- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

------------------------

INTERSTATE HOTELS CORPORATION
FOSTER PLAZA TEN
680 ANDERSEN DRIVE
PITTSBURGH, PENNSYLVANIA 15220
(412) 937-0600

MARYLAND 0-26805 75-2767215
(State of Incorporation) (Commission File No.) (IRS Employer
Identification No.)

------------------------

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Name of each exchange
Title of each class on which registered
- ---------------------------------------------------------- -----------------------
Common Stock, $.01 par value, outstanding as of March 28, Nasdaq SmallCap Market
2001:
Class A shares............................... 6,309,885
Class B shares............................... 242,555
Class C shares............................... --
---------
Total...................................... 6,552,440
=========

The Company (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, and
(2) has been subject to such filing requirements for the past 90 days.

Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
contained in this Report.

There were 5,890,522 shares of the Company's Common Stock outstanding as of
March 28, 2001 that were held by non-affiliates. The aggregate market value of
these shares, based upon the last sale price as reported on the Nasdaq SmallCap
Market on March 28, 2001, was approximately $13,807,000.

------------------------

DOCUMENT INCORPORATED BY REFERENCE:

Portions of the Proxy Statement for the Company's 2001 Annual Meeting of
Stockholders to be held on June 14, 2001, which will be filed on or before April
30, 2001, will be, when so filed, incorporated by reference into Part III of
this Report to the extent stated herein. Except with respect to information
specifically incorporated by reference herein, the Proxy Statement is not deemed
to be filed as a part hereof.
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2

INDEX

INTERSTATE HOTELS CORPORATION

PAGE
--------

PART I
Items 1 & 2 Business and Properties..................................... 2
Item 3 Legal Proceedings........................................... 4
Item 4 Submission of Matters to a Vote of Security Holders......... 4

PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 5
Item 6 Selected Financial Data..................................... 6
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
Item 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 17
Item 8 Financial Statements and Supplementary Data................. 18
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 18

PART III
Item 10 Directors and Executive Officers of the Registrant.......... 19
Item 11 Executive Compensation...................................... 19
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 19
Item 13 Certain Relationships and Related Transactions.............. 19

PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 20

PART I

ITEMS 1 & 2. BUSINESS AND PROPERTIES

Interstate Hotels Corporation (the "Company") is one of the largest
independent hotel management companies in the United States based on number of
properties, number of rooms and total revenues produced for owners. At December
31, 2000, the Company managed, leased or performed related services for 160
hotels with a total of 31,167 rooms in 38 states in the United States, and in
Canada, the Caribbean and Russia. The Company wholly owns one of these
properties, the 156-suite Pittsburgh Airport Residence Inn by Marriott, that it
acquired in 1999. The Company operates these hotels under a variety of major
brand names, including AmeriSuites, Best Western, Colony, Comfort Inn, Courtyard
by Marriott, Embassy Suites, Fairfield Inn by Marriott, Hampton Inn, Hilton,
Holiday Inn, Homewood Suites, Marriott, Radisson, Renaissance, Residence Inn by
Marriott, Sheraton and Westin. The Company is the largest independent operator
of upscale hotels in the Marriott system, operating 15 hotels with 4,944 rooms
bearing the Marriott flag, and manages 23 hotels with 4,286 rooms which are
operated under other brands owned by Marriott International, Inc. In addition,
the Company is the largest independent manager in the Hampton Inn system,
operating 55 hotels with 6,869 rooms bearing the Hampton Inn flag.

The Company operates its hotels under two separate operating
segments -- Interstate, which primarily operates luxury and upscale hotels, and
Crossroads, which primarily operates mid-scale, upper economy and budget hotels.
For financial information about the Company's operating segments, see Note 23 to
the Company's Consolidated Financial Statements and Supplementary Data contained
on pages F-25 through F-27 of this Report. All such information is incorporated
herein by reference.

The Company competes for third-party hotel management agreements with
international, national, regional and local hotel management and franchise
companies. The Company competes with these companies on factors such as
relationships with hotel owners and investors, access to capital, financial
performance, contract terms, name recognition, marketing support and the
willingness to provide funds in connection with new management arrangements.

The Company, together with its subsidiaries and predecessors, was formed
pursuant to a series of events culminating in the spin-off of the Company's
operations from Wyndham International, Inc., formerly Patriot American
Hospitality, Inc. ("Wyndham"), on June 18, 1999. On June 2, 1998, Interstate
Hotels Company (together with its subsidiaries, "Old Interstate") merged into
Wyndham (the "Merger"). Prior to the Merger, Marriott International, Inc.
("Marriott") filed a lawsuit to stop the closing of the Merger as a result of a
dispute over certain franchise agreements between Marriott and Old Interstate.
On June 18, 1999, pursuant to a settlement agreement with Marriott, Wyndham
transferred to the Company, which was then a newly formed corporation, the
third-party hotel management and leasing businesses of Old Interstate and equity
interests in The Charles Hotel Complex. Wyndham then spun-off the Company to its
shareholders (the "Spin-off"). In connection with the Spin-off, Marriott
purchased 4% of the Company's common stock, Wyndham retained 4% of the Company's
common stock, and the remaining 92% of the Company's common stock was
distributed to Wyndham's shareholders. In addition, Wyndham continued to own a
55% non-controlling ownership interest in Interstate Hotels, LLC ("IH LLC"), a
subsidiary of the Company and the successor to the third-party hotel management
and leasing businesses conducted by Old Interstate prior to the Merger.

RECENT DEVELOPMENTS

2
4

which they belong, owning more than 49% of the Company's total common stock
outstanding after the conversion.

In connection with the transactions contemplated under the Securities
Purchase Agreement, the Company entered into amended and restated employment
agreements with three members of senior management of the Company. These amended
and restated employment agreements provided, among other things, for the
issuance of an aggregate of 225,000 shares of the Company's Preferred Stock
valued at $2.25 million to these individuals. This Preferred Stock was issued on
October 20, 2000 and is subject to vesting restrictions.

$25.0 million of the proceeds received from the issuance of the Notes and
the Preferred Stock will be invested by the Company in a newly formed joint
venture (the "Joint Venture") for the acquisition of hotel properties that will
be managed by the Company. The Investor has committed to invest an additional
$20.0 million of capital to the Joint Venture.

In the fourth quarter of 2000, the Company agreed to cause its principal
operating subsidiary, IH LLC, to redeem from affiliates of Wyndham their
aggregate 55% non-voting economic interest in IH LLC (the "Wyndham Redemption").
In connection with the Wyndham Redemption, IH LLC transferred to Wyndham a
management agreement for one hotel owned by Wyndham, and Wyndham terminated the
management agreements with respect to six other hotels owned by Wyndham.
Approximately 9% of Wyndham's 55% interest in IH LLC was redeemed by IH LLC and
substantially all of the remainder was converted into a preferred membership
interest in IH LLC. At any time on or after July 1, 2001, both IH LLC and
Wyndham have the right to require that IH LLC redeem the preferred membership
interest for approximately $12.7 million to be paid with a combination of cash
and promissory notes. In addition, effective December 1, 2000, the Company
purchased all of the Company's common stock owned by Wyndham for approximately
$0.6 million.

Pursuant to a Master Lease Termination Agreement dated September 12, 2000
between the Company and Equity Inns, Inc. ("Equity Inns"), all of the lease
agreements for the 75 hotels leased from Equity Inns were terminated effective
January 1, 2001, and Equity Inns and the Company simultaneously entered into
management agreements for 54 of the hotels formerly leased to the Company. The
management agreements expire on a staggered annual basis beginning January 1,
2002 through January 1, 2005.

Detailed information on the recent developments set forth above is
described in Part II, Item 7, "Management's Discussion and Analysis of Financial
Conditions and Results of Operations -- 2000 Developments".

Also during 2000, the Company acquired a 25% non-controlling equity
interest in the Houston Astrodome/Medical Center Residence Inn by Marriott in
Houston, Texas for $0.8 million; a 20% non-controlling equity interest in the
Renaissance Worldgate Hotel in Kissimmee, Florida for $3.9 million; and a 10%
non-controlling equity interest in the Sawgrass Marriott Resort and Beach Club
in Ponte Vedra Beach, Florida for $4.4 million.

On March 27, 2001, the Company acquired a non-controlling 0.5% general
partnership interest and a non-controlling 49.5% limited partnership interest in
a limited partnership (the "Partnership") that owns seven Marriott-branded
hotels and one Hampton Inn hotel, for a total acquisition cost, including
closing costs, of approximately $8.3 million. FelCor Lodging Trust Incorporated
("FelCor") owns the other 50% of the Partnership. The eight hotels are:
Fairfield Inn Scottsdale-Downtown, Arizona; Courtyard by Marriott
Atlanta-Downtown, Georgia; Fairfield Inn Atlanta-Downtown, Georgia; Fairfield
Inn Dallas-Regal Row, Texas; Courtyard by Marriott Houston-Near the Galleria,
Texas; Fairfield Inn Houston-Near the Galleria, Texas; Fairfield Inn Houston
I-10-East, Texas; and Hampton Inn Houston I-10-East, Texas. The hotels are
leased to newly formed entities also owned 50% by FelCor and 50% by the Company,
and have been managed by the Company since January 1, 2001. The company used
cash on hand, as well as a $4.2 million loan from FelCor, to fund the
acquisition.

In addition, the Company has entered into a management agreement to manage
one other hotel that is currently scheduled to open in 2002.
3
5

The Company's principal executive offices are located in Pittsburgh,
Pennsylvania with regional offices in Orlando, Florida and Scottsdale, Arizona.
As of March 28, 2001, the Company and its subsidiaries employed approximately
12,500 persons, of which approximately 1,900 of these employees were represented
by a union.

ITEM 3. LEGAL PROCEEDINGS

In the ordinary course of its business, the Company is named as a defendant
in legal proceedings resulting from incidents at the hotels it operates. In
addition, legal proceedings were or may be commenced against Old Interstate in
the ordinary course of its business. To the extent that such legal proceedings
relate to operations that are now conducted by the Company, the Company will
succeed to any liabilities resulting from such legal proceedings, and under the
terms of the Spin-off, the Company is required to indemnify Wyndham with respect
thereto, whether arising before or after the Spin-off. The Company maintains
liability insurance, requires hotel owners to maintain adequate insurance
coverage and is generally entitled to indemnification from third-party hotel
owners for lawsuits and damages against it in its capacity as a hotel manager.
Old Interstate had similar arrangements prior to the Merger. In addition, in
connection with the Spin-off, Wyndham has agreed to indemnify the Company
against liabilities relating to, among other things, the assets of Old
Interstate that Wyndham retained.

In January 2001, Columbus Hotels Properties, LLC sought termination of
eight hotel management agreements and a master agreement between it and a
subsidiary of the Company. In response to this attempt to terminate the
agreements, the Company filed a demand for arbitration with the American
Arbitration Association. Following the Company's demand for arbitration,
Columbus Hotel Properties, LLC and Corporate Capital, LLC commenced an action
against Interstate Hotels Company, Crossroads Hospitality Company (sic) and
Crossroads Hospitality Management Company, which are subsidiaries of the
Company, on March 22, 2001 in the Civil District Court for the Parish of Orleans
in the State of Louisiana. The action alleges, among other things, fraudulent
misrepresentations inducing the plaintiffs to enter into a master agreement and
certain hotel management agreements and to purchase the Company's common stock.
In addition, the action alleges gross negligence in defendants' performance
under those agreements and breach of the agreements and fiduciary duties to the
plaintiffs. The action seeks, among other things, compensatory and consequential
damages in such amounts as may be determined by a jury, termination of the
agreements and a recission of certain transactions between the parties.

The Company's management believes that the legal proceedings to which it is
subject will not have a material effect on the Company's financial condition or
results of operations.

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

A special meeting of the stockholders of Interstate Hotels Corporation was
held on October 16, 2000. The stockholders of record at the close of business on
September 12, 2000 approved the issuance of (i) 725,000 shares of Series B
Convertible Preferred Stock valued at $7.25 million, (ii) 8.75% Convertible
Subordinated Notes in the aggregate amount of $25.0 million and (iii) Class A
Common Stock upon conversion thereof, to the Investor and three members of
senior management in connection with the transactions described in Part II, Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- 2000 Developments -- Securities Purchase Agreement". The votes
cast were as follows:

VOTES FOR VOTES AGAINST ABSTENTIONS
- --------- ------------- -----------

3,833,424 422,128 15,584

4
6

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock has been listed on the Nasdaq SmallCap Market
("Nasdaq") since June 18, 1999 under the symbol "IHCO." Prior to that date, the
common stock was not publicly traded. The following table sets forth, for the
periods indicated, the high and low sales prices per share of common stock as
reported on Nasdaq.

STOCK PRICE
-----------
PERIOD HIGH LOW
------ ----- -----

1999:
June 18, 1999 through June 30, 1999....................... $5.00 $3.06
Quarter ended September 30, 1999.......................... 5.06 2.88
Quarter ended December 31, 1999........................... 3.75 2.88
2000:
Quarter ended March 31, 2000.............................. 4.75 2.75
Quarter ended June 30, 2000............................... 3.75 1.69
Quarter ended September 30, 2000.......................... 3.19 1.94
Quarter ended December 31, 2000........................... 3.06 1.53
2001:
First quarter (through March 28, 2001).................... 2.63 1.56

As of March 28, 2001 there were 1,938 registered stockholders of record of
the Company's Class A Common Stock and one registered and beneficial stockholder
of the Company's Class B Common Stock. There were no shares of the Company's
Class C Common Stock issued and outstanding as of March 28, 2001.

The Company has not paid any cash dividends on the common stock and does
not anticipate that it will do so in the foreseeable future. The Notes issued to
the Investor and the terms of the Preferred Stock prohibit the Company from
paying, or setting aside sums for the payment of, dividends on the common stock
without the consent of a majority of the holders of the Notes and the Preferred
Stock. In addition, the terms of the Preferred Stock prohibit the Board of
Directors of the Company from declaring any dividend on any of the Company's
stock until all dividends owing on the Preferred Stock have been paid in full.
The Investor Rights Agreement entered into between the Company and the Investor
also requires the approval of the Board of Directors prior to the payment, or
setting aside of sums for the payment of, dividends on any shares of the
Company's common stock.

On October 20, 2000, the Company issued to the Investor 500,000 shares of
its Preferred Stock for $5.0 million in a private sale exempt from registration
under the Securities Act of 1933, as amended. In addition, the Company issued to
three members of senior management of the Company an aggregate of 225,000 shares
of its Preferred Stock valued at $2.25 million, subject to vesting restrictions.
The Preferred Stock is convertible at any time into Class A Common Stock of the
Company at $4.00 per share. Detailed information on terms of the Preferred Stock
is described in Part II, Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- 2000 Developments -- Securities
Purchase Agreement".

5
7

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected historical financial data for the
Company, prior to the Merger of Old Interstate into Wyndham, as the predecessor,
as of and for the years ended December 31, 1996 and 1997 and for the period from
January 1, 1998 to June 1, 1998, and for the Company, subsequent to the Merger
of Old Interstate into Wyndham, as the successor, as of December 31, 1998 and
for the period from June 2, 1998 to December 31, 1998 and as of and for the
years ended December 31, 1999 and 2000. The following table also includes an
unaudited column that combines the predecessor for the period from January 1,
1998 to June 1, 1998 and the successor for the period from June 2, 1998 to
December 31, 1998. In addition, selected unaudited pro forma financial data for
the year ended December 31, 1999 is presented to include the effects of the
Spin-off, the sale of the equity interests in The Charles Hotel Complex and
certain other adjustments related to the Spin-off as if all of the transactions
had occurred on January 1, 1999. The unaudited pro forma financial data does not
purport to present what the actual results of operations of the Company would
have been if these transactions had occurred on such date or to project the
results of operations of the Company for any future period. The unaudited pro
forma financial data does not reflect any transactions or events that have
occurred since the Spin-off.

