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

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

FORM 10-K/A

ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

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

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

<Table>

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

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

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

<Table>

Name of each exchange
Title of each class on which registered
- ---------------------------------------------------------- -----------------------
Common Stock, $.01 par value, outstanding as of April 16, Nasdaq SmallCap Market
2002:
Class A shares............................... 5,487,885
Class B shares............................... 242,555
Class C shares............................... --
---------
Total...................................... 5,730,440
=========
</Table>

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 4,986,880 shares of the Company's Common Stock outstanding as of
April 16, 2002 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 April 16, 2002, was approximately $12,467,000.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

INDEX

INTERSTATE HOTELS CORPORATION

<Table>
<Caption>
PAGE
--------

PART I
Items 1 & 2 Business and Properties..................................... 2
Item 3 Legal Proceedings........................................... 5
Item 4 Submission of Matters to a Vote of Security Holders......... 6

PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 7
Item 6 Selected Financial Data..................................... 8
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
Item 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 23
Item 8 Financial Statements and Supplementary Data................. 23
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 23

PART III
Item 10 Directors and Executive Officers of the Registrant.......... 24
Item 11 Executive Compensation...................................... 28
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 38
Item 13 Certain Relationships and Related Transactions.............. 40

PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 43
</Table>

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 March 31,
2002, the Company managed or performed related services for 135 hotels with a
total of 28,480 rooms in 37 states in the United States, and in Canada and
Russia. The Company wholly owns one of these properties, the 156-suite
Pittsburgh Airport Residence Inn by Marriott, which it acquired in 1999, and has
non-controlling equity interests in 12 of these hotels. The Company operates
these hotels under a variety of major brand names, including AmeriSuites, Best
Western, Clarion Hotels, Colony, Country Inn and Suites, Comfort Inn and Suites,
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 14 hotels with
4,543 rooms bearing the Marriott flag, and manages 31 hotels with 5,829 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 38 hotels with 4,814 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.
The luxury and upscale hotels segment derives revenues from management fees and
other services which directly relate to providing management services, including
insurance and risk management services, purchasing and project management
services, MIS support, training and relocation programs and equipment leasing.
The mid-scale, upper economy and budget hotels segment derives revenues from
management fees and certain specialized support services, such as centralized
accounting services, as well as the operating revenues for the Pittsburgh
Airport Residence Inn by Marriott. For financial information about the Company's
operating segments, see Note 22 to the Company's Consolidated Financial
Statements and Supplementary Data contained on pages F-29 through F-30 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 investment funds in the form of equity ownership in
connection with new management arrangements. In addition, all of the hotels that
the Company manages or performs related services for face competition on factors
such as room rates, quality of accommodations, name recognition, service levels,
convenience of location and the quality and scope of other amenities, including
food and beverage facilities.

The lodging industry is affected by normally recurring seasonal patterns.
At most of the Company's hotels, demand is higher in the second and third
quarters than during the remainder of the year. This may not be true, however,
for hotels in major tourist destinations, for which revenues are substantially
greater during tourist season than other times of the year. Events beyond the
Company's control, such as extreme weather conditions, economic factors and
other considerations affecting travel may adversely affect hotel demand.

The Company, together with its subsidiaries and predecessors, was formed on
June 18, 1999, pursuant to a series of events culminating in the spin-off of the
Company's operations from Wyndham International, Inc. ("Wyndham") (the
"Spin-off"). On June 2, 1998, Interstate Hotels Company (together with its
subsidiaries, "Old Interstate") merged into Wyndham (the "Merger"). As part of
the Spin-off, 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 business conducted by Old
Interstate prior to the Merger.

The Company's principal executive offices are located in Pittsburgh,
Pennsylvania with regional offices in Orlando, Florida and Scottsdale, Arizona.
As of March 31, 2002, the Company and its subsidiaries employed approximately
11,500 persons, of which approximately 2,300 of these employees were represented
by a union.

RECENT DEVELOPMENTS

On March 27, 2002, Shaner Hotel Group Limited Partnership publicly
announced its intention to commence a partial tender offer to acquire 2,465,322
shares and, if applicable, the related preferred stock purchase rights, of the
Company's Class A Common Stock at a purchase price of $3.00 per share in cash.
The offer is scheduled to terminate on May 10, 2002, unless extended. The
Company announced its intention to respond to the offer by April 24, 2002 in a
Solicitation/Recommendation Statement to be filed with the Commission on
Schedule 14D-9. Following Shaner Hotel Group's public announcement on March 27,
2002, the Board of Directors appointed a Special Committee of independent
directors. The Special Committee was authorized to evaluate and recommend to the
Board of Directors whether the partial tender offer is in the best interests of
the Company's public stockholders. The Special Committee has retained Merrill
Lynch to act as its financial advisor and Miles & Stockbridge as its legal
counsel.

