompanying balance sheets of the Omaha Marriott Hotel (the Hotel), as of January 2, 2004 and January 3, 2003, and the related statements of operations, net assets, and cash flows for each of the years then ended. These financial statements are the responsibility of the management of LaSalle Hotel Properties. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Hotel as of January 2, 2004 and January 3, 2003, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ KPMG LLP

Chicago, Illinois

September 15, 2004

OMAHA MARRIOTT HOTEL

Balance Sheets

June 18, 2004 (Unaudited), January 2, 2004, and January 3, 2003

	June 18, 2004		January 2, 2004	January 3, 2003
	(Unaudited)
Assets
Property and equipment, net	$	25,076,140	25,144,760	25,066,783
Accounts receivable, net		705,154	466,616	420,399
Due from Marriott International, Inc.		68,796	92,180	—
Inventory		47,664	48,600	75,941
Prepaid expenses		82,299	2,672	100,117
Restricted cash		147,618	609,111	1,086,603
Cash and cash equivalents		127,119	152,344	25,000
Total assets	$	26,254,790	26,516,283	26,774,843
Liabilities and Net Assets
Liabilities:
Accounts payable	$	163,511	30,443	451,269
Accrued expenses and other liabilities		883,155	851,534	310,132
Total liabilities		1,046,666	881,977	761,401
Net assets		25,208,124	25,634,306	26,013,442
Total liabilities and net assets	$	26,254,790	26,516,283	26,774,843

See accompanying notes to financial statements.

2

OMAHA MARRIOTT HOTEL

Statements of Operations

For the periods ended June 18, 2004 and June 20, 2003 (Unaudited), and Fiscal

Years ended January 2, 2004 and January 3, 2003

	Periods ended					Fiscal years ended
	June 18, 2004			June 20, 2003		January 2, 2004		January 3, 2003
	(Unaudited)
Revenues:
Rooms	$	4,091,969		3,937,703		8,271,654		8,038,668
Food and beverage		2,130,310		2,154,383		4,697,095		4,956,930
Other		182,601		151,387		303,932		351,208
Total revenues		6,404,880		6,243,473		13,272,681		13,346,806
Operating costs and expenses:
Rooms		962,467		900,527		2,008,916		1,942,191
Food and beverage		1,520,953		1,594,659		3,437,752		3,583,958
Other		146,755		147,193		317,965		344,027
Hotel departmental expenses		1,654,782		1,511,840		3,339,792		3,249,843
Real estate taxes and other taxes		207,094		216,789		395,125		413,861
Other expenses		50,069		28,339		57,780		18,873
Management fees		468,209		451,134		930,610		955,631
Depreciation		711,655		863,770		1,522,743		1,797,666
Total operating costs and expenses		5,721,984		5,714,251		12,010,683		12,306,050
Income before income tax expense		682,896		529,222		1,261,998		1,040,756
Income tax expense		(64,201	)	(71,461	)	(120,642	)	(153,574	)
Net income	$	618,695		457,761		1,141,356		887,182

See accompanying notes to financial statements.

3

OMAHA MARRIOTT HOTEL

Statements of Net Assets

For the periods ended June 18, 2004 and June 20, 2003 (Unaudited), and Fiscal

Years ended January 2, 2004 and January 3, 2003

Balance at December 28, 2001	$	27,241,506
Net income		887,182
Cash distributions, net		(2,115,246	)
Balance at January 3, 2003		26,013,442
Net income		1,141,356
Cash distributions, net		(1,520,492	)
Balance at January 2, 2004		25,634,306
Net income (unaudited)		618,695
Cash distributions, net (unaudited)		(1,044,877	)
Balance at June 18, 2004 (unaudited)	$	25,208,124
Balance at January 3, 2003	$	26,013,442
Net income (unaudited)		457,761
Cash distributions, net (unaudited)		(730,528	)
Balance at June 20, 2003 (unaudited)	$	25,740,675

See accompanying notes to financial statements.

4

OMAHA MARRIOTT HOTEL

Statements of Cash Flows

For the periods ended June 18, 2004 and June 20, 2003 (Unaudited), and Fiscal

Years ended January 2, 2004 and January 3, 2003

						Fiscal years ended
	Periods ended
	June 18, 2004			June 20, 2003		January 2, 2004		January 3, 2003
	(Unaudited)
Cash flows from operating activities:
Net income	$	618,695		457,761		1,141,356		887,182
Adjustments to reconcile net income to net cash flow provided by operating activities:
Depreciation		711,655		863,770		1,522,743		1,797,666
Changes in assets and liabilities:
Accounts receivable, net		(238,538	)	(105,048	)	(46,217	)	152,784
Due from Marriott International, Inc.		23,384		67,486		(92,180	)	—
Inventory		936		908		27,341		3,391
Prepaid expenses		(79,627	)	100,117		97,445		(28,350	)
Accounts payable		133,068		(273,517	)	(420,826	)	318,057
Accrued expenses and other liabilities		31,621		444,523		541,402		(361,795	)
Net cash flow provided by operating activities		1,201,194		1,556,000		2,771,064		2,768,935
Cash flows from investing activities:
Additions to property and equipment		(643,035	)	(1,130,071	)	(1,600,720	)	(215,369	)
Change in restricted cash		461,493		785,801		477,492		(452,656	)
Net cash flow used in investing activities		(181,542	)	(344,270	)	(1,123,228	)	(668,025	)
Cash flows from financing activities:
Capital distributions, net		(1,044,877	)	(730,528	)	(1,520,492	)	(2,115,246	)
Increase (decrease) in cash and cash equivalents		(25,225	)	481,202		127,344		(14,336	)
Cash and cash equivalents at:
Beginning of period		152,344		25,000		25,000		39,336
End of period	$	127,119		506,202		152,344		25,000

See accompanying notes to financial statements.

5

OMAHA MARRIOTT HOTEL

Notes to Financial Statements

June 18, 2004 (unaudited), January 2, 2004, and January 3, 2003

(1) The Business and Basis of Presentation

The Omaha Marriott (the Hotel), a hotel owned by LaSalle Hotel Operating Partnership (the Owner), is an upscale full-service major business hotel located in the western suburbs of Omaha. The Hotel is located in the Regency Office Park, a mixed use development containing over 865,000 square feet of office and retail space, and directly across West Dodge Road from Westroads Shopping Center, one of the largest shopping malls in Omaha. The Hotel is operated by Marriott International, Inc. (MII) pursuant to a long-term incentive-based operating agreement.