6
8

SELECTED FINANCIAL AND OTHER DATA

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

SUCCESSOR
PREDECESSOR SUCCESSOR ----------
-------------------------------------- ------------- YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
YEAR ENDED ------------ ----------
DECEMBER 31, JAN. 1, 1998 JUNE 2, 1998
----------------------- THROUGH THROUGH COMBINED
1996 1997 JUNE 1, 1998 DEC. 31, 1998 1998(1) 1999
---------- ---------- ------------ ------------- ------------ ----------
(UNAUDITED)

STATEMENT OF INCOME DATA:
Lodging revenues:
Rooms................................. $ 9,258 $ 158,343 $ 74,265 $108,698 $ 182,963 $ 183,695
Other departmental.................... 721 9,512 4,504 6,455 10,959 10,693
Net management fees..................... 33,023 39,136 18,018 22,763 40,781 33,275
Other fees.............................. 20,710 23,426 9,976 10,478 20,454 12,691
---------- ---------- -------- -------- ---------- ----------
Total revenues.................... 63,712 230,417 106,763 148,394 255,157 240,354
Lodging expenses:
Rooms................................. 2,334 36,919 16,115 25,114 41,229 44,237
Other departmental.................... 591 5,487 2,674 3,962 6,636 6,975
Property costs........................ 3,201 43,225 21,045 31,714 52,759 56,258
General and administrative.............. 10,369 13,212 6,115 5,822 11,937 14,069
Payroll and related benefits............ 17,666 21,892 10,982 10,439 21,421 19,619
Non-cash compensation (2)............... 11,896 -- -- -- -- --
Lease expense........................... 3,477 73,283 34,515 51,165 85,680 89,174
Depreciation and amortization........... 4,385 4,845 2,152 10,659 12,811 20,833
Joint Venture start-up costs (3)........ -- -- -- -- -- --
Loss on impairment of investment
in hotel lease contracts (4)(5)....... -- -- -- -- -- 16,406
---------- ---------- -------- -------- ---------- ----------
Operating income (loss)................. 9,793 31,554 13,165 9,519 22,684 (27,217)
Other income (expense):
Interest, net......................... 501 498 204 390 594 1,368
Other, net............................ -- 431 474 1,391 1,865 1,516
Loss on sale of investment
in hotel real estate (6)............ -- -- -- -- -- (876)
---------- ---------- -------- -------- ---------- ----------
Income (loss) before income tax expense
(benefit)............................. 10,294 32,483 13,843 11,300 25,143 (25,209)
Income tax expense (benefit)............ 4,117 12,986 5,528 4,436 9,964 (5,078)
---------- ---------- -------- -------- ---------- ----------
Income (loss) before minority
interest.............................. 6,177 19,497 8,315 6,864 15,179 (20,131)
Minority interest....................... -- 18 24 209 233 (12,514)
---------- ---------- -------- -------- ---------- ----------
Net income (loss)....................... 6,177 19,479 8,291 6,655 14,946 (7,617)
Less mandatorily preferred stock:
Dividends............................. -- -- -- -- -- --
Accretion............................. -- -- -- -- -- --
---------- ---------- -------- -------- ---------- ----------
Net income (loss) available to common
stockholders.......................... $ 6,177 $ 19,479 $ 8,291 $ 6,655 $ 14,946 $ (7,617)
========== ========== ======== ======== ========== ==========
Net income (loss) available to common
stockholders per common share:
Basic.................................
Diluted...............................
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents............... $ 11,168 $ 2,432 $ 1,652 $ 1,652 $ 22,440
Total assets............................ 88,204 118,185 161,157 161,157 142,459
Long-term debt.......................... 541 370 -- -- --
Manditorily redeemable preferred
stock................................. -- -- -- -- --
Total equity............................ 56,886 80,730 92,607 92,607 60,006
OTHER FINANCIAL DATA:
EBITDA (unaudited) (7).................. $ 14,178 $ 36,812 $ 15,767 $ 21,360 $ 37,127 $ 7,771
Net cash provided by operating
activities:........................... 15,331 12,517 18,359 9,593 27,952 23,793
Net cash (used in) provided by investing
activities:........................... (4,338) (35,707) 2,674 (27,707) (25,033) (10,121)
Net cash (used in) provided by financing
activities............................ (13,860) 14,454 (19,298) 15,599 (3,699) 7,116
TOTAL HOTEL DATA (UNAUDITED): (8)
Total hotel revenues.................... $1,327,000 $1,601,000 $1,490,000 $1,202,000
Number of hotels (9).................... 212 223 176 158
Number of rooms (9)..................... 43,178 45,329 35,214 29,379

SUCCESSOR
----------
YEAR ENDED
DECEMBER 31,
------------------------

PRO FORMA
1999 2000
----------- ----------
(UNAUDITED)

STATEMENT OF INCOME DATA:
Lodging revenues:
Rooms................................. $ 183,695 $ 191,811
Other departmental.................... 10,693 11,661
Net management fees..................... 28,967 29,481
Other fees.............................. 12,034 13,159
---------- ----------
Total revenues.................... 235,389 246,112
Lodging expenses:
Rooms................................. 44,237 47,014
Other departmental.................... 6,975 7,238
Property costs........................ 56,258 61,767
General and administrative.............. 14,513 14,894
Payroll and related benefits............ 20,069 22,704
Non-cash compensation (2)............... -- --
Lease expense........................... 87,174 88,594
Depreciation and amortization........... 20,833 16,091
Joint Venture start-up costs (3)........ -- 2,096
Loss on impairment of investment
in hotel lease contracts (4)(5)....... 16,406 12,550
---------- ----------
Operating income (loss)................. (31,076) (26,836)
Other income (expense):
Interest, net......................... 1,630 1,777
Other, net............................ (9) (498)
Loss on sale of investment
in hotel real estate (6)............ -- --
---------- ----------
Income (loss) before income tax expense
(benefit)............................. (29,455) (25,557)
Income tax expense (benefit)............ (5,203) (5,935)
---------- ----------
Income (loss) before minority
interest.............................. (24,252) (19,622)
Minority interest....................... (16,447) (10,719)
---------- ----------
Net income (loss)....................... (7,805) (8,903)
Less mandatorily preferred stock:
Dividends............................. -- 127
Accretion............................. -- 12
---------- ----------
Net income (loss) available to common
stockholders.......................... $ (7,805) $ (9,042)
========== ==========
Net income (loss) available to common
stockholders per common share:
Basic................................. $ (1.22) $ (1.40)
Diluted............................... $ (1.22) $ (1.40)
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents............... $ 51,327
Total assets............................ 143,973
Long-term debt.......................... 45,163
Manditorily redeemable preferred
stock................................. 4,708
Total equity............................ 51,858
OTHER FINANCIAL DATA:
EBITDA (unaudited) (7).................. $ 2,515 $ (1,858)
Net cash provided by operating
activities:........................... 10,080
Net cash (used in) provided by investing
activities:........................... (11,378)
Net cash (used in) provided by financing
activities............................ 30,185
TOTAL HOTEL DATA (UNAUDITED): (8)
Total hotel revenues.................... $1,018,000 $1,176,000
Number of hotels (9).................... 158 160
Number of rooms (9)..................... 29,379 31,167

7
9

- ---------------

(1) Represents the sum of the balances from the predecessor for the period from
January 1, 1998 to June 1, 1998 and the successor for the period from June
2, 1998 to December 31, 1998.

(2) Represents a non-recurring expense related to the issuance of 785,533 shares
of common stock to executives and key employees of Old Interstate in
consideration for the cancellation of stock options issued by one of Old
Interstate's predecessors in 1995.

(3) Represents Joint Venture start-up costs of $2.1 million, net of a $0.8
million reimbursement from the Joint Venture, which include the legal,
investment banking and other costs incurred by the Company in connection
with the start-up of the Joint Venture.

(4) For 1999, the amount represents a non-cash impairment charge on the
Company's leased hotel intangible assets resulting from a permanent
impairment of the future profitability of 42 of the Company's leased hotels,
which experienced lower than expected operating cash flows during 1999,
primarily due to decreased occupancy rates and higher operating costs caused
by a significant over-supply of mid-scale, upper economy and budget hotels
in certain markets.

(5) For 2000, the amount represents a non-cash impairment charge on the
non-monetary exchange of the Company's hotel lease agreements for management
agreements. The lease agreements for the 75 hotels leased from Equity Inns
were terminated and the Company entered into management agreements for 54 of
the hotels formerly leased to the Company effective as of January 1, 2001.

(6) Represents a loss resulting from the sale of the Company's equity interests
in The Charles Hotel Complex on June 18, 1999, which was allocated 100% to
Wyndham through minority interest.

(7) EBITDA represents earnings (losses) before interest, income tax expense
(benefit), depreciation and amortization, mandatorily redeemable preferred
stock dividends and accretion and the loss on impairment of investment in
hotel lease agreements. The 1999 pro forma EBITDA was calculated based on
the Company's 45% share of EBITDA from IH LLC for the full year. Historical
1999 EBITDA was calculated based on the Company's 45% share of EBITDA from
IH LLC for the period from June 18, 1999 to December 31, 1999. Historical
2000 EBITDA was calculated based on the Company's 45% share of EBITDA from
IH LLC for the period from January 1, 2000 to October 31, 2000. Management
believes that EBITDA is a useful measure of operating performance because it
is industry practice to evaluate hotel properties based on operating income
before interest, taxes, depreciation and amortization, which is generally
equivalent to EBITDA, and EBITDA is unaffected by the debt and equity
structure of the property owner. EBITDA, as calculated by the Company, may
not be consistent with computations of EBITDA by other companies. EBITDA
does not represent cash flow from operations as defined by generally
accepted accounting principles, is not necessarily indicative of cash
available to fund all cash flow needs and should not be considered as an
alternative to net income under generally accepted accounting principles for
purposes of evaluating the Company's results of operations.

(8) Represents all hotels, including the leased hotels, for which the Company
provides management or related services.

(9) As of the end of the periods presented.

8
10

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

In addition to historical information, this Report contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 and information based on the beliefs of the Company's management, as well
as assumptions made by and information currently available to the Company's
management. When used herein, the words or phrases "will likely result," "are
expected to," "will continue," "anticipates," "believes," "intends,"
"estimates," "projects," "expects" or similar expressions, as they relate to the
Company or the Company's management, are intended to identify these
forward-looking statements. Such statements are subject to risks and
uncertainties that could cause the Company's business and results of operations
to differ materially from those reflected in the Company's forward-looking
statements.

Forward-looking statements are not guarantees of future performance. They
are subject to the Company:

- reversing the current negative trend in its business and financial
results;

- successfully implementing its business strategy; and

- limiting the costs and realizing the expected benefits of that strategy.

The Company's forward-looking statements are based on trends that the
Company's management anticipates in the lodging industry and the effect on those
trends of such factors as industry capacity, the seasonal nature of the lodging
industry, product demand and pricing.

2000 DEVELOPMENTS

Securities Purchase Agreement

On October 20, 2000, the Company issued 8.75% Subordinated Convertible
Notes (the "Notes") for $25.0 million and 500,000 shares of its Series B
Convertible Preferred Stock, par value $.01 per share, (the "Preferred Stock")
for $5.0 million. These securities were issued to CGLH Partners I LP and CGLH
Partners II LP (collectively, the "Investor"), which are entities affiliated
with Lehman Brothers Holdings Inc., pursuant to a Securities Purchase Agreement
dated August 31, 2000 between the Company and the Investor. The Preferred Stock
accrues cumulative dividends payable quarterly in cash at 8.75% per annum, with
up to 25% of the dividends payable in kind (at the option of the Company). The
Preferred Stock must be mandatorily redeemed by the Company no later than
October 20, 2007 for $10 per share. The Notes mature on October 20, 2007 and
accrue interest that is payable quarterly at a rate of 8.75% per annum, with up
to 25% of the interest payable in kind (at the option of the Company). Both the
Preferred Stock and the Notes are convertible at any time into Class A Common
Stock of the Company at $4.00 per share. Initially, these securities are
convertible into an aggregate of 7,500,000 shares of Class A Common Stock,
however, no holder of either the Notes or the Preferred Stock may convert these
securities if that conversion would cause the holder and its affiliates or any
group of which any of them is a member to have beneficial ownership of more than
49% of the Company's total common stock outstanding after the conversion.

The Notes and Preferred Stock were recorded at fair value of $25.0 million
and $5.0 million, respectively, in the fourth quarter of 2000. Transaction costs
of approximately $2.1 million incurred in connection with the Notes have been
deferred and will be amortized over the next seven years. Costs incurred in
connection with the issuance of the Preferred Stock of approximately $0.4
million were allocated to the fair value of the Preferred Stock at issuance. The
Preferred Stock is being accreted to redemption value over the next seven years.

In connection with the transactions contemplated under the Securities
Purchase Agreement, the Company also entered into amended and restated
employment agreements with each of Thomas F. Hewitt, J. William Richardson and
Kevin P. Kilkeary, members of senior management of the Company. These amended
and restated employment agreements became effective upon the closing of the
transactions contemplated under the Securities Purchase Agreement and provided,
among other things, for the issuance of an aggregate of 225,000 shares of
Preferred Stock valued at $2.25 million to these individuals and the immediate
vesting of restricted stock awards for Messrs. Hewitt and Richardson that were
issued under their previous employment agreements, in exchange for their waiver
of stock option rights and severance payments owed to them by the
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Company under their previous employment agreements. These shares were issued on
October 20, 2000 and are convertible, subject to vesting restrictions, into an
aggregate of 562,500 shares of Class A Common Stock and are redeemable, as
discussed above, for $10 per share.

The issuance of the Preferred Stock was recorded as deferred compensation
at fair value and will be amortized as compensation expense over the three-year
vesting period. Compensation expense recorded in the fourth quarter of 2000
related to this issuance was $0.1 million. The vesting of the restricted stock
issued under previous employment agreements was recorded as a compensation
charge of approximately $0.9 million in 2000. Other costs of approximately $0.2
million incurred in connection with the deferred compensation were expensed in
the fourth quarter of 2000.

The terms of the Notes and Preferred Stock contain various voting rights of
the Investor and covenants by the Company with respect to the operation of the
business of the Company on an ongoing basis.

In connection with the issuance of the Notes and Preferred Stock, the
Company and the Investor entered into an Investor Agreement providing for
certain restrictions on, and rights of, the Investor with respect to the
Company, including a standstill agreement, restrictions on transfer of the
Preferred Stock and Notes (and common stock into which they are convertible) and
rights to designate five out of 11 of the members of the Board of Directors of
the Company.

Joint Venture Commitment

$25.0 million of the proceeds received from the issuance of the Notes and
the Preferred Stock will be invested by the Company in a newly formed joint
venture (the "Joint Venture") with the Investor for the acquisition of hotel
properties that will be managed by the Company. The Investor has committed to
invest $20.0 million of additional capital to the Joint Venture.

The Joint Venture is structured as a limited partnership with an affiliate
of the Investor serving as the managing general partner having decision-making
authority and an affiliate of the Company serving as a general partner having
limited authority and responsibility. The limited partnership interests are
owned by affiliates of the Investor, by affiliates of the Company, and by
Messrs. Hewitt and Richardson, (collectively, the "Executives"). The Executives
received aggregate limited partnership interests of 5.25% without any capital
contribution and are subject to a vesting period of up to three years as well as
other conditions. The Company owns a minority common percentage interest of the
Joint Venture. A decision by the Joint Venture to acquire any hotel property or
an interest in any hotel property requires the unanimous approval of all the
partners, other than the Executives. Approximately $11.7 million of the
Company's affiliate investment in the Joint Venture is entitled to a 15% per
annum preferential return from available cash before the same return is payable
on the remaining capital investments by the partners.

Under the terms of the partnership agreement for the Joint Venture, an
affiliate of the Company will manage for ten years all hotel properties
acquired, directly or indirectly, by the Joint Venture, except for minority,
non-controlling investments in hotel properties by the Joint Venture. The
manager will be entitled to a base management fee of 2.5% of hotel gross
revenues and an incentive management fee of 10% of net cash flow. An affiliate
of the Investor will serve as the asset manager for all Joint Venture properties
and will receive an annual fee of 0.75% of the amount of capital invested in the
Joint Venture as of December 31 of every year. The management agreement for each
property is subject to termination in certain circumstances, including the sale
of the property by the Joint Venture, and provides for a termination fee to the
manager in some circumstances.

The Joint Venture has a seven-year term subject to extension by the
Investor. Within two years of a change of control of the Company, the Investor
has a right to require the Company to acquire all of the partnership interests
owned by affiliates of the Investor. The Joint Venture interests are also
subject to a buy/sell agreement which may be triggered in certain circumstances
by any partner and may result in the non-triggering partners either buying the
triggering partner's interest or selling their interests to the triggering
partner, provided that the Executives may not be buyers under the buy/sell
agreement, without the consent of the other partners.

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As of December 31, 2000, the Company has not invested any of the proceeds
from the Notes or Preferred Stock in the Joint Venture. The Joint Venture will
be accounted for by the Company using the equity method of accounting.
Transaction costs of approximately $2.1 million incurred in connection with the
start-up of the Joint Venture, net of a $0.8 million reimbursement from the
Joint Venture, were expensed by the Company in the fourth quarter of 2000. The
Company recorded an equity loss from the Joint Venture of $0.3 million in the
fourth quarter of 2000. The Company will also record compensation expense to the
extent of the fair value of the Executives' interest in the Joint Venture,
subject to the Executives' vesting periods.

Senior Credit Facility

In connection with this transaction with the Investor, the Company is
negotiating with Lehman Brothers Inc. ("Lehman") for a $50.0 million senior
secured revolving credit facility. The Company and Lehman have executed a
commitment letter, pursuant to which Lehman has committed to lend $25.0 million
and an affiliate of Lehman has agreed to syndicate an additional $25.0 million
on a best efforts basis. The term of the credit facility will be two years with
an option to extend for an additional year in certain circumstances, including a
reduction of the facility over a period of time. The credit facility will be
secured by a pledge of the Company's equity interests (i.e., stock, partnership
interests and membership interests) in certain of the Company's major current
and all of its future direct and indirect subsidiaries, mortgages on hotel
properties owned directly by the Company or by its wholly-owned subsidiaries
(with certain exceptions) and a security interest in the rights of the Company
to receive payments under certain of its hotel management agreements and hotel
leases. The Company is permitted to draw upon the facility for several purposes
including to make investments in hotel properties or loans to obtain management
contracts, provide letters of credit and to satisfy the Company's general
working capital needs. Lehman will receive customary fees under the facility,
including a commitment fee of 1.25% of the facility amount, an arrangement fee
of $250,000, an administration fee of $75,000 per year and an annual commitment
fee that will vary depending upon the level of the facility usage. The Company
expects to close on the credit facility in the second quarter of 2001.

Wyndham Redemption

In the fourth quarter of 2000, the Company agreed to cause its principal
operating subsidiary, IH LLC, to redeem from affiliates of Wyndham substantially
all of their aggregate 55% non-voting economic interest in IH LLC (the "Wyndham
Redemption"). The total purchase price was $13.1 million, which included $0.4
million of transaction costs. Pursuant to this agreement, IH LLC transferred to
Wyndham a management agreement of IH LLC for one hotel owned by Wyndham, and
Wyndham terminated the management agreements for six other Wyndham-owned hotels
in January 2001. Approximately 9% of Wyndham's 55% interest in IH LLC was
redeemed by IH LLC and substantially all of the remainder was converted into a
preferred membership interest in IH LLC. At December 31, 2000, the Company had
included in long-term debt a total of $12.7 million related to the redemption of
the preferred membership interest that either party may require to be redeemed
by IH LLC at any time on or after July 1, 2001 (the "Wyndham Redemption Notes").
The Company is required to maintain $7.5 million in cash in an escrow account
through June 30, 2001 to satisfy the Wyndham Redemption Notes. Wyndham's
remaining 1.6627% interest in IH LLC that was not converted into a preferred
membership interest or redeemed will remain outstanding. Thereafter, at any time
on or after July 1, 2004, both IH LLC and Wyndham have the right to require that
IH LLC redeem this remaining common interest at an amount that is the lesser of
(a) the product of (i) five times IH LLC's EBITDA as of December 31, 2003 and
(ii) the percentage of total equity interest in IH LLC which is represented by
the remaining interest, or (b) approximately $0.4 million.

