UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 31, 1998

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

For the transition period from ____ to ____.

Commission file number 1-14045

LASALLE HOTEL PROPERTIES
-----------------------------------------------------
(Exact name of registrant as specified in its charter)

Maryland 36-4219376
------------------------- ---------------------------------
(State or other jurisdic- (IRS Employer Identification No.)
tion of incorporation or
organization)

1401 Eye Street, NW, Suite 900, Washington, D.C. 20005
- ------------------------------------------------ ----------
(Address of principal executive office) (Zip Code)

Registrant's telephone number, including area code 202/222-2600

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

Name of Each Exchange
Title of Class on which registered
-------------- ---------------------

Common Shares of New York Stock Exchange, Inc.
Beneficial Interest
($.01 par value)

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 or Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive or
proxy information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ ]

As of March 15, 1999, there were 15,240,563 shares of the Registrant's
Common Shares issued and outstanding. The aggregate market value of the
Registrant's Common Shares held by non-affiliates of the Registrant
(14,003,929 shares) at March 15, 1998 was approximately $170.7 million. The
aggregate market value was calculated by using the closing price of the
stock as of that date on the New York Stock Exchange.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for its 1998 Annual Meeting of
Shareholders to be held on May 19, 1999 are incorporated by reference in
Part III of this report.

LASALLE HOTEL PROPERTIES

INDEX

FORM 10-K
REPORT
ITEM NO. PAGE
- -------- ---------

PART I

1. Business . . . . . . . . . . . . . . . . . . . . . . . 4
2. Properties . . . . . . . . . . . . . . . . . . . . . . 9
3. Legal Proceedings. . . . . . . . . . . . . . . . . . . 15
4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . . 15

PART II

5. Market for Registrant's Common Shares and
Related Shareholder Matters. . . . . . . . . . . . . . 16
6. Selected Financial Data. . . . . . . . . . . . . . . . 17
7. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . 20
7A. Quantitative and Qualitative Disclosures
About Market Risk. . . . . . . . . . . . . . . . . . . 29
8. Consolidated Financial Statements and
Supplementary Data . . . . . . . . . . . . . . . . . . 29
9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure . . . . . . . . 29

PART III

10. Trustees and Executive Officers of the Registrant. . . 30
11. Executive Compensation . . . . . . . . . . . . . . . . 30
12. Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . . . . 30
13. Certain Relationships and Related Transactions . . . . 30

PART IV

14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K. . . . . . . . . . . . . . . . 30

The "Company" means LaSalle Hotel Properties, a Maryland real estate
investment trust, and one or more of its subsidiaries (including LaSalle
Hotel Operating Partnership, L.P.), and the predecessor thereof or, as the
context may require, LaSalle Hotel Properties only or LaSalle Hotel
Operating Partnership, L.P. only.

INFORMATION CONTAINED IN THIS FINANCIAL REPORT CONTAINS "FORWARD-
LOOKING STATEMENTS" RELATING TO, WITHOUT LIMITATION, FUTURE ECONOMIC
PERFORMANCE, PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS AND
PROJECTIONS OF REVENUE AND OTHER FINANCIAL ITEMS, WHICH CAN BE IDENTIFIED
BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD,"
"EXPECT," "ANTICIPATE," "ESTIMATE" OR "FACTORS THAT MAY INFLUENCE RESULTS
AND ACCURACY OF FORWARD LOOKING STATEMENTS" AND ELSEWHERE IDENTIFY
IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS,
INCLUDING CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS.

PART I

ITEM 1. BUSINESS

GENERAL

The Company was organized as a Maryland real estate investment trust
on January 15, 1998 to own hotel properties and to continue and expand the
hotel investment activities of Jones Lang LaSalle Incorporated (formerly
LaSalle Partners Incorporated) and certain of its affiliates (collectively
"JLL"). The Company is managed and advised by LaSalle Hotel Advisors, Inc.
(the "Advisor"), a wholly owned subsidiary of JLL. As of December 31,
1998, the Company owned interests in 12 hotels with an aggregate of 4,110
guest rooms (the "Hotels") located in nine states. All of the Hotels are
leased under participating leases ("Participating Leases") which provide
for rent equal to the greater of base rent ("Base Rent") or participating
rent ("Participating Rent") which is based on fixed percentages of gross
hotel revenues. All of the Hotels are managed by independent hotel
operators ("Hotel Operators"). The Company intends to operate as a real
estate investment trust ("REIT") as defined in the Internal Revenue Code of
1986, as amended (the "Code").

The Company's primary objectives are to maximize current returns to
its shareholders through increases in distributable cash flow and to
increase long-term total returns to shareholders through appreciation in
the value of its common shares of beneficial interest, $.01 per value per
share (the "Common Shares"). To achieve these objectives, the Company
seeks to (i) enhance the return from, and the value of, the Company's
Hotels and any additional hotels and (ii) invest in or acquire additional
hotel properties on favorable terms.

The hotel industry is highly competitive. Each of the Company's
Hotels is located in a developed area that includes other hotel properties.

The number of competitive hotel properties in a particular area could have
a material adverse effect on occupancy, average daily rate ("ADR") and
revenue per available room ("RevPAR") of the Hotels.

The Company may be competing for investment opportunities with
entities that have substantially greater financial resources than the
Company including lodging companies and other REITs. These entities
generally may be able to accept more risk than the Company can prudently
manage, including risks with respect to the creditworthiness of a hotel
operator or the geographic proximity of its investments. Competition
generally may reduce the number of suitable investment opportunities
offered to the Company and increase the bargaining power of property owners
seeking to sell.

The Company's principal offices are located at 1401 Eye Street, NW,
Suite 900, Washington, DC 20005.

FORMATION AND INITIAL PUBLIC OFFERING

The Company's Amended and Restated Declaration of Trust provides that
the Company may issue 100 million Common Shares and 20 million preferred
shares of beneficial interest (the "Preferred Shares"). On April 29, 1998,
the Company completed its initial public offering (the "IPO"); prior to
such date, the Company had no operations. In connection with the IPO, the
Company sold 14.2 million Common Shares at a price of $18 per Common Share,
resulting in gross proceeds of $255.6 million and net proceeds (after
deducting Underwriting discounts and offering expenses) of approximately
$234.2 million. The Company contributed all of the net proceeds of the IPO
to LaSalle Hotel Operating Partnership, L.P., a Delaware limited
partnership (the "Operating Partnership"), in exchange for an approximate
82.6% general and limited partnership interest in the Operating
Partnership. The Operating Partnership used the net proceeds from the
Company, the issuance of an additional 912,122 Common Shares, the issuance
of 1,280,569 rights to purchase Common Shares and the issuance of 3,181,723
limited partnership interests ("Units"), representing approximately 17.4%
of the Operating Partnership, to acquire ten upscale and luxury full
service hotels (the "Initial Hotels").

Substantially all of the Company's assets are held by, and all of its
operations are conducted through the Operating Partnership. The Company is
the sole general partner of the Operating Partnership. At December 31,
1998, continuing investors held, in the aggregate, 3,181,723 Units or a
17.3% limited partnership interest in the Operating Partnership. Pursuant
to the terms of the Operating Partnership's Amended and Restated
Partnership Agreement, the Units issued to the continuing investors may
not, for up to one year from the IPO date, transfer any of their rights or
redeem their Units as a limited partner without the consent of the Company.

Upon completion of the IPO, the Company's portfolio consisted of ten
full service hotels containing an aggregate of 3,391 guest rooms, which
target both business and leisure travelers, including groups and those
attending meetings and conventions, who prefer a full range of high quality
facilities, services and amenities. The Company's Initial Hotels included
two LeMeridiens<registered trademark>, three Marriotts<registered
trademark>, two Radissons<registered trademark>, two Holiday
Inns<registered trademark> and one independent luxury all-suite hotel.
Full service hotels generally provide a significant array of guest services
and offer a full range of meeting and conference facilities and banquet
space. Facilities also typically include restaurants and lounge areas,
gift shops and recreational facilities, including swimming pools. As a
result, full service hotels often generate significant revenue from sources
other than guest room revenue.

To enable the Company to satisfy certain requirements for
qualifications as a REIT, neither it nor the Operating Partnership can
operate any of the hotels in which they invest. Accordingly, four of the
Company's Hotels are leased to LaSalle Hotel Lessee, Inc. (the "Affiliated
Lessee"). The Company owns a 9% interest in the Affiliated Lessee in which
the Company together with JLL and LPI Charities, a charitable corporation
organized under the laws of the state of Illinois, make all material
decisions concerning the Affiliated Lessee's business affairs and
operations. The remaining eight Hotels are leased to unaffiliated lessees
(affiliates of whom also operate these Hotels).

THE ADVISOR

Upon completion of the IPO, the Company entered into an advisory
agreement (the "Advisory Agreement") with the Advisor, a wholly owned
subsidiary of JLL, to provide acquisition, management, advisory and
administrative services to the Company. The initial term of the Advisory
Agreement extends through December 31, 1999, subject to successive,
automatic one year renewals unless terminated according to the terms of the
Advisory Agreement. The Company may terminate the Advisory Agreement
without termination fees or penalties upon notice given at least 180 days
prior to the end of the then current term of the Advisory Agreement.

GROWTH STRATEGIES

The Company seeks to achieve revenue growth principally through
(i) renovations and/or expansions at certain of the Company's Hotels,
(ii) acquisitions of full service hotel properties located in convention,
resort and major urban business markets in the U.S. and abroad, especially
upscale and luxury full service hotels in such markets where the Company,
through JLL's extensive research and local market experience, perceives
strong demand growth or significant barriers to entry, and (iii) selective
development of hotel properties, particularly upscale and luxury full
service properties in high demand markets where development economics are
favorable.

The Company intends to acquire additional hotel properties in targeted
markets, consistent with the growth strategies outlined above and which
may:

. possess unique competitive advantages in the form of location,
physical facilities or other attributes;

. be available at significant discounts to replacement cost, including
when such discounts result from reduced competition for properties with
long-term management and/or franchise agreements;

. benefit from brand or franchise conversion, new management,
renovations or redevelopment or other active and aggressive asset
management strategies; or

. have expansion opportunities

The Company believes its acquisition capabilities are enhanced by the
considerable experience, resources and relationships of JLL in the hotel
industry specifically and the real estate industry generally.
Additionally, the Company believes that having multiple independent Hotel
Operators creates a network that will continue to generate significant
acquisition opportunities.

HOTEL ACQUISITIONS

Since the completion of the IPO, the Company completed the acquisition
of two additional hotel properties for an aggregate purchase price of
approximately $146.5 million. These acquisitions were financed through use
of the Company's $200 million Senior Unsecured Revolving Credit Facility
(the "1998 Credit Facility") and the proceeds from a private sale of Common
Shares. The two properties have an aggregate of 732 guest rooms.

SAN DIEGO PARADISE POINT RESORT

On June 1, 1998, the Company, through a subsidiary partnership, LHO
Mission Bay Hotel, L.P. (the "Subsidiary Partnership"), acquired a 95.1%
interest in the San Diego Princess Resort (the "San Diego Property") for an
aggregate purchase price of $73.0 million. The acquisition was funded with
proceeds from the 1998 Credit Facility and from the proceeds of the sale of
112,458 Common Shares to the limited partner of the Subsidiary Partnership.

The 462-room San Diego Property was renamed the San Diego Paradise Point
Resort.

HARBORSIDE HYATT CONFERENCE CENTER & HOTEL

On June 24, 1998, the Company, through an indirect subsidiary, LHO
Harborside Hotel, L.L.C. (the "Subsidiary LLC"), acquired a 100% interest
in the 270-room Harborside Hyatt Conference Center & Hotel in Boston (the
"Boston Property"). The Boston Property was acquired for an aggregate
purchase price of $73.5 million, including $40 million of existing tax
exempt industrial revenue bonds to which the Boston Property remains
subject. The remainder of the purchase price was funded through the 1998
Credit Facility. Hyatt Hotels Corporation ("Hyatt") continues to operate
the Boston Property under an existing management agreement.

HOTEL RENOVATIONS

The Company believes that its regular program of capital improvements
at its hotels, including replacement and refurbishment of furniture,
fixtures, and equipment ("FF&E"), helps maintain and enhance their
competitiveness and maximizes revenue growth under the Participating
Leases. During the year ended December 31, 1998, the Company spent
approximately $9.3 million on renovations and additional capital
improvements at the Hotels. Additionally, the Company is planning to spend
approximately $30 million on renovations and additional capital
improvements at the Hotels during 1999.

Under the Participating Leases, the Company established a reserve for
capital improvements at the Hotels (the "Reserve Funds"). The Reserve
Funds have not been recorded on the books and records of the Company, as
such amounts will be capitalized as incurred. The amounts obligated under
the Reserve Funds range from 4.0% to 5.5% of the individual Hotel's total
revenues. The total amount obligated by the Company under the Reserve
Funds was approximately $9.3 million at December 31, 1998, of which $3.8
million is available in restricted cash reserves for future capital
expenditures.

TAX STATUS

The Company has elected to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its taxable year ending
December 31, 1998. If the Company qualifies for taxation as a REIT, the
Company generally will not be subject to corporate income tax on that
portion of its net income that is currently distributed to shareholders. A
REIT is subject to a number of highly technical and complex organizational
and operational requirements, including requirements with respect to the
nature of its gross income and assets and a requirement that it currently
distribute at least 95% of its taxable income. The Company may, however,
be subject to certain state and local taxes on its income and property.

SEASONALITY

The Hotels' operations are seasonal. Eight of the Company's Hotels
maintain higher occupancy rates during the second and third quarters. The
Marriott Seaview Resort generates a large portion of its revenue from golf
related business and, as a result, revenues fluctuate according to the
season and the weather. Holiday Inn Beachside Resort, Radisson Hotel Tampa
and Le Meridien New Orleans experience their highest occupancies in the
first quarter. This seasonality pattern can be expected to cause
fluctuation in the Company's quarterly lease revenue under the
Participating Leases.

ENVIRONMENTAL MATTERS

Under various federal, state and local laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
liable for the costs or removal or remediation of certain hazardous or
toxic substances on under, or in such property. Such laws often impose
liability without regard to whether the owner or operator knew of, or was
responsible for, the presence of hazardous or toxic substances. In
addition, the presence of contamination from hazardous or toxic substances,
or the failure to remediate such contaminated property properly, may
adversely affect the owner's ability to borrow using such property as
collateral. Furthermore, a person who arranges for the disposal or
treatment of a hazardous or toxic substance at a property owned by another,
or who transports such substance to such property, may be liable for the
costs of removal or remediation of such substance released into the
environment at the disposal or treatment facility. The costs of
remediation or removal of such substances may be substantial, and the
presence of such substances, may adversely affect the owner's ability to
sell such real estate or to borrow using such real estate as collateral.
In connection with the ownership and operation of the Hotels, the Company,
the Operating Partnership, or the Lessee, as the case may be, may be
potentially liable for such costs.

Phase I environmental site assessments ("ESAs") have been performed on
all of the Hotels by a qualified independent environmental engineer. The
purpose of the Phase I ESAs is to identify potential sources of
contamination for which the Company may be responsible and to assess the
status of environmental regulatory compliance. The Phase I ESAs include
historical reviews of the Hotels, reviews of certain public records,
preliminary investigations of the sites and surrounding properties,
screening for the presence of asbestos-containing materials,
polychlorinated biphenyls, underground storage tanks, and the preparation
and issuance of a written report. The Phase I ESA's do not include
invasive procedures, such as soil sampling or ground water analysis.

The ESAs have not revealed any environmental liability or compliance
concerns that the Company believes would have a material adverse effect on
the Company's business, assets, results of operation, or liquidity, nor is
the Company aware of any material environmental liability or concerns.
Nevertheless, it is possible that the Phase I ESAs did not reveal all
environmental liabilities or compliance concerns or that material
environmental liabilities or compliance concerns exist of which the Company
is currently unaware. Moreover, no assurance can be given that (i) future
laws, ordinances or regulations will not impose any material environmental
liability or (ii) the current environmental condition of the Hotels will
not be affected by the condition of the properties in the vicinity of the
Hotels (such as the presence of leaking underground storage tanks) or by
third parties unrelated to the Operating Partnership or the Company.

The Company believes that its Hotels are in compliance, in all
material respects, with all federal, state and local environmental
ordinances and regulations regarding hazardous or toxic substances and
other environmental matters, the violation of which would have a material
adverse effect on the Company. The Company has not been notified by any
governmental authority of any material noncompliance, liability or claim
relating to hazardous or toxic substances or other environmental matters in
connection with any of its present properties.

EMPLOYEES

The Company has no employees. The Advisor manages the day-to-day
operations of the Company. All persons employed in the day-to-day
operations of the Company's Hotels are employees of the management
companies engaged by the Lessees to operate such hotels.

ITEM 2. PROPERTIES

HOTEL PROPERTIES

At December 31, 1998, the Company owned interests in the following 12
hotel properties:

Number of
Guest
Property Rooms Location
- -------- --------- --------

Radisson Hotel South and
Plaza Tower 570 Bloomington, MN

Le Meridien New Orleans 494 New Orleans, LA

Le Meridien Dallas 407 Dallas, TX

Marriott Seaview Resort 297 Absecon, NJ
(Atlantic City)

Holiday Inn Beachside Resort 222 Key West, FL

San Diego Paradise Point Resort 462 San Diego, CA

LaGuardia Airport Marriott 436 New York, NY

Omaha Marriott Hotel 301 Omaha, NE

Radisson Hotel Tampa 265 Tampa, FL

Holiday Inn Park Plaza 257 Visalia, CA

Le Montrose All Suite Hotel 129 West Hollywood, CA

Harborside Hyatt Conference
Center & Hotel 270 Boston, MA

RADISSON HOTEL SOUTH AND PLAZA TOWER. Radisson Hotel South and Plaza
Tower is an upscale full service convention hotel located at the
intersection of Interstate 494 and Highway 100, approximately 15 minutes
from the Minneapolis/St. Paul International Airport, and five miles from
the Mall of America. The hotel is leased to and operated by affiliates of
Radisson Group, Inc. ("Radisson").