The Owner leases the Hotel to LaSalle Hotel Lessee, a wholly owned taxable REIT subsidiary (the TRS) of the Owner. The accompanying financial statements include the accounts of the Owner and the TRS relating to the Hotel. The rental income received by the Owner is eliminated against the lease expense of the TRS; all other intercompany receivables and payables are eliminated.

(2) Summary of Significant Accounting Policies

(a) Use of Estimates in the Preparation of Financial Statements

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

(b) Revenue Recognition

Revenues from operations of the Hotel are recognized when the services are provided. Revenues consist of room sales, food and beverage sales, and other department revenues such as telephone and gift shop.

(c) Property and Equipment

Property and equipment is recorded at cost. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, ranging from 27.5 to 30 years for building and improvements and three to five years for furniture and equipment. Leasehold improvements are amortized over the shorter of the lease terms or the estimated useful lives of the assets.

The Owner periodically reviews the carrying value of the Hotel to determine if circumstances exist indicating impairment in the carrying value of the investment in the hotel or that depreciation periods should be modified. If facts or circumstances support the possibility of impairment, the Owner will prepare an estimate of the undiscounted future cash flows, without interest charges, of the hotel and determine if the investment in hotel is recoverable based on the undiscounted future cash flows. If impairment is indicated, an adjustment will be made to the carrying value of the hotel to reflect the hotel at fair value. The Owner does not believe that there are any factors or circumstances indicating impairment of its investments in the Hotel.

(Continued)

6

OMAHA MARRIOTT HOTEL

Notes to Financial Statements

June 18, 2004 (unaudited), January 2, 2004, and January 3, 2003

(d) Income Taxes

The Owner has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. Subject to meeting a number of organization and operating requirements, the Owner is generally not subject to Federal corporate income tax on that portion of its net income that is currently distributed to its shareholders. Taxable income from the TRS is subject to Federal, state, and local taxes.

Provisions for Federal and state income taxes have been allocated from the LaSalle Hotel Lessee on a separate company basis in the accompanying financial statements based on the pre-tax income of the TRS. The income tax liability related to the TRS is transferred to the Owner through an adjustment to capital distributions. The effective tax rate applied to the pre-tax income of the TRS was 41.5% (Federal rate of 34.5% and state rate, net of Federal income tax effect of 7.0%). The income tax expense is current as no significant temporary or permanent differences exist. The income tax expense was calculated as follows:

	Periods ended					Fiscal years ended
	June 18, 2004			June 20, 2003		2004		2003
	(Unaudited)
TRS income before income tax expense	$	154,702		172,196		290,703		370,059
Tax rate		41.5	%	41.5	%	41.5	%	41.5	%
	$	64,201		71,461		120,642		153,574

(e) Cash and Cash Equivalents

All highly liquid investments with a maturity of three months or less at date of purchase are considered cash equivalents.

(f) Restricted Cash

Restricted cash consists of property improvement funds that were established pursuant to the management agreement (see note 4).

(g) Inventories

Inventories, consisting of food and beverage, are stated at the lower of cost or market. Cost is determined using the first-in, first-out method.

(Continued)

7

OMAHA MARRIOTT HOTEL

Notes to Financial Statements

June 18, 2004 (unaudited), January 2, 2004, and January 3, 2003

(3) Property and Equipment

Property and equipment, net, consists of the following:

	June 18, 2004			January 2, 2004		January 3, 2003
	(Unaudited)
Land	$	4,267,610		4,267,610		4,267,610
Building and improvements		24,134,896		23,871,301		23,202,967
Furniture and equipment		6,497,598		6,118,158		5,185,772
		34,900,104		34,257,069		32,656,349
Less accumulated depreciation		(9,823,964	)	(9,112,309	)	(7,589,566	)
	$	25,076,140		25,144,760		25,066,783

(4) Management Agreement

The Hotel is managed by MII pursuant to a long-term management agreement, which commenced on August 9, 1979 and expires 35 years from that date with three automatic extensions for periods of 10 years each.

Pursuant to the terms of the management agreement, MII earns a base management fee of 3% of hotel revenues and an incentive management fee of 20% of net house profit, as defined in the management agreement. Incentive management fees for the Hotel for the periods ended June 18, 2004 and June 20, 2003 were approximately $276,000 and $264,000 and for fiscal years 2003 and 2002 were approximately $532,000 and $555,000, respectively.

The management agreement provides for the establishment of a property improvement fund to cover the cost of replacements and renewals of furniture and fixtures at the Hotel equal to 5% of Hotel sales per annum. Contributions to the property improvement fund, included in the restricted cash balance, for the periods ended June 18, 2004 and June 20, 2003 were approximately $319,000 and $309,000 and for fiscal years 2003 and 2002 were $664,000 and $667,000, respectively.

Pursuant to the terms of the management agreement, the Owner of the Hotel is required to provide MII with working capital and supplies to meet the operating needs of the Hotel.

(5) Employee Benefit Plan

MII sponsors and maintains a 401(k) savings plan that full-time and part-time employees of the Hotel are offered participation in upon completion of one year of service. Payments made under such plan are recorded as an expense in the accompanying statements of operations.

(Continued)

8

OMAHA MARRIOTT HOTEL

Notes to Financial Statements

June 18, 2004 (unaudited), January 2, 2004, and January 3, 2003

(6) Commitments and Contingencies

The nature of the operations of the Hotel exposes it to the risk of claims and litigation in the normal course of its business. Although the outcome of such matters cannot be determined, management believes the ultimate resolution of these matters will not have a material adverse effect on the financial position or operations of the Hotel.

(8) Subsequent Event

On September 15, 2004, the Owner sold the Hotel to Highland Hospitality Corporation. The Hotel will be managed by Crestline Hotels and Resorts, Inc.

9

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

6901 Tower, LLC

Denver, Colorado

We have audited the accompanying balance sheets of 6901 Tower, LLC as of January 2, 2004 and January 3, 2003, and the related statements of operations and comprehensive income, changes in members’ equity, and cash flows for the 52 weeks ended January 2, 2004, 53 weeks ended January 3, 2003, and 52 weeks ended December 28, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of 6901 Tower, LLC as of January 2, 2004 and January 3, 2003, and the results of its operations and its cash flows for the 52 weeks ended January 2, 2004, 53 weeks ended January 3, 2003, and 52 weeks ended December 28, 2001 in conformity with accounting principles generally accepted in the United States of America.