On November 19, 2001, the Company acquired a non-controlling 15% limited
partnership interest in a limited partnership that owns two mid-scale hotels for
a total acquisition cost, including closing costs, of approximately $2.2
million. CNL Hospitality Corp. owns the remaining 85% of the partnership. The
two hotels are the Courtyard by Marriott and the Residence Inn by Marriott, both
of which are located in the greater Hartford, Connecticut area.

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
two limited partnerships that own eight mid-scale hotels for a total acquisition
cost, including closing costs, of approximately $8.7 million. FelCor Lodging
Trust Incorporated ("FelCor") owns the remaining 50% of the partnerships. The
eight hotels are:

<Table>
<Caption>
HOTEL LOCATION
----- --------

Atlanta-Downtown Fairfield Inn by Marriott Atlanta, Georgia
Atlanta-Downtown Courtyard by Marriott Atlanta, Georgia
Dallas-Regal Row Fairfield Inn by Marriott Dallas, Texas
Houston-Near the Galleria Fairfield Inn by Marriott Houston, Texas
Houston-Near the Galleria Courtyard by Marriott Houston, Texas
Houston I-10-East Hampton Inn Houston, Texas
Houston I-10-East Courtyard by Marriott Houston, Texas
Scottsdale-Downtown Fairfield Inn by Marriott Scottsdale, Arizona
</Table>

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.

On July 31, 2001, the Company entered into a $40.0 million senior secured
credit facility co-arranged by Lehman Brothers Holdings Inc., d/b/a Lehman
Capital, and Credit Lyonnais New York Branch. The credit facility, which may be
used to obtain management agreements for hotel properties and to finance the
acquisition of hotel properties, has a two-year term and carries varying rates
of interest. As of March 18, 2002, there were no borrowings against the credit
facility.

In the third quarter of 2001, the Company recorded a loss on impairment of
equity investment in hotel real estate of approximately $3.0 million related to
the Company's 20% non-controlling equity interest in a

partnership that owns the Renaissance Worldgate Hotel in Kissimmee, Florida. The
impairment loss was the result of a permanent impairment of the future
profitability of this hotel. Since its acquisition in the fourth quarter of
2000, the hotel had experienced lower than expected operating cash flows,
primarily due to decreased occupancy rates and average daily room rates that
affected this hotel and the Orlando lodging market in general. In addition,
weakness in the U.S. economy during 2001 coupled with the severe downturn in the
Florida lodging market after the September 11th terrorist attacks had resulted
in significant financial difficulties for the hotel. As a result, the hotel was
unable to satisfy debt service obligations, which resulted in mortgage defaults.
As of December 31, 2001, the Company's accounts receivable owed from this hotel
amounted to approximately $1.2 million, which relates primarily to the
reimbursement of costs.

On February 21, 2002, the ownership and financing for the hotel were
restructured in order to address the financial difficulties of the hotel. As
part of this restructuring, the Company's 20% non-controlling equity interest
was redeemed in exchange for mutual releases with respect to the obligations of
the hotel, and the Company received a $0.9 million cash payment towards the
accounts receivable owed to the Company by the hotel. The hotel owner also
issued a promissory note to the Company for the remaining accounts receivable,
which note bears interest at the rate of nine percent per annum and is payable
in equal quarterly installments beginning January 1, 2003 and ending December
31, 2003. In addition, the hotel owner and the Company amended the management
agreement for the hotel, pursuant to which, among other things, the Company
waived its management fees for the period from July 1, 2001 through February 21,
2002 and agreed to reduce its base management fee for periods following February
21, 2002. The majority owners and the principal lender for the hotel have
representation on the Company's board of directors and are affiliated with the
holders of the Company's Series B Convertible Preferred Stock and the Company's
Subordinated Convertible Notes, which are described below.