LE MERIDIEN NEW ORLEANS. Le Meridien New Orleans is a luxury full
service convention oriented hotel located in downtown New Orleans, a major
convention city. The hotel is centrally located across the street from the
French Quarter and near the central business district, the Ernest N. Morial
Convention Center and the New Orleans Superdome. The hotel has received
the AAA Four Diamond award for 13 consecutive years. The hotel is subject
to a 99-year ground lease, which expires May 2081. The hotel is leased to
and operated by affiliates of Le Meridien Hotels & Resorts ("Meridien").

LE MERIDIEN DALLAS. Le Meridien Dallas is an upscale full service
convention oriented hotel located in downtown Dallas, approximately 25
minutes from the Dallas/Fort Worth International Airport, in the heart of
the city's arts and financial districts. The hotel is conveniently located
near the City Convention Center, four stops away on the new Dallas light
rail system, with a DART station adjacent to the hotel. The hotel is
leased to and operated by Meridien.

MARRIOTT SEAVIEW RESORT. Marriott Seaview Resort is a luxury golf and
conference resort located in Brigantine Bay, approximately nine miles north
of Atlantic City, New Jersey. The hotel is leased to the Affiliated Lessee
and operated by Marriott International, Inc. ("Marriott") pursuant to a
long-term incentive-based operating agreement.

HOLIDAY INN BEACHSIDE RESORT. Holiday Inn Beachside Resort is an
upscale full service resort comprised of several one, two and three-story
buildings, located on an approximately 7.8 acre parcel north of U.S. 1 on
the beach facing the gulf of Mexico. The resort is located on the island
of Key West, considered to have the most consistent weather in Florida, and
benefits from the island's reputation as a popular tourist destination.
The hotel is leased to and operated by affiliates of Durbin Companies, Inc.
("Durbin").

SAN DIEGO PARADISE POINT RESORT. San Diego Paradise Point Resort is
an upscale resort that lies on 44 acres and has nearly one mile of
beachfront and is located in the heart of Mission Bay on Vacation Island, a
4,600-acre aquatic park in southwest San Diego County. The resort is
minutes away from the San Diego International Airport and convenient to
many major San Diego tourist attractions including Sea World, Old Town,
Downtown San Diego, the San Diego Convention Center, Qualcomm Stadium and
the San Diego Zoo. The hotel is subject to a 50-year ground lease from the
City of San Diego with 46 years currently remaining on the term. The hotel
is leased to and operated by WestGroup San Diego Associates, Ltd
("WestGroup"), an affiliate of Noble House Hotels and Resorts.

LAGUARDIA AIRPORT MARRIOTT. LaGuardia Airport Marriott is an upscale
full service urban/major business hotel located directly across from New
York's LaGuardia Airport. The hotel is five minutes from Shea Stadium and
the USTA National Tennis Center and 20 minutes from Manhattan. The hotel
is leased to the Affiliated Lessee and operated by Marriott pursuant to a
long-term incentive based operating agreement.

OMAHA MARRIOTT HOTEL. Omaha Marriott Hotel is an upscale full service
major business hotel located in the western suburbs of Omaha at one of the
city's busiest intersections (I-680 and West Dodge Road). 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, the largest shopping mall in
Omaha. The hotel is leased to the Affiliated Lessee and operated by
Marriott pursuant to a long-term incentive based operating agreement.

RADISSON HOTEL TAMPA. The Radisson Hotel Tampa is an upscale full
service major business hotel located in east suburban Tampa, Florida. The
hotel is situated at the entrance to Sabal Business Park, a three million
square foot office complex. The hotel is near Busch Gardens and Houlihan's
Stadium, 50 minutes from Walt Disney World in Orlando, and a 35 minute
drive to Tampa International Airport. The hotel is leased to and operated
by Radisson.

HOLIDAY INN PARK PLAZA. Holiday Inn Park Plaza is a mid-price full
service hotel located at the junction of Highways 99 and 198 in Visalia,
California. The hotel is situated in the heart of Central California, a
major agri-business center and is also a popular tourist destination due to
its central location and proximity to Yosemite, Sequoia and Kings Canyon
National Parks. In addition, the hotel is utilized extensively by major
corporate groups and social users due to the size and flexibility of its
meeting space and ample parking. The hotel is leased to and operated by
affiliates of Outrigger Lodging Services ("OLS").

LE MONTROSE ALL SUITE HOTEL. Le Montrose All Suite Hotel is a five-
story, luxury full-service hotel located in West Hollywood, California, two
blocks east of Beverly Hills and one block south of the "Sunset Strip".
The hotel is within walking distance of many of the area's finest
restaurants, retail shops and night clubs. The hotel attracts short and
long-term guests and small groups primarily from the recording, film and
design industries. The hotel is leased to and operated by OLS.

HARBORSIDE HYATT CONFERENCE CENTER & HOTEL. Harborside Hyatt
Conference Center & Hotel is a full-service luxury conference and airport
hotel located adjacent to Boston's Logan International Airport along the
Boston waterfront. The property features 19,000 square feet of meeting
space and is directly across from Boston's central business district and
next to the Ted Williams tunnel, providing convenient access to downtown
Boston. The property is subject to a long-term ground lease from Massport,
Logan International Airport's owner and operating authority. The hotel is
leased by the Affiliated Lessee and operated by Hyatt pursuant to a long-
term incentive-based operating agreement.

THE PARTICIPATING LEASES

In order for the Company to qualify as a REIT, neither the Company nor
the Operating Partnership may operate hotels or related properties. The
Operating Partnership leases the Hotels to the Lessees for terms of between
six and 11 years pursuant to separate Participating Leases that provide for
rent equal to the greater of base rent ("Base Rent") or participating rent
("Participating Rent") and which set forth the Lessees' required
capitalization and certain other matters. Unless otherwise noted, each
Participating Lease contains the provisions described below.

PARTICIPATING LEASE TERMS. The Participating Leases have an average
term of approximately 9.9 years, with expiration dates staggered between
the years 2004 and 2009, subject to earlier termination upon the occurrence
of certain contingencies described in the Participating Leases (including,
particularly, the provisions summarized below under the captions "Damage to
Hotels," "Condemnation of Hotels," "Termination of Participating Leases for
Failure to Meet Performance Goals" and "Termination of Participating Leases
upon Disposition of Hotels"). The variation of the lease terms is intended
to provide the Company with protection from the risk inherent in
simultaneous lease expirations and to align the expiration of certain of
the Participating Leases with the expiration of the applicable franchise
license.

BASE RENT; PARTICIPATING RENT; ADDITIONAL CHARGES. Each Participating
Lease requires the applicable Lessee to pay (x) the greater of (i) Base
Rent in a fixed amount (ii) Participating Rent based on certain percentages
of room revenue, food and beverage revenue and telephone and other revenue
at the applicable Hotel, and (y) certain other amounts, including utility
charges, certain impositions and insurance premiums, and interest accrued
on any late payments or charges ("Additional Charges"). For each lease year
beginning with the lease year commencing in January 1999, or January 2000
with respect to the hotels operated by Meridien, as applicable, the Base
Rent and Participating Rent thresholds will be increased to reflect any
increase in the applicable Consumer Price Index published by the Bureau of
Labor Statistics of the United States of America Department of Labor, U.S.
City Average, Urban Wage Earners and Clerical Workers ("CPI"). Lessees

are required to pay Base Rent monthly in arrears by the first day of each
calendar month, and Participating Rent is payable quarterly in arrears by
the twentieth day of each fiscal quarter, except for the Hotels operated by
Marriott and the Hotel operated by Hyatt, whose rents are due in accordance
with their respective Participating Leases, as defined. Participating Rent
is calculated based on the year-to-date departmental receipts as of the end
of the preceding fiscal quarter, plus the prorated amount of each of the
applicable departmental thresholds for the fiscal quarter, or portion
thereof, minus the cumulative Participating Rent previously paid for such
fiscal year and the cumulative Base Rent paid for such fiscal year as of
the end of the preceding fiscal quarter.

Other than real estate and personal property taxes, casualty insurance
including business interruption insurance, ground lease payments, capital
impositions and capital replacements and refurbishments (determined in
accordance with generally accepted accounting principles ("GAAP")), which
are obligations of the Company, the Participating Leases require the
Lessees to pay rent, condominium dues, certain insurance, all costs and
expenses, and all utility and other charges incurred in the operation of
the Hotels. The Participating Leases also provide for rent reductions and
abatements in the event of damage or destruction or a partial taking of any
Hotel as described under "Damage to Hotels" and "Condemnation of Hotels."

The Company has sold certain FF&E to the Lessees of Radisson Hotel
South and Plaza Tower and Le Meridien Dallas at its book value in exchange
for promissory notes receivable ("FF&E Notes") of approximately $1.0
million and $.6 million, respectively. The FF&E Notes bear interest at 6.0%
and 5.6% per annum, respectively, and are payable in monthly installments
of interest only. These FF&E Notes have an initial term of five years
unless extended at the Company's option. Additionally, the Company provided
working capital to each of the Lessees in the aggregate amount of $3.4
million in exchange for a note receivable (each, a "Working Capital
Notes"). The Working Capital Notes bear interest at either 5.6% or 6.0% per
annum, and are payable in monthly installments of interest only. The term
of each Working Capital Note is identical to the term of the related
Participating Lease. Payments made under the FF&E Notes and the Working
Capital Notes are used to reduce the related Participating Lease payments
by an equal amount. The total of the interest income payments and
Participating Lease payments will be equal to the amounts calculated by
applying the rent provisions of the Participating Leases to the revenues of
the Hotels.

RESERVES. The Participating Leases for the Hotels obligate the
Company to make funds available for capital improvements at the Hotels
(including the periodic replacement or refurbishment of FF&E)in amounts
ranging from 4.0% to 5.5% of total revenue from the Hotels, with the amount
of such reserve with respect to each hotel representing projected capital
requirements of each hotel. The Company's obligation to make funds
available for capital improvements has not been recorded on the books and
records of the Company as such amounts are and will be capitalized as
incurred. Any unexpended amounts will remain the property of the Company
upon termination of the Participating Leases. The reserve requirements for
the hotels operated by Marriott and Hyatt are contained in certain non-
cancelable operating agreements, which require the reserves for the hotels
operated by Marriott and Hyatt to be maintained through restricted cash
escrows ("FF&E Escrows"). The amounts maintained in the FF&E escrows have
been recorded on the books and records of the Company. Otherwise, the
Lessees are required, at their expense, to maintain the Hotels in good
order and repair, subject to ordinary wear and tear, and to make all
necessary and appropriate nonstructural, foreseen and unforeseen, and
ordinary and extraordinary repairs (other than capital repairs) which may
be necessary and appropriate to keep the Hotels in good order and repair.

The Lessees are not obligated to bear the cost of any capital
improvements or capital repairs to the Hotels. With the consent of the
Company, however, the Lessees may utilize funds from the capital
expenditure reserves to make capital additions, modifications or
improvements to the Hotels. All such alterations, replacements and
improvements are subject to all the terms and provisions of the
Participating Leases and will become the property of the Company upon
termination of the Participating Leases. The Company owns substantially all
personal property (other than inventory, linens and other nondepreciable
personal property) not affixed to, or deemed a part of, the real estate or
improvements on the Hotels, except to the extent that ownership of such
personal property would cause any portion of the rents under the
Participating Leases not to qualify as "rents from real property" for REIT
income test purposes.

INSURANCE AND PROPERTY TAXES. The Company is responsible for paying
(i) real estate and personal property taxes on the Hotels, (ii) any ground
lease payments on the Hotels, (iii) casualty insurance on the Hotels, and
(iv) business interruption insurance on the Hotels. The Lessees are
required to pay for or reimburse the Company for all liability insurance on
the Hotels, with extended coverage, including comprehensive general public
liability, workers' compensation and other insurance appropriate and
customary for properties similar to the Hotels and naming the Company as an
additional insured, where permitted by law.

EVENTS OF DEFAULT. Events of Default under the Participating Leases
include, among others, the following:

(i) the failure by a Lessee to pay Base or Participating Rent
within ten days after same is due; or with respect to Radisson Hotel South
and Plaza Tower, ten days after notice of non-payment;

(ii) the failure of a Lessee to observe or perform any other term of
a Participating Lease and the continuation of such failure beyond any
applicable cure or grace period;

(iii) the failure of a Lessee to pay for required insurance;

(iv) the failure of a Lessee to maintain the Required Minimum Net
Worth;

(v) should a Lessee or Operator file a petition for relief or
reorganization or arrangement or any other petition in bankruptcy, for
liquidation or to take advantage of any bankruptcy or insolvency law of any
jurisdiction, or consent to the appointment of a custodian, receiver,
trustee or other similar office with respect to it or any substantial part
of its assets, or take corporate action for the purpose of any of the
foregoing; or if a court or governmental authority of competent
jurisdiction shall enter an order appointing, without consent by the Lessee
or Operator, a custodian, receiver, trustee or other similar officer with
respect to the Lessee or Operator or any substantial part of its assets, or
if an order for relief shall be entered in any case or proceeding for
liquidation or reorganization or otherwise to take advantage of any
bankruptcy or insolvency law of any jurisdiction, or ordering the
dissolution, winding up or liquidation of the Lessee or Operator, or if any
petition for any such relief shall be filed against the Lessee or Operator
and such petition shall not be dismissed within 120 days;

(vi) should a Lessee or Operator cause a default beyond applicable
grace periods, if any, under any Franchise Agreement or Operator Agreement
relating to any Hotel; or

(vii) should a Lessee or Operator voluntarily cease operations of the
Leased Property for more than three (3) days other than by reason of
casualty, condemnation or force majeure.

In addition, an Event of Default will result in a cross-default of all
other Participating Leases to which the Lessee is a party; except with
respect to a default at Radisson Hotel Tampa, which would not result in a
cross default of Radisson Hotel South and Plaza Tower.

INDEMNIFICATION. Under each of the Participating Leases, the Lessees
will indemnify, and are obligated to hold harmless, the Company, the
Advisor and their officers and trustees, from and against all liabilities,
costs and expenses (including reasonable attorneys' fees and expenses)
incurred by, imposed upon or asserted against the Company or any of them on
account of, among other things, (i) any accident or injury to persons or
property on or about the Hotels, (ii) any misuse by the applicable Lessee
or any of its agents of the leased property, (iii) any environmental
liability caused or resulting from any action or negligence of the Lessee
or Operator (see "Environmental Matters"); (iv) taxes and assessments in
respect of the Hotels (other than real estate and personal property taxes
and income taxes of the Company on income attributable to the Hotels and
capital impositions); (v) the sale or consumption of alcoholic beverages on
or in the real property or improvements thereon; or (vi) the failure to
comply with the terms of the Participating Leases by the Lessee; provided,
however, that such indemnification will not be construed to require the
Lessee to indemnify the Company against the Company's own negligent acts or
misconduct.

ASSIGNMENT AND SUBLEASING. The Lessees are not permitted to sublet
all or any part of the Hotels or assign their interest under any of the
Participating Leases, other than to affiliates of certain of the applicable
Lessees, without the prior written consent of the Company. No assignment or
subletting will release a Lessee from any of its obligations under the
Participating Leases unless the Company expressly agrees that the Lessee
shall be released from any of its obligations under the Participating
Leases.

DAMAGE TO HOTELS. In the event of damage to or destruction of any
hotel covered by insurance which then renders the leased property
unsuitable for its intended use and occupancy as a hotel, the Participating
Lease shall terminate, and the Company shall generally be entitled to
retain the proceeds of insurance. In the event that damage to or
destruction of a hotel which is covered by insurance does not render the
leased property unsuitable for its intended use and occupancy as a hotel,
the Company generally will be obligated to repair or restore the hotel to
substantially the same condition as existed immediately prior to such
damage. In the event of damage to or destruction of any hotel that is not
covered by insurance, the Company generally, may either repair, rebuild or
restore the hotel (at the Company's expense) to substantially the same
condition as existed immediately prior to such damage, or terminate the
Participating Lease on the terms and conditions set forth in such
Participating Lease.

CONDEMNATION OF HOTELS. In the event of a total condemnation of a
hotel, the relevant Participating Lease will terminate with respect to such

hotel as of the date of taking, and the Company will be entitled to all of
the condemnation award in accordance with the provisions of the
Participating Lease. In the event of a partial taking which does not render
the property unsuitable for its intended use as a hotel, then the Company
generally will be obligated to restore the untaken portion of the property,
and the Company shall contribute the condemnation award to the cost of such
restoration.

TERMINATION OF PARTICIPATING LEASES. The Company has the right to
terminate the Participating Lease for a hotel if the hotel fails to meet
certain performance goals, as defined. Additionally, in the event the
Company enters into an agreement to sell or otherwise transfer a hotel, the
Company, at its option, may terminate the Participating Lease upon 30 days'
notice to the applicable Lessee, subject to certain provisions.
Additionally, in the event that changes in federal income tax laws allow
the Company or a subsidiary or affiliate to directly operate hotels, the
Company will have the right to terminate all, but not less than all,
Participating Leases with the Lessees.