/s/ HEIN &ASSOCIATES LLP

Denver, Colorado

September 10, 2004

-2-

6901 TOWER, LLC

BALANCE SHEETS

	JUNE 30, 2004			JANUARY 2, 2004			JANUARY 3, 2003
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash	$	178,831		$	343,752		$	778,567
Restricted cash		719,038			716,710			711,536
Receivable - Management Company		180,926			65,830			128,174
Total current assets		1,078,795			1,126,292			1,618,277
PROPERTYAND EQUIPMENT, net		10,875,739			11,127,207			11,000,995
OTHER ASSETS, net		82,190			81,246			97,893
ESCROWED RESERVES		1,378,827			1,469,342			1,296,611
DEPOSIT, working capital		101,000			101,000			101,000
TOTAL ASSETS	$	13,516,551		$	13,905,087		$	14,114,776
LIABILITIES AND MEMBERS’ EQUITY
CURRENT LIABILITIES:
Payables	$	225,474		$	440,514		$	341,139
Current portion of long-term debt		341,401			328,940			305,364
Total current liabilities		566,875			769,454			646,503
LONG-TERM LIABILITIES:
Notes payable, net of current portion		11,385,659			11,559,532			11,888,472
Derivative liability		770,747			1,143,450			1,424,400
Total long-term liabilities		12,156,406			12,702,982			13,312,872
TOTAL LIABILITIES		12,723,281			13,472,436			13,959,375
COMMITMENTS (Notes 8, 9, and 10)
MEMBERS’ EQUITY:
Members’ capital		1,520,000			1,520,000			1,520,000
Accumulated other comprehensive income		(770,747	)		(1,143,450	)		(1,424,400	)
Retained earnings		44,017			56,101			59,801
Total members’ equity		793,270			432,651			155,401
TOTAL LIABILITIESAND MEMBERS’ EQUITY	$	13,516,551		$	13,905,087		$	14,114,776

See accompanying notes to these financial statements.

-3-

6901 TOWER, LLC

STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

	FORTHE PERIODS FROM						FOR THE 52 WEEKS ENDED JANUARY 2, 2004			FOR THE 53 WEEKS ENDED JANUARY 3, 2003			FORTHE 52 WEEKS ENDED DECEMBER 28, 2001
	JANUARY 3, 2004 TO JUNE 30, 2004			JANUARY 4, 2003 TO JUNE 30, 2003
	(unaudited)
REVENUE:
Guest rooms	$	2,719,710		$	2,681,519		$	5,323,111		$	5,495,915		$	5,347,250
Food and beverage		587,582			505,125			962,902			1,170,493			1,459,504
Other		36,177			55,822			101,149			134,116			162,020
Total revenues		3,343,469			3,242,466			6,387,162			6,800,524			6,968,774
OPERATING COSTSANDEXPENSES:
Departmental Expenses:
Guest rooms		704,611			658,435			1,377,690			1,391,758			1,336,104
Food and beverage		416,571			397,556			788,555			836,171			1,001,990
Other		23,027			22,543			41,992			55,563			43,166
Other Expenses:
Property operating costs		664,913			664,061			1,330,717			1,280,026			1,180,710
Management fees		352,726			343,287			679,083			743,831			824,184
Depreciation and amortization		298,967			279,721			564,340			570,949			578,935
Property taxes		145,309			145,309			290,617			256,996			258,576
Marketing		85,978			73,240			139,489			130,680			107,626
General and administrative		108,470			53,855			100,989			107,465			95,468
Total operating costs		2,800,572			2,638,007			5,313,472			5,373,439			5,426,759
OPERATING INCOME		542,897			604,459			1,073,690			1,427,085			1,542,015
Interest expense, net		(429,981	)		(437,254	)		(877,390	)		(889,650	)		(874,792	)
NET INCOME		112,916			167,205			196,300			537,435			667,223
OTHER COMPREHENSIVE INCOME (EXPENSE):
Change in fair value of hedging instrument		372,703			(245,753	)		280,950			(1,110,413	)		(313,987	)
COMPREHENSIVE INCOME (LOSS)	$	485,619		$	(78,548	)	$	477,250		$	(572,978	)	$	353,236

See accompanying notes to these financial statements.

-4-

6901 TOWER, LLC

STATEMENT OF CHANGES IN MEMBERS’ EQUITY

FROM DECEMBER 29, 2000 THROUGH JANUARY 2, 2004

	MEMBERS’ CAPITAL			RETAINED EARNINGS			ACCUMULATED OTHER COMPREHENSIVE INCOME			TOTAL MEMBERS’ EQUITY
MEMBERS’ EQUITY, Balance December 29, 2000	$	2,670,000		$	(494,857	)	$	—		$	2,175,143
Distributions		(1,150,000	)		—			—			(1,150,000	)
Net income		—			667,223			—			667,223
Change in fair value of hedging instrument		—			—			(313,987	)		(313,987	)
MEMBERS’ EQUITY, Balance December 28, 2001		1,520,000			172,366			(313,987	)		1,378,379
Distributions		—			(650,000	)		—			(650,000	)
Net income		—			537,435			—			537,435
Change in fair value of hedging instrument		—			—			(1,110,413	)		(1,110,413	)
MEMBERS’ EQUITY, Balance January 3, 2003		1,520,000			59,801			(1,424,400	)		155,401
Distributions		—			(200,000	)		—			(200,000	)
Net income		—			196,300			—			196,300
Change in fair value of hedging instrument		—			—			280,950			280,950
MEMBERS’ EQUITY, Balance January 2, 2004		1,520,000			56,101			(1,143,450	)		432,651
Distributions (unaudited)		—			(125,000	)		—			(125,000	)
Net income (unaudited)		—			112,916			—			112,916
Change in fair value of hedging instrument (unaudited)		—			—			372,703			372,703
MEMBERS’ EQUITY, Balance June 30, 2004 (unaudited)	$	1,520,000		$	44,017		$	(770,747	)	$	793,270

See accompanying notes to these financial statements.