On October 20, 2000, the Company issued 500,000 shares of its Series B
Convertible Preferred Stock, par value $.01 per share, (the "Preferred Stock")
for $5.0 million and 8.75% Subordinated Convertible Notes (the "Notes") for
$25.0 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 "Investor
transaction"). The Preferred Stock accrues dividends that are payable quarterly
in cash at 8.75% per annum and must be mandatorily redeemed by the Company on
October 20, 2007 for $10 per share. The Notes mature on October 20, 2007 and
accrue interest that is payable quarterly at 8.75% per annum. Both the Preferred
Stock and the Notes are convertible at any time into the Company's Class A
Common Stock at $4.00 per share. However, neither the Investor nor any other
holder of these securities may convert these securities if that conversion would
cause such 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.

In connection with the transactions contemplated under the Securities
Purchase Agreement, the Company entered into amended and restated employment
agreements with three executives of the Company. These amended and restated
employment agreements provided, among other things, for the issuance of an
aggregate of 225,000 shares of Preferred Stock valued at $2.25 million to these
executives and the immediate vesting of restricted stock awards that were issued
to two of these executives under 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, are convertible into the Company's Class A Common Stock at
$4.00 per share, subject to forfeiture restrictions, and are redeemable for $10
per share.

One purpose of the proceeds received by the Company from the issuance of
the Preferred Stock and the Notes is to invest $25.0 million into a newly formed
joint venture with the Investor (the "Joint Venture") for the acquisition of
hotel properties that will be managed by the Company. The Company is required to
maintain, and does maintain, sufficient liquidity for this investment, which may
be accomplished through lines of credit or other means. The Investor has
committed to invest an additional $20.0 million of capital into the Joint
Venture. As of April 16, 2002, the Company has not invested any funds into the
Joint Venture. Such

amounts are expected to be invested incrementally, concurrent with the closings
of hotel property acquisitions by the Joint Venture.

In the fourth quarter of 2000, the Company agreed to cause its principal
operating subsidiary, Interstate Hotels, LLC ("IH LLC"), to redeem from
affiliates of Wyndham substantially all of their aggregate 55% non-voting
ownership interest in IH LLC (the "Wyndham Redemption"). 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. IH LLC redeemed approximately 9%
of Wyndham's 55% interest in IH LLC and substantially all of the remaining
interest was converted into a preferred membership interest in IH LLC. On July
1, 2001, IH LLC redeemed the preferred membership interest from Wyndham for
$12.7 million, which was paid with $8.25 million in cash and the remainder in
promissory notes. Wyndham's remaining 1.6627% common interest in IH LLC that was
not redeemed or converted into a preferred membership interest will remain
outstanding until any time on or after July 1, 2004. At that time, both Wyndham
and IH LLC have the right to require that IH LLC redeem the remaining common
interest.

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.

On January 26, 2001, Columbus Hotels Properties, LLC ("Columbus") sought
termination of eight hotel management agreements and a master agreement between
it and a subsidiary of the Company on the basis of gross negligence and failure
to achieve the performance standards set forth in the management agreements. 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 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 rescission of certain transactions between
the parties. After several procedural rulings against Columbus by the federal
court to which the Company removed the case, Columbus has agreed to arbitrate
all claims outstanding among the parties and place the lawsuit on the inactive
docket.

On September 30, 1999, Chisholm Properties South Beach, Inc. ("Chisholm")
terminated the management agreement between it and Crossroads Hospitality
Company, L.L.C., a subsidiary of the Company, relating to the Surfcomber Hampton
Inn in Miami Beach, Florida. Subsequently, Chisholm filed a demand

for arbitration with the American Arbitration Association alleging breach of
contract. Specifically, the arbitration demand alleges, among other things,
failure to adequately market the hotel, commission of accounting and management
errors and wrongful retention of a contractually agreed-upon termination fee.
Chisholm's claim seeks compensatory and consequential lost profits damages in
such amounts as may be determined by the panel of arbitrators. The parties
completed approximately six weeks of arbitration hearings in 2001 and 2002, and
closing arguments are scheduled for June 2002.

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

None.

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.

<Table>
<Caption>
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:
Quarter ended March 31, 2001.............................. 2.63 1.56
Quarter ended June 30, 2001............................... 3.15 2.00
Quarter ended September 30, 2001.......................... 2.95 1.56
Quarter ended December 31, 2001........................... 1.74 1.25
2002:
Quarter ended March 31, 2002.............................. 2.52 1.40
Second quarter (through April 16, 2002)................... 2.69 2.10
</Table>

As of April 16, 2002 there were 1,880 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 April 16, 2002.