In addition, Wyndham granted the Company an option exercisable within 90
days of October 20, 2000, to acquire all of the Company's common stock owned by
Wyndham at a weighted average trading price per share, as defined. The Company
exercised this option and purchased the stock effective December 1, 2000 for
$0.6 million. The Company accounted for the purchase as treasury stock, which
was subsequently cancelled.

As additional consideration for the redemption and conversion of Wyndham's
55% interest in IH LLC, Wyndham caused its representative on the Company's Board
of Directors to resign and relinquished its right to appoint a member to the
Company's Board of Directors in the future. Further, the Company's Bylaws have
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been amended to remove the right of the Class B and Class C directors to approve
appointments of members to the committees of the Board of Directors.

The Wyndham Redemption was accounted for by the Company in the fourth
quarter of 2000 using the purchase method of accounting. Transaction costs of
approximately $0.4 million incurred in connection with the Wyndham Redemption
were included in the total purchase price of $13.1 million.

Equity Inns Conversion

On July 21, 2000, the Company executed a binding Memorandum of
Understanding (the "Memorandum") with Equity Inns, Inc. ("Equity Inns") with
respect to the hotel lease agreements between the Company and Equity Inns, which
was superseded by a Master Lease Termination Agreement dated September 12, 2000
(the "Termination Agreement"). Pursuant to the Termination Agreement, all of the
lease agreements for the 75 hotels leased from Equity Inns were terminated
effective January 1, 2001, and Equity Inns and the Company simultaneously
entered into management agreements for 54 of the hotels formerly leased to the
Company. The management agreements expire on a staggered annual basis beginning
January 1, 2002 through January 1, 2005. As a result, effective January 1, 2001,
the revenues and expenses and the working capital of these hotels will no longer
be reflected in the financial statements of the Company. Instead, the Company
will record revenues from management fees only. The Company also continues to
manage, under a new management agreement, one additional hotel it manages for,
but did not lease, from Equity Inns in 2000. Concurrently with the Company's
decision to enter into the Memorandum, the Company recorded a non-cash
impairment loss of $12.6 million in the third quarter of 2000 related to its
leased hotel intangible assets included in the mid-scale, upper economy and
budget hotels segment.

HISTORICAL YEAR ENDED DECEMBER 31, 2000 COMPARED TO HISTORICAL YEAR ENDED
DECEMBER 31, 1999

Lodging revenues consist of rooms, food and beverage and other departmental
revenues from the leased hotels and one hotel acquired by the Company in
November 1999. Lodging revenues increased by $9.1 million, or 4.7%, from $194.4
million in 1999 to $203.5 million in 2000. This increase was partially due to
incremental revenues of $3.6 million in 2000 related to the acquired hotel. In
addition, the Company entered into leases for two newly constructed hotels in
June 1999 that earned incremental revenues of approximately $9.3 million during
2000. These additional revenues were offset by the loss of 7 hotel operating
leases since January 1, 1999. As a result of the Equity Inns Conversion
effective January 1, 2001, lodging revenues related to the leased hotels will no
longer be reflected in the financial statements of the Company. Instead, the
Company will record revenues from management fees only. Therefore, lodging
revenues earned in 2001 will be substantially reduced.

The average daily room rate for the leased hotels increased by 4.2%, from
$76.76 during 1999 to $79.99 during 2000, and the average occupancy rate
increased slightly to 65.5% during 2000 from 65.0% during 1999. This resulted in
an increase in room revenue per available room of 4.9% to $52.38 during 2000.
The operating results of the Company's leased hotels were consistent with the
current trends within the lodging industry. The increase in the average daily
room rate primarily resulted from inflationary rate increases.

Net management fees decreased by $3.8 million, or 11.4%, from $33.3 million
in 1999 to $29.5 million in 2000. This decrease was due to the net loss of 16
management contracts since January 1, 1999, which included 20 hotels whose
management was transferred to either Wyndham or Marriott in connection with the
Spin-off. These hotels earned $5.3 million of management fees during 1999. This
loss was offset by a $1.0 million increase in management fees earned by the
Company's three properties managed in Moscow, Russia in 2000 as compared to
1999. Other fees increased by $0.5 million, or 3.7%, from $12.7 million in 1999
to $13.2 million in 2000. This increase was primarily due to a $1.1 million
increase in insurance revenues, which was offset by a decrease in other fees
resulting from the reduction in the total number of hotels operated by the
Company in 2000 as compared to 1999.

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Lodging expenses consist of rooms, food and beverage, property costs and
other departmental expenses from the leased hotels and one hotel acquired by the
Company in November 1999. Lodging expenses increased by $8.5 million, or 8.0%,
from $107.5 million in 1999 to $116.0 million in 2000. This increase was
partially due to incremental expenses of $2.1 million in 2000 related to the
acquired hotel. For the leased hotels, increased competition resulting from an
increased supply of limited-service hotels in certain markets required higher
operating costs to maintain and increase revenue levels. In addition, the
Company entered into leases for two newly constructed hotels in June 1999 that
incurred incremental operating expenses of approximately $8.9 million during
2000. These additional expenses were offset by the loss of 7 hotel operating
leases since January 1, 1999. The operating margin of the leased and owned
hotels decreased from 44.7% during 1999 to 43.0% during 2000 due primarily to
the increased operating costs associated with the leased hotels. As a result of
the Equity Inns Conversion effective January 1, 2001, lodging expenses related
to the leased hotels will no longer be reflected in the financial statements of
the Company. Instead, the Company will record revenues from management fees
only. Therefore, lodging expenses incurred in 2001 will be substantially
reduced.

General and administrative expenses are associated with the management of
hotels and consist primarily of centralized management expenses such as
operations management, sales and marketing, finance and other hotel support
services, as well as general corporate expenses. General and administrative
expenses increased by $0.8 million, or 5.9%, from $14.1 million in 1999 to $14.9
million in 2000. During 2000, the Company incurred legal and accounting expenses
of approximately $0.4 million in connection with the Equity Inns Conversion and
other related transactions contemplated under the Securities Purchase Agreement,
and recorded approximately $1.0 million of reserves for uncollectible
receivables. In addition, the Company incurred an expense of $1.4 million during
2000, compared to $2.0 million during 1999, for a deficiency between the amount
of premiums received as compared to actual and estimated claims incurred under
the Company's self-insured health and welfare plan. General and administrative
expenses as a percentage of revenues increased to 6.1% during 2000 compared to
5.9% during 1999.

Payroll and related benefits increased by $3.1 million, or 15.7%, from
$19.6 million in 1999 to $22.7 million in 2000. During 2000, the Company
recorded incremental compensation charges of $0.7 million related to restricted
stock for two executives that became fully vested in accordance with amended
employment agreements resulting from transactions contemplated under the
Securities Purchase Agreement. In addition, the increase in payroll and related
benefits was partially due to the addition of the Company's Chief Executive
Officer and three marketing and development vice-presidents who were hired after
the Spin-off. Payroll and related benefits as a percentage of revenues increased
to 9.2% during 2000 compared to 8.2% during 1999.

Lease expense represents base rent and participating rent that is based on
a percentage of rooms and food and beverage revenues from the leased hotels,
adjusted for increases in the consumer price index. Lease expense decreased by
$0.6 million, or 0.7%, from $89.2 million in 1999 to $88.6 million in 2000.
During 2000, the Company paid additional incentive rent of $0.5 million to
Equity Inns in connection with the sale of one of the Company's leased hotels by
Equity Inns. In addition, the impact on lease expense related to the increase in
lodging revenues during 2000 was offset by a $2.0 million one-time charge that
was incurred by the Company in 1999 for additional incentive rent paid in
settlement of a dispute with Equity Inns resulting from the Merger. As a result
of the Equity Inns Conversion effective January 1, 2001, the Company will no
longer incur lease expense related to the leased hotels in 2001.

Depreciation and amortization decreased by $4.7 million, or 22.8%, from
$20.8 million in 1999 to $16.1 million in 2000. In the fourth quarter of 1999
and the third quarter of 2000, the Company incurred non-cash impairment losses
related to the Company's leased hotel intangible assets in the amounts of $16.4
million and $12.6 million, respectively. These losses reduced the Company's
investment in lease agreements that resulted in decreased amortization by $4.2
million in 2000. In addition, the Company accounted for the Wyndham Redemption
using the purchase method of accounting, which resulted in a reduction of the
carrying value of long-term intangible assets related to the Company's
investment in management agreements of $14.1 million. As a result, amortization
decreased by $0.9 million in the fourth quarter of 2000. The Company expects
depreciation and amortization to be further reduced in 2001 by the full year
effect of the transactions set forth above.
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Joint Venture start-up costs of $2.1 million in 2000, net of a $0.8 million
reimbursement from the Joint Venture, include the legal, investment banking and
other costs incurred by the Company in connection with the start-up of the Joint
Venture.

The impairment loss of $12.6 million in 2000 represents a non-cash
impairment charge on the non-monetary exchange of the Company's hotel lease
agreements for management agreements. As discussed above under the caption
"Equity Inns Conversion", the lease agreements for the 75 hotels leased from
Equity Inns were terminated and the Company entered into management agreements
for 54 of the hotels formerly leased to the Company effective as of January 1,
2001. The Company believes that eliminating the risk of potential operating
losses in the future under the leases and replacing them with management fee
revenue will positively impact future cash flows and profitability.

As a result of the changes noted above, an operating loss of $26.8 million
was incurred in 2000 as compared to an operating loss of $27.2 million in 1999.

Other income in 1999 consisted primarily of equity in earnings from The
Charles Hotel Complex, which was sold on June 18, 1999. In 2000, the Company
recorded $0.2 million in equity losses related to three non-controlling equity
investments that the Company acquired during 2000.

Loss on sale of investment in hotel real estate in 1999 resulted from the
sale of the Company's equity interests in The Charles Hotel Complex.

Income tax benefit for both 1999 and 2000 was computed based on an
effective tax rate of 40% after reduction of minority interest, except for the
$0.9 million loss on the sale of equity interests in The Charles Hotel Complex
in 1999, which was allocated 100% to Wyndham.

Minority interest in 2000 reflects Wyndham's 55% non-controlling interest
in IH LLC through October 31, 2000, and Wyndham's 1.6627% interest thereafter.
In addition, an additional one-time $0.6 million was charged to minority
interest and distributed to Wyndham during 2000. Minority interest in 1999
reflects the $0.9 million loss on the sale of equity interests in The Charles
Hotel Complex that was allocated 100% to Wyndham, in addition to Wyndham's 55%
non-controlling interest in IH LLC that it retained after the Spin-off. The
Company expects that allocations to minority interests will substantially
decrease in 2001 as a result of the Wyndham Redemption.

As a result of the changes noted above, a net loss of $8.9 million was
incurred in 2000 as compared to a net loss of $7.6 million in 1999.

HISTORICAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO HISTORICAL YEAR ENDED
DECEMBER 31, 1998

Lodging revenues increased slightly to $194.4 million in 1999 partially due
to revenues of $0.4 million for one hotel acquired by the Company on November 1,
1999. The increase was offset by the net loss of ten hotel operating leases
since January 1, 1998, increased competition and general negative trends in the
limited-service hotel sector. In addition, some of the Company's leased hotels
underwent renovations, which reduced rooms available and negatively impacted
operating results.

Net management fees decreased by $7.5 million, or 18.4%, from $40.8 million
in 1998 to $33.3 in 1999. This decrease was due to the net loss of 53 management
contracts since January 1, 1998, which included 29 hotels whose management was
transferred to either Wyndham or Marriott in connection with the Merger and
Spin-off. Contributing to the net loss of management contracts was the
uncertainty surrounding the timing and completion of the Merger and subsequent
Spin-off, which impaired the Company's ability to add new management contracts.
Other fees decreased by $7.8 million, or 38.0%, from $20.5 million in 1998 to
$12.7 million in 1999. This decrease was due to the decrease in the total number
of hotels operated by the Company in 1999 as compared to 1998. A significant
portion of this decrease resulted from a decrease in insurance revenues, which
decreased by $3.8 million from 1998 to 1999. This decrease was primarily due to
the decrease in the total number of hotels operated by the Company in 1999 as
compared to 1998 and a reduction in the amount of financial indemnity revenue
for the Company's self-insured health and welfare plan.

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Lodging expenses increased by $6.9 million, or 6.8%, from $100.6 million in
1998 to $107.5 million in 1999. This increase was partially due to incremental
expenses related to one hotel acquired by the Company on November 1, 1999. For
the leased hotels, increased competition resulting from an increased supply of
limited-service hotels in certain markets required higher operating costs to
maintain revenue levels during 1999. In addition, the Company entered into
leases for two newly constructed hotels during 1999 which incurred expenses of
approximately $8.5 million. The operating margin of the leased and owned hotels
decreased from 48.1% during 1998 to 44.7% during 1999 due primarily to the
increased costs associated with the leased hotels. The Company expects the
increased competition and over-supply of limited-service hotels to continue to
affect negatively the future operating margin of the Company's leased hotels.

General and administrative expenses increased by $2.2 million, or 17.9%,
from $11.9 million in 1998 to $14.1 million in 1999. This increase resulted in
part from a $2.0 million deficiency between the amount of premiums received as
compared to actual and estimated claims incurred under the Company's
self-insured health and welfare plan. General and administrative expenses as a
percentage of revenues increased to 5.8% during 1999 compared to 4.7% during
1998. This increase was primarily due to the decrease in total revenues and the
increase in general and administrative expenses.

Payroll and related benefits decreased by $1.8 million, or 8.4%, from $21.4
million in 1998 to $19.6 million in 1999. This decrease was due to elimination
of salaries and related benefits of employees who were terminated subsequent to
the Merger and whose positions have been eliminated. Payroll and related
benefits as a percentage of revenues decreased slightly to 8.2% during 1999
compared to 8.4% during 1998.

Depreciation and amortization increased by $8.0 million from $12.8 million
in 1998 to $20.8 million in 1999. This increase was due to incremental
amortization of $5.9 million related to management contract costs associated
with the step-up in basis arising from the allocation of Merger consideration.
The management contract costs have been stated at their estimated fair market
values and are being amortized using the straight-line method over five years.
In addition, accelerated amortization of $2.0 million was incurred in 1999
related to three leased hotels that were sold by Equity Inns, Inc. Future
terminations of hotel leases by Equity Inns, Inc. could result in accelerated
amortization of the remaining leased hotel intangible assets.

The loss on impairment of investment in hotel lease contracts of $16.4
million in 1999 represents a non-cash impairment loss related to the Company's
leased hotel intangible assets. The loss was the result of a permanent
impairment of the future profitability of 42 of the Company's leased hotels for
the remainder of the hotel lease contract terms. These hotels had experienced
lower than expected operating cash flows during 1999, primarily due to decreased
occupancy rates and higher operating costs resulting from a significant over-
supply of mid-scale, upper economy and budget hotels in certain markets.
Management will continue to evaluate the recoverability of the remaining leased
hotel intangible assets on a quarterly basis based on the financial results of
these properties compared to future expectations. A significant decrease in
occupancy rates or average daily room rates or a significant increase in
operating costs from expectations could trigger future impairment.

Operating income decreased by $49.9 million from $22.7 million in 1998 to
an operating loss of $27.2 million in 1999. This decrease is primarily due to
the decrease in total revenues and the increase in operating expenses from 1998
to 1999, including the loss on impairment of investment in hotel lease
contracts, as discussed above.

Other income consists primarily of equity in earnings from The Charles
Hotel Complex.

Loss on sale of investment in hotel real estate resulted from the sale of
the Company's equity interests in The Charles Hotel Complex on June 18, 1999.
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Income tax expense (benefit) for both 1998 and 1999 was computed based on
an effective tax rate of 40% after reduction of minority interest, except for
the $0.9 million loss on the sale of equity interests in The Charles Hotel
Complex in 1999, which was allocated 100% to Wyndham.

Minority interest in 1999 primarily reflects Wyndham's 55% non-controlling
interest in IH LLC that it retained after the Spin-off.

As a result of the changes noted above, a net loss of $7.6 million was
incurred in 1999 as compared to net income of $14.9 million in 1998.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and cash equivalent assets were $51.3 million at
December 31, 2000 compared to $22.4 million at December 31, 1999 and current
assets exceeded current liabilities by $24.0 million at December 31, 2000. At
December 31, 2000, the Company's cash and cash equivalents includes $7.6 million
of escrowed funds that are payable to Wyndham in July 2001 in connection with
the Wyndham Redemption. In addition, the Company has committed to invest $25.0
million of its cash and cash equivalents into the Joint Venture with the
Investor.

The Company's principal source of liquidity during 2000 was cash from
operations and proceeds received from the issuance of the Notes and the
Preferred Stock and from the issuance of long-term debt. Net cash provided by
operating activities was $10.1 million during 2000 compared to $23.8 million
during 1999. The decrease resulted primarily from a decrease in operating income
(adjusted for non-cash items) of $7.4 million from 1999 to 2000, and a decrease
of $6.3 million in cash provided by changes in assets and liabilities.

Net cash of $30.2 million was provided by financing activities during 2000
compared to $7.1 million during 1999. In the first quarter of 2000, the Company
entered into a $7.6 million limited-recourse mortgage note that is
collateralized by the Pittsburgh Airport Residence Inn by Marriott, which was
acquired by the Company in November 1999. The mortgage note is payable in
monthly installments through February 2002. In addition, the Company received
proceeds from the issuance of the Notes and the Preferred Stock in the amounts
of $25.0 million and $5.0 million, respectively, net of financing fees and
issuance costs paid of $2.7 million. The Notes and Preferred Stock are
convertible at any time to Class A Common Stock. The Notes mature in October
2007 and the Preferred Stock must be mandatorily redeemed no later than October
2007. These proceeds were offset by a $3.9 million payment to Wyndham in the
second quarter of 2000 which represents Wyndham's 55% cash flow distribution
from IH LLC for the period from the Spin-off through December 31, 1999.