-5-

6901 TOWER, LLC

STATEMENTS OF CASH FLOWS

	FOR THE PERIODS FROM						FOR THE 52 WEEKS ENDED JANUARY 2, 2004			FOR THE 53 WEEKS ENDED JANUARY 3, 2003			FORTHE 52 WEEKS ENDED DECEMBER 28, 2001
	JANUARY 4, 2003TO JUNE 30, 2004			JANUARY 3, 2004TO JUNE 30, 2003
	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	112,916		$	167,205		$	196,300		$	537,435		$	667,223
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		298,967			279,721			564,340			570,949			578,935
Changes in operating assets and liabilities:   (Increase) decrease in:
Receivable–Management Company		(115,096	)		(56,175	)		62,343			(12,312	)		(2,683	)
Escrowed reserves		90,515			18,591			(172,731	)		(322,536	)		(231,898	)
Interest earned on restricted cash		(2,328	)		(2,732	)		(5,174	)		(9,200	)		(2,336	)
Other assets		(9,267	)		—			—			(13,215	)		(103,313	)
Increase (decrease) in:
Payables		(215,040	)		(116,435	)		99,375			41,293			(81,530	)
Net cash provided by operating activities		160,667			290,175			744,453			792,414			824,398
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets		(39,176	)		(58,785	)		(673,904	)		(21,064	)		(42,204	)
Net cash used by investing activities		(39,176	)		(58,785	)		(673,904	)		(21,064	)		(42,204	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Members’ distributions		(125,000	)		(200,000	)		(200,000	)		(650,000	)		(1,150,000	)
Proceeds from new debt		—			—			—			—			1,200,000
Repayment of debt		(161,412	)		(149,843	)		(305,364	)		(260,652	)		(130,348	)
Net cash used by financing activities		(286,412	)		(349,843	)		(505,364	)		(910,652	)		(80,348	)
INCREASE (DECREASE)IN CASH		(164,921	)		(118,453	)		(434,815	)		(139,302	)		701,846
CASHAND CASH EQUIVALENTS, beginning of year		343,752			778,567			778,567			917,869			216,023
CASHAND CASH EQUIVALENTS, end of year	$	178,831		$	660,114		$	343,752		$	778,567		$	917,869
SUPPLEMENTARY DISCLOSUREOF CASH FLOW INFORMATION:
Cash paid for interest	$	441,112		$	450,186		$	894,730		$	840,125		$	1,041,875
Amounts deposited into restricted cash	$	—		$	—		$	—		$	—		$	700,000
Refinanced note	$	—		$	—		$	—		$	—		$	10,600,000

See accompanying notes to these financial statements.

-6-

6901 TOWER, LLC

NOTES TO FINANCIAL STATEMENTS

(Financial information subsequent to January 2, 2004 is unaudited.)

1. ORGANIZATIONAND NATUREOF OPERATIONS:

6901 Tower, LLC (the “Company”) was formed as a Colorado Limited Liability Company on December 5, 1995. The Company was formed to develop, own and operate a hotel located near the Denver International Airport (the “Hotel”). The Company received member contributions in May 1996, and construction on the Hotel began in late 1996. The Hotel was substantially completed in December 1997, and initial Hotel operations began on December 20, 1997.

The Company has 50 members. The operating agreement provides that losses are allocated to the members in proportion to their initial capital account balances. Profits are allocated first to members who have previously been allocated losses, in proportion to the losses allocated, and the balance in accordance with the number of units held.

The Company has management agreements with L.C. Fulenwider, Inc. (Fund Manager – related party) and Marriott International (Management Company).

2. SIGNIFICANT ACCOUNTING PRINCIPLES:

Revenue Recognition – Revenue is generally recognized as services are performed. Hotel revenue represents primarily room rentals and food and beverage sales.

Use of Estimates – The preparation of the Company’s financial statements in conformity with generally accepted accounting principles requires the Company’s management to make estimates and assumptions that affect the amount reported in these financial statements and accompanying notes. Actual results could differ from those estimates.

Fair Value of Financial Instruments – The carrying value of cash, accounts receivable and payables, other assets and accrued liabilities and expenses are considered to approximate fair value due to the short-term nature of these instruments. The fair value of the Company’s long-term debt is estimated to approximate carrying values, as the pricing and terms are indicative of the Company’s effective borrowing rates.

Impairment of Long-Lived Assets – In the event that facts and circumstances indicate that the carrying value of long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down to market value or discounted cash flow value is required.

Cash and Cash Equivalents – The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

-7-

6901 TOWER, LLC

NOTES TO FINANCIAL STATEMENTS

(Financial information subsequent to January 2, 2004 is unaudited.)

Restricted Cash – Restricted cash represents cash and interest which is restricted pursuant to the Company’s note agreement.

Receivable – Management Company – This receivable generally represents net revenue due to the Company from the Management Company. Such amounts are generally paid within 30 days, and historically, no allowance for bad debt has been recognized.

Property and Equipment – Property and equipment is recorded at cost, including interest and development fees incurred during development and construction. Interest and development fees paid to third parties that were capitalized as a cost of property and equipment totaled $347,000 and $348,595, respectively. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from 5 to 39 years. Property and equipment includes land, which was recorded at fair value at the date of transfer, of $1,200,000 (see Note 9).

Expenditures for renewals and improvements that significantly extend the estimated useful life of an asset are capitalized, and expenditures for maintenance and repairs are charged to operations as incurred. When equipment is retired or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts, and the resulting gain or loss, if any, is recognized.

Income Taxes – The Company is not subject to Federal and state income taxes. Each member reports his/her distributive share of realized income, gain, loss, deductions or credits on his/her individual income tax return.

The tax returns, the qualification of the Company as such for tax purposes, and the amount of distributable member income are subject to examination by Federal and state taxing authorities. If such examinations result in changes with respect to the Company’s qualification or in changes to distributable member income, the tax liability of the member would be changed accordingly.

Fiscal Year – The Company’s fiscal year ends on the Friday that is nearest December 31. The 2003 and 2001 fiscal years consisted of 52 weeks, while the 2002 fiscal year consisted of 53 weeks.

Unaudited Information – The balance sheet as of June 30, 2004 and the statements of operations and cash flows for the six-month periods ended June 30, 2004 and 2003 were taken from the Company’s books and records without audit. However, in the opinion of management, such information includes all adjustments (consisting only of normal recurring accruals) which are necessary to properly reflect the financial position of the Company as of June 30, 2004 and the results of operations for the periods from January 3, 2004 to June 30, 2004 and January 4, 2003 to June 30, 2003.

-8-

6901 TOWER, LLC

NOTES TO FINANCIAL STATEMENTS

(Financial information subsequent to January 2, 2004 is unaudited.)