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 terms of the
Preferred Stock and the Notes issued to the Investor 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 Preferred Stock and the
Notes. 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 500,000 shares of its Preferred
Stock to the Investor 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 executives 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.

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 year ended December 31, 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, 2000 and 2001. 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.

SELECTED FINANCIAL AND OTHER DATA

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<Table>
<Caption>
PREDECESSOR SUCCESSOR
--------------------------- ------------- YEAR ENDED SUCCESSOR
DECEMBER 31, ----------------------------------
YEAR ENDED JAN. 1, 1998 JUNE 2, 1998 ------------ YEAR ENDED DECEMBER 31,
DECEMBER 31, THROUGH THROUGH COMBINED ----------------------------------
1997 JUNE 1, 1998 DEC. 31, 1998 1998(1) 1999 2000 2001
------------ ------------ ------------- ------------ ---------- ---------- --------
(UNAUDITED)

STATEMENT OF INCOME DATA:
Lodging revenues:
Rooms......................... $ 158,343 $ 74,265 $108,698 $ 182,963 $ 183,695 $ 191,811 $ 4,277
Other departmental............ 9,512 4,504 6,455 10,959 10,693 11,661 149
Net management fees............. 39,136 18,018 22,763 40,781 33,275 29,481 24,525
Other fees...................... 23,426 9,976 10,478 20,454 12,691 13,159 15,074
---------- -------- -------- ---------- ---------- ---------- --------
Total revenues............ 230,417 106,763 148,394 255,157 240,354 246,112 44,025
Lodging expenses:
Rooms......................... 36,919 16,115 25,114 41,229 44,237 47,014 1,030
Other departmental............ 5,487 2,674 3,962 6,636 6,975 7,238 86
Property costs................ 43,225 21,045 31,714 52,759 56,258 61,767 1,531
General and administrative...... 13,212 6,115 5,822 11,937 14,069 14,894 11,385
Payroll and related benefits.... 21,892 10,982 10,439 21,421 19,619 22,704 19,738
Lease expense................... 73,283 34,515 51,165 85,680 89,174 88,594 482
Depreciation and amortization... 4,845 2,152 10,659 12,811 20,833 16,091 10,394
Joint Venture start-up costs
(2)........................... -- -- -- -- -- 2,096 --
Loss on impairment of investment
in hotel lease contracts
(3)(4)........................ -- -- -- -- 16,406 12,550 --
---------- -------- -------- ---------- ---------- ---------- --------
Operating income (loss)......... 31,554 13,165 9,519 22,684 (27,217) (26,836) (621)
Other income (expense):
Interest, net................. 498 204 390 594 1,368 1,777 (1,673)
Other, net.................... 58 (39) (135) (174) (9) 24 38
Earnings (losses) from equity
investments in hotel real
estate...................... 373 513 1,526 2,039 1,525 (522) (5,169)
Loss on impairment of equity
investment in hotel real
estate (5).................. -- -- -- -- -- -- (3,026)
Loss on sale of investment in
hotel real estate (6)....... -- -- -- -- (876) -- --
---------- -------- -------- ---------- ---------- ---------- --------
Income (loss) before income tax
expense (benefit)............. 32,483 13,843 11,300 25,143 (25,209) (25,557) (10,451)
Income tax expense (benefit).... 12,986 5,528 4,436 9,964 (5,078) (5,935) (3,295)
---------- -------- -------- ---------- ---------- ---------- --------
Income (loss) before minority
interest...................... 19,497 8,315 6,864 15,179 (20,131) (19,622) (7,156)
Minority interest............... 18 24 209 233 (12,514) (10,719) 194
---------- -------- -------- ---------- ---------- ---------- --------
Net income (loss)............... 19,479 8,291 6,655 14,946 (7,617) (8,903) (7,350)
Less mandatorily redeemable
preferred stock:
Dividends..................... -- -- -- -- -- 127 634
Accretion..................... -- -- -- -- -- 12 62
---------- -------- -------- ---------- ---------- ---------- --------
Net income (loss) available to
common stockholders........... $ 19,479 $ 8,291 $ 6,655 $ 14,946 $ (7,617) $ (9,042) $ (8,046)
========== ======== ======== ========== ========== ========== ========
Net income (loss) available to
common stockholders per common
share:
Basic......................... $ (1.40) $ (1.30)
Diluted....................... $ (1.40) $ (1.30)
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents....... $ 2,432 $ 1,652 $ 1,652 $ 22,440 $ 51,327 $ 39,040
Total assets.................... 118,185 161,157 161,157 142,459 143,523 108,669
Long-term debt.................. 370 -- -- -- 45,163 40,981
Manditorily redeemable preferred
stock......................... -- -- -- -- 4,258 5,070
Total equity.................... 80,730 92,607 92,607 60,006 51,858 42,035
OTHER FINANCIAL DATA:
EBITDA (unaudited) (7).......... $ 36,812 $ 15,767 $ 21,360 $ 37,127 $ 7,771 $ (1,858) $ 9,705
Net cash provided by (used in)
operating activities:......... 12,517 18,359 9,593 27,952 23,793 10,080 (1,411)
Net cash (used in) provided by
investing activities:......... (35,707) 2,674 (27,707) (25,033) (10,121) (11,378) (1,066)
Net cash provided by (used in)
financing activities.......... 14,454 (19,298) 15,599 (3,699) 7,116 30,185 (9,810)
TOTAL HOTEL DATA (UNAUDITED):
(8)
Total hotel revenues............ $1,601,000 $1,490,000 $1,202,000 $1,176,000 $999,000
Number of hotels (9)............ 223 176 158 160 134
Number of rooms (9)............. 45,329 35,214 29,379 31,167 28,316
</Table>