Net cash of $11.4 million was used by investing activities during 2000
compared to $10.1 million during 1999. During 2000, the Company invested $9.0
million for minority equity investments in three hotels. During 1999, the
Company received $13.6 million of proceeds from the sale of equity interests in
The Charles Hotel Complex. This amount was offset by the Company's acquisition
of one hotel for a total acquisition cost, including closing costs, of $13.0
million and $8.9 million of amounts paid in connection with the Merger and
Spin-off. The Company's capital expenditure budget for the year ending December
31, 2001 is approximately $0.2 million consisting primarily of expenditures for
computer and systems-related equipment. In addition, the Company has committed
to invest $25.0 million of the total proceeds received from the issuance of the
Notes and the Preferred Stock into the Joint Venture with the Investor. Such
amount is expected to be invested concurrently with the closings of hotel
property acquisitions.

In accordance with the terms of IH LLC's limited liability company
agreement, and prior to the execution of the Wyndham Redemption, the Company was
required to distribute 55% of IH LLC's cash flows from operations to Wyndham.
The Company's required distribution to Wyndham for the period from the January
1, 2000 through October 31, 2000 totaled $2.5 million and is expected to be paid
in the second quarter of 2001. In addition, the agreement required the Company
to allocate between IH LLC and the Company the costs and expenses relating to
services provided by one party for the benefit of the other in accordance with
generally accepted accounting principles, on the basis of which party benefited
from the expenditure. To the extent that the allocation of any such costs and
expenses, including general and administrative expenses, could not be fairly
apportioned, IH LLC and the Company were required to allocate such costs and
expenses based
16
18

upon their respective gross revenues, so that each party's profit margins are
substantially the same for similar services. During 2000, the Company reached an
agreement with Wyndham with respect to such allocation of costs and expenses
between IH LLC and the Company. As a result, the Company recorded a one-time
$0.6 million charge to minority interest in the second quarter, which represents
a settlement of expense allocations for the period from January 1, 2000 through
April 30, 2000.

On August 31, 2000, the Company reached an agreement with Wyndham providing
for the redemption over time of Wyndham's entire 55% interest in IH LLC for
approximately $12.7 million. Pursuant to such agreement, on October 20, 2000, IH
LLC's limited liability company agreement was amended and restated to provide,
among other things, that a) a portion of Wyndham's interest was redeemed, b)
substantially all of Wyndham's remaining interest in IH LLC was converted to a
preferred membership interest earning a quarterly yield equal to the yield
earned by the Company on certain escrowed funds until the date of redemption of
such preferred interest on or after July 1, 2001, and c) the remainder of
Wyndham's interest, comprising a 1.6627% common interest in IH LLC, is entitled
to receive its percentage share of cash distributions after payment of the
quarterly yield on Wyndham's preferred interest, until the date of redemption of
such common interest on or after July 1, 2004.

The Company intends to pursue future opportunities to manage hotels on
behalf of third-party owners, including through the Joint Venture, as well as
pursue other business opportunities, such as selective hotel investments and the
formation of strategic alliances. Such opportunities may require capital
investments by the Company. The Company believes that the proceeds from the
issuance of the Notes and the Preferred Stock, together with the planned credit
facility with Lehman, cash on hand and future cash flows from operations, will
be sufficient to pursue its business strategy and to fund its presently
foreseeable capital requirements.

On March 27, 2001, the Company acquired a non-controlling 0.5% general
partnership interest and a non-controlling 49.5% limited partnership interest in
a limited partnership (the "Partnership") that owns seven Marriott-branded
hotels and one Hampton Inn hotel, for a total acquisition cost, including
closing costs, of approximately $8.3 million. FelCor Lodging Trust Incorporated
("FelCor") owns the other 50% of the Partnership. The eight hotels are:
Fairfield Inn Scottsdale-Downtown, Arizona; Courtyard by Marriott
Atlanta-Downtown, Georgia; Fairfield Inn Atlanta-Downtown, Georgia; Fairfield
Inn Dallas-Regal Row, Texas; Courtyard by Marriott Houston-Near the Galleria,
Texas; Fairfield Inn Houston-Near the Galleria, Texas; Fairfield Inn Houston
I-10-East, Texas; and Hampton Inn Houston I-10-East, Texas. The hotels are
leased to newly formed entities also owned 50% by FelCor and 50% by the Company,
and have been managed by the Company since January 1, 2001. The Company used
cash on hand, as well as a $4.2 million loan from FelCor, to fund the
acquisition.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The quantitative and qualitative disclosures required by this item and by
Rule 305 of SEC Regulation S-K are not material to the Company at this time. The
Company does not have any foreign currency or commodities contracts. Interest
rates governing the majority of the Company's debt are fixed and therefore not
subject to market risk.

17
19

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is set forth in the Company's
Consolidated Financial Statements and Supplementary Data contained in this
Report and is incorporated herein by reference. Specific financial statements
and supplementary data can be found at the pages listed below:

PAGE
----

Report of Independent Accountants........................... F-1
Consolidated Balance Sheets as of December 31, 1999 and
2000...................................................... F-2
Consolidated Statements of Operations for the period from
January 1, 1998 to June 1, 1998, for the period from June
2, 1998 to December 31, 1998 and for the years ended
December 31, 1999 and 2000................................ F-3
Consolidated Statements of Stockholders' Equity for the
period from January 1, 1998 to June 1, 1998, for the
period from June 2, 1998 to December 31, 1998 and for the
years ended December 31, 1999 and 2000.................... F-4
Consolidated Statements of Cash Flows for the period from
January 1, 1998 to June 1, 1998, for the period from June
2, 1998 to December 31, 1998 and for the years ended
December 31, 1999 and 2000................................ F-5
Notes to Consolidated Financial Statements.................. F-6

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

None.

18
20

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is set forth under the caption
"Election of Directors--Nominees for Election of Directors" and "--Executive
Officers Who Are Not Directors" in the Company's Proxy Statement for the 2001
Annual Meeting of Stockholders to be held on June 14, 2001 (the "Proxy
Statement") and incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is set forth under the caption
"Election of Directors--Executive Compensation" in the Proxy Statement and
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is set forth under the caption
"Election of Directors--Beneficial Ownership of Common Stock" in the Proxy
Statement and incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is set forth under the caption
"Election of Directors--Certain Relationships and Related Transactions" in the
Proxy Statement and incorporated herein by reference.

19
21

PART IV

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

(a) The following documents are filed as part of this Report.

1. Financial Statements

The list of financial statements required by this item is set forth
in Item 8, "Consolidated Financial Statements and Supplementary Data,"
and is incorporated herein by reference.

2. Financial Statement Schedules

All financial statement schedules are omitted as they are either
not applicable or the required information is included in the
consolidated financial statements or the notes thereto.

3. Exhibits

EXHIBIT NO. DESCRIPTION
- ----------- -----------

2.1 Distribution Agreement, dated as of June 18, 1999, by and
among Patriot American Hospitality, Inc., Wyndham
International, Inc., the Company and Interstate Hotels,
LLC(1)
3.1 Articles of Amendment and Restatement of the Company(1)
3.2 Articles Supplementary Classifying and Designating Series A
Junior A Participating Cumulative Preferred Stock(2)
3.3 Form of Articles Supplementary to the Charter of the Company
Designating the Series B Convertible Preferred Stock(3)
3.4 Articles Supplementary to the Charter of the Company
amending authorized number of shares of stock
3.5 Second Amended and Restated Bylaws of the Company, adopted
and effective as of August 31, 2000 and amended as of
October 12, 2000(4)
4.1 Shareholder Rights Agreement, dated as of July 8, 1999, by
and between the Company and American Stock Transfer and
Trust Company, as Rights Agent(2)
4.2 Amendment No. 1, effective as of August 31, 2000, to the
Rights Agreement, dated as of July 8, 1999, by and between
the Company and American Stock Transfer and Trust Company(5)
10.1 Form of Limited Liability Company Agreement of IHC II,
LLC(6)
10.2 Amended and Restated Limited Liability Company Agreement,
dated as of June 18, 1999, of Interstate Hotels, LLC(1)
10.3 Voting Agreement, dated as of June 18, 1999, by and among
the Company and the identified stockholders of the
Company(1)
10.4 Form of Owner Agreement among Patriot American Hospitality
Partnership, L.P., Wyndham International Operating
Partnership, L.P., IHC II, LLC and Marriott International,
Inc./Marriott Hotel Services, Inc.(6)
10.5 Form of Lease Agreement(6)
10.6 Form of Management Agreement among Wyndham International
Operating Partnership, L.P. and IHC II, LLC(6)
10.7 Form of Submanagement Agreement among Marriott
International, Inc./Marriott Hotel Services, Inc. and IHC
II, LLC(6)
10.8 Form of Interstate Hotels Corporation Guaranty(6)
10.9 Settlement Agreement, dated as of May 27, 1998, by and among
Marriott International, Inc., the Company, Interstate Hotels
Company, Patriot American Hospitality, Inc. and Wyndham
International, Inc.(6)
10.10 First Amendment to Settlement Agreement dated as of August
26, 1998(6)

20
22

EXHIBIT NO. DESCRIPTION
- ----------- -----------

10.11 Second Amendment to Settlement Agreement dated as of October
29, 1998(6)
10.12 Third Amendment to Settlement Agreement dated as of January
6, 1999(6)
10.13 Fourth Amendment to Settlement Agreement dated as of March
11, 1999(6)
10.14 Fifth Amendment to Settlement Agreement dated as of April
23, 1999(6)
10.15 Sixth Amendment to Settlement Agreement dated as of May 14,
1999(6)
10.16 Employment Agreement, dated as of December 1, 1998, by and
between Interstate Hotels Management, Inc. and Henry L.
Ciaffone(6)
10.17 Employment Agreement, dated as of June 2, 1998, by and
between Interstate Hotels Management, Inc. and Charles R.
Tomb, as amended(6)
10.18 Interstate Hotels Corporation 1999 Equity Incentive Plan(1)
10.18.1 Form of Standard Stock Option Agreement(1)
10.18.2 Form of Stock Option Agreement for certain employees with
employment agreements(1)
10.19 Interstate Hotels Corporation Employee Stock Purchase
Plan(1)
10.20 Asset Purchase Agreement, dated as of May 7, 1999, by and
among IHC/Chaz Corporation, PAH-Management Corporation and
F&H Realty, LLC(7)
10.21 Instrument of Assignment and Assumption, dated as of June
18, 1999, by and among IHC/Chaz Corporation and
PAH-Management Corporation in favor of Interstate Hotels,
LLC(7)
10.22 Instrument of Assignment and Assumption, dated as of June
18, 1999, by and among F&H Realty, LLC in favor of F&H GP
Corporation(7)
10.23 Certificate and Agreement, dated as of November 1, 1999, by
and among Syracuse Office Associates, L.P.
Syracuse/Pittsburgh Hotel Holdings, L.L.C., Interstate
Property Partnership, L.P. and the Company(8)
10.24 Assignment and Assumption of Membership Interest, effective
as of November 1, 1999, by and among Syracuse Office
Associates, L.P. and Interstate Property Partnership,
L.P.(8)
10.25 Loan Agreement by and between Interstate Pittsburgh Hotel
Holdings, L.L.C. and PNC Bank, National Association, dated
as of February 14, 2000(9)
10.25.1 First Amendment to Loan Agreement by and between Interstate
Pittsburgh Hotel Holdings, L.L.C. and PNC Bank, National
Association, dated as of December 15, 2000
10.26 Open-End Mortgage and Security Agreement by Interstate
Pittsburgh Hotel Holdings, L.L.C. in favor of PNC Bank,
National Association, dated as of February 14, 2000(9)
10.27 Agreement of Guaranty by Suretyship by the Company dated as
of February 14, 2000(9)
10.27.1 First Amendment to and Confirmation of Agreement of Guaranty
and Suretyship by and between Interstate Hotels Corporation
and PNC Bank, National Association, dated as of December 15,
2000
10.28 Conversion and Redemption Agreement, dated as of August 31,
2000, by and among Interstate Hotels, LLC, PAH-Interstate
Holdings, Inc., Wyndham International, Inc., Patriot
American Hospitality, Inc., Northridge Holdings, Inc. and
the Company(5)
10.29 Securities Purchase Agreement, dated as of August 31, 2000,
by and among the Company and CGLH Partners I LP and CGLH
Partners II LP(3)
10.30 Amended and Restated Employment Agreement, dated as of
August 31, 2000, by and between the Company and Kevin P.
Kilkeary(4)
10.31 Amended and Restated Employment Agreement, dated as of
August 31, 2000, by and between the Company and J. William
Richardson(5)

21
23

EXHIBIT NO. DESCRIPTION
- ----------- -----------

10.32 Amended and Restated Employment Agreement, dated as of
August 31, 2000, by and between the Company and Thomas F.
Hewitt(4)
10.33 Stockholders Agreement, dated as of August 31, 2000, by and
among Thomas F. Hewitt, J. William Richardson and Kevin P.
Kilkeary, as stockholders, and CGLH Partners I LP and CGLH
Partners II LP(5)
10.34 Form of 8.75% Subordinated Convertible Note due 2007(3)
10.35 Form of Investor Agreement by and among the Company and CGLH
Partners I LP and CGLH Partners II LP(3)
10.36 Form of Registration Rights Agreement by and among the
Company and CGLH Partners I LP and CGLH Partners II LP(5)
10.37 Form of Agreement of Limited Partnership of CGLH-IHC Fund I,
L.P. by and among CGLH Partners III LP, as managing general
partner, Interstate Investment Corporation, as general
partner, CGLH Partners IV LP, Interstate Property
Partnership, L.P., J. William Richardson and Thomas F.
Hewitt, as limited partners(5)
21.1 List of Subsidiaries of Interstate Hotels Corporation
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Powers of Attorney

- ---------------

(1) Filed previously as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1999, and
incorporated herein by reference.

(2) Filed previously as an exhibit to the Company's Current Report on Form
8-K, dated July 8, 1999, and incorporated herein by reference.

(3) Filed previously as an appendix to the Company's Proxy Statement on
Schedule 14A for Special Meeting of Stockholders, dated September 15,
2000, and incorporated herein by reference.

(4) Filed previously as an exhibit to the Company's Quarterly Report of
Form 10-Q for the quarterly period ended September 30, 2000, and
incorporated herein by reference.

(5) Filed previously as an exhibit to the Company's Current Report on Form
8-K, dated August 31, 2000, and incorporated herein by reference.

(6) Filed previously as an exhibit to the Company's Registration Statement
on Form S-1, as amended (Registration No. 333-67065), and incorporated
herein by reference.

(7) Filed previously as an exhibit to the Company's Current Report on Form
8-K, dated June 18, 1999, and incorporated herein by reference.

(8) Filed previously as an exhibit to the Company's Current Report on Form
8-K, dated November 1, 1999, and incorporated herein by reference.

(9) Filed previously as an exhibit to the Company's Quarterly Report of
Form 10-Q for the quarterly period ended March 31, 2000, and
incorporated herein by reference.

(b) Reports on Form 8-K

During the three months ended December 31, 2000, the Company filed the
following Current Reports on Form 8-K:

1. Form 8-K, dated October 10, 2000, under Item 5.

2. Form 8-K, dated October 12, 2000, under Item 5.

3. Form 8-K, dated October 13, 2000, under Item 5.

22
24

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Pittsburgh, in the Commonwealth of Pennsylvania, on March 30, 2001.

INTERSTATE HOTELS CORPORATION

By: /s/ J. WILLIAM RICHARDSON
------------------------------------
J. William Richardson
Vice Chairman and Chief Financial
Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Company and in the capacities and on the dates indicated.

SIGNATURES TITLE DATE
---------- ----- ----

* Chief Executive Officer and Chairman March 30, 2001
- ------------------------------------- of the Board of Directors (Principal
Thomas F. Hewitt Executive Officer)

/s/ J. WILLIAM RICHARDSON Vice Chairman, Chief Financial March 30, 2001
- ------------------------------------- Officer and Director (Principal
J. William Richardson Financial and Accounting Officer)

* Director March 30, 2001
- -------------------------------------
Karim J. Alibhai

* Director March 30, 2001
- -------------------------------------
Michael L. Ashner

* Director March 30, 2001
- -------------------------------------
Joseph J. Flannery

* Director March 30, 2001
- -------------------------------------
Benjamin D. Holloway

* Director March 30, 2001
- -------------------------------------
Stephen P. Joyce

* Director March 30, 2001
- -------------------------------------
Alan J. Kanders

* Director March 30, 2001
- -------------------------------------
Mahmood J. Khimji

* Director March 30, 2001
- -------------------------------------
Phillip H. McNeill, Sr.

* Director March 30, 2001
- -------------------------------------
Sherwood M. Weiser

* The undersigned, by signing his name hereto, does sign and execute this Annual
Report on Form 10-K pursuant to the powers of attorney executed by the
above-named officers and directors and filed herewith.

By: /s/ J. WILLIAM RICHARDSON
------------------------------------
J. William Richardson
Attorney-in-Fact

23
25

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of
Interstate Hotels Corporation:

We have audited the accompanying consolidated balance sheets of Interstate
Hotels Corporation (together with its subsidiaries and predecessors, the
"Company"), as described in Note 1 of the consolidated financial statements, as
of December 31, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended December 31,
2000 and 1999 and for the period from January 1, 1998 to June 1, 1998 and for
the period from June 2, 1998 to 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 audits.