3. PROPERTYAND EQUIPMENT:

Property and equipment consist of the following as of:

	June 30, 2004			January 2, 2004			January 3, 2003
	(unaudited)
Land	$	1,200,000		$	1,200,000		$	1,200,000
Leasehold improvements		11,855			11,855			11,855
Building		10,363,893			9,864,274			9,864,274
Furniture and fixtures		2,177,313			2,637,756			1,963,852
Capitalized interest and development fees		695,595			695,595			695,595
		14,448,656			14,409,480			13,735,576
Less accumulated depreciation		(3,572,917	)		(3,282,273	)		(2,734,581	)
	$	10,875,739		$	11,127,207		$	11,000,995

4. OTHER ASSETS:

Other assets consist of the following as of:

	June 30, 2004			January 2, 2004			January 3, 2003
	(unaudited)
Closing costs on bank loan	$	116,527		$	116,527		$	116,527
Loan acquisition fees		26,687			26,687			26,687
Other		9,267			—			—
		152,481			143,214			143,214
Accumulated amortization		(70,291	)		(61,968	)		(45,321	)
	$	82,190		$	81,246		$	97,893

-9-

6901 TOWER, LLC

NOTES TO FINANCIAL STATEMENTS

(Financial information subsequent to January 2, 2004 is unaudited.)

5. ESCROW RESERVES:

The following reserves were retained by the Management Company of the Hotel for the benefit of the Company as of:

	June 30, 2004		January 2, 2004		January 3, 2003
	(unaudited)
Property taxes	$	187,605	$	322,087	$	331,256
Repair and maintenance		1,191,222		1,147,255		965,355
	$	1,378,827	$	1,469,342	$	1,296,611

During 2003, 2002 and 2001, $227,000, $57,000 and $78,680, respectively, of the repair and maintenance funds were expended.

6. DEPOSIT – WORKING CAPITAL:

In 1997, the Company deposited $101,000 with the Management Company as initial working capital. Pursuant to the terms of the Management Agreement, the Management Company determines the amount required to be consistently on deposit for working capital purposes. Any balance remaining that has not been expended for working capital purposes will be returned to the Company at the end of the Management Company’s contracted term, including extensions and automatic renewals. As of January 2, 2004, none of the initial deposit had been expended.

7. PAYABLES:

Payables consist of the following as of:

	June 30, 2004		January 2, 2004		January 3, 2003
	(unaudited)
Property taxes	$	145,309	$	291,441	$	256,996
Payable to Fund Manager		8,435		9,286		8,490
Trade and other		—		63,679		—
Interest		71,730		76,108		75,653
	$	225,474	$	440,514	$	341,139

-10-

6901 TOWER, LLC

NOTES TO FINANCIAL STATEMENTS

(Financial information subsequent to January 2, 2004 is unaudited.)

8. NOTES PAYABLE:

The Company has a loan with an original principal amount of $12,500,000 with a financial institution with variable interest at LIBOR rate plus 175 basis points. Based on an interest rate swap agreement, as described below, monthly principal and interest payments to the financial institution are based on an annual fixed-rate of 7.34% with principal payments based on a 20-year amortization schedule. The note is due November 1, 2008. As of January 2, 2004, the note had a balance of $11,888,472 and is collateralized by the Hotel and restricted cash. The note required an initial cash deposit of $700,000 that is shown as restricted cash on the balance sheet, which reflects a higher balance due to interest income. The Fund Manager has also guaranteed repayment of the loan equal to 50% of the outstanding balance.

As of January 2, 2004, the scheduled maturities of the note payable are as follows:

Years Ending
2004	$	328,940
2005		354,335
2006		381,691
2007		411,160
2008		10,412,346
	$	11,888,472

Interest Rate Swap Agreement – The Company entered into a derivative financial instrument for the purpose of hedging the exposure to interest rate fluctuations on its variable-rate long-term debt. The types of risks hedged are those relating to the variability of future earnings and cash flows caused by movements in interest rates.

Derivatives are held only for the purpose of hedging such risks and are accounted for as a cash flow hedge under SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities.

The Company recognized a net unrealized gain (loss) of $280,950, ($1,110,413), and ($313,987) from its cash flow hedge during the fiscal 2003, 2002 and 2001 years, respectively. Cash flow hedges of forecasted transactions resulted in an aggregate balance of ($1,143,450) remaining at January 2, 2004 in accumulated other comprehensive income. During the six months ended June 30, 2004, this balance decreased to ($770,747) (unaudited).

-11-

6901 TOWER, LLC

NOTES TO FINANCIAL STATEMENTS

(Financial information subsequent to January 2, 2004 is unaudited.)

Following is an analysis of the changes in the net unrealized gain (losses) on cash flow hedges included in accumulated other comprehensive income:

	Six Months Ended June 30, 2004			Fiscal Year
				2003			2003
	(unaudited)
Balance, beginning of period	$	(1,143,450	)	$	(1,424,400	)	$	(313,987	)
Net gain (loss) for the period		372,703			280,950			(1,110,413	)
Balance, end of period	$	(770,747	)	$	(1,143,450	)	$	(1,424,400	)

The Company’s agreements relating to the long-term notes payable and the interest rate swap contain covenants pertaining to the debt coverage ratios and the minimum net worth of the Fund Manager. At January 2, 2004, the Company was in compliance with its covenants.

9. RELATED PARTY TRANSACTIONS:

Fund Manager – The Company received the land upon which the Hotel was constructed as an initial contribution from a member who has been elected as the fund manager (the “Fund Manager”). The member contributed land with a fair value of $1,200,000 for its 32% interest in the Company.

The Fund Manager receives a monthly management and operation fee equal to 2.5% of the total Hotel revenues less the expenses of the Hotel, attributable to the rooms, food, beverage, and telephones. During 2003, 2002 and 2001, the Fund Manager received approximately $104,000, $113,000 and $115,000, respectively, in management and operating fees based on 2.5% of the Hotel’s operating gross margin. Of this amount, approximately $6,000 was in payables at January 2, 2004.

Management Company – The Company entered into an agreement with Marriott International (Management Company), to have an exclusive right to supervise, direct, and control the management and operation of the Hotel until the year 2017, with an automatic renewal option for two 10-year periods. The Management Company receives a base management fee equal to 9% of gross revenues plus an incentive management fee equal to 25% of available cash flow, generally defined as revenues less operating expenses (including escrowed reserves) in excess of $1,750,000 in any fiscal year. During the 52 weeks ended January 2, 2004, 53 weeks ended January 3, 2003 and 52 weeks ended December 28, 2001, Marriott earned management fees totaling approximately $575,000, $612,000 and $627,000, respectively. As of January 2, 2004, the Management Company owed the Company $65,830, which generally represented net operating revenues for the period then ended.

-12-

6901 TOWER, LLC

NOTES TO FINANCIAL STATEMENTS

(Financial information subsequent to January 2, 2004 is unaudited.)