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

(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 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.

(3) 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.

(4) For 2000, the amount represents a non-cash impairment charge on the
non-monetary exchange of the Company's hotel lease contracts for management
agreements. The lease contracts for the 75 hotels previously 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.

(5) Represents a non-cash impairment loss related to the Company's 20%
non-controlling equity interest in a partnership that owns the Renaissance
Worldgate Hotel in Kissimmee, Florida. The impairment loss was the result of
a permanent impairment of the future profitability of this hotel.

(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 (which includes depreciation and
amortization included in earnings (losses) from equity investments in hotel
real estate), mandatorily redeemable preferred stock dividends and
accretion, the loss on impairment of investment in hotel lease contracts and
the loss on impairment of equity investment in hotel real estate. 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 previously leased hotels, for which the
Company provides management or related services.

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

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.

The Preferred Stock and the Notes were recorded at fair value of $5.0
million and $25.0 million, respectively, in the fourth quarter of 2000. Costs
incurred in connection with 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 a seven-year period.
Transaction costs of approximately $2.1 million incurred in connection with the
Notes were deferred and are being amortized over a seven-year period.

approximately $0.9 million in the fourth quarter of 2000. Other costs of
approximately $0.2 million incurred in connection with the deferred compensation
were expensed in the fourth quarter of 2000.

The Joint Venture was accounted for by the Company using the equity method
of accounting in the fourth quarter of 2000. As a result, the Company recorded
an equity loss from the Joint Venture in the amount of $0.3 million in the
fourth quarter of 2000. In addition, the Company expensed transaction costs of
approximately $2.1 million in the fourth quarter of 2000 that were incurred in
connection with the start-up of the Joint Venture, net of a $0.8 million
reimbursement from the Joint Venture.

The Wyndham Redemption was accounted for by the Company using the purchase
method of accounting in the fourth quarter of 2000. 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.

Pursuant to a Master Lease Termination Agreement dated September 12, 2000
between the Company and Equity Inns, Inc. ("Equity Inns"), all of the lease
contracts for the 75 hotels previously leased from Equity Inns were terminated
effective January 1, 2001, and the Company and Equity Inns simultaneously
entered into management agreements for 54 of the hotels formerly leased to the
Company (the "Equity Inns Conversion"). These management agreements expire on a
staggered annual basis beginning January 1, 2002 through January 1, 2005.
However, Equity Inns renewed several management agreements that were due to
expire on January 1, 2002. As a result of this conversion, effective January 1,
2001, the operating revenues and expenses and the working capital of these
hotels were no longer reflected in the financial statements of the Company.
Instead, the Company recorded revenues from management fees only.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

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 $0.7 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 February 21, 2002, in connection
with the restructuring of the ownership and financing for the Renaissance
Worldgate Hotel as discussed below, the Company's 20% non-controlling equity
interest was redeemed in exchange for mutual releases with respect to the
obligations of the hotel.