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

As discussed in Note 1, the Company was not a separate legal entity prior to
June 18, 1999. The accompanying consolidated financial statements have been
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission and are not intended to be a complete
presentation of the consolidated financial statements of Interstate Hotels
Company or its affiliates.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at December 31, 2000 and 1999, and the consolidated results of their
operations and their cash flows for the years ended December 31, 2000 and 1999
and for the period from January 1, 1998 to June 1, 1998 and for the period from
June 2, 1998 to December 31, 1998, in conformity with accounting principles
generally accepted in the United States of America.

/s/ PRICEWATERHOUSECOOPERS LLP

600 Grant Street
Pittsburgh, Pennsylvania
February 20, 2001, except for Note 25,
as to which the date
is March 27, 2001

F-1
26

INTERSTATE HOTELS CORPORATION

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

DECEMBER 31,
--------------------
1999 2000
-------- --------

ASSETS
Current assets:
Cash and cash equivalents................................. $ 22,440 $ 51,327
Accounts receivable, net of allowance for doubtful
accounts of $486 in 1999 and
$542 in 2000............................................ 16,779 17,066
Deferred income taxes..................................... 1,172 1,891
Net investment in direct financing leases................. 464 248
Prepaid expenses and other assets......................... 1,148 1,039
Related party receivables -- management contracts......... 423 300
-------- --------
Total current assets.................................. 42,426 71,871
Restricted cash............................................. 1,701 2,173
Marketable securities....................................... 2,134 2,289
Property and equipment, net................................. 16,049 15,084
Officers and employees notes receivable..................... 3,541 3,442
Affiliates notes receivable, net of reserve for
uncollectible notes receivable of $666 in 2000............ 10,838 10,235
Net investment in direct financing leases................... 928 495
Equity investments in hotel real estate..................... -- 8,779
Deferred income taxes....................................... -- 3,086
Intangible and other assets................................. 64,842 26,519
-------- --------
Total assets.......................................... $142,459 $143,973
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade................................. 3,430 2,922
Accounts payable -- health trust.......................... 3,358 4,459
Accounts payable -- related parties....................... 3,991 2,473
Accrued payroll and related benefits...................... 8,252 9,992
Accrued rent.............................................. 5,348 5,227
Other accrued liabilities................................. 12,486 14,449
Current portion of long-term debt......................... -- 8,343
-------- --------
Total current liabilities............................. 36,865 47,865
Deferred income taxes....................................... 2,454 --
Deferred compensation....................................... 2,134 2,289
Long-term debt.............................................. -- 36,820
-------- --------
Total liabilities..................................... 41,453 86,974
Minority interest........................................... 41,000 433
Mandatorily redeemable preferred stock...................... -- 4,708
Commitments and contingencies............................... -- --
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; no shares issued or outstanding at December
31, 1999 and 2000....................................... -- --
Common stock, $.01 par value; 64,939,361 shares
authorized; 6,394,996 and 6,399,744 shares issued and
outstanding at December 31, 1999 and 2000,
respectively............................................ 64 64
Paid-in capital........................................... 66,705 66,725
Retained deficit.......................................... (5,889) (14,931)
Unearned compensation..................................... (874) --
-------- --------
Total stockholders' equity............................ 60,006 51,858
-------- --------
Total liabilities and stockholders' equity............ $142,459 $143,973
======== ========

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

F-2
27

INTERSTATE HOTELS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

PREDECESSOR SUCCESSOR
--------------- -----------------------------------------------
PERIOD FROM
-----------------------------------
JANUARY 1, 1998 JUNE 2, 1998 YEAR ENDED YEAR ENDED
TO TO DECEMBER 31, DECEMBER 31,
JUNE 1, 1998 DECEMBER 31, 1998 1999 2000
--------------- ----------------- ------------ ------------

Lodging revenues:
Rooms..................................... $ 74,265 $108,698 $183,695 $191,811
Other departmental........................ 4,504 6,455 10,693 11,661
Net management fees......................... 18,018 22,763 33,275 29,481
Other fees.................................. 9,976 10,478 12,691 13,159
-------- -------- -------- --------
106,763 148,394 240,354 246,112
-------- -------- -------- --------
Lodging expenses:
Rooms..................................... 16,115 25,114 44,237 47,014
Other departmental........................ 2,674 3,962 6,975 7,238
Property costs............................ 21,045 31,714 56,258 61,767
General and administrative.................. 6,115 5,822 14,069 14,894
Payroll and related benefits................ 10,982 10,439 19,619 22,704
Lease expense............................... 34,515 51,165 89,174 88,594
Depreciation and amortization............... 2,152 10,659 20,833 16,091
Joint Venture start-up costs................ -- -- -- 2,096
Loss on impairment of investment in hotel
lease contracts........................... -- -- 16,406 12,550
-------- -------- -------- --------
93,598 138,875 267,571 272,948
-------- -------- -------- --------
Operating income (loss)..................... 13,165 9,519 (27,217) (26,836)
Other income (expense):
Interest, net............................. 204 390 1,368 1,777
Other, net................................ 474 1,391 1,516 (498)
Loss on sale of investment in hotel real
estate.................................. -- -- (876) --
-------- -------- -------- --------
Income (loss) before income tax expense
(benefit)................................. 13,843 11,300 (25,209) (25,557)
Income tax expense (benefit)................ 5,528 4,436 (5,078) (5,935)
-------- -------- -------- --------
Income (loss) before minority interest...... 8,315 6,864 (20,131) (19,622)
Minority interest........................... 24 209 (12,514) (10,719)
-------- -------- -------- --------
Net income (loss)........................... 8,291 6,655 (7,617) (8,903)
Mandatorily redeemable preferred stock:
Dividends................................. -- -- -- 127
Accretion................................. -- -- -- 12
-------- -------- -------- --------
Net income (loss) available to common
stockholders.............................. $ 8,291 $ 6,655 $ (7,617) $ (9,042)
======== ======== ======== ========
Earnings per common share (Note 17):
Basic....................................... $ (1.40)
========
Diluted..................................... $ (1.40)
========

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

F-3
28

INTERSTATE HOTELS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(IN THOUSANDS)

MANDATORILY
RETAINED REDEEMABLE
COMMON PAID-IN EARNINGS UNEARNED OWNERS' PREFERRED
STOCK CAPITAL (DEFICIT) COMPENSATION EQUITY TOTAL STOCK
----- ------- --------- ------------ ------ ----- -----------

Balance at December 31, 1997.... $-- $ -- $ -- $ -- $ 80,730 $ 80,730 $ --
Net capital distributions..... -- -- -- -- (9,840) (9,840) --
Net income.................... -- -- -- -- 8,291 8,291 --
--- ------- -------- ------- --------- -------- ------
Balance at June 1, 1998......... -- -- -- -- 79,181 79,181 --
Net capital distributions..... -- -- -- -- (49,981) (49,981) --
Change in basis............... -- -- -- -- 56,752 56,752 --
Net income.................... -- -- -- -- 6,655 6,655 --
--- ------- -------- ------- --------- -------- ------
Balance at December 31, 1998.... -- -- -- -- 92,607 92,607 --
Net capital contributions..... -- -- -- -- 25,816 25,816 --
Spin-off transaction.......... 59 63,511 1,728 -- (118,423) (53,125) --
Issuance of common stock...... 2 2,118 -- -- -- 2,120 --
Unearned compensation related
to the issuance of common
stock....................... 3 1,076 -- (1,079) -- -- --
Amortization of unearned
compensation................ -- -- -- 205 -- 205 --
Net loss...................... -- -- (7,617) -- -- (7,617) --
--- ------- -------- ------- --------- -------- ------
Balance at December 31, 1999.... 64 66,705 (5,889) (874) -- 60,006 --
--- ------- -------- ------- --------- -------- ------
Issuance of common stock...... 2 615 -- -- -- 617 --
Common stock repurchased and
retired..................... (2) (595) -- -- -- (597) --
Issuance of mandatorily
redeemable preferred
stock....................... -- -- -- -- -- -- 7,250
Unearned compensation related
to the issuance of
mandatorily redeemable
preferred stock............. -- -- -- -- -- -- (2,250)
Mandatorily redeemable
preferred stock issuance
costs....................... -- -- -- -- -- -- (429)
Mandatorily redeemable
preferred stock accretion... -- -- -- -- -- -- 12
Amortization of unearned
compensation................ -- -- -- 874 -- 874 125
Net loss available to common
stockholders................ -- -- (9,042) -- -- (9,042) --
--- ------- -------- ------- --------- -------- ------
Balance at December 31, 2000.... $64 $66,725 $(14,931) $ -- $ -- $ 51,858 $4,708
=== ======= ======== ======= ========= ======== ======

The accompanying notes are an integral part of the consolidated financial
statements.
F-4
29

INTERSTATE HOTELS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

Cash flows from operating activities:
Net income (loss).................................... $ 8,291 $ 6,655 $ (7,617) $ (8,903)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization...................... 2,152 10,659 20,833 16,091
Equity in (earnings)losses from unconsolidated
subsidiaries..................................... (513) (1,526) (1,525) 522
Loss on impairment of investment in hotel lease
contracts........................................ -- -- 16,406 12,550
Loss on sale of investment in hotel real estate.... -- -- 876 --
Minority interest.................................. 24 209 (12,514) (10,719)
Deferred income taxes.............................. (1,555) 8,346 (3,867) (6,259)
Amortization of restricted common stock and
mandatorily redeemable preferred stock........... -- -- -- 999
Other.............................................. 176 135 165 1,115
Cash (used in) provided by assets and liabilities:
Accounts receivable, net........................... (3,661) 2,552 662 (287)
Prepaid expenses and other assets.................. 307 1,092 (285) 109
Related party receivables.......................... (341) 1,017 662 123
Accounts payable................................... 1,053 (5,181) 4,625 2,333
Accrued liabilities................................ 12,426 (14,365) 5,372 2,406
-------- -------- -------- --------
Net cash provided by operating activities........ 18,359 9,593 23,793 10,080
-------- -------- -------- --------
Cash flows from investing activities:
Net investment in direct financing leases............ 145 (377) 1,115 649
Change in restricted cash............................ 540 (417) 500 (472)
Purchase of property and equipment, net.............. (709) (487) (970) (419)
Acquisition of hotel, net of cash received........... -- -- (12,981) --
Purchases of marketable securities................... -- (10,725) (2,245) (2,435)
Proceeds from sale of marketable securities.......... -- 14,567 1,958 2,449
Proceeds from sale of investment in hotel real
estate............................................. -- -- 13,654 --
Net cash received from (invested in) unconsolidated
subsidiaries....................................... 1,085 (2,327) 1,176 (9,301)
Change in officers and employees notes receivable,
net................................................ (2) (989) (960) (755)
Net investment in management contracts............... (666) (548) (291) (881)
Merger-related acquisition costs..................... -- (26,484) (8,941) --
Change in notes receivable -- affiliates, net........ 2,043 (311) (2,057) (63)
Other................................................ 238 391 (79) (150)
-------- -------- -------- --------
Net cash provided by (used in) investing
activities..................................... 2,674 (27,707) (10,121) (11,378)
-------- -------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt......................... -- -- -- 32,560
Repayment of long-term debt.......................... (180) (190) -- (79)
Proceeds from issuance of common stock............... -- -- 2,120 617
Proceeds from the issuance of mandatorily redeemable
preferred stock.................................... -- -- -- 5,000
Mandatorily redeemable preferred stock issuance costs
paid............................................... -- -- -- (429)
Net (distributions to) contributions from minority
interest........................................... (44) (55) 6,934 (4,592)
Related party payables............................... (9,234) 17,571 (18,597) --
Net contributions from (distributions to) owners..... (9,840) (1,727) 16,659 --
Financing fees paid.................................. -- -- -- (2,295)
Common stock repurchased and retired................. -- -- -- (597)
-------- -------- -------- --------
Net cash (used in) provided by financing
activities..................................... (19,298) 15,599 7,116 30,185
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents... 1,735 (2,515) 20,788 28,887
Cash and cash equivalents at beginning of period....... 2,432 4,167 1,652 22,440
-------- -------- -------- --------
Cash and cash equivalents at end of period............. $ 4,167 $ 1,652 $ 22,440 $ 51,327
======== ======== ======== ========

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

F-5
30

INTERSTATE HOTELS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1. ORGANIZATION AND BASIS OF PRESENTATION:

Interstate Hotels Corporation (together with its subsidiaries and
predecessors, the "Company") was formed pursuant to a series of events
culminating in the spin-off of the Company's operations from Wyndham
International, Inc., formerly Patriot American Hospitality, Inc. ("Wyndham"), on
June 18, 1999. On June 2, 1998, Interstate Hotels Company (the predecessor of
the Company, and together with its subsidiaries, "Old Interstate") merged into
Wyndham (the "Merger"). Prior to the Merger, Marriott International, Inc.
("Marriott") filed a lawsuit to stop the closing of the Merger as a result of a
dispute over certain franchise agreements between Marriott and Old Interstate.
On June 18, 1999, pursuant to a settlement agreement with Marriott, Wyndham
transferred to the Company, which was then a newly formed corporation, the
third-party hotel management business of Old Interstate, equity interests in The
Charles Hotel Complex and long-term leasehold interests in 79 hotels. Wyndham
then spun-off the Company to its shareholders (the "Spin-off"). In connection
with the Spin-off, Marriott purchased 4% of the Company's common stock, Wyndham
retained 4% of the Company's common stock, and the remaining 92% of the
Company's common stock was distributed to Wyndham's shareholders. In addition,
Wyndham continued to own a 55% non-controlling ownership interest in Interstate
Hotels, LLC ("IH LLC"), a subsidiary of the Company and the successor to the
third-party hotel management and leasing businesses conducted by Old Interstate
prior to the Merger.

The financial statements have been prepared using the predecessor basis of
accounting for the period from January 1, 1998 to June 1, 1998 (the "June 1998
period"), and the successor basis of accounting for the period from June 2, 1998
to December 31, 1998 (the "December 1998 period"), as well as for the years
ended December 31, 1999 and 2000, to coincide with the periods before and after
the Merger. The Merger was accounted for using the purchase method of
accounting, and the Merger consideration was allocated by Wyndham on the basis
of the estimated fair market value of the assets of Old Interstate. The Spin-off
was accounted for using the historical basis of accounting. When used herein,
"consolidated financial statements" refers to the historical combined financial
statements of the Company prior to the Spin-off and the historical consolidated
financial statements of the Company thereafter.

Prior to the Spin-off, the Company was not a separate legal entity.
Therefore, the accompanying consolidated financial statements of the Company
have been carved out of Old Interstate's financial statements prior to the
Merger using the predecessor basis of accounting, and from Wyndham's financial
statements subsequent to the Merger through the Spin-off date using the
successor basis of accounting, which gives effect to the allocation of the
Merger consideration. The financial statements include only those assets,
liabilities, revenues and expenses directly attributable to the third-party
hotel management business, the equity interests in The Charles Hotel Complex and
the leased hotels that were retained by the Company in connection with the
Spin-off. These consolidated financial statements have been prepared as if the
Company had operated as a separate entity for all periods presented.

In accordance with IH LLC's limited liability company agreement, and prior
to the execution of the Wyndham Redemption discussed in Note 5, the Company was
required to distribute 55% of IH LLC's cash flows from operations to Wyndham and
allocate between IH LLC and the Company the costs and expenses relating to
services provided by one party for the benefit of the other in accordance with
generally accepted accounting principles, on the basis of which party benefited
from the expenditure during the December 1998 period, the year ended December
31, 1999 and the period from January 1, 2000 to October 31, 2000. To the extent
that the allocation of any such costs and expenses, including general and
administrative expenses, could not be fairly apportioned, IH LLC and the Company
were required to allocate such costs and expenses based upon their respective
gross revenues, so that each party's profit margins are substantially the same
for similar services.

F-6
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1. ORGANIZATION AND BASIS OF PRESENTATION, CONTINUED:

The Company includes the revenues and expenses and the working capital of
the leased hotels in the financial statements because the risk of operating
these hotels is borne by the Company, as lessee, under the terms of the leases.
Revenues and expenses from the operation of the managed hotels are not included
in the financial statements because the hotel management agreements are
generally cancellable, not transferable and do not shift the risks of operation
to the Company. Therefore, the Company records revenues from management fees
only for its managed hotels.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation:

The consolidated financial statements include the accounts of the Company
as described in Note 1. All significant intercompany transactions and balances
have been eliminated in consolidation. Minority interests represent the
proportionate share of the equity that is owned by third parties in entities
controlled by the Company. The net income or loss of such entities is allocated
to the minority interests based on their percentage ownership throughout the
year.

Cash and Cash Equivalents:

All unrestricted, highly liquid investments purchased with a remaining
maturity of three months or less are considered to be cash equivalents. The
Company maintains cash and cash equivalents with various financial institutions
in excess of the amount insured by the Federal Deposit Insurance Corporation.
Management believes the credit risk related to these cash and cash equivalents
is minimal.

At December 31, 2000, the Company's cash and cash equivalents includes
$7,592 of escrowed funds that are payable to Wyndham in July 2001 in connection
with the Wyndham Redemption (see Note 5).

Restricted Cash:

Capital restricted under applicable government insurance regulations is
included in restricted cash, and represents approximately 20% of the annual
insurance premiums written by the Company.

Direct Financing Leases:

Equipment acquired and subsequently leased to hotels under capital leases
is recorded at the net investment in direct financing leases, which represents
the total future minimum lease payments receivable net of unearned income. When
payments are received, the receivable is reduced and the unearned income is
recognized on a pro-rata basis over the life of the lease.

Property and Equipment:

Property and equipment are recorded at cost, which includes the allocated
purchase price for hotel acquisitions, and are depreciated on the straight-line
method over their estimated useful lives. Expenditures for repairs and
maintenance are expensed as incurred. Expenditures for major renewals and
betterments that significantly extend the useful life of existing property and
equipment are capitalized and depreciated. The cost and the related accumulated
depreciation applicable to property no longer in service are eliminated from the
accounts and any gain or loss thereon is included in operations.

F-7
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

Officers and Employees Notes Receivable:

The Company grants loans from time to time to officers and employees, which
are payable upon demand and generally do not bear interest until such demand is
made. Certain notes may be forgiven and expensed provided certain conditions are
satisfied.