OTHER LEASE COVENANTS. Each Lessee has agreed that during the term of
its Participating Lease, the Lessee will not engage in any unrelated
business activities. The owners of each Lessee and their parent entities
have agreed that, for the term of its Participating Lease, any sale of
their interest in such Lessee, or of their hotel management businesses in
general, will subject their interest in the Lessee to a limited fair market
value acquisition right in favor of a designee of the Company. In the event
that the Company exercises this right, any nonselling partner of the Lessee
will have the right to put its interest in the Lessee to the Company's
designee at a price equal to the fair market value of such interest. The
Participating Leases require each Lessee to make available to the Company
unaudited monthly and quarterly and audited annual operating information
for each Hotel leased by such Lessee.

INVENTORY. All inventory required in the operation of the hotels is
owned by the applicable Lessee. Upon termination of a related Participating
Lease, the Lessee shall surrender the related hotel together with all such
inventory to the Company.

ITEM 3. LEGAL PROCEEDINGS

None of the Company, the Operating Partnership or the Advisor is aware
of any material pending or threatened legal proceedings to which the
Company, the Operating Partnership or any of their subsidiaries is a party
or of which any of their property is subject.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of the Company's
shareholders during the fourth quarter of the year covered by this Annual
Report on Form 10-K.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND
RELATED SHAREHOLDER MATTERS

MARKET INFORMATION

The Common Shares of the Company began trading on the New York Stock
Exchange ("NYSE") on April 24, 1998 under the symbol "LHO". On March 15,
1999, the last reported closing sale price per Common Share on the NYSE was
$12 3/16. The following table sets forth for the indicated periods the high
and low sales for the Common Shares and the cash distributions declared per
share:

High Low Distributions
---- --- -------------
For the period from April 29, 1998
(inception) through June 30, 1998 $18 9/16 $15 7/16 $0.260(a)
Quarter ended September 30, 1998 $17 1/4 $11 11/16 $0.375(b)
Quarter ended December 31, 1998 $13 1/2 $ 7 1/2 $0.375(c)

(a) The Company's Board of Trustees declared a distribution of $0.260 per
Common Share on July 28, 1998. The distribution was to shareholders of
record on August 4, 1998 and was paid August 14, 1998. The distribution
was for the period from April 29, 1998 (inception) through June 30, 1998,
which is approximately equivalent to a full quarterly distribution of
$0.375 per Common Share and annual distribution of $1.50 per Common Share.

(b) The Company's Board of Trustees declared a distribution of $0.375 per
Common Share on October 20, 1998. The distribution was to shareholders of
record on October 30, 1998 and was paid November 13, 1998.

(c) The Company's Board of Trustees declared a distribution of $0.375 per
Common Share on October 20, 1998. The distribution was to shareholders of
record on December 31, 1998 and was paid on January 15, 1999.

SHAREHOLDER INFORMATION

As of March 15, 1999, there were 131 record holders of the Company's
Common Shares, including shares held in "street name" by nominees who are
record holders, and approximately 9,000 beneficial holders.

In order to comply with certain requirements related to qualification
of the Company as a REIT, the Company's Amended and Restated Declaration of
Trust limits the number of Common Shares that may be owned by any single
person or affiliated group to 9.8% of the outstanding Common Shares.

DISTRIBUTION INFORMATION

The Company's current annualized distribution rate is $1.50 per Common
Share, payable quarterly in an amount equal to $0.375 per share. The
Company's 1998 distributions were fully taxable as ordinary income.

The Company currently anticipates that it will maintain at least the
current distribution rate in the near term, unless actual results of
operations, economic conditions or other factors differ from its current
expectations. The declaration of distributions by the Company is in the
sole discretion of the Company's Board of Trustees and depends on the
actual cash flow of the Company, its financial condition, capital
expenditure requirements for the Company's Hotels, the annual distribution
requirements under the REIT provisions of the Code and such other factors
as the Board of Trustees deems relevant.

UNITS

On April 29, 1998 (inception) the Company had 3,181,723 Units
outstanding. The unit holders received distributions per unit in the same
manner as distributions distributed on a per share basis to the common
shareholders. On December 31, 1998 there remained 3,181,723 Units
outstanding.

SALES OF UNREGISTERED SECURITIES

On June 1, 1998, the Company sold 112,458 common shares of beneficial
interest to WestGroup for cash consideration of approximately $2.0 million.

This sale was not registered under the Securities Act of 1933 (the
"Securities Act") in reliance upon the exemption from the registration
requirements, thereof provided by Section 4(2) of the Securities Act.

ITEM 6. SELECTED FINANCIAL DATA

SELECTED FINANCIAL INFORMATION

The following tables set forth selected historical operating and
financial data for the Company and selected historical financial data for
LRP Bloomington Limited Partnership, which is the predecessor of the
Company (the "Predecessor"). The selected historical financial data for
the Company for the period from April 29, 1998 (inception) through
December 31, 1998, and the selected historical financial data for the
Predecessor for the period from January 1, 1998 through April 28, 1998, the
years ended December 31, 1997 and 1996 and for the period from December 1,
1995 (date of formation) through December 31, 1995 have been derived from
the historical financial statements of the Company and the Predecessor,
respectively. The following selected financial information should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and all of the financial statements
and notes thereto included elsewhere in this Form 10-K.

LASALLE HOTEL PROPERTIES
SELECTED HISTORICAL OPERATING AND FINANCIAL DATA
(Unaudited, Dollars in thousands, except share data)

For the period from
April 29, 1998
(inception) through
December 31, 1998
--------------------
OPERATING DATA:
REVENUE:
Participating lease revenue. . . . . . . . . . . . . . $ 46,464
Interest income. . . . . . . . . . . . . . . . . . . . 189
Equity in loss of affiliated lessee. . . . . . . . . . (59)
Other income . . . . . . . . . . . . . . . . . . . . . 399
----------
Total revenue. . . . . . . . . . . . . . . . . . . . 46,993

EXPENSES:
Depreciation . . . . . . . . . . . . . . . . . . . . . 13,666
Real estate, personal property taxes, and
insurance. . . . . . . . . . . . . . . . . . . . . . 5,047
Ground rent. . . . . . . . . . . . . . . . . . . . . . 1,886
General and administrative . . . . . . . . . . . . . . 472
Interest . . . . . . . . . . . . . . . . . . . . . . . 8,474
Amortization of deferred financing costs . . . . . . . 514
Advisory fee (1) . . . . . . . . . . . . . . . . . . . 2,134
Minority interest in Operating Partnership . . . . . . 2,567
----------

For the period from
April 29, 1998
(inception) through
December 31, 1998
--------------------

Total expenses . . . . . . . . . . . . . . . . . . . 34,760
----------
Net income applicable to common shareholders . . . . . . $ 12,233
==========
Net income per share - basic and diluted . . . . . . . . $ 0.80
==========
Weighted average number of Common Shares outstanding -
basic and diluted. . . . . . . . . . . . . . . . . . . 15,209,555
==========

As of
December 31, 1998
-----------------
BALANCE SHEET DATA:
Investment in hotel properties, net. . . . . . . . . . $ 467,552
Total assets . . . . . . . . . . . . . . . . . . . . . 496,338
Borrowings under the credit facility . . . . . . . . . 164,700
Bonds payable, net . . . . . . . . . . . . . . . . . . 42,828
Minority interest in Operating Partnership . . . . . . 47,694
Shareholders' equity . . . . . . . . . . . . . . . . . 228,384

For the period from
April 29, 1998
(inception) through
December 31, 1998
--------------------
OTHER DATA:
Funds from operations (2). . . . . . . . . . . . . . . $ 28,466
Cash provided by operating activities. . . . . . . . . 21,280
Cash used in investing activities. . . . . . . . . . . (406,732)
Cash provided by financing activities. . . . . . . . . 387,022
Distributions declared . . . . . . . . . . . . . . . . 18,590

LRP BLOOMINGTON LIMITED PARTNERSHIP (3)
SELECTED PREDECESSOR HISTORICAL FINANCIAL DATA
(Unaudited, Dollars in thousands)

Total revenue. . . 8,405 26,217 24,617 1,371

For the
period from
December 1,
For the 1995 (date of
period from Year Ended formation)
January 1, December 31, through
1998 through ------------------ December 31,
April 28, 1998 1997 1996 1995
-------------- ------- ------- -------------
OPERATING EXPENSES:
Departmental and
operating expenses. 5,712 17,404 16,462 1,219
Management fees. . . 336 1,111 1,053 55
Property taxes . . . 405 1,240 1,191 97
Interest expense . . 833 2,658 2,601 212
Depreciation and
amortization. . . . 1,196 3,123 2,718 375
Advisory fees. . . . 53 159 159 13
------- ------- ------- -------
Total expenses . . 8,535 25,695 24,184 1,971
------- ------- ------- -------
Net income (loss). . . $ (130) $ 522 $ 433 $ (600)
======= ======= ======= =======

(1) Represents advisory fee paid to the Advisor for acquisition,
management, advisory and administrative services provided to the Company.
The Advisor receives an annual base fee up to 5% of the Company's net
operating income, as defined in the Advisory Agreement, and an annual
incentive fee which prior to January 1, 1999 is limited to 1% of the
Company's prorated pro forma net operating income based on growth in Funds
from Operations ("FFO") per share.

(2) FFO, as defined by the National Association of Real Estate Investment
Trusts ("NAREIT"), represents net income applicable to common shareholders
(computed in accordance with GAAP), excluding gains (losses) from debt
restructuring and sales of property (including furniture and equipment),
plus real estate related depreciation and amortization (excluding
amortization of deferred financing costs), and after adjustments for
unconsolidated partnerships and joint ventures. FFO does not represent
cash generated from operating activities in accordance with GAAP, is not
necessarily indicative of cash flow available to fund cash needs and should
not be considered as an alternative to net income as an indication of
performance or to cash flow as a measure of liquidity. The Company
considers FFO to be an appropriate measure of the performance of an equity
REIT in that such calculation is a measure used by the Company to evaluate
its performance against its peer group and is a basis for making the
determination as to the allocation of its resources and reflects the
Company's ability to meet general operating expenses. Although FFO has
been computed in accordance with the current NAREIT definition, FFO as
presented may not be comparable to other similarly titled measures used by
other REIT's. FFO may include funds that may not be available for
management's discretionary use due to functional requirements to conserve
funds for capital expenditures and property acquisitions, and other
commitments and uncertainties.

(3) The Predecessor was formed on December 1, 1995 for the purpose of
acquiring and operating the Radisson Hotel South and Plaza Tower (the
"property"). On April 29, 1998, the Predecessor contributed the property
to the Company.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

This report includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. All statements, other than statements of
historical facts, included in this report that address activities, events
or developments that the Company expects, believes or anticipates will or
may occur in the future, including such matters as future capital
expenditures, distributions and acquisitions (including the amount and
nature thereof), expansion and other development trends of the real estate
industry, business strategies, expansion and growth of the Company's
operations and other such matters are forward-looking statements. These
statements are based on certain assumptions and analyses made by the
Company and the Advisor in light of their experience and perceptions of
historical trends, current conditions, expected future developments and
other factors they believe are appropriate. Such statements are subject to
a number of assumptions, risks and uncertainties, general economic and
business conditions, the business opportunities that may be presented to
and pursued by the Company, changes in laws or regulations and other
factors, many of which are beyond the control of the Company. Any such
statements are not guarantees of future performance and actual results or
developments may differ materially from those anticipated in the forward-
looking statements.

GENERAL BACKGROUND

The following discusses: (i) the Company's actual results of
operations for the period from April 29, 1998 (inception) through
December 31, 1998, and (ii) the Company's pro forma results of operations
for the years ended December 31, 1998 and 1997. This discussion should be
read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere in this form 10-K. The Company has not
included a discussion of the Predecessor, as its financial information
would not be deemed comparable to the Company. However, the Predecessor's
financial information has been included in the notes to the consolidated
financial statements.

The pro forma financial information of the Company is presented as if
(i) the IPO and the related formation transactions and (ii) the
acquisitions of the hotels discussed in Note 4 to the consolidated
financial statements had been consummated as of January 1, 1997. The pro
forma financial information is not necessarily indicative of what actual
results of operations of the Company would have been assuming the IPO and
the related formation transactions and the subsequent acquisitions had been
consummated and all of the Hotels had been leased as of January 1, 1997,
nor does it purport to represent the results of operations for future
periods.

RESULTS OF OPERATIONS

ACTUAL RESULTS FOR THE PERIOD FROM APRIL 29, 1998 (INCEPTION) THROUGH
DECEMBER 31, 1998

The Company earned approximately $46.5 million in participating lease
revenue from the Affiliated Lessee and the other lessees. The Company's
expenses before minority interest, consisting principally of depreciation,
property taxes, insurance, ground rent, advisory fees, general and
administrative expenses and interest expense were approximately $32.2
million. Minority interest in the Operating Partnership was approximately
$2.6 million representing the weighted average minority interest percentage
for the period from April 29, 1998 (inception) through December 31, 1998.

Net income applicable to common shareholders was approximately $12.2
million or 26.0% of total revenues for the period.

PRO FORMA RESULTS OF OPERATIONS FOR THE COMPANY FOR THE YEAR ENDED
DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

For the year ended December 31, 1998, the Company's pro forma total
revenues would have been approximately $72.5 million, representing a $6.7
million, or 10.2%, increase over pro forma total revenues for the year
ended December 31, 1997 of approximately $65.7 million. The increase for
1998 over 1997 consisting almost entirely of Participating Lease revenues,
is primarily attributable to a 5.3% increase in RevPAR for the 12 Hotels
owned by the Company at December 31, 1998.

Pro forma expenses before minority interest, consisting principally of
depreciation, property taxes, insurance, ground rent, advisory fees,
general and administrative expenses and interest expense would have been
approximately $51.7 million for 1998, representing a $2.1 million, or 4.1%
increase over 1997 expenses of approximately $49.7 million. This increase
is principally attributable to property taxes, insurance, ground rent and
advisory fees. Property taxes and insurance would have increased from
approximately $7.2 million in 1997 to approximately $7.6 million in 1998,
or 5.4%, primarily because of inflation and the reassessment of certain
Hotels in 1998.

Pro forma general and administrative expenses and interest expense
would have remained relatively unchanged.

Pro forma depreciation would have increased to approximately $21.5
million in 1998 from approximately $20.5 million in 1997, representing a
$1.0 million or 4.7% increase, primarily due to FF&E refurbishments.

Pro forma minority interest would have been approximately $3.6 million
and $2.8 million for the year ended December 31, 1998 and 1997,
respectively.

As a result of the above, pro forma net income of the Company would
have been approximately $17.2 million and approximately $13.3 million for
the year ended December 31, 1998 and 1997, respectively. As a percentage
of total revenues, net income would have been 23.7% and 20.2% for the year
ended December 31, 1998 and 1997, respectively.

FUNDS FROM OPERATIONS

The Company believes that FFO is helpful to investors as a measure of
the performance of an equity REIT because, along with cash flow from
operating activities, financing activities and investing activities, it
provides investors with an indication of the ability of the Company to
incur and service debt, to make capital expenditures and to fund other cash
needs. The White Paper on FFO approved by the Board of Governors of NAREIT
in March 1995 defines FFO as net income (loss) (computed in accordance with
GAAP), excluding gains (or losses) from debt restructuring and sales of
properties, plus real estate related depreciation and amortization and
after comparable adjustments for the Company's portion of these items
related to unconsolidated entities and joint ventures. The Company
computes FFO in accordance with standards established by NAREIT which may
not be comparable to FFO reported by other REITs that do not define the
term in accordance with the current NAREIT definition or that interpret the
current NAREIT definition differently than the Company. FFO does not
represent cash generated from operating activities determined by GAAP and
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial
performance or to cash flow from operating activities (determined in
accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs, including
its ability to make cash distributions. FFO may include funds that may not
be available for management's discretionary use due to functional
requirements to conserve funds for capital expenditures and property
acquisitions, and other commitments and uncertainties. The following is a

reconciliation between net income and FFO for the period from April 29,
1998 (inception) through December 31, 1998 and pro forma net income and pro
forma FFO for the years ended December 31, 1998 and 1997, respectively (in
thousands, except per share data):

For the period
from April 29,
1998 (inception)
through
December 31,
1998
-----------------
Net income applicable to
common shareholders. . . . . . . . . . . . . $ 12,233
Depreciation . . . . . . . . . . . . . . . . . 13,666
Minority interest. . . . . . . . . . . . . . . 2,567
----------
FFO. . . . . . . . . . . . . . . . . . . . . . $ 28,466
==========
FFO per common share and unit. . . . . . . . . $ 1.55
==========
Weighted average common shares and
units outstanding. . . . . . . . . . . . . . 18,391,278
==========

Year Ended December 31,
--------------------------------
1998 1997
---------- ----------
Pro forma net income applicable
to common shareholders . . . . . $ 17,152 $ 13,283
Pro forma depreciation . . . . . . 21,453 20,493
Pro forma minority interest. . . . 3,584 2,776
---------- ----------
Pro forma FFO. . . . . . . . . . . $ 42,189 $ 36,552
========== ==========
Pro forma FFO per common share
and unit . . . . . . . . . . . . $ 2.29 $ 1.99
========== ==========
Pro forma weighted average
common shares and units
outstanding. . . . . . . . . . . 18,406,303 18,406,303
========== ==========

Pro forma FFO for the year ended December 31, 1998 would have
increased $5.6 million, or 15.4% to approximately $42.2 million compared to
approximately $36.6 million in the year ended December 31, 1997. The
increase in pro forma FFO in 1998 is primarily attributable to the increase
in participating lease revenues.

THE HOTELS

The following table sets forth historical comparative information with
respect to occupancy, ADR and RevPAR for the comparable Hotels, the non-
comparable Hotels and total Hotel portfolio, regardless of ownership, for
the years ended December 31, 1998 and 1997.

This information is useful in understanding the underlying changes in
the pro forma participating lease revenue for the Company during the pro
forma periods presented.