<Table>
<Caption>
HOTEL LOCATION
----- --------

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 events of September 11th and the aftermath of the terrorist attacks on
the United States adversely affected the Company during 2001. Since the attacks,
the Company's managed hotels have experienced significant short-term declines in
occupancy compared to 2000. At present, it is not possible to predict either the
severity or duration of such declines in the near- or long-term or the potential
impact on the Company's results of operations, financial condition or cash
flows. Weaker hotel performance would reduce management fees and could give rise
to additional losses under minority investments that were made in connection
with hotels that the Company manages, which could, in turn, have an adverse
impact on the Company's financial performance. The Company's management is
currently unable to estimate the extent of the impact that the terrorist attacks
could have on the Company's operations, liquidity or capital resources.

Lodging revenues consist of rooms, food and beverage and other departmental
revenues from the Pittsburgh Airport Residence Inn by Marriott ("the Owned
Hotel") and one leased hotel. Lodging revenues decreased by $199.1 million, or
97.8%, from $203.5 million in 2000 to $4.4 million in 2001. As a result of the
Equity Inns Conversion, effective January 1, 2001, the operating revenues of
these hotels were no longer reflected in the financial statements of the
Company. Instead, the Company recorded revenues from management fees only.
During 2000, the Company recorded lodging revenues of $198.2 million related to
these previously leased hotels.

Net management fees decreased by $5.0 million, or 16.8%, from $29.5 million
in 2000 to $24.5 million in 2001. During 2001, the Company earned lower base and
incentive management fee revenue on its hotels in the luxury and upscale hotel
segment. Net management fees earned from hotels in this segment decreased by
$7.3 million during 2001 as compared to 2000. Pursuant to the Wyndham Redemption
in the fourth quarter of 2000, the Company's management agreements for seven
Wyndham-owned hotels were terminated. During 2000, the Company earned management
fee revenue of $2.1 million from these hotels. In addition, lower incentive
management fee revenue was earned from hotels in this segment due to the
weakness in the U.S. economy during 2001 and significant declines in occupancy
following the September 11th terrorist attacks.

During 2001, net management fees earned from hotels in the mid-scale, upper
economy and budget hotel segment increased by $2.3 million during 2001 as
compared to 2000. This increase was primarily due to

additional management fee revenue of $1.9 million during 2001 earned from
previously leased hotels as a result of the Equity Inns Conversion, as discussed
above.

In accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition
in Financial Statements," and Securities and Exchange Commission ("SEC") Topic
No. D-96, "Accounting for Management Fees Based on a Formula" (Method No. 2),
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.

Other fees increased by $1.9 million, or 14.6%, from $13.2 million in 2000
to $15.1 million 2001. This increase was partially due to incremental accounting
fee revenue of $0.7 million during 2001 earned from previously leased hotels as
a result of the Equity Inns Conversion, as discussed above. In addition, income
earned on national purchasing contracts increased by $1.4 million during 2001 as
compared to 2000.

Lodging expenses consist of rooms, food and beverage, property costs and
other departmental expenses from the Owned Hotel and one leased hotel. Lodging
expenses decreased by $113.4 million, or 97.7%, from $116.0 million in 2000 to
$2.6 million in 2001. As a result of the Equity Inns Conversion, effective
January 1, 2001, the operating expenses of the previously leased hotels were no
longer reflected in the financial statements of the Company. Instead, the
Company recorded revenues from management fees only. During 2000, the Company
recorded lodging expenses of $113.0 million related to these previously leased
hotels.

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 decreased by $3.5 million, or 23.6%, from $14.9 million in 2000 to
$11.4 million in 2001. During 2001, the Company incurred lower general and
administrative expenses relating to business travel and relocation.
Specifically, during the fourth quarter of 2001, the Company and Equity Inns
finalized the conversion of hotel lease contracts for management agreements.
Based on the final settlement with Equity Inns, the Company reversed
approximately $1.0 million of estimated accrued liabilities related to the
conversion that were established and recorded as a general and administrative
expense in the fourth quarter of 2000. The reversal of the accrued liabilities
was recorded as a reduction of general and administrative expense in 2001. The
Company incurred $3.1 million of legal expenses during 2001 related to on-going
lawsuits as compared to $1.4 million during 2000. This increase was primarily
associated with the legal fees and expenses related to the Columbus Hotels
Properties, LLC and Chisholm Properties South Beach, Inc. legal matters.
Additional information regarding these matters is set forth in Part I, Item 3,
"Legal Proceedings".