Intangible and Other Assets:

Intangible and other assets consist of the amounts paid to obtain
management and lease contracts including the allocation of the Merger
consideration by Wyndham. Intangibles and other assets are amortized on the
straight-line method over the life of the underlying contracts or estimated
useful lives.

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of:

The carrying values of long-lived assets, which include property and
equipment and all intangible assets, are evaluated quarterly in relation to the
operating performance and future undiscounted operating cash flows of the
underlying assets. Adjustments are made if the sum of expected future
undiscounted net cash flows is less than book value.

Deferred Income Taxes:

Deferred income taxes are recorded using the asset and liability method.
Under this method, deferred tax assets and liabilities are provided for the
differences between the financial statement basis and the tax basis of assets
and liabilities using enacted tax rates in effect for the years in which the
differences are expected to reverse.

Income Tax Status:

Prior to the Spin-off, the entities that comprised the Company were
included in the consolidated federal income tax return of either Old Interstate
or Wyndham and all tax liabilities were paid by either Old Interstate or
Wyndham. The income tax provision presented in these consolidated financial
statements through the Spin-off date has been calculated as if the Company had
prepared and filed a separate income tax return for those periods. The income
tax liability for all current income taxes for purposes of these consolidated
financial statements through the Spin-off date have been settled with either Old
Interstate or Wyndham through owners' equity. For periods after the Spin-off,
the Company files a separate consolidated income tax return. Such return
includes an allocation of the operating results of IH LLC based on the Company's
share of the taxable operating results of IH LLC.

The effective tax rate used after the Spin-off is based on the Company's
effective tax rate for the years ended December 31, 1999 and 2000, and varies
from the statutory tax rate as a result of the allocations of the taxable
operating results of IH LLC to minority interests, as discussed above.

Insurance:

Insurance revenues are earned through reinsurance premiums, direct premiums
written and reinsurance premiums ceded. Reinsurance premiums are recognized when
policies are written and any unearned portion of the premium is recognized to
account for the unexpired term of the policy (as-reported basis). Direct
premiums written are recognized pursuant to the underlying policy and
reinsurance premiums ceded are recognized on a pro-rata basis over the life of
the related policies. Unearned premiums represent the portion of premiums
applicable to the unexpired term of policies in force. Losses are provided for
reported claims, claims incurred but not reported and claims settlement expense
at each balance sheet date. Such losses are based on management's estimate of
the ultimate cost of settlement of claims and historical loss rates. Accrued
claims

F-8
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

liabilities are carried at present value without discounting since the contracts
are of a short duration and discounting would not be significant. Actual
liabilities may differ from estimated amounts. Any changes in estimated losses
and settlements are reflected in current earnings.

Owners' Equity:

Owners' equity prior to the Spin-off represents the net equity of Old
Interstate and Wyndham in the Company. Net contributions/distributions from
owners represent non-operating transfers to and from Old Interstate and Wyndham.

Revenue Recognition:

The owned and leased hotels recognize revenue from their rooms, food and
beverage and other departments as earned on the close of each business day. Net
management fees comprise base and incentive management fees received from
third-party owners of hotel properties. The Company recognizes base fees as
revenue when earned in accordance with the management agreement. In accordance
with Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements," base and incentive management fees are accrued as earned
based on the profitability of the hotel, subject to the specific terms of each
individual management agreement.

Reimbursable Expenses:

The Company is reimbursed for costs associated with providing insurance and
risk management services, purchasing and project management services, MIS and
legal support, centralized accounting, training and relocation programs to the
owned, managed and leased hotels. These revenues are included in other fees and
the corresponding costs are included in general and administrative and payroll
and related benefits in the consolidated statements of operations.

Financial Instruments:

As a policy, the Company does not engage in speculative or leveraged
transactions, nor does the Company hold or issue financial instruments for
trading purposes.

Use of Estimates:

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

3. WYNDHAM MERGER:

In connection with the Merger, Wyndham allocated the Merger consideration
on the basis of the estimated fair market value of the assets of Old Interstate.
The fair market value of these assets was determined using historical and
projected cash flow and earnings at then current market multiples and discount
rates. As a result, on June 2, 1998, Old Interstate recorded an additional
intangible asset related to management contracts of $69,862, a net decrease in
other assets of $7,652 related to hotel leases and a net deferred tax liability
of $5,458, resulting in a net increase to owners' equity of $56,752 ("Change in
Basis"). The intangible asset related to the management contracts was being
amortized over five years, based on the

F-9
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

3. WYNDHAM MERGER, CONTINUED:

average remaining contract term, and the intangible asset related to the leased
hotels was being amortized over the average remaining periods of the leases of
11 and 13.5 years, beginning June 2, 1998.

Merger-related costs incurred by Old Interstate were not reflected in the
accompanying consolidated statement of operations for the June 1998 period, as
they did not relate specifically to ongoing business.

The following unaudited pro forma information is presented to include the
effects of the Spin-off, the sale of equity interests in The Charles Hotel
Complex and certain other adjustments as if all of the transactions had occurred
on January 1, 1999. Such other adjustments principally include the elimination
and addition of certain management fee and other fee revenues related to
Wyndham-owned hotels, the management of which was transferred to Wyndham,
Marriott or the Company as a result of the Spin-off. The adjustments also
include the elimination of a $2,000 one-time charge for additional incentive
lease expense paid in settlement of a dispute with Equity Inns, Inc. resulting
from the Merger, and the addition of minority interest to reflect Wyndham's 55%
non-controlling interest in IH LLC prior to the Spin-off. In management's
opinion, all material pro forma adjustments necessary to reflect the effects of
these transactions have been made. No unaudited pro forma information is
presented for the year ended December 31, 2000 since the adjustments described
above would not have impacted the historical results of operations. The
unaudited pro forma information does not include earnings on the Company's pro
forma cash and cash equivalents or certain one-time charges to income relating
to the Merger, and does not purport to present what the actual results of
operations of the Company would have been if the previously mentioned
transactions had occurred on such date or to project the results of operations
of the Company for any future period.

YEAR ENDED
DECEMBER 31, 1999
-----------------

Total revenues............................................. $235,389
Operating loss............................................. (31,076)
Net loss................................................... (7,805)
Basic earnings per common share............................ (1.22)
Diluted earnings per common share.......................... (1.22)

4. INVESTOR TRANSACTION:

Securities Purchase Agreement:

On October 20, 2000, the Company issued 8.75% Subordinated Convertible
Notes (the "Notes") for $25,000 and 500,000 shares of its Series B Convertible
Preferred Stock, par value $.01 per share, (the "Preferred Stock") for $5,000.
These securities were issued to CGLH Partners I LP and CGLH Partners II LP
(collectively, the "Investor"), which are entities affiliated with Lehman
Brothers Holdings Inc., pursuant to a Securities Purchase Agreement dated August
31, 2000 between the Company and the Investor. The Preferred Stock accrues
cumulative dividends payable quarterly in cash at 8.75% per annum, with up to
25% of the dividends payable in kind (at the option of the Company). The
Preferred Stock must be mandatorily redeemed by the Company no later than
October 20, 2007 for $10 per share. The Notes mature on October 20, 2007 and
accrue interest that is payable quarterly at a rate of 8.75% per annum, with up
to 25% of the interest payable in kind (at the option of the Company). Both the
Preferred Stock and the Notes are convertible at any time into Class A Common
Stock of the Company at $4.00 per share. Initially, these securities are
convertible into an aggregate of 7,500,000 shares of Class A Common Stock,
however, no holder of either the Notes or the Preferred Stock may convert these
securities if that conversion would cause the holder and its affiliates or any
group of which any of them is a member to have beneficial ownership of more than
49% of the Company's total common stock outstanding after the conversion.

F-10
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

4. INVESTOR TRANSACTION, CONTINUED:

The Notes and Preferred Stock were recorded at fair value of $25,000 and
$5,000, respectively, in the fourth quarter of 2000. Transaction costs of $2,141
incurred in connection with the Notes have been deferred and will be amortized
over the next seven years. Costs incurred in connection with the issuance of the
Preferred Stock of $429 were allocated to the fair value of the Preferred Stock
at issuance. The Preferred Stock is being accreted to redemption value over the
next seven years.

In connection with the transactions contemplated under the Securities
Purchase Agreement, the Company also entered into amended and restated
employment agreements with three executives of the Company. These amended and
restated employment agreements became effective upon the closing of the
transactions contemplated under the Securities Purchase Agreement and provided,
among other things, for the issuance of an aggregate of 225,000 shares of
Preferred Stock valued at $2,250 to these executives and the immediate vesting
of restricted stock awards for two of these executives that were issued under
their previous employment agreements, in exchange for their waiver of stock
option rights and severance payments owed to them by the Company under their
previous employment agreements. These shares were issued on October 20, 2000 and
are convertible, subject to vesting restrictions, into an aggregate of 562,500
shares of Class A Common Stock and are redeemable, as discussed above, for $10
per share.

The issuance of the Preferred Stock was recorded as deferred compensation
at fair value and will be amortized as compensation expense over the three-year
vesting period. Compensation expense recorded in the fourth quarter of 2000
related to this issuance was $125. The vesting of the restricted stock issued
under previous employment agreements was recorded as a compensation charge of
$874 in 2000. Other costs of $281 incurred in connection with the deferred
compensation were expensed in the fourth quarter of 2000.

The terms of the Notes and Preferred Stock contain various voting rights of
the Investor and covenants by the Company with respect to the operation of the
business of the Company on an ongoing basis.

Joint Venture Commitment:

$25,000 of the proceeds received from the issuance of the Notes and the
Preferred Stock will be invested by the Company in a newly formed joint venture
(the "Joint Venture") with the Investor for the acquisition of hotel properties
that will be managed by the Company. The Investor has committed to invest
$20,000 of additional capital to the Joint Venture.

The Joint Venture is structured as a limited partnership with an affiliate
of the Investor serving as the managing general partner having decision-making
authority and an affiliate of the Company serving as a general partner having
limited authority and responsibility. The limited partnership interests are
owned by affiliates of the Investor, by affiliates of the Company, and by two
executives of the Company. The executives received aggregate limited partnership
interests of 5.25% without any capital contribution and are subject to a vesting
period of up to three years as well as other conditions. The Company owns a
minority common percentage interest of the Joint Venture. A decision by the
Joint Venture to acquire any hotel property or an interest in any hotel property
requires the unanimous approval of all the partners, other than the executives.
Approximately $11,667 of the Company's affiliate investment in the Joint Venture
is entitled to a 15% per annum preferential return from available cash before
the same return is payable on the remaining capital investments by the partners.

F-11
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

4. INVESTOR TRANSACTION, CONTINUED:

The Joint Venture has a seven-year term subject to extension by the
Investor. Within two years of a change of control of the Company, the Investor
has a right to require the Company to acquire all of the partnership interests
owned by affiliates of the Investor. The Joint Venture interests are also
subject to a buy/sell agreement which may be triggered in certain circumstances
by any partner and may result in the non-triggering partners either buying the
triggering partner's interest or selling their interests to the triggering
partner, provided that the executives may not be buyers under the buy/sell
agreement, without the consent of the other partners.

As of December 31, 2000, the Company has not invested any of the proceeds
from the Notes or Preferred Stock in the Joint Venture. The Joint Venture will
be accounted for by the Company using the equity method of accounting.
Transaction costs of $2,096 incurred in connection with the start-up of the
Joint Venture, net of a $750 reimbursement from the Joint Venture, were expensed
by the Company in the fourth quarter of 2000. The Company recorded an equity
loss from the Joint Venture of $300 in the fourth quarter of 2000. The Company
will also record compensation expense to the extent of the fair value of the
Executives' interest in the Joint Venture, subject to the executives' vesting
periods.

5. WYNDHAM REDEMPTION:

In the fourth quarter of 2000, the Company agreed to cause its principal
operating subsidiary, IH LLC, to redeem from affiliates of Wyndham substantially
all of their aggregate 55% non-voting economic interest in IH LLC (the "Wyndham
Redemption"). The total purchase price was $13,129, which included $447 of
transaction costs. Pursuant to this agreement, IH LLC transferred to Wyndham a
management agreement of IH LLC for one hotel owned by Wyndham, and Wyndham
terminated the management agreements for six other Wyndham-owned hotels in
January 2001. Approximately 9% of Wyndham's 55% interest in IH LLC was redeemed
by IH LLC and substantially all of the remainder was converted into a preferred
membership interest in IH LLC. At December 31, 2000, the Company had included in
long-term debt a total of $12,682 related to the redemption of the preferred
membership interest that either party may require to be redeemed by IH LLC at
any time on or after July 1, 2001 (the "Wyndham Redemption Notes"). The Company
is required to maintain $7,500 in cash in an escrow account through June 30,
2001 to satisfy the Wyndham Redemption Notes. Wyndham's remaining 1.6627%
interest in IH LLC that was not converted into a preferred membership interest
or redeemed will remain outstanding. Thereafter, at any time on or after July 1,
2004, both IH LLC and Wyndham have the right to require that IH LLC redeem this
remaining common interest at an amount that is the lesser of (a) the product of
(i) five times IH LLC's EBITDA as of December 31, 2003 and (ii) the percentage
of total equity interest in IH LLC which is represented by the remaining
interest, or (b) approximately $433.

In addition, Wyndham granted the Company an option exercisable within 90
days of October 20, 2000, to acquire all of the Company's common stock owned by
Wyndham at a weighted average trading price per share, as defined. The Company
exercised this option and purchased the stock effective December 1, 2000 for
$597. The Company accounted for the purchase as treasury stock, which was
subsequently cancelled.

The Wyndham Redemption was accounted for by the Company in the fourth
quarter of 2000 using the purchase method of accounting. Transaction costs of
$447 incurred in connection with the Wyndham Redemption were included in the
total purchase price of $13,129. The assets acquired and the liabilities assumed
of IH LLC have been recorded at their estimated fair values. The purchase
resulted in a reduction of the carrying value of long-term intangible assets
related to the Company's investment in management

F-12
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

5. WYNDHAM REDEMPTION, CONTINUED:

agreements of $14,092. The remaining intangible asset will continue to be
amortized on a straight-line basis over the original amortization period of five
years which began in June 1998.

The following unaudited pro forma information for the years ended December
31, 1999 and 2000 is presented to include the effects of the Wyndham Redemption
as if it had occurred on January 1, 1999. In management's opinion, all material
pro forma adjustments necessary to reflect the effects of this transaction have
been made. The unaudited pro forma information does not purport to present what
the actual results of operations of the Company would have been if the Wyndham
Redemption had occurred on such date or to project the results of operations of
the Company for any future period. The 1999 pro forma results above have not
been adjusted for the Merger described in Note 3.

1999 2000
-------- --------

Total revenue.................................. $239,180 $243,398
Net loss available to common stockholders...... (12,527) (14,464)
Basis earnings per common share................ (2.04) (2.31)
Diluted earnings per common share.............. (2.04) (2.31)

6. LONG-TERM DEBT:

Long-term debt consisted of the following at December 31:

2000
-------

8.75% Subordinated Convertible Notes....................... $25,000
Wyndham Redemption Notes................................... 12,682
Limited Recourse Mortgage Note............................. 7,481
-------
45,163
Less current portion..................................... (8,343)
-------
$36,820
=======

Wyndham Redemption Notes--The Wyndham Redemption Notes balance of $12,682
bears interest at a rate that varies with a bank's escrow rate through June
2001. On July 1, 2001, $8,250 is payable and the interest rate on the remaining
$4,432 outstanding principal is fixed at 9.75%. Principal payments of $750 and
$3,682 are due July 1, 2002 and July 1, 2004, respectively.

Limited Recourse Mortgage Note--In February 2000, a subsidiary of the
Company entered into a limited-recourse mortgage note with a bank. The proceeds
from the note, which has a two-year term with a one-year extension, amounted to
$7,560. Monthly payments are due based on a 25-year amortization schedule for
principal, with interest based on variable rate options using the prime rate or
the LIBOR rate. The average effective interest rate for 2000 was 8.57%. The note
is collateralized by the Pittsburgh Airport Residence Inn by Marriott, which was
acquired by the Company on November 1, 1999, and provides for a guarantee by the
Company of up to $3,000. The outstanding principal balance on the note is due
and payable at maturity.

See Note 4 for information on the 8.75% Subordinated Convertible Notes.

F-13
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

6. LONG-TERM DEBT, CONTINUED:
Scheduled maturities of long-term debt for the next five years and
thereafter are as follows:

2001........................................................ $ 8,343
2002........................................................ 8,138
2003........................................................ --
2004........................................................ 3,682
2005........................................................ --
Thereafter.................................................. 25,000
-------
$45,163
=======

7. IMPAIRMENT OF INVESTMENT IN HOTEL LEASE CONTRACTS:

On July 21, 2000, the Company executed a binding Memorandum of
Understanding (the "Memorandum") with Equity Inns, Inc. ("Equity Inns") with
respect to the hotel lease agreements between the Company and Equity Inns, which
was superseded by a Master Lease Termination Agreement dated September 12, 2000
(the "Termination Agreement"). Pursuant to the Termination Agreement, all of the
lease agreements for the 75 hotels leased from Equity Inns were terminated
effective January 1, 2001, and Equity Inns and the Company simultaneously
entered into management agreements for 54 of the hotels formerly leased to the
Company. The management agreements expire on a staggered annual basis beginning
January 1, 2002 through January 1, 2005. As a result, effective January 1, 2001,
the revenues and expenses and the working capital of these hotels will no longer
be reflected in the financial statements of the Company. Instead, the Company
will record revenues from management fees only. The Company also continues to
manage, under a new management agreement, one additional hotel it currently
manages for Equity Inns (but did not lease). The Company has accounted for the
transaction as an exchange of nonmonetary assets in accordance with Accounting
Principles Board ("APB") No. 29, "Accounting for Nonmonetary Transactions."