Year Ended December 31,
-----------------------------------------
1998 1997 Variance
----------- ---------- ----------
COMPARABLE HOTELS (a)
Occupancy. . . . . . . . . . 73.0% 73.1% (0.1%)
ADR. . . . . . . . . . . . . $131.74 $123.17 7.0%
RevPAR . . . . . . . . . . . $96.17 $90.03 6.8%

NON-COMPARABLE HOTELS (b)
Occupancy. . . . . . . . . . 60.6% 75.3% (19.5%)
ADR. . . . . . . . . . . . . $102.44 $95.00 7.8%
RevPAR . . . . . . . . . . . $62.08 $71.51 (13.2%)

TOTAL PORTFOLIO
Occupancy. . . . . . . . . . 71.8% 73.3% (2.0%)
ADR. . . . . . . . . . . . . $129.44 $120.51 7.4%
RevPAR . . . . . . . . . . . $93.00 $88.33 5.3%

(a) Comparable Hotels include all Hotels excluding those in Non-
Comparable.
(b) Non-Comparable Hotels represent Hotels which underwent significant
renovations and include the following:
Radisson Hotel Tampa for quarters three and four,
Le Meridien Dallas and Radisson Hotel South and Plaza Tower
for quarter three.

The Total Hotel Portfolio experienced an increase in RevPAR of $4.67,
or 5.3%, for the year ended December 31, 1998 compared to the same period
in 1997. This increase was led by significant RevPAR percentage increases
at LeMeridien New Orleans, LaGuardia Airport Marriott and San Diego
Paradise Point Resort. The increased RevPAR for LeMeridien New Orleans and
LaGuardia Airport Marriott is a result of increases in the room rates and
occupancy of those full service hotels. For the San Diego Paradise Point
Resort, the increase in RevPAR is a result of an increase in room rates for
the hotel. The increases in RevPAR for these properties were partially
offset by the decreases in RevPAR at Radisson Hotel Tampa and LeMeridien
Dallas. The Radisson Hotel Tampa and Le Meridien Dallas experienced a
decline in occupancy due to renovations at these hotels during the third
and fourth quarter and the third quarter of 1998, respectively. In
addition, the Radisson Hotel South and Plaza Tower in Bloomington,
Minnesota, experienced a decline in occupancy, due in part to the Northwest
Airlines strike, which occurred in the third quarter of 1998. Also in the
third quarter of 1998, the Holiday Inn Beachside Resort and Le Meridien New
Orleans experienced a decline in occupancy due in part to evacuations at
these two hotels associated with Hurricane Georges.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal source of cash to meet its cash requirements,
including distributions to shareholders, is its pro rata share of the
Operating Partnership's cash flow from the Participating Leases. Except for
the security deposits required under the Participating Leases, the Lessees'
obligations under the Participating Leases are unsecured and the Lessees'
abilities to make rent payments to the Operating Partnership, and the
Company's liquidity, including its ability to make distributions to
shareholders, will be dependent on the Lessees' abilities to generate
sufficient cash flow from the operations of the Hotels.

In April 1998, the Company entered into a $200 million senior
unsecured revolving credit facility (the "1998 Credit Facility") to be used
for acquisitions, capital improvements, working capital and general
corporate purposes. The Company amended its 1998 Credit Facility on
October 30, 1998. Under the Amended and Restated Senior Unsecured Credit
Agreement, as amended (the "1998 Amended Credit Facility"), the commitment
was increased by $35 million, bringing the total commitment to $235
million. Borrowings under the 1998 Amended Credit Facility bear interest at
floating rates equal to LIBOR plus an applicable margin or an "Adjusted
Base Rate" plus an applicable margin, at the election of the Company. At
December 31, 1998 the interest rate was approximately 6.8% for LIBOR
borrowings. The Company did not have any Adjusted Base Rate borrowings
outstanding at December 31, 1998. Additionally, the Company is required to
pay an unused commitment fee which is variable, determined from a ratings
or leverage based pricing matrix, currently set at 25 basis points. The
Company incurred an unused commitment fee of approximately $93 for the
period from April 29, 1998 (inception) through December 31, 1998. The 1998
Amended Credit Facility matures on April 30, 2001 and contains certain
financial covenants relating to debt service coverage, market value net
worth and total funded indebtedness.

On June 24, 1998 the Company, through the Subsidiary LLC, acquired the
Boston Property subject to $40 million principal amount of special project
revenue bonds ("Massport Bonds") previously issued under the loan and trust
agreement with the Massachusetts Port Authority ("Massport"), as amended
("Massport Bond Agreement"). In conjunction with the Massport Bonds, the
Company recorded a premium of $3.5 million, of which $2.8 million remains
unamortized at December 31, 1998. The Massport Bonds are collateralized by
the leasehold improvements and bear interest at 10% per annum through the
date of maturity, March 1, 2026. Interest payments are due semiannually on
March 1 and September 1. Interest expense, net of the premium
amortization, for the period June 24, 1998 through December 31, 1998
totaled $1.4 million. The Massport Bonds shall be redeemed in part
commencing March 1, 2001 and annually until March 1, 2026, at which time
the remaining principal and any accrued interest thereon is due in full.
The Company has the option to prepay the Massport Bonds in full beginning
March 1, 2001 subject to a prepayment penalty which varies depending on the
date of prepayment.

At December 31, 1998, the Company had $1.6 million of cash and cash
equivalents and had utilized $164.7 million outstanding under its 1998
Credit Facility.

Net cash provided by operating activities was approximately $21.3
million for the period from April 29, 1998 (inception) through December 31,
1998 primarily due to the collections of Participating Lease revenues prior
to December 31, 1998, which was offset by payments for real estate taxes,
personal property taxes, interest expense, insurance, ground rent and the
Advisory Fee.

Net cash used in investing activities was approximately $406.7 million
for the period from April 29, 1998 (inception) through December 31, 1998
primarily due to the acquisition of the Initial Hotels, the San Diego
Property and the Boston Property.

Net cash provided by financing activities was approximately $387.0
million for the period from April 29, 1998 (inception) through December 31,
1998 primarily attributable to the net proceeds received from the IPO and
the borrowings under the 1998 Amended Credit Facility.

During the period from April 29, 1998 (inception) through December 31,
1998, the Company granted 81,000 stock options from the 1998 Share Option
and Incentive Plan. These stock options vest over periods determined by the
Compensation, Contract and Governance Committee. The stock options have
strike prices ranging from $14.81 to $18.00 per share and have a duration
of seven to ten years from date of grant.

In connection with the purchase of the San Diego Property, the sole
limited partner in the Subsidiary Partnership (which is an affiliate of the
hotel operator) acquired 112,458 Common Shares from the Company for a
purchase price of $2.0 million. The purchase and sale of the Common Shares
was a condition to the selection of the affiliate of the limited partner as
operator of the San Diego Property, and the Common Shares have been pledged
to the Operating Partnership to secure the limited partner's obligations
under the Participating Lease.

The Company is obligated to maintain Reserve Funds for capital
expenditures at the Hotels, as determined in accordance with the
Participating Leases. The Reserve Funds have not been recorded on the
books and records of the Company as such amounts will be capitalized as
incurred. The amounts obligated under the Reserve Funds are subject to
increases ranging from 4.0% to 5.5% of the individual Hotel's total
revenues. The total amount obligated by the Company under the Reserve
Funds is approximately $9.3 million at December 31, 1998, of which $3.8
million is available in restricted cash reserves for future capital
expenditures. Purchase orders totaling approximately $5.7 million have
been issued for renovations at the Hotels. The Company has committed to
these projects and anticipates making similar arrangements with the
existing Hotels or any future hotels that it may acquire.

The Board of Trustees has modified the Company's debt policy to a
basis which better reflects the underlying value of the Company's
properties. It is the Company's policy to incur debt only if upon such
incurrence the Company's total funded indebtedness would not exceed 50% of
"Aggregate Asset Value." For purposes of this policy, Aggregate Asset Value
is defined as the sum of (a) for all the Company's properties owned for
more than four quarters ("Seasoned Properties"), the EBITDA (reduced by the
aggregate FF&E reserves for the relevant period in respect of the Seasoned
Properties) of the Seasoned Properties for the preceding four quarters
times 10, and (b) for all Properties owned for less than four quarters
("New Properties"), the investment amount (which shall include the purchase
price, including assumed indebtedness, and all acquisition costs) of the
New Properties and 95% of all the capital expenditures with respect to the
New Properties. The Company's previous policy was based upon market
capitalization, which can fluctuate from time to time and which is not
necessarily an accurate measure of the value of the Company's properties.
The new basis for the Company's debt policy is expected to provide a more
consistent measure of the value of the Company's properties.

The Company has considered its short-term (one year or less) liquidity
needs and the adequacy of its estimated cash flow from operations and other
expected liquidity sources to meet these needs. The Company believes that
its principal short-term liquidity needs are to fund normal recurring
expenses, debt service requirements and the minimum distribution required
to maintain the Company's REIT qualification under the Code. The Company
anticipates that these needs will be met with cash flows provided by
operating activities. The Company has also considered capital improvements
and property acquisitions as short-term needs that will be funded either
with cash flows provided by operating activities, under the 1998 Amended
Credit Facility, other indebtedness, or the issuance of additional equity
securities.

The Company expects to meet long-term (greater than one year)
liquidity requirements such as property acquisitions, scheduled debt
maturities, major renovations, expansions and other nonrecurring capital
improvements through estimated cash from operations, long-term unsecured
and secured indebtedness and the issuance of additional equity securities.
The Company will acquire or develop additional hotel properties only as
suitable opportunities arise, and the Company will not undertake
acquisition or development of properties unless stringent acquisition
criteria have been achieved.

INFLATION

The Company's revenues come primarily from the Participating Leases,
thus the Company's revenues will vary based on changes in the revenues at
the Hotels. Therefore, the Company relies entirely on the performance of
the Hotels and the lessees' abilities to increase revenues to keep pace
with inflation. Operators of hotels can change room rates quickly, but
competitive pressures may limit the Lessees' and their Operators abilities
to raise rates faster than inflation or even at the same rate.

The Company's expenses are subject to inflation. These expenses
(primarily real estate and personal property taxes, property and casualty
insurance and ground rent) are expected to grow with the general rate of
inflation, except for instances in which the properties are subject to
periodic real estate tax reassessments.

YEAR 2000

The "Year 2000 Issue" is the result of computer programs and systems
having been designed and developed to use two digits, rather than four, to
define the applicable year. As a result, these computer programs and
systems may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions, pay invoices or engage in similar normal
business activities.

Under the guidance of a Year 2000 program team, whose strategy is
supported by senior management, the Company has a heightened sense of
awareness to the Year 2000 Issue. The Company has grouped its systems and
technology into three categories for purposes of Year 2000 readiness: (i)
commercial software purchased from third-party vendors; (ii) information
resource applications and technology (Operator IT Applications) - systems
supported by the hotel operators; and (iii) building systems -- non IT
equipment at hotels that use embedded computer chips, such as elevators,
automated room key systems and HVAC equipment. In conducting its system
assessment, the Company's Hotel Operators reviewed the Year 2000 readiness
of these systems in addition to creating an inventory of all other
applications, systems software and hardware including the related impact of
the Year 2000 Issue. The Company, working with its Hotel Operators, then
prioritized each of the hotel systems in terms of the degree of impact on
the operations of the hotel.

Based upon the results of the assessment, the Company's Hotel
Operators are determining the appropriate levels of renovation that will be
required and the process for validating the effect of the renovations. The
order in which this process is occurring is based on a system priority
rating. The renovation process of converting, replacing or eliminating
selected platforms, applications, databases and utilities, as well as the
validation process of testing and verifying, is anticipated to be completed
by the end of September 1999. The implementation phase, which involves
returning the tested systems to operational status, ongoing maintenance
procedures to insure continued readiness and development of contingency
plans for critical business systems, is also anticipated to be completed by
September 1999.

The Company's business is heavily dependent upon the efforts of the
Company's Hotel Operators. The Company has assisted its Hotel Operators in
developing guidelines for determining the status of Year 2000 readiness for
the Hotels, planning for the remediation and testing of Year 2000 affected
systems, and the preparation for potential unanticipated issues through the
creation of contingency plans. The Company's Hotel Operators are
addressing Year 2000 issues in a predetermined sequence based on a
priority schedule which places life safety and mission critical issues as

immediate concerns and so-called "amenity" or non-operationally critical
systems as less immediate. The Company continues to rely on its Hotel
Operators to identify and enact appropriate measures to assure that any
adverse impact of the arrival of the Year 2000 will be minimized. The
Company's involvement in terms of issue prioritization, scheduled review
and on-going feedback will ensure that adequate focus by the Hotel
Operators is maintained. The Company's senior management is, in addition
to reviewing Year 2000 status reports submitted by the Hotel Operators,
visiting all of the hotels to meet with hotel management regarding their
specific Year 2000 issues, reviewing first hand the situation, and
reiterating the importance of their efforts towards Year 2000 readiness.

The Company is reasonably optimistic that its portfolio will have made
prudent efforts towards the goal of Year 2000 readiness, and will be
adequately prepared for most foreseen problems before the end of 1999. At
this time, the majority of the Company's Hotel Operators have taken prudent
measures to prevent any foreseeable Year 2000 impact on systems classified
as either life safety related or mission critical for the on-going
operation of the hotels, with the remaining open issues expected to be
addressed in the near future. As such, the Company believes that it has
significantly reduced its exposure to life safety related liability and has
protected a significant portion of its revenue and earnings streams. The
Company expects that its Hotel Operators will have taken prudent measures
to prevent any foreseeable impact on systems related to the efficient
production of revenues and control of expenses by the end of the first
quarter 1999. At that time, the only remaining currently identified
systems will be those systems which have limited impact on revenue
generation or expense control. These systems will be ready to the fullest
extent possible as of the end of the second quarter 1999. There can be no
guarantee that the Company's Hotel Operators have identified every system
in any of the above described categories, nor can there be any assurance
that the steps taken to prepare for the Year 2000 will have addressed all
potential impact of Year 2000, especially those issues yet to be
identified.

The Company and its Hotel Operators are currently developing
contingency plans for each of the Hotels' systems, which are expected to be
in place by the end of the second quarter 1999.

Additionally, there can be no guarantee that the systems of other
companies, including some of the Hotel Operator's parent companies, on
which the operators rely for certain data and services will be Year 2000
ready on a timely basis and that any such lack of readiness will not have a
material adverse effect on the Company.

The Company's hotels rely on a variety of third party suppliers to
provide critical operating services. These suppliers may utilize systems
and embedded technologies to control the operation of building systems such
as utilities, lighting, security, elevators, heating, ventilating and air
conditioning systems. The Company has been and will continue to obtain
assurances from suppliers as to their Year 2000 compliance and will
continue to prepare contingency plans, including the identification of
alternative suppliers. The Company does not control these third party
suppliers, and for some suppliers, such as utility companies, there may be
no feasible alternative suppliers available. The failure of these
suppliers' systems could have a material adverse effect on the operations
of the affected hotel, and failures could have a material adverse effect on
the Company.

The actual costs to be incurred by the Company will depend on a number
of factors, many of which cannot currently be accurately predicted,
including the extent and difficulty of the remediation and other work to be
done, the appearance of unforeseen issues, the availability and cost of
consultants, the extent of testing required to demonstrate Year 2000
readiness, and the reliance on contingency planning to mitigate any non-
compliant situations. At this point in time, the Company is relying on the

estimates of its Hotel Operators who have projected the total costs related
to Year 2000 issues for the Company's hotels to be approximately $0.3
million. For the period from April 29, 1998 (inception) through
December 31, 1998, less than $0.1 million was incurred in connection with
costs related to Year 2000 issues.

The ability of third parties with whom the Company transacts business
to adequately address their Year 2000 issues is outside the Company's
control. At this time, the Company is in the process of reviewing the Year
2000 compliance of its major suppliers. There can be no assurance that
their failure to adequately address Year 2000 issues will not have a
material adverse effect on the Company's business, financial condition,
results of operations, or liquidity.

Although the Company is not aware of any threatened claims related to
the Year 2000, the Company may become subject to litigation arising from
such claims and, depending on the outcome, such litigation could have a
material adverse effect on the Company. It is not clear whether the
Company's insurance coverage would be adequate to offset these and other
business risks related to the Year 2000.

Finally, the Company also cannot predict the potential impact on its
business of the failure of other third parties to achieve Year 2000
compliance. For example, failure by third parties to achieve Year 2000
compliance could cause short-term disruptions in travel patterns,
potentially caused by actual or perceived problems with travel system (such
as the air traffic control system), and potential temporary disruptions in
the supply of utility, telecommunications and financial services, which may
be local or regional in scope. These events could lead travelers to
accelerate travel to late 1999, postpone travel to later in 2000 or cancel
travel plans, which could in turn affect lodging patterns and occupancy.
These potential issues are out of the control of the Company and may have
material impact on the financial performance of the Company.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5 "Reporting on the Costs of
Start-Up Activities," which requires that all non-governmental entities
expense costs of start-up activities, including organizational costs, as
those costs are incurred and requires the write-off of any unamortized
balances upon implementation. SOP 98-5 is effective for periods beginning
after December 15, 1998. The Company chose to adopt SOP 98-5 on April 29,
1998. Accordingly, there is no effect from the adoption of SOP 98-5 for
the period from April 29, 1998 (inception) through December 31, 1998.