During 2000, the Company incurred $0.7 million of expenses for reserves for
doubtful accounts related to notes receivable. The Company incurred no such
expenses during 2001. In addition, the Company incurred expenses during 2000 for
a $1.5 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. The Company incurred no such deficiency during 2001. General and
administrative expenses as a percentage of revenues increased to 25.9% during
2001 compared to 6.1% during 2000. This increase was due to the decrease in
total revenues resulting from the Equity Inns Conversion.

Payroll and related benefits decreased by $3.0 million, or 13.1%, from
$22.7 million in 2000 to $19.7 million in 2001. During 2001, the Company
incurred lower expenses related to bonuses for executives and key employees.
These expenses decreased by $2.4 million during 2001. In addition, overall
salaries and wages decreased by $0.4 million during 2001 due to temporary pay
reductions following the September 11th terrorist attacks and a wage freeze
until 2002. Payroll and related benefits as a percentage of revenues increased
to 44.8% during 2001 compared to 9.2% during 2000. This increase was due to the
decrease in total revenues resulting from the Equity Inns Conversion.

Lease expense represents base rent and participating rent that is based on
a percentage of rooms and food and beverage revenues from one leased hotel.
Lease expense decreased by $88.1 million, or 99.5%, from $88.6 million in 2000
to $0.5 million in 2001. As a result of the Equity Inns Conversion effective
January 1, 2001, the Company no longer incurs lease expense related to the
previously leased hotels.

Depreciation and amortization decreased by $5.7 million, or 35.4%, from
$16.1 million in 2000 to $10.4 million in 2001. This decrease was partially due
to the Equity Inns Conversion that resulted in a non-cash impairment loss of
$12.6 million in 2000 related to the carrying value of the Company's long-term
intangible assets. This loss reduced the Company's investment in lease contracts
and resulted in decreased amortization of $1.2 million in 2001. In addition, as
a result of the Wyndham Redemption in the fourth quarter of 2000, the Company
recorded a $14.1 million reduction of the carrying value of long-term intangible
assets related to the Company's investment in management agreements and resulted
in decreased amortization of $5.2 million in 2001.

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
contracts for management agreements. As discussed above, the lease contracts for
75 hotels previously leased from Equity Inns were terminated and the Company
entered into management agreements for 54 of the hotels formerly leased to the
Company effective January 1, 2001.

As a result of the changes noted above, an operating loss of $0.6 million
was incurred in 2001 as compared to an operating loss of $26.8 million in 2000.

Net interest income of $1.8 million was recorded in 2000 as compared to net
interest expense of $1.7 million in 2001 primarily due to $1.8 million of
incremental interest expense that was incurred by the Company related to the
$25.0 million Subordinated Convertible Notes. Also during 2001, the Company
incurred interest expense of $0.5 million on the long-term debt associated with
the Wyndham Redemption and interest expense of $0.4 million on the long-term
debt associated with the FelCor acquisition.

Losses from equity investments in hotel real estate of $5.2 million in 2001
consisted of the Company's proportionate share of the losses incurred by four
non-controlling equity investments in 11 hotels. These losses were incurred by
the hotels due to the weakness in the U.S. economy during 2001 and significant
declines in occupancy following the September 11th terrorist attacks. Future
adverse changes in the hospitality and lodging industry market conditions or
poor operating results of the underlying investments could result in future
losses or an inability to recover the carrying value of these investments.

The loss on impairment of equity investment in hotel real estate of $3.0
million in 2001 represents a non-cash impairment loss related to the Company's
20% non-controlling equity interest in a partnership that owns the Renaissance
Worldgate Hotel in Kissimmee, Florida. The impairment loss was recorded by the
Company in the 3rd quarter of 2001 and was the result of a permanent impairment
of the future profitability of this hotel. Since its acquisition in the fourth
quarter of 2000, the hotel had experienced lower than expected operating cash
flows, primarily due to decreased occupancy rates and average daily room rates
that affected this hotel and the Orlando lodging market in general. In addition,
the weakness in the U.S. economy during 2001 coupled with the severe downturn in
the Florida lodging market after the September 11th terrorist attacks had
resulted in significant financial difficulties for the hotel. As a result, the
hotel was unable to satisfy debt service obligations, which resulted in mortgage
defaults. Consequently, on February 21, 2002, the ownership and financing for
the hotel were restructured in order to address the financial difficulties of
the hotel. As part of this restructuring, the Company's 20% non-controlling
equity interest was redeemed in exchange for mutual releases with respect to the
obligations of the hotel. In addition, the hotel owner and the Company amended
the management agreement for the hotel, pursuant to which, among other things,
the Company waived its management fees for the period from July 1, 2001 through
February 21, 2002 and agreed to reduce its base management fee for periods
following February 21, 2002.