Concurrently with the Company's decision to enter into the Memorandum, the
Company recorded a non-cash impairment loss of $12,550 in the third quarter of
2000 related to its leased hotel intangible assets included in the mid-scale,
upper economy and budget hotels segment. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Assets to be Disposed Of," the Company evaluated
the recoverability of the intangible assets by measuring the carrying amount of
the intangible assets against the estimated future cash flows of the individual
properties. The Company estimated the discounted cash flows utilizing estimates
of future operating results for the remaining lease and anticipated management
agreement terms, in accordance with the provisions of the Memorandum.

In addition, the Termination Agreement addressed a dispute between the
Company and Equity Inns regarding certain performance standards previously in
place with respect to the leased hotels, including requirements to maintain
revenue per available room and expenditures to within specified percentages of
the amounts targeted in the hotels' operating budgets. The execution of the
Termination Agreement ended the application of the performance standards.

In 1999, the Company recorded a non-cash impairment loss of $16,406 related
to its leased hotel intangible assets included in the mid-scale, upper economy
and budget hotels segment. The impairment loss was the result of a permanent
impairment of the future profitability of these hotels for the remainder of the
hotel lease agreement terms. These hotels had experienced lower than expected
operating cash flows during 1999, primarily due to decreased occupancy rates and
higher operating costs resulting from significant construction that has occurred
within this industry segment. This recent construction has caused a significant
over-supply of mid-scale, upper economy and budget hotels in certain markets.
The long-term impact of this

F-14
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

7. IMPAIRMENT OF INVESTMENT IN HOTEL LEASE CONTRACTS, CONTINUED:

over-supply on the profitability of the Company's leased hotels was determined
and quantified as a result of a negative trend in operating statistics
increasing through the fourth quarter of 1999 and during the completion of the
Company's budgeting process in the fourth quarter of 1999.

In accordance with SFAS No. 121, the Company evaluated the recoverability
of the intangible assets by measuring the carrying amount of the intangible
assets against the estimated future cash flows of the individual properties. As
a result of the 1999 evaluation, the Company recognized the impairment loss on
42 of its leased hotel intangible assets.

8. CHANGE IN ACCOUNTING:

Effective September 30, 1998, the Company adopted the provisions of
Emerging Issues Task Force Issue 97-14 "Accounting for Deferred Compensation
Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested" (EITF
97-14). The issue requires that the accounts of the rabbi trust (the "Trust") be
consolidated with the accounts of the employer. Previously the accounts of the
Trust were not consolidated.

The Company provides deferred compensation for certain executives and hotel
general managers by depositing amounts into a Trust for the benefit of the
participating employees. Deposits into the Trust are expensed and amounted to
$178, $250, $530 and $771 for the June 1998 and December 1998 periods and for
the years ended December 31, 1999 and 2000, respectively. Amounts in the Trust
earn investment income, which serves to increase the corresponding deferred
compensation obligation. Amounts in the Trust are always fully vested.

Investments, which are recorded at market value, are directed by the
Company and consist principally of mutual funds. Unrealized gains and losses
were not significant at December 31, 2000 and 1999.

9. ACQUISITIONS AND DISPOSITIONS:

During 2000, the Company acquired a 25% non-controlling equity interest in
the Houston Astrodome/ Medical Center Residence Inn by Marriott in Houston,
Texas for $0.8 million; a 20% non-controlling equity interest in the Renaissance
Worldgate Hotel in Kissimmee, Florida for $3.9 million; and a 10% non-
controlling equity interest in the Sawgrass Marriott Resort and Beach Club in
Ponte Vedra Beach, Florida for $4.4 million. The Company manages all three
hotels. The Company accounts for these investments using the equity method of
accounting and recorded $222 in equity losses related to these three equity
investments for the year ended December 31, 2000. Pro forma information related
to these acquisitions has not been provided due to the relative insignificance
of their impact on the Company's historical results of operations.

One of the former owners of the Houston Astrodome/Medical Center Residence
Inn by Marriott and the Renaissance Worldgate Hotel is currently a member of the
board of directors of the Company and an officer of an affiliate of the
Investor. This former owner is also an affiliate of the current managing
partners of these properties.

On November 1, 1999, the Company acquired the Pittsburgh Airport Residence
Inn by Marriott for a total acquisition cost, including closing costs, of
$12,981. This acquisition was accounted for using the purchase method of
accounting. The purchase price was allocated to the following assets: net
working capital $288; land $1,344; buildings $9,813; and furniture, fixtures and
equipment $1,536. Prior to the acquisition, an officer of the Company
beneficially owned a 10% limited partnership interest in the entity that sold
the hotel to the Company.

On June 18, 1999, the Company sold substantially all of its equity
interests in The Charles Hotel Complex by selling a 1% general partnership
interest and an 82.9% limited partnership interest and, through

F-15
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

9. ACQUISITIONS AND DISPOSITIONS, CONTINUED:

IH LLC, received $13,500 in cash and a $5,750 secured non-recourse promissory
note in connection with the sale. The promissory note pays quarterly interest
only, at a rate of 10% per annum, until maturity in 2002. The loss of $876 on
the sale is included in "loss on sale of investment in hotel real estate" in the
1999 consolidated statements of operations and is allocated 100% to Wyndham in
"minority interest" in the 1999 consolidated statements of operations in
accordance with IH LLC's limited liability company agreement. This agreement
also requires that the proceeds and interest from the promissory note be
allocated entirely to the Company.

In 1999, the management agreement for The Charles Hotel was amended in
connection with the sale to provide for a reduction in management fees payable
to the Company in exchange for an extension of the term of the management
contract to ten years.

10. PROPERTY AND EQUIPMENT:

Property and equipment, which principally relates to the Pittsburgh Airport
Residence Inn by Marriott and the Company's corporate offices, consisted of the
following at December 31:

1999 2000
------- -------

Land........................................................ $ 1,344 $ 1,344
Buildings and leasehold improvements (15 to 40 years)....... 11,070 10,935
Furniture, fixtures and equipment (5 to 10 years)........... 4,874 5,286
------- -------
17,288 17,565
Less accumulated depreciation............................... (1,239) (2,481)
------- -------
$16,049 $15,084
======= =======

Depreciation expense was $313, $446, $890 and $1,384 for the June 1998 and
December 1998 periods and for the years ended December 31, 1999 and 2000,
respectively.

11. NET INVESTMENT IN DIRECT FINANCING LEASES:

The Company leases office, computer and telephone equipment to managed
hotels under capital leases. The following represents the components of the net
investment in direct financing leases at December 31:

1999 2000
------ -----

Total future minimum lease payments receivable.............. $1,745 $ 936
Less unearned income........................................ (353) (193)
------ -----
1,392 743
------ -----
Less current portion........................................ (464) (248)
------ -----
$ 928 $ 495
====== =====

Future minimum lease payments to be received under these leases for each of
the years ending December 31 are as follows:

2001........................................................ $591
2002........................................................ 262
2003........................................................ 83
----
$936
====

F-16
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

12. INTANGIBLE AND OTHER ASSETS:

Intangible and other assets consisted of the following at December 31:

1999 2000
-------- --------

Management contracts (3 to 6 years through the June 1998
period, 5 to 20 years thereafter)..................... $ 74,086 $ 42,551
Lease contracts (15 and 11 years through the June 1998
period,
13.5 and 11 years thereafter)......................... 20,442 --
Deferred financing fees (2 and 7 years)................. -- 2,295
Other................................................... 362 212
-------- --------
94,890 45,058
Less accumulated amortization........................... (30,048) (18,539)
-------- --------
$ 64,842 $ 26,519
======== ========

13. COMMITMENTS AND CONTINGENCIES:

The Company accounts for the leases of office space (the office leases
expire at varying times through 2005) and certain office equipment (the
equipment leases expire at varying times through 2005) as operating leases.
Total rent expense amounted to approximately $911, $1,305, $2,216 and $2,103 for
the June 1998 and December 1998 periods and for the years ended December 31,
1999 and 2000, respectively. The following is a schedule of future minimum lease
payments under these leases for each of the years ending December 31:

2001........................................................ $2,145
2002........................................................ 2,069
2003........................................................ 1,650
2004........................................................ 377
2005........................................................ 228
------
$6,469
======

As discussed in Note 4, the Company has committed to invest $25,000 of the
total proceeds received from the issuance of the Notes and the Preferred Stock
into the Joint Venture. Such amount is expected to be invested concurrent with
the closings of hotel property acquisitions.

F-17
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

14. PREFERRED AND COMMON STOCK:

Preferred Stock:

The Company has the authority to issue up to 10,000,000 shares of preferred
stock having such rights, preferences and privileges as designated by the Board
of Directors of the Company without stockholder approval. The rights of the
holders of the Company's common stock will be subject to, and may be affected
by, the rights of the holders of any such preferred stock that may be issued in
the future. No preferred stock has been issued to date.

Mandatorily Redeemable Preferred Stock:

On October 20, 2000, the Company issued 725,000 shares of its Series B
Convertible Preferred Stock, par value $.01 per share, (the "Preferred Stock")
pursuant to a Securities Purchase Agreement (see Note 4). The Company has
authorized a total of 850,000 shares of Preferred Stock. The Preferred Stock
accrues cumulative dividends payable in cash at 8.75% per annum of the stated
amount ($10 per share) on a quarterly basis, with up to 25% of the dividends
payable in additional shares of Preferred Stock at the Company's option. If the
dividends are in arrears for a period of 60 days or more, then an additional
cumulative dividend is payable in additional shares of Preferred Stock at 2% per
annum of the stated amount. The Preferred Stock also receives any dividends paid
to holders of Class A Common Stock of the Company on an as-converted basis. The
Company is precluded from paying dividends on, or repurchasing, capital stock
that is on parity with Preferred Stock and from repurchasing capital stock that
is not ranked senior to the Preferred Stock, unless all dividends accrued on the
Preferred Stock have been paid. Approximately $127 of dividends were accrued but
unpaid as of December 31, 2000. Such amounts were paid in January 2001.

The holders of the Preferred Stock have the right to elect up to five
members to the Company's Board of Directors. In addition, if the Company fails
to pay dividends on the Preferred Stock for six quarterly periods, then the size
of the Company's Board of Directors increases to thirteen directors and the
holders of the Preferred Stock are entitled to elect seven of the thirteen
directors until the payment default has been cured.

Each share of Preferred Stock, including any shares of Preferred Stock
issued in lieu of dividends, is convertible at any time at the option of the
holder into Class A Common Stock prior to any redemption. The conversion price
is $4.00 per share of Class A Common Stock subject to anti-dilution adjustment.
Initially, these securities are convertible into 1,812,500 shares of Class A
Common Stock. The terms of the Securities Purchase Agreement prohibit any holder
from exercising the right to convert any shares of Preferred Stock if the
conversion would cause the holder and its affiliates, or any group of which any
of them is a member, to have beneficial ownership of more than 49% of the
Company's total common stock after conversion.

The Company has an obligation to redeem all outstanding shares of Preferred
Stock on October 20, 2007. The redemption price will be $10 per share plus all
accrued dividends on the date of redemption.

The Preferred Stock will have an aggregate liquidation preference of
$7,250. Upon a liquidation of the Company, the holders of Preferred Stock will
be entitled to receive the greater of (a) $10 per share plus any accrued
dividends and (b) the fair market value of the cash, securities and other
property that the holder of the Preferred Stock would have received had it
converted its Preferred Stock plus accrued dividends.

The Preferred Stock has the following significant restrictive covenants
which require approval from the holders of the Preferred Stock: the
authorization or creation of any senior class of stock to the Preferred Stock,
entering into a change in control transaction, amendment of rights of Class A, B
or C common stockholders or redemption of any securities of the Company without
first offering to redeem the Preferred Stock.

F-18
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

14. PREFERRED AND COMMON STOCK, CONTINUED:

Common Stock:

Each holder of Class A, Class B and Class C Common Stock is entitled to one
vote for each share held by such holder, and no stockholders have cumulative
voting rights or preemptive, subscription or redemption rights, and no liability
exists for further calls or assessments. Holders of Class B shares are entitled
to elect one director, and holders of Class C shares are entitled to elect one
director. Subject to the rights of the holders of the Preferred Stock, holders
of Class A shares elect the remaining directors. Upon the liquidation or
dissolution of the Company, all holders of shares of common stock share ratably
in the assets of the Company available for distribution to stockholders, subject
to the preferential rights of any then outstanding shares of preferred stock. On
December 1, 2000, the Company purchased and cancelled 181,916 shares of Class A
Common Stock and 60,639 shares of Class C Common Stock, which were held by
Wyndham, for an aggregate price of $597 (see Note 5).

The following table represents the number of shares of common stock
authorized, issued and outstanding at December 31:

ISSUED AND
OUTSTANDING
-------------------------
PAR VALUE AUTHORIZED 1999 2000
--------- ---------- ----------- -----------

Class A Common Stock........... $.01 62,000,000 6,091,802 6,157,189
Class B Common Stock........... $.01 1,500,000 242,555 242,555
Class C Common Stock........... $.01 1,439,361 60,639 --
---------- --------- ---------
64,939,361 6,394,996 6,399,744
========== ========= =========

The following represents the number of shares of common stock authorized
for issuance under the Company's stock plans at December 31:

1999 2000
--------- ---------

1999 Equity Incentive Plan........................... 2,300,000 2,300,000
Employee Stock Purchase Plan......................... 400,000 400,000
--------- ---------
2,700,000 2,700,000
========= =========

The 1999 Equity Incentive Plan provides for long-term incentives to be
awarded to eligible employees through grants of restricted stock and grants of
stock options to purchase shares of common stock. The options generally vest
over a three-year period and expire after ten years. During 1999, the Company
issued 331,917 restricted shares of Class A Common Stock to two executives under
the 1999 Equity Incentive Plan. In connection with the transactions contemplated
under the Securities Purchase Agreement, these restricted shares became fully
vested during the fourth quarter of 2000. The Employee Stock Purchase Plan,
which was terminated by the Company in 2001, was designed to be a
non-compensatory plan, whereby eligible employees elected to withhold a maximum
of 8% of their salary and use such amounts to purchase common stock.

The Company has elected to account for stock-based employee compensation
arrangements under the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," rather than SFAS No. 123,
"Accounting for Stock-Based Compensation." Based on the fair value of the
options at the grant dates according to SFAS No. 123, the Company's net loss
would not have changed for compensation cost related to the stock options for
the years ended December 31, 1999 or 2000.

F-19
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

14. PREFERRED AND COMMON STOCK, CONTINUED:

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

1999 2000
---- ----

Weighted average risk-free interest rate.................... 6.2% 5.4%
Expected dividend yield..................................... -- --
Expected volatility......................................... 55.0% 60.0%
Expected life (number of years)............................. 9.5 8.5

The transactions for stock options issued under the 1999 Equity Incentive
Plan were as follows:

WEIGHTED AVERAGE
-----------------------------------
NUMBER OF REMAINING VALUE EXERCISE RANGE OF
OPTIONS LIFE (YEARS) PER SHARE PRICE EXERCISE PRICE
--------- ------------ --------- -------- --------------

Outstanding, December 31, 1998...... --
Granted............................. 1,768,000 $4.50 $4.50
Canceled............................ (30,000) $4.50 $4.50
---------
Outstanding, December 31, 1999...... 1,738,000 9.5 $3.25 $4.50 $4.50
Canceled............................ (675,000)
---------
Outstanding, December 31, 2000...... 1,063,000 8.5 $0.98 $4.50 $4.50
=========
Shares reserved for future options
at December 31, 2000.............. 1,237,000

In February 2001, the Company amended its employees' stock option
agreements to permit such employees to return 40% of the original options
granted to them at a $4.50 exercise price and retain the 60% remaining options
with a new exercise price of $2.00. The Company will account for this repricing
in the first quarter of 2001 using variable plan accounting.

15. NET MANAGEMENT FEES:

The Company's management agreements have initial terms that range from one
month to 49 years, expire through the year 2044 and are generally cancelable
under certain conditions, including the sale of the hotel.

The management agreements specify the base management fees to be earned,
which are generally based on percentages of gross revenues. In certain cases,
incentive management fees are earned based on the hotels' profitability as
defined by the management agreements. The net management fees earned for the
June 1998 and December 1998 periods and for the years ended December 31, 1999
and 2000 were as follows:

JUNE DECEMBER
1998 1998 1999 2000
------- -------- ------- -------

Base management fees...................... $14,435 $16,108 $25,107 $20,444
Incentive management fees................. 3,882 7,096 8,656 9,691
------- ------- ------- -------
18,317 23,204 33,763 30,135
Less:
Administrative fees..................... (299) (441) (488) (654)
------- ------- ------- -------
$18,018 $22,763 $33,275 $29,481
======= ======= ======= =======

F-20
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

16. INCOME TAXES:

Income tax expense (benefit) consisted of the following for the June 1998
and December 1998 periods and for the years ended December 31, 1999 and 2000:

JUNE DECEMBER
1998 1998 1999 2000
------- -------- ------- -------

Current:
Federal.................................. $ 6,198 $(3,421) $ 1,113 $ 292
State.................................... 885 (489) 195 (42)
------- ------- ------- -------
7,083 (3,910) 1,308 250
------- ------- ------- -------
Deferred:
Federal.................................. (1,360) 7,303 (5,552) (5,477)
State.................................... (195) 1,043 (834) (782)
------- ------- ------- -------
(1,555) 8,346 (6,386) (6,259)
------- ------- ------- -------
Income tax expense (benefit)............. $ 5,528 $ 4,436 $(5,078) $(5,935)
======= ======= ======= =======

A reconciliation of the Company's effective tax rate to the federal
statutory rate for the years ended December 31, 1999 and 2000 is as follows:

1999 2000
---- ----

Federal statutory rate................................. 35% 35%
State taxes, net of federal benefit.................... 3 3
Minority interest...................................... (17) (17)
Other.................................................. (1) 2
--- ---
Effective tax rate..................................... 20% 23%
=== ===

For periods prior to the Spin-off, the provision for income tax was
recorded based on the federal statutory rate of 35% plus the state tax rate, net
of federal income tax benefit of 5% after consideration of minority interests in
passthrough tax entities. These rates approximate Old Interstate's historical
rates.