10. SUBSEQUENT EVENTS (unaudited):

The Company entered into an agreement with Highland Hospitality Corporation to sell the Hotel for $17,250,000. The sale of the Hotel is an event that will trigger the dissolution of the 6901 Tower, LLC, and the Company will cease to exist, except to liquidate its net assets to its members. The sale closed and was funded on September 17, 2004.

-13-

PRO FORMA FINANCIAL INFORMATION OF HIGHLAND HOSPITALITY CORPORATION

Highland Hospitality Corporation (the “Company”) commenced operations on December 19, 2003 when it completed its initial public offering (“IPO”) and concurrently acquired or leased its first three hotel properties, the Portsmouth Renaissance hotel and conference center, the Sugar Land Marriott hotel and conference center, and the Hilton Garden Inn Virginia Beach Town Center hotel. On December 29, 2003 and December 30, 2003, the Company acquired the Plaza San Antonio Marriott hotel and the Hyatt Regency Savannah hotel, respectively. On January 8, 2004, January 12, 2004, and May 10, 2004, the Company acquired the Hilton Tampa Westshore hotel, the Hilton Garden Inn BWI Airport hotel, and the Dallas/Fort Worth Airport Marriott hotel, respectively. The results of operations for each of the hotel properties are included in the Company’s historical consolidated statements of operations from their respective acquisition dates.

On August 2, 2004, the Company acquired the Courtyard Savannah Historic District hotel and the Residence Inn Tampa Downtown hotel (the “McKibbon Acquisition”). On August 19, 2004, the Company acquired four hotels, the Hilton Parsippany hotel, the Crowne Plaza Atlanta-Ravinia hotel, the Wyndham Wind Watch hotel, and the Tremont Boston hotel, from Wyndham International, Inc. (the “Wyndham Acquisition”). The results of operations for each of these hotel properties are not included in the Company’s historical consolidated statements of operations for the six months ended June 30, 2004, as the acquisition occurred subsequent to June 30, 2004.

The pro forma financial information of Highland Hospitality Corporation set forth below is based on the unaudited consolidated financial statements as of and for the six months ended June 30, 2004 and the audited consolidated financial statements for the period from December 19, 2003 (inception) through December 31, 2003. The unaudited pro forma statements of operations for the six months ended June 30, 2004 and for the year ended December 31, 2003 reflect the hotel property acquisitions described above, as well as the acquisition of the Radisson Mount Laurel hotel, the Omaha Marriott hotel, and the Courtyard Denver Airport hotel, as if those transactions had been completed at the beginning of the periods presented, with the exception of the Hilton Tampa Westshore hotel and the Hilton Garden Inn BWI Airport hotel in the pro forma statement of operations for the six months ended June 30, 2004. No pro forma adjustments have been made for the Hilton Tampa Westshore hotel or the Hilton Garden Inn BWI Airport hotel in the pro forma statement of operations for the six months ended June 30, 2004, as the acquisitions occurred near the beginning of the period.

The historical financial statements of the Omaha Marriott hotel and the Courtyard Denver Airport hotel are presented on a fiscal year basis, ending on the Friday closest to December 31, and report twelve weeks of operations for the first three quarters and sixteen or seventeen weeks for the fourth quarter. As a result, the fiscal year 2003 results of operations for the Omaha Marriott hotel and the Courtyard Denver Airport hotel are for the period from January 4, 2003 to January 2, 2004, and the first quarter and second quarter results of operations of the Omaha Marriott hotel are for the period from January 3, 2004 to June 18, 2004. The Company presents its financial statements on a calendar year basis. No adjustments have been made to the pro forma financial information to account for the difference between the financial reporting bases used by the Omaha Marriott hotel, the Courtyard Denver Airport hotel, and the Company due to the close proximity of the period-end dates

The unaudited pro forma financial information does not purport to represent what the Company’s results of operations or financial condition would actually have been if these transactions had in fact occurred at the beginning of the periods presented, or to project the Company’s results of operations or financial condition for any future period. In addition, the unaudited pro forma financial information is based upon available information and upon assumptions and estimates, some of which are set forth in the notes to the unaudited pro forma financial information, which we believe are reasonable under the circumstances. The unaudited pro forma financial information and accompanying notes should be read in conjunction with the Company’s audited financial statements included in its Form 10-K.

1

HIGHLAND HOSPITALITY CORPORATION

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

AS OF JUNE 30, 2004

(in thousands, except share data)

	Historical Highland Hospitality Corporation			Previous Hotel Acquisitions Adjustment(1)			Previous Financings Adjustment(2)			Acquisition of Radisson Mount Laurel(3)			Acquisition of Omaha Marriott(4)			Acquisition of Courtyard Denver Airport(5)			CIGNA Financing(6)		Pro Forma Highland Hospitality Corporation
ASSETS
Investment in hotel properties, net	$	256,210		$	265,315		$	—		$	14,272		$	28,545		$	17,962		$	—	$	582,304
Deposits on hotel property acquisitions		11,950			(11,000	)		—			(200	)		(750	)		—			—		—
Cash and cash equivalents		107,498			(255,893	)		198,515			(14,199	)		(28,222	)		(5,756	)		37,339		39,282
Restricted cash		3,377			—			30,895			—			—			—			162		34,434
Accounts receivable, net		5,968			3,446			—			55			347			101			—		9,917
Prepaid expenses and other assets		5,003			601			—			116			134			(16	)		—		5,838
Deferred financing costs, net		—			—			2,530			—			—			—			499		3,029
Deposits on loan applications		4,940			—			(4,940	)		—			—			—			—		—
Total assets	$	394,946		$	2,469		$	227,000		$	44		$	54		$	12,291		$	38,000	$	674,804
LIABILITIES AND STOCKHOLDERS’ EQUITY
Debt	$	17,000		$	—		$	227,000		$	—		$	—		$	11,343		$	38,000	$	293,343
Accounts payable and accrued expenses		8,740			2,469			—			44			54			—			—		11,307
Payable to affiliates		316			—			—			—			—			—			—		316
Dividends/distributions payable		5,323			—			—			—			—			—			—		5,323
Other liabilities		631			—			—			—			—			948			—		1,579
Total liabilities		32,010			2,469			227,000			44			54			12,291			38,000		311,868
Minority interest in operating partnership		8,496			—			—			—			—			—			—		8,496
Commitments and contingencies
Preferred stock, $.01 par value; 100,000,000 shares authorized; no shares issued and outstanding at June 30, 2004		—			—			—			—			—			—			—		—
Common stock, $.01 par value; 500,000,000 shares authorized; 39,982,011 shares issued and outstanding at June 30, 2004		400			—			—			—			—			—			—		400
Additional paid-in capital		366,639			—			—			—			—			—			—		366,639
Unearned compensation		(7,486	)		—			—			—			—			—			—		(7,486	)
Accumulated deficit		(5,113	)		—			—			—			—			—			—		(5,113	)
Total stockholders’ equity		354,440			—			—			—			—			—			—		354,440
Total liabilities and stockholders’ equity	$	394,946		$	2,469		$	227,000		$	44		$	54		$	12,291		$	38,000	$	674,804

2

Footnotes:

⁽¹⁾ Reflects the McKibbon Acquisition on August 2, 2004 and the Wyndham Acquisition on August 19, 2004 (see Company’s Form 8-K/A filed on October 14, 2004).