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Financial Instruments and Hedging Activities". This statement,
effective for fiscal years beginning after June 15, 1999, establishes
accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments imbedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that the changes
in the derivative's fair value be recognized in earnings unless specific
hedge accounting criteria are met. Currently, the pronouncement has no
impact on the Company, as the Company has not utilized derivative
instruments or entered into any hedging activities.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to interest rate changes primarily as a result
of its 1998 Amended Credit Facility which is used for acquisitions, capital
improvements, working capital and general corporate purposes. The Company's
interest rate risk management objective is to limit the impact of interest
rate changes on earnings and cash flows and to lower its overall borrowing
costs. To achieve this objective, the Company borrows at primarily variable
interest rates. At December 31, 1998, the Company's outstanding borrowings
under the 1998 Amended Credit Facility were $164.7 million.

At December 31, 1998, the Company also had outstanding bonds payable
of $42.8 million, of which $40.0 million represents the principal balance
of the bonds and the remaining $2.8 million represents unamortized premium.

The bonds bear interest at a fixed rate. For fixed rate debt, changes in
interest rates generally affect the fair value of the debt, but not the
earnings or cash flows of the Company. Changes in the fair market value of
fixed rate debt generally will not have a significant impact on the
Company, unless the Company is required to refinance such debt. At
December 31, 1998, the carrying value of the bonds approximated their fair
value.

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Index to the Financial Statements on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated by reference to
the material in the Company's Proxy Statement for the 1999 Annual Meeting
of Shareholders (the Proxy Statement) under the captions "Election of
Trustees".

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to
the material in the Proxy Statement under the caption "Executive
Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference to
the material in the Proxy Statement under the caption "Principal and
Management Shareholders."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to
the material in the Proxy Statement under the caption "Certain
Relationships and Related Transactions."

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORT ON FORM 8-K.

(a) 1. FINANCIAL STATEMENTS

Included herein at pages F-1 through F-36

2. FINANCIAL STATEMENT SCHEDULES

The following financial statement schedule is included
herein at pages F-24 through F-26

Schedule III - Real Estate and Accumulated Depreciation

All other schedules for which provision is made in
Regulation S-X are either not required to be included herein under the
related instructions or are inapplicable or the related information is
included in the footnotes to the applicable financial statement and,
therefore, have been omitted.

3. EXHIBITS

The following exhibits are filed as part of this Annual
Report on Form 10-K:

EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------

23 Consent of KPMG LLP
27 Financial Data Schedule

(b) REPORTS ON FORM 8-K

No reports on Form 8-K were filed during the fourth
quarter of 1998.

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.

LASALLE HOTEL PROPERTIES

Dated: March 24, 1999 BY: /S/ HANS WEGER
------------------------------
Hans Weger
Executive Vice President,
Treasurer and Chief
Financial Officer
(Authorized Officer and
Principal Financial and
Accounting Officer)

KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
trustees of LaSalle Hotel Properties, hereby severally constitute Jon E.
Bortz, Michael D. Barnello and Hans S. Weger, and each of them singly, our
true and lawful attorneys with full power to them, and each of them singly,
to sign for us and in our names in the capacities indicated below, the Form
10-K filed herewith and any and all amendments to said Form 10-K, and
generally to do all such things in our names and in our capacities as
officers and trustees to enable LaSalle Hotel Properties to comply with the
provisions of the Securities Exchange Act of 1934, as amended and all
requirements of the Securities and Exchange Commission, hereby ratifying
and confirming our signatures as they may be signed by our said attorneys,
or any of them, to said Form 10-K and any and all amendments thereto.

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and dates indicated.

DATE SIGNATURE TITLE
---- --------- -----

March 24, 1999 /s/ Jon E. Bortz President, Chief Executive
-------------------------- Officer and Trustee
Jon E. Bortz

March 24, 1999 /s/ Stuart L. Scott Chairman of the
-------------------------- Board of Trustees
Stuart L. Scott

March 24, 1999 /s/ Darryl Hartley-Leonard Trustee
--------------------------
Darryl Hartley-Leonard

March 24, 1999 /s/ George F. Little, II Trustee
--------------------------
George F. Little, II

DATE SIGNATURE TITLE
---- --------- -----

March 24, 1999 /s/ Donald S. Perkins Trustee
--------------------------
Donald S. Perkins

March 24, 1999 /s/ Shimon Topor Trustee
--------------------------
Shimon Topor

March 24, 1999 /s/ Donald A. Washburn Trustee
--------------------------
Donald A. Washburn

March 24, 1999 /s/ Michael D. Barnello Chief Operating Officer and
-------------------------- Executive Vice President
Michael D. Barnello of Acquisitions

LASALLE HOTEL PROPERTIES

INDEX TO FINANCIAL STATEMENTS

LASALLE HOTEL PROPERTIES

Report of Independent Accountants. . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheet as of December 31, 1998 . . . . . . . . . . F-3
Consolidated Statement of Operations for the period from
April 29, 1998 (inception) through December 31, 1998 . . . . . . . . F-4
Consolidated Statement of Shareholders' Equity for the period
from April 29, 1998 (inception) through December 31, 1998. . . . . . F-5
Consolidated Statement of Cash Flows for the period from
April 29, 1998 (inception) through December 31, 1998 . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . F-7
Schedule III - Real Estate and Accumulated Depreciation
as of December 31, 1998. . . . . . . . . . . . . . . . . . . . . . . F-24

LASALLE HOTEL LESSEE, INC.

Report of Independent Accountants. . . . . . . . . . . . . . . . . . . F-27
Balance Sheet as of December 31, 1998. . . . . . . . . . . . . . . . . F-28
Statement of Operations for the period from
April 29, 1998 (inception) through December 31, 1998 . . . . . . . . F-29
Statement of Stockholders' Equity (Deficit) for the period
from April 29, 1998 (inception) through December 31, 1998. . . . . . F-30
Statement of Cash Flows for the period from April 29,
1998 (inception) through December 31, 1998 . . . . . . . . . . . . . F-31
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . F-32

INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Trustees of
LaSalle Hotel Properties:

We have audited the consolidated financial statements of LaSalle Hotel
Properties as listed in the accompanying index. In connection with our
audit of the consolidated financial statements, we also have audited the
financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. 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 audit
provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
LaSalle Hotel Properties as of December 31, 1998, and the results of their
operations and their cash flows for the period from April 29, 1998
(inception) through December 31, 1998 in conformity with generally accepted
accounting principles. Also in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

KPMG LLP

Chicago, Illinois
January 18, 1999

LASALLE HOTEL PROPERTIES

CONSOLIDATED BALANCE SHEET

(Dollars in thousands, except per share data)

December 31,
1998
-------------
ASSETS
------

Investment in hotel properties, net. . . . . . . . . . . $ 467,552
Investment in affiliated lessee. . . . . . . . . . . . . (21)
Cash and cash equivalents. . . . . . . . . . . . . . . . 1,570
Restricted cash reserves . . . . . . . . . . . . . . . . 9,789
Rent receivable from lessees:
Affiliated lessee. . . . . . . . . . . . . . . . . . . --
Other lessees. . . . . . . . . . . . . . . . . . . . . 3,088
Notes receivable:
Affiliated lessee. . . . . . . . . . . . . . . . . . . 1,500
Other lessees. . . . . . . . . . . . . . . . . . . . . 3,451
Deferred financing costs, net. . . . . . . . . . . . . . 1,754
Prepaid expenses and other assets. . . . . . . . . . . . 7,655
----------
Total assets . . . . . . . . . . . . . . . . . $ 496,338
==========

LIABILITIES AND
SHAREHOLDERS' EQUITY
--------------------

Borrowings under credit facility . . . . . . . . . . . . $ 164,700
Bonds payable, net . . . . . . . . . . . . . . . . . . . 42,828
Due to JLL . . . . . . . . . . . . . . . . . . . . . . . 886
Due to affiliated lessee . . . . . . . . . . . . . . . . 614
Accounts payable and accrued expenses. . . . . . . . . . 4,320
Distributions payable. . . . . . . . . . . . . . . . . . 6,902
Minority interest in Operating Partnership . . . . . . . 47,694
Minority interest in other partnerships. . . . . . . . . 10

Commitments and contingencies

SHAREHOLDERS' EQUITY:
Preferred shares of beneficial interest,
$.01 par value, 20,000,000 shares
authorized, no shares issued and
outstanding at December 31, 1998 . . . . . . . . . . --
Common shares of beneficial interest,
$.01 par value, 100,000,000 shares
authorized, 15,224,580 shares
issued and outstanding at
December 31, 1998. . . . . . . . . . . . . . . . . . 152
Additional paid-in capital . . . . . . . . . . . . . . 231,376
Retained earnings. . . . . . . . . . . . . . . . . . . --
Distributions in excess of Retained Earnings . . . . . (3,144)
----------
Total shareholders' equity . . . . . . . . . . 228,384
----------
Total liabilities and
shareholders' equity . . . . . . . . . . . . $ 496,338
==========

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

LASALLE HOTEL PROPERTIES

CONSOLIDATED STATEMENT OF OPERATIONS

(Dollars in thousands, except per share data)

For the Period
from April 29,
1998 (inception)
through
December 31,
1998
----------------

Revenues:
Participating lease revenue:
Affiliated lessee. . . . . . . . . . . . . . . . . $ 19,436
Other lessees. . . . . . . . . . . . . . . . . . . 27,028
Interest income:
Affiliated lessee. . . . . . . . . . . . . . . . . 54
Other lessees. . . . . . . . . . . . . . . . . . . 135
Equity in loss of affiliated lessee. . . . . . . . . (59)
Other income . . . . . . . . . . . . . . . . . . . . 399
----------
Total revenues . . . . . . . . . . . . . . . . 46,993
----------

Expenses:
Depreciation . . . . . . . . . . . . . . . . . . . . 13,666
Real estate, personal property taxes and
insurance. . . . . . . . . . . . . . . . . . . . . 5,047
Ground rent. . . . . . . . . . . . . . . . . . . . . 1,886
General and administrative . . . . . . . . . . . . . 472
Interest . . . . . . . . . . . . . . . . . . . . . . 8,474
Amortization of deferred financing costs . . . . . . 514
Advisory fee . . . . . . . . . . . . . . . . . . . . 2,134
----------
Total expenses . . . . . . . . . . . . . . . . 32,193
----------

Income before minority interest. . . . . . . . . . . . 14,800
Minority interest in Operating Partnership . . . . . . 2,567
----------
Net income applicable to common shareholders . . . . . $ 12,233
==========

Net income applicable to common shareholders
per weighted average common share outstanding
- basic and diluted. . . . . . . . . . . . . . . . . $ .80
==========

Weighted average number of common shares
outstanding - basic and diluted. . . . . . . . . . . 15,209,555
==========

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

LASALLE HOTEL PROPERTIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Period from April 29, 1998 (inception)
through December 31, 1998
(Dollars in thousands, except per share data)

Distribu-
tions in
Additional Excess of
Common Paid-In Retained Retained
Shares Capital Earnings Earnings Total
------ --------- -------- --------- --------

Initial funding. . . $ -- $ 1 $ -- $ -- $ 1

Net proceeds from
issuance of common
shares. . . . . . . 142 234,052 -- -- 234,194
Issuance of
restricted common
shares. . . . . . . 9 16,409 -- -- 16,418
Proceeds from
issuance of
common shares . . . 1 1,999 -- -- 2,000
Issuance of rights
and options to
purchase shares . . -- 2,997 -- -- 2,997
Adjustment required
to reflect pre-
decessor's basis. . -- (24,082) -- -- (24,082)
Distributions
declared ($1.01
per share). . . . . -- -- (12,233) (3,144) (15,377)
Net income . . . . . -- -- 12,233 -- 12,233
---- -------- -------- -------- --------
Balance,
December 31, 1998 . $152 $231,376 $ -- $ (3,144) $228,384
==== ======== ======== ======== ========

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

LASALLE HOTEL PROPERTIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands, except per share data)

For the Period
from April 29,
1998 (inception)
through
December 31,
1998
-----------------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 12,233
Adjustments to reconcile net income to net cash
flow provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . 13,666
Amortization of deferred financing fees. . . . . . . 514
Bond premium amortization. . . . . . . . . . . . . . (652)
Minority interest in Operating Partnership . . . . . 2,567
Equity in loss of Affiliated Lessee. . . . . . . . . 59
Changes in assets and liabilities:
Rent receivable from lessees . . . . . . . . . . . . (3,088)
Prepaid expenses and other assets. . . . . . . . . . (3,952)
Due to JLL . . . . . . . . . . . . . . . . . . . . . 811
Accounts payable and accrued expenses. . . . . . . . (878)
----------
Net cash flow provided by
operating activities . . . . . . . . . . . . 21,280
----------

Cash flows from investing activities:
Acquisitions of hotel properties . . . . . . . . . . . (380,250)
Improvements and additions to hotel properties . . . . (9,309)
Advances to Affiliated Lessee. . . . . . . . . . . . . (2,405)
Funding of notes receivable. . . . . . . . . . . . . . (4,951)
Funding of restricted cash reserves. . . . . . . . . . (14,385)
Proceeds from restricted cash reserves . . . . . . . . 4,596
Proceeds from minority interest in other
partnerships . . . . . . . . . . . . . . . . . . . . 10
Capital contribution to affiliated lessee. . . . . . . (38)
----------
Net cash flow used in
investing activities . . . . . . . . . . . . (406,732)
----------

Cash flows from financing activities:
Borrowings under credit facility . . . . . . . . . . . 164,700
Payment of deferred financing costs. . . . . . . . . . (2,190)
Proceeds from issuance of common shares. . . . . . . . 257,601
Offering costs . . . . . . . . . . . . . . . . . . . . (21,401)
Distributions. . . . . . . . . . . . . . . . . . . . . (11,688)
----------
Net cash flow provided by
financing activities . . . . . . . . . . . . 387,022
----------

Net change in cash and cash equivalents. . . . . . . . . 1,570
Cash and cash equivalents at beginning of period . . . . --
----------

Cash and cash equivalents at end of period . . . . . . . $ 1,570
==========

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

LASALLE HOTEL PROPERTIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD FROM APRIL 29, 1998 (INCEPTION) THROUGH DECEMBER 31, 1998
(Dollars in thousands, expect per share data)

1. ORGANIZATION AND INITIAL PUBLIC OFFERING

LaSalle Hotel Properties (the "Company") was organized in the state of
Maryland on January 15, 1998. The Company is a real estate investment
trust ("REIT") as defined in the Internal Revenue Code. The Company was
formed to own hotel properties and to continue and expand the hotel
investment activities of Jones Lang LaSalle Incorporated (formerly LaSalle
Partners Incorporated) and certain of its affiliates (collectively "JLL").
On April 23, 1998, the Company's Registration Statement on Form S-11 was
declared effective. The Company had no operations prior to April 29, 1998.

On April 29, 1998, the Company completed an initial public offering (the
"IPO") of 14,200,000 common shares of beneficial interest (the "Common
Shares"). The offering price of all Common Shares sold was $18 per common
share, resulting in gross proceeds of $255,600 and net proceeds (less the
underwriters' discount and offering expenses) of $234,194. The Company
contributed all of the net proceeds of the IPO to LaSalle Hotel Operating
Partnership, L.P., a limited partnership (the "Operating Partnership"), in
exchange for an approximate 82.6% general partnership interest in the
Operating Partnership. The Operating Partnership used the net proceeds
from the Company, the issuance of additional Common Shares of the Company,
the issuance of rights to purchase Common Shares and the issuance of
limited partnership interests ("Units"), representing an approximate 17.4%
interest in the Operating Partnership, to acquire ten upscale and luxury
full service hotels (the "Initial Hotels").

As of December 31, 1998, the Company owned interests in 12 hotels with
an aggregate of 4,110 suites/rooms (the "Hotels") located in nine states.
The Company owns 100% equity interests in 11 of the hotels and a 95.1%
interest in a partnership which owns one hotel. All of the Hotels are
leased under participating leases ("Participating Leases") which provide
for rent based on hotel revenues and are managed by independent hotel
operators ("Hotel Operators"). Eight of the Hotels are leased to
unaffiliated lessees (affiliates of whom also operate these hotels) and
four of the Hotels are leased to LaSalle Hotel Lessee, Inc. (the
"Affiliated Lessee").

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the
Company, the Operating Partnership and its consolidated subsidiaries and
partnerships. All significant intercompany balances and transactions have
been eliminated.

USE OF ESTIMATES

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is determined by using available market information and
appropriate valuation methodologies. The Company's financial instruments
include cash and cash equivalents, accounts receivable, accounts payable,
accrued expenses and borrowings against the 1998 Amended Credit Facility
(as defined in Note 6). Due to their short maturities, cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses are
carried at amounts which reasonably approximate fair value. As borrowings
under the 1998 Amended Credit Facility bear interest at variable market
rates, carrying value approximates market value at December 31, 1998.

INVESTMENT IN HOTEL PROPERTIES

Hotel properties are stated at cost and are depreciated using the
straight-line method over estimated useful lives ranging from 27.5-30 years
for buildings and improvements and 5 years for furniture, fixtures and
equipment.

The Company periodically reviews the carrying value of each Hotel to
determine if circumstances exist indicating an 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 Company will prepare a projection of the undiscounted future cash
flows, without interest charges, of the specific hotel and determine if the
investment in such 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 based on discounted future cash flows. The
Company does not believe that there are any factors or circumstances
indicating impairment of any of its investment in Hotels.

INVESTMENT IN AFFILIATED LESSEE

The Company owns a 9% interest in the Affiliated Lessee in which the
Company together with JLL and LPI Charities, a charitable corporation
organized under the laws of the state of Illinois, make all material
decisions concerning the business affairs and operations. Accordingly, the
Company does not control the Affiliated Lessee and carries its investment
at cost, plus its equity in net earnings, less distributions received since
the date of inception.

CASH AND CASH EQUIVALENTS

All highly liquid investments with a maturity of three months or less
when purchased are considered to be cash equivalents.