The financial statement components that give rise to the net deferred tax
assets and liabilities consisted of the following at December 31:

1999 2000
--------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------

Depreciation and amortization................. $ -- $1,742 $2,296 $ --
Payroll and related benefits.................. 189 -- 418 --
Self-insured health trust..................... 605 -- 1,151 --
Retirement plan............................... 34 -- 43 --
Other......................................... -- 368 554 --
Investment in hotel real estate............... -- -- 515 --
---- ------ ------ ------
$828 $2,110 $4,977 $ --
==== ====== ====== ======

17. EARNINGS PER SHARE:

Prior to the Spin-off, the Company was not a separate legal entity.
Therefore, the accompanying consolidated financial statements of the Company
have been carved out of the financial statements of Old Interstate and Wyndham,
and principally include those assets, liabilities, revenues and expenses
directly attributable to the third-party hotel management and leasing businesses
conducted by the Company. The Company believes that the historical earnings per
share calculations required in accordance with SFAS No.

F-21
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

17. EARNINGS PER SHARE, CONTINUED:

128 are not meaningful for periods prior to the Spin-off and, therefore, have
not been provided. Pro forma earnings per share for the year ended December 31,
1999 is described in Note 3.

Basic earnings per common share was calculated by dividing net loss
available to common stockholders by the weighted average number of shares of
common stock outstanding. Diluted earnings per common share assumes the issuance
of common stock for all potentially dilutive equivalents outstanding. The effect
of the conversion of the Notes and the Preferred Stock into Class A Common Stock
is considered to be anti-dilutive. The details of basic and diluted earnings per
common share for the year ended December 31, 2000 are as follows:

Net loss available to common stockholders................... $9,042
------
Weighted average number of common shares outstanding........ 6,474
------
Basic earnings per common share............................. $(1.40)
------
Shares issuable upon exercise of dilutive outstanding stock
options................................................... --
------
Weighted average number of diluted common shares
outstanding............................................... 6,474
------
Diluted earnings per common share........................... $(1.40)
------

18. SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid for interest amounted to $20, $10 and $570 for the June 1998 and
December 1998 periods and for the year ended December 31, 2000, respectively. No
cash was paid for interest for the year ended December 31, 1999. Cash paid for
income taxes amounted to $392 and $559 for the years ended December 31, 1999 and
2000, respectively.

In connection with the Merger, in the December 1998 period, the Company
excluded from the consolidated statements of cash flows a non-cash step-up in
basis of $30,268 arising from the allocation of Merger consideration, which
includes an increase to management contract costs of $43,378, a decrease in
other assets related to hotel leases of $7,652 and a deferred tax liability of
$5,458. In addition, as a result of the change in accounting discussed in Note
8, the Company recorded marketable securities and deferred compensation in the
amount of $6,451 as of September 30, 1998, which was also excluded from the
December 1998 period statement of cash flows.

In 1999, as a result of the Spin-off, the Company excluded from the
consolidated statements of cash flows non-cash equity transfers of $57,614 to
minority interests, representing the net book value of Wyndham's 55%
non-controlling ownership interest in IH LLC, a transfer of Wyndham's share of
the net deferred tax liability of $5,289, and the net book value of the Common
Stock distributed to the stockholders of the Company of $65,456. Prior to the
Spin-off, the Company excluded from the consolidated statements of cash flows
the contribution of Wyndham stock valued at $2,172 that was used to reduce
accrued liabilities recorded in connection with the Merger. In addition, as a
result of the sale of the equity interests in The Charles Hotel Complex, the
Company excluded from the consolidated statements of cash flows a $5,750 secured
non-recourse promissory note, which was received as proceeds from the sale, and
the elimination of $2,409 of third-party minority interests. The Company also
excluded from the consolidated statements of cash flows non-cash unearned
compensation of $1,079 related to the issuance of common stock to two executives
during 1999.

In 2000, in connection with the Wyndham Redemption, as discussed in Note 5,
the Company excluded from the consolidated statements of cash flows the purchase
accounting adjustment that reduced its intangible asset related to investment in
management agreements and minority interest by $14,092 and increased long-

F-22
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

18. SUPPLEMENTAL CASH FLOW INFORMATION, CONTINUED:

term debt by $12,682. In addition, the Company issued 225,000 shares of
Preferred Stock valued at $2,250 to three executives, as discussed in Note 4.

19. INSURANCE:

The Company provides certain insurance coverage to hotels under the terms
of the various management and lease contracts. This insurance is generally
arranged through third-party carriers. Northridge Insurance Company
("Northridge"), a subsidiary of IH LLC, reinsures a portion of the coverage from
these third-party primary insurers. The policies provide for layers of coverage
with minimum deductibles and annual aggregate limits. The policies are for
coverage relating to innkeepers' losses (general/comprehensive liability),
wrongful employment practices, garagekeeper's legal liability, replacement cost
automobile losses and real and personal property insurance.

The Company is liable for any deficiencies in the IHC Employee Health and
Welfare Plan (and related Health Trust), which provides employees of the Company
with group health insurance benefits. The Company has a financial indemnity
liability policy with Northridge which indemnifies the Company for certain
obligations for the deficiency in the related Health Trust. The premiums for
this coverage received from the properties managed by the Company, net of
intercompany amounts paid for employees at the Company's corporate offices and
leased hotels, are recorded as direct premiums written. There was a deficiency
of $2,949 and $3,374 in the related Health Trust as of December 31, 1999 and
2000, respectively, which was recorded as a liability of the Company in the
accompanying consolidated balance sheets.

All accounts of Northridge are classified with assets and liabilities of a
similar nature in the consolidated balance sheets. Amounts restricted due to
statutory requirements consist of cash and cash equivalents of $1,083 and $1,361
at December 31, 1999 and 2000, respectively. These amounts are included in
restricted cash in the accompanying consolidated balance sheets. The
consolidated statements of operations include the insurance income earned and
related insurance expenses incurred. The insurance income earned is included in
other fees in the consolidated statements of operations and is comprised of the
following for the June 1998 and December 1998 periods and for the years ended
December 31, 1999 and 2000:

JUNE DECEMBER
1998 1998 1999 2000
------ -------- ------ ------

Reinsurance premiums written.................. $3,191 $2,585 $3,907 $5,772
Direct premiums written....................... 625 875 800 200
Reinsurance premiums ceded.................... (130) (170) (100) (355)
Change in unearned premiums reserve........... (87) (103) 2 90
Loss sharing premiums......................... 702 926 10 --
------ ------ ------ ------
Insurance income.............................. $4,301 $4,113 $4,619 $5,707
====== ====== ====== ======

20. EMPLOYEE BENEFIT PLANS:

The Company maintains a defined contribution savings plan for all employees
of the Company. Eligibility for participation in the plan is based on the
employee's attainment of 21 years of age and on the completion of one year of
service with the Company. Employer contributions are based on a percentage of
employee contributions. Participants may make voluntary contributions to the
plan of up to 6% of their compensation, as defined. The Company incurred
expenses related to employees at its corporate offices of approximately $105,
$147, $221 and $227 for the June 1998 and December 1998 periods and for the
years ended December 31, 1999 and 2000, respectively.

F-23
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

21. FINANCIAL INSTRUMENTS:

The carrying values and fair values of the Company's financial instruments
consisted of the following at December 31:

1999 2000
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- -------

Cash and cash equivalents................... $22,440 $22,440 $51,327 $51,327
Restricted cash............................. 1,701 1,701 2,173 2,173
Officers and employees notes receivable..... 3,541 3,541 3,442 3,442
Notes receivable-affiliates................. 10,838 10,838 10,235 10,235
Marketable securities....................... 2,134 2,134 2,289 2,289
Redeemable preferred stock.................. -- -- 4,708 4,708
Long-term debt.............................. -- -- 45,163 45,163

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:

Cash and cash equivalents and restricted cash: The carrying amounts
approximate fair value because of the short maturity of these investments.

Notes receivable: The fair value of notes receivable is based on
anticipated cash flows and approximates carrying value.

Marketable securities: The fair value of marketable securities is based
principally on the quoted market prices of the underlying security.

Redeemable preferred stock: The fair value of redeemable preferred stock
is estimated based on quoted market prices.

Long-term debt: The fair value of long-term debt is estimated using a
discounted cash flow analysis.

22. RELATED PARTY TRANSACTIONS:

Transactions with Significant Related Parties:

Included in net management fees are management fees earned pursuant to
management agreements between the Company and the affiliates of Old Interstate
or Wyndham that owned the hotels (the "Owned Hotels"). Included in net
management fee revenue in the accompanying consolidated statements of operations
are fees related to the Owned Hotels amounting to $6,987, $6,129, $7,410 and
$2,050 for the June 1998 and December 1998 periods and for the years ended
December 31, 1999 and 2000, respectively. Receivables from management fee
revenues from the Owned Hotels comprise the related party receivables --
management contracts in the accompanying consolidated balance sheets.

Revenues from other fees include primarily insurance revenues and
purchasing fees. Insurance revenues from Owned Hotels amounted to $1,378,
$1,929, $750 and $325 for the June 1998 and December 1998 periods and for the
years ended December 31, 1999 and 2000, respectively. Purchasing fees from Owned
Hotels amounted to $616, $552, $357 and $321 for the June 1998 and December 1998
periods and for the years ended December 31, 1999 and 2000, respectively.

During 2000, the Company paid $1,000 to Lehman Brothers Holdings Inc. for
advisory services in connection with the closing of the Securities Purchase
Agreement.

F-24
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

22. RELATED PARTY TRANSACTIONS, CONTINUED:

Concentration of Risk:

Notes receivable -- affiliates at December 31, 1999 and 2000 include two
notes receivable from the current owner of The Charles Hotel Complex, which were
loaned in 1999, in the amounts of $5,750 and $2,500, and mature on June 18, 2002
and October 1, 2002, respectively. Both notes pay quarterly interest only, at a
rate of 10% per annum, until maturity, at which time the outstanding principal
balances on the notes are due and payable. The notes are not collateralized. In
addition, the Company manages three hotels located in Russia, one of which
opened in December 1998. As of December 31, 1999 and 2000, receivables from
these hotels amounted to $4,049 and $4,537, respectively. The Company currently
estimates that all of these receivables are collectible; however, actual
collections could differ from current estimates.

Equity Inns:

A significant shareholder and the Chairman of the Board of Equity Inns is a
member of the Company's Board of Directors.

Included in notes receivable -- affiliates is a loan in the amount of $666
to an entity for which the Company shares proceeds from the loan pari pasu with
Equity Inns. The Company recorded a reserve for uncollectible accounts for the
full amount of the loan during 2000.

Account Payable -- Related Parties:

Accounts payable -- related parties at December 31, 1999 and 2000
represents the Company's required distribution to Wyndham for the period
subsequent to the Spin-off. In accordance with the term of IH LLC's limited
liability company agreement, and prior to the execution of the Wyndham
Redemption, the Company was required to distribute 55% of IH LLC's cash flows
from operations to Wyndham for the year ended December 31, 1999 and for the
period from January 1, 2000 to October 31, 2000. Effective with the execution of
the Wyndham Redemption, the Company is required to distribute 1.6627% of IH
LLC's cash flows from operations to Wyndham for the period from November 1, 2000
to December 31, 2000.

23. SEGMENT INFORMATION:

The Company adopted the provisions of SFAS No. 131 "Disclosures about
Segments of an Enterprise and Related Information," effective December 31, 1998.
The statement requires disclosure of segment information for all periods
presented.

The Company determined that its reportable segments are those that are
based on the Company's method of internal reporting, which disaggregates its
business by operating entities which provide differing services.

The Company's reportable segments are: (i) operations of luxury and upscale
hotels, (ii) operations of mid-scale, upper economy and budget hotels, and (iii)
The Charles Hotel (hotel ownership). The luxury and upscale hotels segment
derives revenues from management fees and other services which directly relate
to providing management services, including revenues from insurance, purchasing
and equipment leasing. The mid-scale, upper economy and budget hotels segment
derives revenues from managing and leasing hotels and certain specialized
support services. The Charles Hotel segment consisted principally of an equity
investment in The Charles Hotel Complex, which was sold during the second
quarter of 1999.

F-25
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

23. SEGMENT INFORMATION, CONTINUED:
The table below presents revenue and operating income (loss) information
for each reportable segment for the June 1998 and December 1998 periods and for
the years ended December 31, 1999 and 2000.

JUNE DECEMBER
1998 1998 1999 2000
-------- -------- -------- --------

REVENUES:
Luxury and Upscale Hotels............... $ 26,010 $ 30,745 $ 41,808 $ 37,332
Mid-Scale, Upper Economy
and Budget Hotels..................... 80,753 117,649 198,546 208,780
-------- -------- -------- --------
Consolidated totals................... $106,763 $148,394 $240,354 $246,112
======== ======== ======== ========
OPERATING INCOME (LOSS):
Luxury and Upscale Hotels(1)............ $ 11,887 $ 10,727 $ 2,868 $ (6,532)
Mid-Scale, Upper Economy and Budget
Hotels(2)............................. 1,278 (1,208) (30,085) (20,304)
-------- -------- -------- --------
Consolidated totals................... $ 13,165 $ 9,519 $(27,217) $(26,836)
======== ======== ======== ========

- ---------------

(1) The 2000 amount includes $2,096 of costs incurred in connection with the
start-up of the Joint Venture and $923 of other costs incurred in connection
with transactions contemplated under the Securities Purchase Agreement.

(2) The 1999 amount includes a $2,000 one-time charge for additional incentive
rent paid in settlement of a dispute with Equity Inns resulting from the
Merger, and a $16,406 impairment charge on leased hotel intangible assets.
The 2000 amount includes a $12,550 non-cash impairment charge on leased
hotel intangible assets.

Depreciation and amortization included in segment operating income (loss)
for the June 1998 and December 1998 periods and for the years ended December 31,
1999 and 2000 were as follows:

JUNE DECEMBER
1998 1998 1999 2000
------ -------- ------- -------

Luxury and Upscale Hotels.................... $ 776 $ 7,844 $13,569 $12,548
Mid-Scale, Upper Economy and Budget Hotels... 1,376 2,815 7,264 3,543
------ ------- ------- -------
Consolidated totals........................ $2,152 $10,659 $20,833 $16,091
====== ======= ======= =======

The net book value of intangible and other assets by segment consisted of
the following at December 31:

1999 2000
------- -------

Luxury and Upscale Hotels................................... $42,736 $21,969
Mid-Scale, Upper Economy and Budget Hotels.................. 22,106 4,550
------- -------
Consolidated totals....................................... $64,842 $26,519
======= =======

F-26
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

23. SEGMENT INFORMATION, CONTINUED:

The following table reconciles the Company's measure of segment profit to
consolidated net income (loss) for the June 1998 and December 1998 periods and
for the years ended December 31, 1999 and 2000.

JUNE DECEMBER
1998 1998 1999 2000
------ --------- -------- --------

Total after-tax operating income (loss)........... $7,899 $5,711 $(16,330) $(16,101)
Unallocated amounts, net of tax:
Interest, net................................... 122 234 821 1,066
Other, net...................................... 284 835 910 (299)
Loss on sale of investment in hotel real
estate....................................... -- -- (526) --
Minority interest............................... (14) (125) 7,508 6,431
------ ------ -------- --------
Consolidated net income (loss).................... $8,291 $6,655 $ (7,617) $ (8,903)
====== ====== ======== ========

24. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):

The following table sets forth certain items included in the Company's
unaudited consolidated financial statements for each quarter of the years ended
December 31, 1999 and 2000:

FIRST SECOND THIRD FOURTH
------- ------- ------- -------

2000:
Total revenues..................................... $54,810 $65,665 $65,854 $59,783
Operating loss..................................... (4,303) (940) (15,929) (5,664)
Net loss available to common stockholders.......... (905) (411) (4,156) (3,570)
Basic earnings per common share.................... (.15) (.07) (.66) (.54)
Diluted earnings per common share.................. (.15) (.07) (.66) (.54)

1999:
Total revenues..................................... $54,144 $63,541 $65,561 $57,108
Operating loss..................................... (4,455) (822) (2,489) (19,451)
Net (loss) income available to common
stockholders..................................... (2,438) 375 (565) (4,989)
Basic earnings per common share.................... -- -- (.09) (.82)
Diluted earnings per common share.................. -- -- (.09) (.82)

25. SUBSEQUENT EVENT:

On March 27, 2001, the Company acquired a non-controlling 0.5% general
partnership interest and a non-controlling 49.5% limited partnership interest in
a limited partnership (the "Partnership") that owns eight mid-scale hotels, for
a total acquisition cost, including closing costs, of approximately $8,330.
FelCor Lodging Trust Incorporated ("FelCor") owns the other 50% of the
Partnership. The eight hotels are: Fairfield Inn Scottsdale-Downtown, Arizona;
Courtyard by Marriott Atlanta-Downtown, Georgia; Fairfield Inn Atlanta-
Downtown, Georgia; Fairfield Inn Dallas-Regal Row, Texas; Courtyard by Marriott
Houston-Near the Galleria, Texas; Fairfield Inn Houston-Near the Galleria,
Texas; Fairfield Inn Houston I-10-East, Texas; and Hampton Inn Houston
I-10-East, Texas. The hotels are leased to newly formed entities also owned 50%
by FelCor and 50% by the Company, and have been managed by Crossroads
Hospitality Management Company, a subsidiary of the Company since January 1,
2001.

The Company used cash on hand, as well as a $4,170 loan from FelCor, to
fund the acquisition. As part of the transaction, the Partnership simultaneously
closed on an aggregate of $52,250 non-recourse loans from Lehman Brothers Bank,
FSB secured by the hotels, with cash proceeds to FelCor of approximately
$48,000. The loans mature in 2011.

The Company will account for this investment using the equity method of
accounting.

F-27