⁽²⁾ Reflects the issuance of a $67,000 mortgage loan on July 9, 2004 and the issuance of a $135,000 mortgage loan and a $25,000 mezzanine loan on August 19, 2004 (see Company’s Form 8-K/A filed on October 14, 2004).

⁽³⁾ Reflects the purchase of the Radisson Mount Laurel hotel as if it had occurred on June 30, 2004 for approximately $14.5 million. The pro forma adjustment reflects the following:

Cash paid of $14,399 (net of cash acquired), including previously funded deposits of $200;

Purchase of land, building, and furniture, fixtures and equipment of $14,272;

Purchase of net working capital of $224; and

Reclassification of capitalized transaction costs directly associated with the acquisition of $97.

⁽⁴⁾ Reflects the purchase of the Omaha Marriott hotel as if it had occurred on June 30, 2004 for approximately $29.1 million. The pro forma adjustment reflects the following:

Cash paid of $28,972 (net of cash acquired), including previously funded deposits of $750;

Purchase of land, building, and furniture, fixtures and equipment of $28,545;

Purchase of net working capital of $478; and

Reclassification of capitalized transaction costs directly associated with the acquisition of $51.

⁽⁵⁾ Reflects the purchase of the Courtyard Denver Airport hotel as if it had occurred on June 30, 2004 for approximately $18.1 million, which includes the assumption of mortgage debt that encumbers the property of approximately $11.3 million, net of discount. The pro forma adjustment reflects the following:

Cash paid of $5,756;

Purchase of land, building, and furniture, fixtures and equipment of $17,962;

Assumption of mortgage debt of $11,343, net of discount of $301;

Assumption of interest rate swap agreement of $948;

Purchase of net working capital of $101; and

Reclassification of capitalized transaction costs directly associated with the acquisition of $16.

⁽⁶⁾ Reflects the proceeds, net of deferred financing costs and required escrow deposits, associated with the issuance of a $38,000 mortgage loan related to the CIGNA financing.

3

HIGHLAND HOSPITALITY CORPORATION

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2004

(in thousands, except share and per share data)

	Historical Highland Hospitality Corporation			Previous Hotel Acquisitions Adjustment(1)			Previous Financings Adjustment(2)			Acquisition of Radisson Mount Laurel(3)		Acquisition of Omaha Marriott(4)			Acquisition of Courtyard Denver Airport(5)		CIGNA Financing(6)			Pro Forma Adjustments			Pro Forma Highland Hospitality Corporation
REVENUE
Rooms	$	28,543		$	33,763		$	—		$	2,211	$	4,092		$	2,720	$	—		$	—		$	71,329
Food and beverage		13,784			17,370			—			999		2,130			588		—			—			34,871
Other		1,661			4,839			—			113		183			35		—			—			6,831
Total revenue		43,988			55,972			—			3,323		6,405			3,343		—			—			113,031
EXPENSES
Hotel operating expenses:
Rooms		6,090			7,687			—			563		962			705		—			—			16,007
Food and beverage		10,488			10,048			—			726		1,521			417		—			—			23,200
Other direct		1,077			1,088			—			79		147			23		—			—			2,414
Indirect		15,826			22,309			—			1,337		2,380			1,356		—			—			43,208
Total hotel operating expenses		33,481			41,132			—			2,705		5,010			2,501		—			—			84,829
Depreciation and amortization		3,726			6,090			—			438		712			299		—			(2,330	)(7)		8,935
Corporate general and administrative:
Stock-based compensation		1,590			—			—			—		—			—		—			—			1,590
Other		2,963			—			—			—		—			—		—			—			2,963
Total operating expenses		41,760			47,222			—			3,143		5,722			2,800		—			(2,330	)		98,317
Operating income		2,228			8,750			—			180		683			543		—			2,330			14,714
Interest income		675			—			—			—		—			—		—			—			675
Interest expense		646			6,615			7,669			—		—			430		1,138			(6,693	)(8)		9,805
Income (loss) before minority interest in operating partnership and income taxes		2,257			2,135			(7,669	)		180		683			113		(1,138	)		9,023			5,584
Minority interest in operating partnership		(66	)		—			—			—		—			—		—			(70	)(9)		(136	)
Income tax benefit (expense)		567			(149	)		—			—		(64	)		—		—			(119	)(10)		235
Net income (loss)	$	2,758		$	1,986		$	(7,669	)	$	180	$	619		$	113	$	(1,138	)	$	8,834		$	5,683
Earnings per share:
Basic	$	0.07																					$	0.14
Diluted	$	0.07																					$	0.14
Weighted average number of common shares outstanding:
Basic		39,082,449																						39,082,449
Diluted		39,358,064																						39,358,064

4

Footnotes:

⁽¹⁾ Reflects the results of operations of the Dallas/Fort Worth Airport Marriott hotel prior to the Company’s acquisition of the hotel on May 10, 2004, the McKibbon Acquisition on August 2, 2004, and the Wyndham Acquisition on August 19, 2004 (see Company’s Form 8-K/A filed on October 14, 2004).

⁽²⁾ Reflects the interest expense associated with the issuance of a $67,000 mortgage loan on July 9, 2004 and the issuance of a $135,000 mortgage loan and a $25,000 mezzanine loan on August 19, 2004 (see Company’s Form 8-K/A filed on October 14, 2004).

⁽³⁾ Reflects the historical unaudited statement of operations of the Radisson Mount Laurel hotel for the six months ended June 30, 2004.

⁽⁴⁾ Reflects the historical unaudited statement of operations of the Omaha Marriott hotel for the six-month period ended June 18, 2004.

⁽⁵⁾ Reflects the historical unaudited statement of operations of the Courtyard Denver Airport hotel for the six months ended June 30, 2004.

⁽⁶⁾ Reflects the interest expense associated with the issuance of a $38,000 mortgage loan related to the CIGNA financing.