DEFERRED FINANCING FEES

Deferred financing fees are recorded at cost and are amortized over
the three-year term of the related credit facility. Accumulated
amortization at December 31, 1998 was $474.

DISTRIBUTIONS

The Company pays regular quarterly distributions to its shareholders
as directed by the Board of Trustees. The Company's ability to pay
distributions is dependent on the receipt of distributions from the
Operating Partnership.

REVENUE RECOGNITION

The Company recognizes lease revenue on an accrual basis pursuant to
the terms of the respective Participating Leases. Base and incentive
participating rent is recognized based on quarterly thresholds, pursuant to
the lease agreements (see Note 8).

MINORITY INTEREST

Minority interest in the Operating Partnership represents the limited
partners' proportionate share of the equity in the Operating Partnership.
Income is allocated to minority interest based on the weighted average
percentage ownership throughout the year.

Minority interest in the Subsidiary Partnership (as defined in Note 4)
represents the limited partner's proportionate share of the equity in the
Subsidiary Partnership. Income is allocated to minority interest based on
the terms of the partnership agreement.

INCOME TAXES

The Company has elected to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code (the "Code") commencing with its
taxable year ending December 31, 1998. If the Company qualifies for
taxation as a REIT, the Company generally will not be subject to Federal
corporate income tax on that portion of its net income that is currently
distributed to shareholders. Accordingly, no provision for income taxes
has been included in the accompanying consolidated financial statements.

For federal income tax purposes, the cash distributions paid to
shareholders may be characterized as ordinary income, return of capital
(generally non-taxable) or capital gains. The Company's 1998 distributions
were fully taxable as ordinary income.

EARNINGS PER SHARE

The Company's basic and diluted earnings per share for the period from
April 29, 1998 (inception) through December 31, 1998 was $.80.

Basic and diluted earnings per share are based on the weighted average
number of common shares outstanding during the period. There was no
adjustment to either the weighted average number of common shares
outstanding or the reported amounts of income in computing diluted earnings
per share because the unexercised stock options were anti-dilutive. The
weighted average number of shares used in determining basic and diluted
earnings per share was 15,209,555 for the period from April 29, 1998
(inception) through December 31, 1998.

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

3. NOTES RECEIVABLE

The Company provided working capital to the Affiliated Lessee and the
other lessees in the aggregate amount of $3,368 in exchange for notes
receivable ("Working Capital Notes"). In addition, the Company sold
certain furniture, fixtures and equipment to two of its unaffiliated
lessees in exchange for notes receivable ("FF&E Notes") of $1,583. Both
the Working Capital Notes and the FF&E Notes are payable in monthly
installments of interest only. The Working Capital Notes bear interest at
either 5.6% or 6% per annum and have terms identical to the terms of the
related Participating Lease. The FF&E Notes bear interest at 5.6% and 6.0%
per annum and have an initial term of five years unless extended at the
Company's option.

4. ACQUISITION OF HOTEL PROPERTIES

The Initial Hotels were previously owned by various limited and
general partnerships (the "Existing Partnerships"). In conjunction with
the IPO and the related formation transactions, the Initial Hotels, except
for Radisson Hotel South and Plaza Tower (previously owned by LRP
Bloomington Limited Partnership), were purchased by the Company from their
Existing Partnerships and were accounted for as purchase transactions. LRP
Bloomington Limited Partnership, the Existing Partnership that retained the
largest number and percentages of voting rights of the Company after the
formation transactions, was designated as the predecessor (the
"Predecessor") for accounting purposes. Therefore, the Company recorded a
purchase accounting adjustment in order to account for the Radisson Hotel
South and Plaza Tower using the historical basis of accounting.

In June 1998, the Company acquired an interest in the San Diego
Princess Resort (the "San Diego Property") through a subsidiary
partnership, LHO Mission Bay Hotel, L.P. (the "Subsidiary Partnership").
The Subsidiary Partnership is a limited partnership of which the Operating
Partnership holds an approximate 95.1% general partnership interest. The
462-room San Diego Property was renamed the San Diego Paradise Point
Resort.

The San Diego Property was acquired for an aggregate purchase price of
$73 million funded with proceeds from a borrowing under the Company's 1998
Credit Facility (as defined in Note 6) and from the proceeds of the sale of
112,458 Common Shares to the limited partner of the Subsidiary Partnership
who will also operate the San Diego Property pursuant to the terms of a
participating lease.

Also in June 1998, the Company acquired a 100% interest in the 270-
room Harborside Hyatt Conference Center & Hotel in Boston (the "Boston
Property") through an indirect subsidiary, LHO Harborside Hotel, L.L.C.
(the "Subsidiary LLC"). The Subsidiary LLC is a limited liability company,
of which the Operating Partnership is the sole member.

The Boston Property was acquired for an aggregate purchase price of
$73.5 million, including $40 million of existing tax exempt industrial
revenue bonds to which the Boston Property remains subject. The remainder
of the purchase price was funded with proceeds from a borrowing under the
Company's 1998 Credit Facility. Hyatt Hotels Corporation continues to
operate the Boston Property under an existing management agreement.

5. INVESTMENT IN HOTEL PROPERTIES

Investment in hotel properties as of December 31, 1998 consists of the
following:

Land . . . . . . . . . . . . . . . . . . . . $ 46,989
Buildings and improvements . . . . . . . . . 383,294
Furniture, fixtures and equipment. . . . . . 58,180
--------
Accumulated depreciation . . . . . . . . . . (13,666)
Accumulated depreciation (Predecessor) . . . (7,245)
--------
$467,552
========

The Hotels are located in California (3), Florida (2), Louisiana,
Massachusetts, Minnesota, Nebraska, New Jersey, New York and Texas.

6. LONG-TERM DEBT

CREDIT FACILITY

In April 1998, the Company obtained a three-year commitment for a $200
million senior unsecured revolving credit facility (the "1998 Credit
Facility") to be used for acquisitions, capital improvements, working
capital and general corporate purposes. The Company amended the 1998
Credit Facility on October 30, 1998. Under the Amended and Restated Senior
Unsecured Credit Agreement, as amended (the "1998 Amended Credit
Facility"), the commitment was increased by an additional $35 million,
bringing the total commitment under the facility to $235 million.
Borrowings under the 1998 Amended Credit Facility bear interest at floating
rates equal to LIBOR plus an applicable margin or an "Adjusted Base Rate"
plus an applicable margin, at the election of the Company. At December 31,
1998, the interest rate on LIBOR borrowings was approximately 6.8%. The
Company did not have any Adjusted Base Rate borrowings outstanding at
December 31, 1998. Additionally, the Company is required to pay an unused
commitment fee which is variable, determined from a ratings based pricing
matrix, currently set at 25 basis points. The Company has incurred an
unused commitment fee of approximately $93 for the period from April 29,
1998 (inception) through December 31, 1998. The 1998 Amended Credit
Facility matures on April 30, 2001 and contains certain financial covenants
relating to debt service coverage, market value net worth and total funded
indebtedness. As of December 31, 1998, the Company had outstanding
borrowings against the 1998 Credit Facility of $164,700.

BONDS PAYABLE

On June 24, 1998 the Company, through the Subsidiary LLC, acquired the
Boston Property subject to $40,000 of special project revenue bonds
("Massport Bonds") previously issued under the loan and trust agreement
with the Massachusetts Port Authority ("Massport"), as amended ("Massport
Bond Agreement"). In conjunction with the Massport Bonds, the Company
recorded a premium of $3,480, of which $2,828 remains unamortized at
December 31, 1998. The Massport Bonds are collateralized by the leasehold
improvements and bear interest at 10% per annum through the date of
maturity, March 1, 2026. Interest payments are due semiannually on March 1
and September 1. Interest expense, net of the premium amortization, for
the period June 24, 1998 through December 31, 1998 totaled $1,425. The
Massport Bonds shall be redeemed in part commencing March 1, 2001 and
annually until March 1, 2026, at which time the remaining principal and any
accrued interest thereon is due in full. The Company has the option to
prepay the Massport Bonds in full beginning March 1, 2001 subject to a
prepayment penalty which varies depending on the date of prepayment.
Future principal payments are as follows:

1999 . . . . . . . . . . . . . $ --
2000 . . . . . . . . . . . . . --
2001 . . . . . . . . . . . . . 400
2002 . . . . . . . . . . . . . 400
2003 . . . . . . . . . . . . . 400
Thereafter . . . . . . . . . . 38,800
-------
$40,000
=======

Under the terms of the Massport Bond Agreement, certain cash reserves
are required to be held in trust for payments of interest, credit
enhancement fees and ground rent. As of December 31, 1998, these reserves
totaled $5,979 and are included in Restricted Cash Reserves.

In addition, the Massport Bond Agreement was supplemented by a credit
enhancement agreement (the "Massport Credit Enhancement Agreement").
Pursuant to the Massport Credit Enhancement Agreement, certain funds have
been set aside by Massport to provide additional deficit funding if the
amounts held in trust by the Company are not sufficient to cover the debt
service requirements on the outstanding Massport Bonds. In consideration
for the Massport Credit Enhancement Agreement, the Company is required to
pay an annual enhancement fee of $150, payable March 1 and September 1.

7. SHAREHOLDERS' EQUITY

COMMON SHARES OF BENEFICIAL INTEREST

In connection with the acquisition of the Initial Hotels, the Company
issued 912,122 restricted Common Shares to JLL. The Common Shares were
valued at $18.00 per share or $16,418. The Company also granted 1,280,569
rights mainly to purchase Common Shares at the exercise price of $18.00 per
share in connection with the acquisition of the Initial Hotels. Among the
rights which were granted, 457,346 were granted to the Advisor. The
Advisor may exercise its rights to purchase Common Shares or Units, at the
option of the Company. The Company has recorded these rights in
shareholders' equity at their fair value on the date of grant, which was
$2,997. All rights have a one year vesting period and a 10 year term. At
December 31, 1998 none of the rights were exercisable.

In connection with the purchase of the San Diego Property (see
Note 4), the sole limited partner in the Subsidiary Partnership (which is
an affiliate of the hotel operator) acquired 112,458 Common Shares, from
the Company for a purchase price of $2,000. The purchase and sale of the
Common Shares was a condition to the selection of the affiliate of the
limited partner as operator of the San Diego Property, and the Common
Shares have been pledged to the Operating Partnership to secure the limited
partner's obligations under the related Participating Lease.

As of December 31, 1998 the Company has reserved 757,000 Common Shares
for future issuance under the 1998 Share Option and Incentive Plan. The
Company has also reserved a total of 1,280,569 Common Shares for future
issuance pursuant to rights which have been issued and 3,181,723 Common
Shares for issuance upon the conversion of the Units, both of which were
issued in connection with the IPO, the acquisition of the Initial Hotels
and the formation of the Company.

OPERATING PARTNERSHIP UNITS

The outstanding Units are redeemable at the option of the holder for a
like number of Common Shares of the Company or, at the option of the
Company, for the cash equivalent thereof.

8. PARTICIPATING LEASES

The Participating Leases have noncancelable terms ranging from six to
11 years, subject to earlier termination on the occurrence of certain
contingencies, as defined. The rent due under each Participating Lease is
the greater of base rent, as defined, or participating rent. Participating
rent applicable to room and other hotel revenues varies by lease and is
calculated by multiplying fixed percentages by the total amounts of such
revenues over specified threshold amounts. Both the base rent and the
participating rent thresholds used in computing percentage rents applicable
to room and other hotel revenues, including food and beverage revenues, are
subject to annual adjustments based on increases in the United States
Consumer Price Index ("CPI") published by the Bureau of Labor Statistics of
the United States of America Department of Labor, U.S. City Average, Urban
Wage Earners and Clerical Workers. Participating rents applicable to food
and beverage revenues are calculated by multiplying fixed percentages by
the total amounts of such revenues. Participating Lease revenue for the
period from April 29, 1998 (inception) through December 31, 1998 was
$46,464, of which $15,256 was in excess of base rent.

Future minimum rentals (without reflecting future CPI increases) to be
received by the Company pursuant to the Participating Leases for each of
the years in the period 1999 to 2003 and in total thereafter are as
follows:

1999 . . . . . . . . . . . . . . . . . $ 50,123
2000 . . . . . . . . . . . . . . . . . 49,954
2001 . . . . . . . . . . . . . . . . . 49,954
2002 . . . . . . . . . . . . . . . . . 49,954
2003 . . . . . . . . . . . . . . . . . 50,202
Thereafter . . . . . . . . . . . . . . 221,307

9. ADVISORY AGREEMENT

Upon completion of the IPO, the Company entered into an advisory
agreement (the "Advisory Agreement") with LaSalle Hotel Advisors, Inc. (the
"Advisor"), a wholly owned subsidiary of JLL, to provide acquisition,
investment management, advisory and administrative services for the
Company. The initial term of the Advisory Agreement extends through
December 31, 1999, subject to successive, automatic one year renewals
unless terminated according to the terms of the Advisory Agreement. The
Company may terminate the Advisory Agreement without termination fees or
penalties upon notice given at least 180 days prior to the end of the then
current term of the Advisory Agreement.

The Advisory Agreement provides for payment of a base fee, payable
quarterly, starting at 5% of the first $100 million of net operating income
("NOI") (as defined). The percentage of NOI used to calculate the base fee
is reduced by .2% for every incremental $125 million of NOI above $100
million until $600 million, at which point any excess NOI above $600
million is subject to a base fee of 4%.

In addition, the Advisory Agreement provides for payment of an annual
incentive fee to be paid by the Company in arrears. The annual incentive
fee is equal to 25% of the product of (i) the amount by which the funds
from operations ("FFO") per common share/Unit (as defined) for the calendar
year then ended (the "Measurement Year") exceeds a growth rate of 7% per
annum of the FFO per common share/Unit for the prior calendar year and (ii)
the common shares/Units outstanding for the Measurement Year. For partial
years, the incentive fee shall be calculated on a pro rata basis for only
that portion of the year that the Advisory Agreement was in effect.
Payment of the incentive fee will be in common shares or Units at the
option of the Advisor.

10. SHARE OPTION AND INCENTIVE PLAN

In April 1998, the Board of Trustees adopted and the then current
shareholder, approved the 1998 Share Option and Incentive Plan (the 1998
SIP) which is currently administered by the Compensation, Contract and
Governance Committee (the "Compensation Committee") of the Board of
Trustees. The Advisor and its employees and the Hotel Operators and their
employees generally are eligible to participate in the 1998 SIP.
Independent Trustees continuing in office after an annual meeting of
shareholders of the Company receive automatic annual grants of options to
purchase 1,000 common shares at a per share exercise price equal to fair
market value of a common share on the date of the meeting.

The 1998 SIP authorizes, among other things: (i) the grant of share
options that qualify as incentive options under the Code; (ii) the grant of
share options that do not so qualify; (iii) the grant of share options in
lieu of cash Trustees' fees; (iv) grants of common shares in lieu of cash
compensation; and (v) the making of loans to acquire common shares in lieu
of compensation. The exercise price of share options is determined by the
Compensation Committee, but may not be less than 100% of the fair market
value of the common shares on the date of grant. Options under the plan
vest over a period determined by the Compensation Committee. The duration

of each option is also determined by the Compensation Committee, however,
the duration of each option shall not exceed 10 years from date of grant.
As of December 31, 1998, the Company has authorized 757,000 shares for
issuance under the 1998 SIP, of which 676,000 shares are available for
future grants.

Stock Option transactions are summarized as follows:

Weighted
Average
Exercise
Shares Price
--------- ----------

Outstanding at beginning
of the year. . . . . . . . . . . . . . -- $ --
Options granted. . . . . . . . . . . . . 81,000 $16.22
--------
Outstanding at end of year . . . . . . . 81,000
========
Exercisable at end of the year . . . . . --
Available for future grant
at year end. . . . . . . . . . . . . . 676,000

Weighted average per share fair
value of options granted during
the year . . . . . . . . . . . . . . . $ .94

Options Outstanding Options Exercisable
--------------------------------- ----------------------
Number Weighted Weighted Number Weighted
Range of Outstand- Average Average Exercisable Average
Exercise ing at Remaining Exercise at Exercise
Prices 12/31/98 Life Price 12/31/98 Price
- ----------- --------- --------- --------- ----------- --------

$14.81-$18.00 81,000 7.4 years $16.22 25,000 $18.00

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

1998
------
Expected Life. . . . . . . . . . 7.9
Expected Volatility. . . . . . . 13.4%
Risk-free Interest Rate. . . . . 4.7%
Dividend Yield . . . . . . . . . 9.3%

PRO FORMA NET INCOME AND NET INCOME PER COMMON SHARE

The Company has applied Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for the 1998 SIP, accordingly, no
compensation costs have been recognized. Had the compensation costs for
the Company's 1998 SIP been determined in accordance with the method
required by statement of Financial Accounting Standards No. 123, the
Company's net income and net income per common share for 1998 would
approximate the pro forma amounts below (in thousand, except per share
data).

As Reported Pro Forma
----------- ----------

Net income . . . . . . . . . . 12,233 12,229
Net income per common share. . $ .80 $ .80

11. AFFILIATED LESSEE

A significant portion of the Company's participating lease revenue is
derived from the Participating Leases with the Affiliated Lessee. Certain
condensed financial information, related to the Affiliated Lessee's
financial statements, is as follows:
December 31, 1998
------------------
Balance Sheet Information:
Cash and cash equivalents. . . . . . . . . . . . . . . $ 3,742
Due from LaSalle Hotel Properties. . . . . . . . . . . 614
Total assets . . . . . . . . . . . . . . . . . . . . . 9,293
Notes payable to LaSalle Hotel Properties. . . . . . . 1,500
Total liabilities. . . . . . . . . . . . . . . . . . . 9,527
Shareholders' deficit. . . . . . . . . . . . . . . . . (234)
Total liabilities and shareholders' deficit. . . . . . 9,293

For the Period from
April 29, 1998
(inception) through
December 31,
1998
-------------------
Statement of Operations Information:
Total revenues . . . . . . . . . . . . . . . . . . . . $ 66,335
Participating lease expense. . . . . . . . . . . . . . 19,436
Net loss . . . . . . . . . . . . . . . . . . . . . . . (659)

At December 31, 1998, the Company owed the Affiliated Lessee $614 for
reimbursement of capital improvements, which were paid by the Affiliated
Lessee.

12. SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS

For the Period from
April 29, 1998
(inception) through
December 31,
1998
-------------------
Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest . . . . . . $ 7,325
Interest capitalized . . . . . . . . . . . . . . . . . 57
Distributions payable. . . . . . . . . . . . . . . . . 6,902

In conjunction with the hotel acquisitions, the
Company assumed the following assets and liabilities:
Purchase of real estate. . . . . . . . . . . . . . . . $470,859
Adjustment required to reflect predecessor's
basis. . . . . . . . . . . . . . . . . . . . . . . . 33,012
Liabilities, net of other assets . . . . . . . . . . . (3,455)
Bonds payable. . . . . . . . . . . . . . . . . . . . . (43,480)
Issuance of shares/units . . . . . . . . . . . . . . . (76,686)
--------
Investment in hotel properties . . . . . . . . . . . . $380,250
========

13. COMMITMENTS AND CONTINGENCIES

Three of the Hotels are subject to ground leases under noncancelable
operating leases with terms ranging out to May 2081. Total lease expense
for the period from April 29, 1998 (inception) through December 31, 1998
was $1,886. Future minimum lease payments are as follows:

1999 . . . . . . . . . . . . . . . . . $ 1,761
2000 . . . . . . . . . . . . . . . . . 1,761
2001 . . . . . . . . . . . . . . . . . 1,761
2002 . . . . . . . . . . . . . . . . . 1,761
2003 . . . . . . . . . . . . . . . . . 1,761
Thereafter . . . . . . . . . . . . . . 79,065
-------
$87,870
=======

The Company is obligated to make funds available to the Hotels for
capital expenditures (the "Reserve Funds"), as determined in accordance
with the Participating Leases. The Reserve Funds have not been recorded on
the books and records of the Company as such amounts will be capitalized as
incurred. The amounts obligated under the Reserve Funds range from 4.0%
to 5.5% of the individual Hotel's total revenues. The total amount
obligated by the Company under the Reserve Funds is approximately $9,320 at
December 31, 1998, of which $3,810 is available in restricted cash reserves
for future capital expenditures. Purchase orders and letters of commitment
totaling approximately $5,655 have been issued for renovations at the
Hotels.

The nature of the operations of the Hotels expose them to the risk of
claims and litigation in the normal course of their business. Although the
outcome of these matters cannot be determined, management does not expect
that the ultimate resolution of these matters to have a material adverse
effect on the financial position, operations or liquidity of the Hotels.

On behalf of the Company, the Advisor seeks opportunities for the
purchase of additional full service hotel properties located primarily in
convention, resort, urban and major business markets. From time to time,
the Company may enter into purchase contracts for the acquisition of hotel
properties. The consummation of each acquisition will be subject to
satisfactory completion of due diligence.

14. RELATED PARTY TRANSACTIONS

At December 31, 1998, the Company had a payable to JLL of $886,
primarily for the advisory fee. For the period from April 29, 1998
(inception) through December 31, 1998, the total advisory fee was $2,134,
of which $155 represented the incentive portion of the advisory fee.

At December 31, 1998, the Company had a receivable of $3,160 in
conjunction with the final settlement of the hotel acquisitions. The
receivable has been classified in other assets on the consolidated balance
sheet and was collected in its entirety subsequent to December 31, 1998.

15. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)

The pro forma financial information set forth below is presented as if
(i) the Initial Offering and the related formation transactions and (ii)
the acquisitions of the hotels discussed in Note 4 had been consummated and
leased as of January 1, 1997. The pro forma financial information is not
necessarily indicative of what actual results of operations of the Company
would have been assuming the Initial Offering and the related formation
transactions and the acquisitions had been consummated and all the Hotels
had been leased as of January 1, 1997, nor does it purport to represent the
results of operations for future periods.

For the
Year Ended
December 31,
----------------------
1998 1997
---------- ----------
Total revenues . . . . . . . . . . . . . . . . . . $ 72,463 65,740
---------- ----------
Depreciation . . . . . . . . . . . . . . . . . . . 21,453 20,493
Real estate and personal property taxes and
insurance. . . . . . . . . . . . . . . . . . . . 7,584 7,196
General and administrative . . . . . . . . . . . . 707 702
Interest expense . . . . . . . . . . . . . . . . . 14,384 14,361
Amortization of deferred financing costs . . . . . 783 751
Advisory fees. . . . . . . . . . . . . . . . . . . 3,661 3,298
Ground rent. . . . . . . . . . . . . . . . . . . . 3,155 2,880
---------- ----------
Income before minority interest. . . . . . . . . . 20,736 16,059
Minority interest. . . . . . . . . . . . . . . . . 3,584 2,776
---------- ----------
Net income applicable to common shareholders . . . $ 17,152 13,283
========== ==========
Net income applicable to common shareholders
per share - basic and diluted. . . . . . . . . . $ 1.13 0.87
========== ==========
Weighted average number of common
shares outstanding - basic and diluted . . . . . 15,224,580 15,224,580
========== ==========

16. PREDECESSOR INFORMATION

Pursuant to SEC regulations which require the presentation of
predecessor financial information for corresponding periods of the
preceding year, the following information represents condensed balance
sheet information as of December 31, 1997 and condensed statements of
operations and cash flows information of LRP Bloomington Limited
Partnership, which is considered to be the predecessor of the Company, for
the years ended December 31, 1997 and 1996 and for the period from
January 1, 1998 through April 28, 1998.

LRP BLOOMINGTON LIMITED PARTNERSHIP (PREDECESSOR)

BALANCE SHEET
(Dollar Amounts in Thousands)

December 31,
1997
------------

ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . $ 1,744
Guest and trade receivables, less allowance for
doubtful accounts of $34. . . . . . . . . . . . . . . . 976
Inventories. . . . . . . . . . . . . . . . . . . . . . . 288
Prepaid expenses and other current assets. . . . . . . . 439
--------
Total current assets. . . . . . . . . . . . . . . . . 3,447
--------

Investment in hotel, at cost . . . . . . . . . . . . . . 35,539
Less: accumulated depreciation. . . . . . . . . . . . . (6,074)
--------
Net investment in hotel property. . . . . . . . . . . 29,465
--------
Deferred charges, net of accumulated amortization
of $142 . . . . . . . . . . . . . . . . . . . . . . . . 199
Restricted cash reserves . . . . . . . . . . . . . . . . 490
--------
Total Assets . . . . . . . . . . . . . . . . . . . . $ 33,601
========

LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 497
Accrued expenses and other liabilities . . . . . . . . . 1,169
Current installments of long-term debt . . . . . . . . . 863
--------
Total current liabilities. . . . . . . . . . . . . . 2,529
--------
Long-term debt, excluding current installments . . . . . 23,667

Commitments and contingencies
--------

Total Liabilities 26,196
--------

Partners' capital. . . . . . . . . . . . . . . . . . . . 7,405
--------
Total Liabilities and Equity. . . . . . . . . . . . . $ 33,601
========

LRP BLOOMINGTON LIMITED PARTNERSHIP (PREDECESSOR)

STATEMENTS OF OPERATIONS

(Unaudited, Dollar Amounts in Thousands)

For the period from
January 1, 1998
through
April 28, 1998
--------------------
REVENUES
Rooms. . . . . . . . . . . . . . . . . . . . . . $ 4,285
Food & beverage. . . . . . . . . . . . . . . . . 3,459
Telephone. . . . . . . . . . . . . . . . . . . . 124
Other. . . . . . . . . . . . . . . . . . . . . . 537
-------
Total Revenue . . . . . . . . . . . . . . . 8,405
-------

EXPENSES
Departmental expenses:
Rooms. . . . . . . . . . . . . . . . . . . . . 1,096
Food & beverage. . . . . . . . . . . . . . . . 2,379
Telephone. . . . . . . . . . . . . . . . . . . 88
Other operating departments. . . . . . . . . . 307
General & administrative . . . . . . . . . . . 571
Sales and marketing. . . . . . . . . . . . . . 435
Real estate and personal property taxes. . . . 405
Property operations and management . . . . . . 400
Management fees. . . . . . . . . . . . . . . . 336
Energy . . . . . . . . . . . . . . . . . . . . 292
Insurance. . . . . . . . . . . . . . . . . . . 71
Other fixed expenses . . . . . . . . . . . . . 73
Interest expense . . . . . . . . . . . . . . . 833
Depreciation and amortization. . . . . . . . . 1,196
Advisory fees. . . . . . . . . . . . . . . . . 53
-------
Total Expenses. . . . . . . . . . . . . . . 8,535
-------
Net Loss . . . . . . . . . . . . . . . . . . . . $ (130)
=======

LRP BLOOMINGTON LIMITED PARTNERSHIP (PREDECESSOR)

STATEMENTS OF OPERATIONS

For the years ended December 31, 1997 and 1996
(Dollar Amounts in Thousands)

1997 1996
-------- --------
Revenues:
Rooms. . . . . . . . . . . . . . . . $ 13,863 13,419
Food and beverage. . . . . . . . . . 10,214 9,276
Telephone. . . . . . . . . . . . . . 491 523
Other. . . . . . . . . . . . . . . . 1,649 1,399
-------- --------
Total revenue. . . . . . . . 26,217 24,617
-------- --------

Expenses:
Departmental expenses:
Rooms. . . . . . . . . . . . . . . 3,524 3,231
Food and beverage. . . . . . . . . 7,198 6,515
Telephone. . . . . . . . . . . . . 298 317
Other operating departments. . . . 1,017 887
General and administrative . . . . 1,674 1,718
Sales and marketing. . . . . . . . 1,352 1,293
Real estate and personal
property taxes . . . . . . . . . 1,240 1,191
Property operations and
management . . . . . . . . . . . 1,154 1,085
Management fees. . . . . . . . . . 1,111 1,053
Energy . . . . . . . . . . . . . . 808 832
Insurance. . . . . . . . . . . . . 132 310
Other fixed expenses . . . . . . . 247 274
Interest expense . . . . . . . . . 2,658 2,601
Depreciation and amortization. . . 3,123 2,718
Advisory fees. . . . . . . . . . . 159 159
-------- --------
Total expenses . . . . . . . 25,695 24,184
-------- --------

Net income . . . . . . . . . . . . . . $ 522 433
======== ========

LRP BLOOMINGTON LIMITED PARTNERSHIP (PREDECESSOR)

STATEMENT OF CASH FLOWS
(Unaudited, Dollar Amounts in Thousands)

For the period from
January 1, 1998
through
April 28, 1998
--------------------

Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . $ (130)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . 1,196
Changes in assets and liabilities:
Guest and trade receivables, net. . . . . . . (284)
Inventories . . . . . . . . . . . . . . . . . 8
Prepaid expenses. . . . . . . . . . . . . . . (367)
Accounts payable. . . . . . . . . . . . . . . (133)
Accrued expenses and other liabilities. . . . 515
-------
Net cash provided by operating
activities . . . . . . . . . . . . . . . 805
-------

Cash flows from investing activities:
Proceeds from restricted cash reserves . . . . . 148
Capital expenditures . . . . . . . . . . . . . . (611)
-------
Net cash used in investing activities . . . (463)
-------

Cash flows from financing activities:
Principal payments on long-term debt . . . . . . (145)
-------
Net cash used in financing activities . . . (145)
-------

Increase in cash and cash equivalents. . . . . . . 197
Cash and cash equivalents, beginning of
period . . . . . . . . . . . . . . . . . . . . 1,744
-------
Cash and cash equivalents, end of period . . . . $ 1,941
=======

Cash paid for interest . . . . . . . . . . . . . . $ 833
=======

LRP BLOOMINGTON LIMITED PARTNERSHIP (PREDECESSOR)

STATEMENT OF CASH FLOWS
For the years ended December 31, 1997 and 1996
(Dollar Amounts in Thousands)

1997 1996
-------- --------

Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . $ 522 433
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization. . . . . . . . 3,123 2,718
Changes in assets and liabilities:
Guest and trade receivables, net . . . . . 175 (604)
Inventories. . . . . . . . . . . . . . . . 45 (91)
Prepaid expenses . . . . . . . . . . . . . 358 (372)
Accounts payable . . . . . . . . . . . . . 4 (54)
Accrued expenses and other liabilities . . 90 186
-------- --------
Net cash provided by
operating activities . . . . . . . . 4,317 2,216
-------- --------

Cash flows from investing activities:
Funding of restricted cash reserves. . . . . . (1,010) (1,020)
Payment received from restricted
cash reserves. . . . . . . . . . . . . . . . 1,736 1,607
Capital expenditures . . . . . . . . . . . . . (1,736) (1,607)
-------- --------
Net cash used in investing activities. . (1,010) (1,020)
-------- --------
Cash flows from financing activities:
Partner's distributions. . . . . . . . . . . . (1,151) (900)
Principal payments on long-term debt . . . . . (758) (658)
-------- --------
Net cash used in investing activities. . (1,909) (1,558)
-------- --------
Increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . . . . 1,398 (362)
Cash and cash equivalents,
beginning of period. . . . . . . . . . . . . . 346 708
-------- --------
Cash and cash equivalents, end of period . . . . $ 1,744 346
======== ========

Cash paid for interest . . . . . . . . . . . . . $ 2,658 2,600
======== ========

17. SUBSEQUENT EVENTS

On January 15, 1999, the Company paid its regular fourth quarter
distribution of $0.375 per Share on its common shares of beneficial
interest.

The Company is in negotiations with the Affiliated Lessee to amend the
terms of the Affiliated Lessee's current leases. In conjunction with the
lease amendments, the Company is also negotiating the execution of
additional notes receivable from the Affiliated Lessee in the amount of
$2,400, which was advanced to the Affiliated Lessee as working capital
during 1998 and is classified in other assets on the consolidated balance
sheet.

18. QUARTERLY OPERATING RESULTS (UNAUDITED)

The Company's unaudited consolidated quarterly operating data for the
period from April 29, 1998 (inception) through June 30, 1998 and for the
quarters ended September 30 and December 31, 1998 follows (in thousands,
except per share data). In the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation
of quarterly results have been reflected in the data. It is also
management's opinion, however, that quarterly operating data for hotel
enterprises are not indicative of results to be achieved in succeeding
quarters or years.

For the Period
from April 29,
1998 (inception) For the 1998 Quarter Ended
through --------------------------
June 30, 1998 September 30, December 31,
---------------- ------------ -----------

Total revenues . . . . . $ 11,727 19,820 15,446
Total expenses . . . . . 6,922 14,517 13,321
Net income . . . . . . . 4,805 5,303 2,125
Net income applicable
to common shareholders
per weighted average
common shares out-
standing - basic and
diluted . . . . . . . . 0.32 0.35 0.14
Weighted average
number of common
shares outstanding -
basic and diluted . . . 15,165,673 15,224,580 15,224,580

LASALLE HOTEL PROPERTIES

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
As of December 31, 1998

Costs Capitalized
Subsequent to Gross Amounts at Which
Initial Cost Acquisition Carried At Close of Period
--------------------------- ------------------ ---------------------------
Building Building Building
and and and
Improve- Improve- Improve-
Land ments FF&E ments FF&E Land ments FF&E
-------- -------- -------- -------- -------- -------- -------- --------

Radisson Hotel South
and Plaza Tower . . . . . . . . . . $ 8,172 $11,258 $13,811 $ -- $ 494 $ 8,172 $ 11,258 $ 14,305

Le Meridien New Orleans. . . . . . . -- 60,062 6,554 -- 1,465 -- 60,062 8,019

Le Meridien Dallas . . . . . . . . . 2,452 20,847 2,166 -- 1,960 2,452 20,847 4,126

Marriott Seaview Resort. . . . . . . 7,415 40,337 2,339 104 1,845 7,415 40,441 4,184

Holiday Inn Beachside
Resort . . . . . . . . . . . . . . 5,505 14,702 1,901 -- 334 5,505 14,702 2,235

San Diego Paradise
Point . . . . . . . . . . . . . . . -- 69,639 3,665 179 1,537 -- 69,818 5,202

LaGuardia Airport
Marriott. . . . . . . . . . . . . . 8,127 32,139 3,976 29 486 8,127 32,168 4,462

Omaha Marriott Hotel . . . . . . . . 4,268 22,405 3,086 2 475 4,268 22,407 3,561

Radisson Tampa . . . . . . . . . . . 4,383 20,223 2,166 -- 1,085 4,383 20,223 3,251

Holiday Inn Park Plaza . . . . . . . 1,663 5,335 396 2 85 1,663 5,337 481

Le Montrose All Suite
Hotel . . . . . . . . . . . . . . . 5,004 19,752 2,951 1 91 5,004 19,753 3,042

Harborside Hyatt
Conference Center
& Hotel . . . . . . . . . . . . . . -- 66,159 5,246 119 66 -- 66,278 5,312
-------- -------- -------- -------- -------- -------- -------- --------
Totals . . . . . . . . . . . . . . . $ 46,989 $382,858 $ 48,257 $ 436 $ 9,923 $ 46,989 $383,294 $ 58,180
======== ======== ======== ======== ======== ======== ======== ========

LASALLE HOTEL PROPERTIES

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
As of December 31, 1998

Life On Which
Date of Depreciation In
Accumulated Net Original Date of Income Statement
Depreciation Book Value Construction Acquisition is Computed
------------ ---------- ------------ ----------- ----------------

Radisson Hotel South
and Plaza Tower . . . . . $ 8,260 $ 25,475 1969 12/01/95 5 - 30 years

Le Meridien New Orleans. . 2,317 65,764 1984 04/29/98 5 - 30 years

Le Meridien Dallas . . . . 879 26,546 1980 04/29/98 5 - 30 years

Marriott Seaview Resort. . 1,364 50,676 1912 04/29/98 5 - 30 years

Holiday Inn Beachside
Resort . . . . . . . . . 604 21,838 1960 04/29/98 5 - 30 years

San Diego Paradise
Point . . . . . . . . . . 1,817 73,203 1962 06/01/98 5 - 30 years

LaGuardia Airport
Marriott. . . . . . . . . 1,293 43,464 1981 05/01/98 5 - 30 years

Omaha Marriott Hotel . . . 966 29,270 1982 04/29/98 5 - 30 years

Radisson Tampa . . . . . . 770 27,087 1987 04/29/98 5 - 30 years

Holiday Inn Park Plaza . . 174 7,307 1976 04/29/98 5 - 30 years

Le Montrose All Suite
Hotel . . . . . . . . . . 836 26,963 1976 04/29/98 5 - 30 years

Harborside Hyatt
Conference Center
& Hotel . . . . . . . . . 1,631 69,959 1993 06/24/98 5 - 30 years
-------- --------
Totals . . . . . . . . . . $ 20,911 $467,552
======== ========

LASALLE HOTEL PROPERTIES

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - CONTINUED
As of December 31, 1998

Reconciliation of real estate and accumulated depreciation:

Reconciliation of Real Estate:
December 31,
1998
------------
Balance at April 29, 1998 . . . . . . . . . . . . . . . $ 33,241
Acquisitions of hotel properties. . . . . . . . . . . 444,863
Improvements and additions to hotel properties. . . . 10,359
--------
Balance at December 31, 1998. . . . . . . . . . . . . . $488,463
========

Reconciliation of Accumulated Depreciation:
December 31,
1998
------------

Balance at April 29, 1998 . . . . . . . . . . . . . . . $ 7,245
Depreciation. . . . . . . . . . . . . . . . . . . . . 13,666
--------
Balance at December 31, 1998. . . . . . . . . . . . . . $ 20,911
========

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
LaSalle Hotel Lessee, Inc.