⁽⁷⁾ Reflects adjustment to depreciation expense based on the Company’s cost basis in the acquired hotel properties and its accounting policy for depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 15 to 40 years for building and building improvements and three to ten years for furniture, fixtures and equipment.

⁽⁸⁾ Reflects adjustment to remove interest expense associated with debt which was not assumed in conjunction with the hotel property acquisitions and the addition of pro forma interest expense associated with the assumption of debt related to the acquisition of the Courtyard Denver Airport hotel.

⁽⁹⁾ Reflects adjustment to minority interest in income of the operating partnership related to the results of operations for 2004 hotel property acquisitions that were not included in the Company’s historical results of operations for the six months ended June 30, 2004, and the pro forma adjustments.

⁽¹⁰⁾ Reflects adjustment to income taxes related to the results of operations for 2004 hotel property acquisitions that were not included in the Company’s historical results of operations for the six months ended June 30, 2004, and the pro forma adjustments.

5

HIGHLAND HOSPITALITY CORPORATION

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2003

(in thousands, except share and per share data)

	Historical Highland Hospitality Corporation (12/19/03- 12/31/03)			Previous Hotel Acquisitions Adjustment(1)			Previous Financings Adjustment(2)			Acquisition of Radisson Mount Laurel(3)		Acquisition of Omaha Marriott(4)			Acquisition of Courtyard Denver Airport(5)		CIGNA Financing(6)			Pro Forma Adjustments			Pro Forma Highland Hospitality Corporation
REVENUE
Rooms	$	348		$	107,768		$	—		$	4,698	$	8,272		$	5,323	$	—		$	—		$	126,409
Food and beverage		311			52,987			—			2,122		4,697			963		—			—			61,080
Other		24			12,954			—			268		304			101		—			—			13,651
Total revenue		683			173,709			—			7,088		13,273			6,387		—			—			201,140
EXPENSES
Hotel operating expenses:
Rooms		89			25,160			—			1,252		2,009			1,378		—			—			29,888
Food and beverage		310			35,154			—			1,373		3,438			789		—			—			41,064
Other direct		20			3,821			—			167		318			42		—			—			4,368
Indirect		341			69,376			—			2,865		4,723			2,541		—			—			79,846
Total hotel operating expenses		760			133,511			—			5,657		10,488			4,750		—			—			155,166
Depreciation and amortization		108			19,275			—			890		1,523			564		—			(4,897	)(7)		17,463
Corporate general and administrative:
Stock-based compensation		637			—			—			—		—			—		—			2,567	(8)		3,204
Start-up costs		1,951			—			—			—		—			—		—			—			1,951
Other		306			—			—			—		—			—		—			5,621	(9)		5,927
Total hotel operating expenses		3,762			152,786			—			6,547		12,011			5,314		—			3,291			183,711
Operating income (loss)		(3,079	)		20,923			—			541		1,262			1,073		—			(3,291	)		17,429
Interest income		65			4			—			—		—			—		—			—			69
Interest expense		—			16,082			15,339			—		—			877		2,276			(14,911	)(10)		19,663
Income (loss) before minority interest in operating partnership and income taxes		(3,014	)		4,845			(15,339	)		541		1,262			196		(2,276	)		11,620			(2,165	)
Minority interest in operating partnership		64			—			—			—		—			—		—			—			64
Income tax benefit (expense)		277			(635	)		—			—		(121	)		—		—			(107	)(11)		(586	)
Net income (loss)	$	(2,673	)	$	4,210		$	(15,339	)	$	541	$	1,141		$	196	$	(2,276	)	$	11,513		$	(2,687	)
Loss per share:
Basic	$	(0.07	)																				$	(0.07	)
Diluted	$	(0.07	)																				$	(0.07	)
Weighted average number of common shares outstanding:
Basic		36,656,923																			(12	)		39,080,000
Diluted		36,656,923																			(13	)		39,882,500

6

Footnotes:

⁽¹⁾ Reflects the results of operations of the five hotels acquired in December 2003 for the period prior to their acquisition and the results of operations of the two hotels acquired in January 2004, the Dallas/Fort Worth Airport Marriott hotel acquired in May 2004, the McKibbon Acquisition on August 2, 2004, and the Wyndham Acquisition on August 19, 2004 (see Company’s Form 8-K/A filed on October 14, 2004).

⁽²⁾ Reflects the interest expense associated with the issuance of a $67,000 mortgage loan on July 9, 2004 and the issuance of a $135,000 mortgage loan and a $25,000 mezzanine loan on August 19, 2004 (see Company’s Form 8-K/A filed on October 14, 2004).

⁽³⁾ Reflects the historical audited statement of operations of the Radisson Mount Laurel hotel for the year ended December 31, 2003.

⁽⁴⁾ Reflects the historical audited statement of operations of the Omaha Marriott hotel for the fiscal year ended January 2, 2004.

⁽⁵⁾ Reflects the historical audited statement of operations of the Courtyard Denver Airport hotel for the fiscal year ended January 2, 2004.

⁽⁶⁾ Reflects the interest expense associated with the issuance of a $38,000 mortgage loan related to the CIGNA financing.

⁽⁷⁾ Reflects adjustment to depreciation expense based on the Company’s cost basis in the acquired hotel properties and its accounting policy for depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 15 to 40 years for building and building improvements and three to ten years for furniture, fixtures and equipment.

⁽⁸⁾ Reflects adjustment to record stock-based compensation expense for a full year for the Company’s chairman of the board of directors and executives with management contracts.

⁽⁹⁾ Reflects adjustment to record corporate general and administrative expenses, including employee payroll and benefits, board of directors fees, investor relations costs, professional services fees, and other costs of being a public company, for a full year.

⁽¹⁰⁾ Reflects adjustment to remove interest expense associated with debt which was not assumed in conjunction with the hotel property acquisitions and the addition of pro forma interest expense associated with the assumption of debt related to the acquisition of the Courtyard Denver Airport hotel.

⁽¹¹⁾ Reflects adjustment to income taxes related to the results of operations for 2003 and 2004 hotel property acquisitions that were not included in the Company’s historical results of operations for the period from December 19, 2003 to December 31, 2003, and the pro forma adjustments.

⁽¹²⁾ Reflects the number of shares of common stock issued and outstanding at December 31, 2003, not including unvested restricted shares of common stock.

⁽¹³⁾ Reflects the number of shares of common stock issued and outstanding at December 31, 2003, including unvested restricted shares of common stock. The amount does not include warrants to purchase common stock that were anti-dilutive for the period from December 19, 2003 through December 31, 2003.

7