We have audited the accompanying balance sheet of LaSalle Hotel
Lessee, Inc. (the Company) as of December 31, 1998 and the related
statement of operations, stockholders' equity (deficit), and cash flows for
the period from April 29, 1998 (inception) through December 31, 1998.
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 audit.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of LaSalle Hotel
Lessee, Inc. as of December 31, 1998, and the results of its operations and
its cash flows for the period from April 29, 1998 (inception) through
December 31, 1998, in conformity with generally accepted accounting
principles.

KPMG LLP

Chicago, Illinois
March 17, 1999

LASALLE HOTEL LESSEE, INC.

BALANCE SHEET
(Dollars in Thousands)

December 31,
1998
------------

ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . $ 3,742
Accounts receivable - trade, net of allowance
for doubtful accounts of $102. . . . . . . . . . . . . 3,804
Note receivable - LPI Charities. . . . . . . . . . . . . 201
Inventories. . . . . . . . . . . . . . . . . . . . . . . 742
Prepaid expenses and other assets. . . . . . . . . . . . 190
Due from LaSalle Hotel Properties. . . . . . . . . . . . 614
--------
Total assets. . . . . . . . . . . . . . . . . . . . . $ 9,293
========

LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable
Trade. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,753
Advance deposits . . . . . . . . . . . . . . . . . . . 915
Accrued expenses
Accrued sales, use and occupancy taxes . . . . . . . . 610
Other accrued liabilities. . . . . . . . . . . . . . . 4,749
Notes Payable to LaSalle Hotel Properties. . . . . . . . 1,500
--------
Total liabilities. . . . . . . . . . . . . . . . . 9,527
--------
Stockholders' equity (deficit)
Common stock . . . . . . . . . . . . . . . . . . . . . --
Additional paid-in capital . . . . . . . . . . . . . . 425
Retained deficit . . . . . . . . . . . . . . . . . . . (659)
--------
Total stockholders' equity (deficit) . . . . . . . (234)
--------
Total liabilities and
stockholders' equity (deficit) . . . . . . . . . $ 9,293
========

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

LASALLE HOTEL LESSEE, INC.

STATEMENT OF OPERATIONS
(Dollars in Thousands)

For the period from
April 29, 1998
(inception) through
December 31, 1998
--------------------
REVENUES
Room revenue . . . . . . . . . . . . . . . . . $ 36,643
Telephone revenue. . . . . . . . . . . . . . . 1,124
Food and beverage revenue. . . . . . . . . . . 20,897
Golf revenue . . . . . . . . . . . . . . . . . 5,680
Other revenue. . . . . . . . . . . . . . . . . 1,949
Interest income. . . . . . . . . . . . . . . . 42
--------
Total revenues . . . . . . . . . . . . . 66,335
--------

EXPENSES
Departmental expenses of hotels
Rooms. . . . . . . . . . . . . . . . . . . . 8,736
Telephone. . . . . . . . . . . . . . . . . . 607
Food and beverage. . . . . . . . . . . . . . 15,640
Golf . . . . . . . . . . . . . . . . . . . . 3,231
Other. . . . . . . . . . . . . . . . . . . . 1,212
Repairs and maintenance. . . . . . . . . . . . 2,577
Utilities. . . . . . . . . . . . . . . . . . . 1,618
Sales and marketing. . . . . . . . . . . . . . 3,384
General and administrative . . . . . . . . . . 4,940
Insurance. . . . . . . . . . . . . . . . . . . 360
Management and incentive fees. . . . . . . . . 4,975
Participation rent . . . . . . . . . . . . . . 19,436
Interest on notes payable. . . . . . . . . . . 54
Other. . . . . . . . . . . . . . . . . . . . . 224
--------
Total expenses . . . . . . . . . . . . 66,994
--------
Net loss . . . . . . . . . . . . . . . . . . . $ (659)
========

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

LASALLE HOTEL LESSEE, INC.

STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

For the Period from April 29, 1998 (inception) through December 31, 1998
(Dollars in Thousands)

APIC -
Common Common Retained
Stock Stock Deficit Total
---------- ---------- ---------- ---------

Initial proceeds
from stock
issuance. . . . . $ -- $ 425 $ -- $ 425

Net loss . . . . . -- -- (659) (659)
---------- ---------- ---------- ---------

Balance at
December 31,
1998. . . . . . . $ -- $ 425 $ (659) $ (234)
========== ========== ========== =========

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

LASALLE HOTEL LESSEE, INC.

STATEMENT OF CASH FLOWS
(Dollars in Thousands)

For the period from
April 29, 1998
(inception) through
December 31, 1998
--------------------
OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . $ (659)
Adjustments to reconcile net loss to net
cash used in operating activities:
Bad debts. . . . . . . . . . . . . . . . . . . 94
Changes in operating assets and liabilities
Accounts receivable. . . . . . . . . . . . . (3,656)
Inventories. . . . . . . . . . . . . . . . . (663)
Prepaid expenses and other assets. . . . . . (434)
Accounts payable and accrued expenses. . . . 2,355
--------

Net cash used in
operating activities . . . . . . . . . . (2,963)
--------
FINANCING ACTIVITIES
Proceeds from notes payable . . . . . . . . . . . 1,500
Capital contributions . . . . . . . . . . . . . . 232
Proceeds from prorations. . . . . . . . . . . . . 2,568
Advances from LaSalle Hotel Properties. . . . . . 2,405
--------
Net cash provided by
financing activities . . . . . . . . . . 6,705
--------
Increase in cash and cash equivalents. . . . . . . 3,742
Cash and cash equivalents at beginning of period . --
--------
Cash and cash equivalents at end of period . . . . $ 3,742
========

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
Cash paid for interest . . . . . . . . . . . . . $ 54
========

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

LASALLE HOTEL LESSEE, INC.

NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)

1. ORGANIZATION

LaSalle Hotel Lessee, Inc. was formed on March 24, 1998 as an Illinois
Corporation, (the "Affiliated Lessee") by Jones Lang LaSalle Incorporated
(formerly LaSalle Partners Incorporated) ("JLL") in connection with the
initial public offering of LaSalle Hotel Properties (the "Company") to
serve as lessee for three of the initial hotels owned by the Company. The
Affiliated Lessee is owned as follows: 9.0% by the Company, 45.5% by JLL
and 45.5% by LPI Charities, a charitable corporation organized under the
laws of the state of Illinois. Accordingly, the stockholders share in the
profits and losses of the Affiliated Lessee in accordance with their
respective ownership interests. In addition, any cash deficits will be
funded by the stockholders in proportion to their ownership interests. The
Affiliated Lessee had no operations prior to April 29, 1998. On June 24,
1998, the Affiliated Lessee leased Harborside Hyatt Conference Center and
Hotel (the "Boston Property") from the Company pursuant to the Company's
acquisition of the Boston Property.

The owners capitalized the Affiliated Lessee through three demand
notes receivable totaling $425 and bearing interest at 5.62% per annum. As
of December 31, 1998 only the note from LPI Charities was outstanding. In
connection with the formation of the Affiliated Lessee and the subsequent
lease of the Boston Property, the Affiliated Lessee assumed certain assets
and liabilities of the four hotels. The net liability totaling $2,568 was
paid to the Affiliated Lessee by the Company. All four hotels (the
"hotels") are leased under participating leases ("Participating Leases")
which provide for rent based on hotel revenues and are managed by
independent hotel operators (the "Operators").

PROPERTY NAME LOCATION
- ------------- --------

LaGuardia Airport Marriott New York, NY
Omaha Marriott Hotel Omaha, NE
Marriott Seaview Resort Atlantic City, NJ
Harborside Hyatt
Conference Center and Hotel Boston, MA

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The Affiliated Lessee is operated on a calendar year basis. However,
the Marriott hotels are operated on a fiscal year basis. The Marriott
fiscal year ends on the Friday closest to December 31. The 1998 fiscal
year for Marriott ended on January 1, 1999, and is reflected in the
accompanying financial statements.

USE OF ESTIMATES

CASH AND CASH EQUIVALENTS

All highly liquid investments with a maturity of three months or less
when purchased are considered to be cash equivalents.

LASALLE HOTEL LESSEE, INC.

NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)

FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is determined by using available market information and
appropriate valuation methodologies. The Affiliated Lessee's financial
instruments include cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, which due to their short maturities,
are carried at amounts which reasonably approximate fair value.

INVENTORIES

Inventories consisting primarily of food and beverages and gift store
merchandise are stated at the lower of cost or market.

REVENUE RECOGNITION

Revenue is recognized as earned. Ongoing credit evaluations are
performed and an allowance for potential credit losses is provided against
the portion of accounts receivable which is estimated to be uncollectible.
Such losses have been within management's expectations.

MEMBERSHIP FEES

Golf course membership fees are recognized as revenue using the
straight-line method over the membership period.

3. PARTICIPATING LEASES

The Participating Leases are operating leases with noncancelable terms
of 10 years, subject to earlier termination on the occurrence of certain
contingencies, as defined. The rent due under each Participating Lease is
the greater of base rent, as defined, or participating rent. Participating
rent applicable to room and other hotel revenues varies by lease and is
calculated by multiplying fixed percentages by the total amounts of such
revenues over specified quarterly threshold amounts. Both the base rent
and the participating rent thresholds used in computing percentage rents
applicable to room and other hotel revenues, including food and beverage
revenues, are subject to annual adjustments based on increases in the
applicable Consumer Price Index ("CPI"). Participating Lease expense for
the period from April 29, 1998 (inception) through December 31, 1998 was
$19,436 of which approximately $7,125 was in excess of base rent.

Future minimum rentals (without reflecting future CPI increases) to be
paid by the Affiliated Lessee pursuant to the Participating Leases for the
years 1999 to 2003 and in total thereafter are as follows:

1999 . . . . . . . $ 18,451
2000 . . . . . . . 18,451
2001 . . . . . . . 18,451
2002 . . . . . . . 18,451
2003 . . . . . . . 18,451
Thereafter . . . . 80,992
--------
Total. . . . . . $173,247
========

LASALLE HOTEL LESSEE, INC.

NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)

Other than real estate and personal property taxes, ground rent,
casualty insurance and capital improvements which are obligations of the
Company, the Percentage Leases require the Affiliated Lessee to pay rent,
liability insurance premiums, all costs, expenses, utilities and other
charges incurred in the operation of the leased hotels. At December 31,
1998, the Affiliated Lessee had an outstanding receivable of $614 from the
Company for the reimbursement of capital improvements, which were paid by
the Affiliated Lessee.

The Affiliated Lessee is required to indemnify the Company against all
liabilities, costs and expenses incurred by or asserted against the Company
in the normal course of operating the hotels.

4. ADVISORY AGREEMENT

On April 29, 1998, the Affiliated Lessee entered into an advisory
agreement (the "Advisory Agreement") with LaSalle Hotel Advisors, Inc. (the
"Advisor"), a wholly owned subsidiary of JLL, to provide all management,
administrative and accounting services for the Affiliated Lessee. The
Advisory Agreement will remain in effect until either party gives notice of
termination. The Advisory Agreement provides for an annual fee, prorated
for any partial year the Advisory Agreement is in effect, to be paid to the
Advisor, as follows:

Annual Annual Fee
1998 Advisory Fee in Subsequent years
----------------- -------------------

Four hotels $25.0 Prior year fee + 2%
Each additional hotel $ 2.5 Prior year fee + 2%

The advisory fee for the period from April 29, 1998 (inception)
through December 31, 1998 was $17.

5. INCOME TAXES

The components of the income tax expense (benefit) were as follows:

Current income tax expense (benefit)
Federal $ --
State --

Deferred income tax expense (benefit)
Federal --
State --
-------
$ --
Total income tax expense (benefit) =======

LASALLE HOTEL LESSEE, INC.

NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)

A reconciliation of the income tax expense (benefit) at the statutory
income tax rate to the financial statements follows:

For the period from
April 29, 1998 (inception)
through December 31, 1998
---------------------------

Tax computed at 25% $(165)
State income taxes, net of federal
income tax effect (35)
Increase in valuation allowance 200
-----
Income tax expense (benefit) $ --
=====

The components of the Affiliated Lessee's deferred tax assets as of
December 31, 1998 were as follows:

Deferred tax assets:
Operating loss carryforward $(165)
Gift certificate liability (32)
Bad debt allowance (2)
-----
Gross deferred tax assets (200)
Less: valuation allowance 200
-----
Deferred tax assets $ --
=====

A valuation allowance has been established due to the uncertainty of
realizing loss carryforwards. The Affiliated Lessee has a net operating
loss carryforward for federal income tax purposes of $543 which is
available to offset future federal taxable income through 2018.

6. OPERATOR AGREEMENTS

The hotels have entered into separate management agreements ("Operator
Agreements") with the Operators. Pursuant to the terms of the Operator
Agreements, the Operators are to manage the hotels for a base management
fee ranging from 3% to 3.5% of gross revenues plus an incentive fee equal
to a percentage of certain measures of profitability, as defined. For the
period from April 29, 1998 (inception) through December 31, 1998, base and
incentive management fees totaled $2,045 and $2,930, respectively.
Management fees of approximately $107 were payable at December 31, 1998,
respectively. In addition, pursuant to the terms of the Operator
Agreements, the Operators provide the hotels with various services and
supplies, including marketing, reservations, and insurance.

7. CONTINGENCIES

The nature of the operations of the hotels exposes them to the risk of
claims and litigation in the normal course of their business. Although the
outcome of these matters cannot be determined, management does not expect
that the ultimate resolution of these matters to have a material adverse
effect on the financial position, operations or liquidity of the hotels.

The Operators are addressing Year 2000 issues based on a priority
schedule to ensure that any adverse impact on the Affiliated Lessee is
minimized. There can be no assurance, however, that all such risks will be
mitigated.

LASALLE HOTEL LESSEE, INC.

NOTES TO FINANCIAL STATEMENTS
(Dollars in thousands)

8. NOTES PAYABLE

The Company provided working capital to the Affiliated Lessee in the
aggregate amount of $1,500 in exchange for notes payable. The notes bear
interest at 5.6% per annum and are payable in monthly installments of
interest only. The term of each note is 10 years. Interest expense
totaled $54 for the period from April 29, 1998 (inception) through
December 31, 1998.

9. CONCENTRATION OF RISK

The profitability of the hotels is dependent upon business and leisure
travelers and in certain circumstances, golf tourism. Consequently demand
may fluctuate and be seasonal. Unfavorable economic or weather conditions
could adversely affect the results of operations.

10. EMPLOYEE BENEFIT PLANS

A majority of the employees of the hotels participate in defined
contribution and other benefit plans, which are administered by the
respective Operators in accordance with the provisions of the related labor
contracts and are generally based on hours worked. The hotels contribution
to these plans totaled approximately $534 for the period from April 29,
1998 (inception) through December 31, 1998.

11. SUBSEQUENT EVENTS

On March 2, 1999, the Affiliated Lessee received $201 from LPI
Charities in satisfaction of its demand note receivable.

The Affiliated Lessee is in negotiations with the Company to amend the
terms of the Participating Leases. In conjunction with the lease
amendments, the Affiliated Lessee is also negotiating the execution of
additional notes payable to the Company in the amount of $2,400, which was
advanced to the Affiliated Lessee as working capital during 1998 and is
classified in other accrued liabilities on the balance sheet.