Income tax benefit for 2000 was computed based on an effective tax rate of
40% after reduction of minority interest. Income tax benefit for 2001 was
computed based on an effective tax rate of 38% after reduction of minority
interest and adjusted for a full valuation allowance established on the
anticipated capital loss that was generated through the impairment of the
Renaissance Worldgate Hotel equity investment in

hotel real estate. A valuation allowance has not been recorded on the net
operating losses as management of the Company believes it is more likely than
not that these assets are realizable.

Minority interest reflects Wyndham's 55% non-controlling ownership interest
in IH LLC through October 31, 2000 and adjusted to 1.6627% thereafter to reflect
the reduction of Wyndham's common interest in IH LLC resulting from the Wyndham
Redemption, as discussed above.

As a result of the changes noted above, a net loss of $7.4 million was
incurred in 2001 as compared to a net loss of $8.9 million in 2000.

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

Lodging revenues consist of rooms, food and beverage and other departmental
revenues from the previously 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.

Lodging expenses consist of rooms, food and beverage, property costs and
other departmental expenses from the previously 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.

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 previously 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 contracts 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.

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
contracts for management agreements. Pursuant to the Equity Inns Conversion
discussed above, all of the lease contracts for the 75 hotels previously 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 ownership
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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the consolidated financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and the related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, which include those related to base and incentive management fee
revenue, bad debt expense, marketable securities, equity investments in hotel
real estate, intangible assets, income taxes, insurance receivables and
reserves, the self-insured health program, impairments of long-term assets, as
well as contingencies and litigation. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.

The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements. The Company records base management fee
revenue on full- and limited-service hotels based on a percentage of the managed
hotels' annual gross operating revenues. The Company records incentive
management fee revenue on full- and limited-service hotels based on a number of
factors as required by the provisions of the management agreements, but the most
significant factor is the managed hotels' annual operations. Revisions to base
and incentive management fee estimates are charged to income in the period in
which the facts that gave rise to the revision became known. The Company
maintains allowances for doubtful accounts for estimated losses resulting from
the inability of its managed hotels' owners to make required payments. If the
financial condition of the Company's managed hotels' owners were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances would be required.

The Company has non-controlling equity interests in several hotel real
estate properties which are accounted for under the equity method of accounting.
The Company measures equity earnings or losses based on its proportionate share
of the hotels' net income adjusted for any preferential returns for individual
partners or investors. The Company records an investment charge when it believes
an investment has experienced a decline in value that is other than temporary.
Future adverse changes in the hospitality and lodging industry market conditions
or poor operating results of the underlying investments could result in losses
or an inability to recover the carrying value of the investments.

Intangible assets for full- and limited-service hotel management agreements
have been recorded at the estimated fair value or at the cost of acquiring the
management agreements. Future adverse changes in the
18

hospitality and lodging industry and termination of management agreements could
result in an inability to recover the carrying value of the intangible assets
that may not be reflected in the current carrying value, thereby possibly
requiring an impairment charge in the future.

The Company records a valuation allowance to reduce its deferred tax assets
to the amount that is more likely than not to be realized. While the Company has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event that
the Company were to determine that it would not be able to realize its deferred
tax assets in the future in excess of its net recorded amount, an adjustment to
the deferred tax asset would be charged to income in the period that such
determination was made.

The Company earns insurance revenues through reinsurance premiums, direct
premiums written and reinsurance premiums ceded. Reinsurance premiums are
recognized when policies are written and any unearned portions of the premium
are recognized to account for the unexpired term of the policy. Direct premiums
written are recognized in accordance with the underlying policy and reinsurance
premiums ceded are recognized on a pro-rata basis over the life of the related
policies. Losses, at present value, are provided for reported claims, claims
incurred but not reported and claims settlement expenses. Claims incurred but
not reported are estimated based on historical experience and other various
factors that are believed to be reasonable under the circumstances. Actual
liabilities may differ from estimated amounts and any changes in estimated
losses and settlements are reflected in current earnings.

Amounts due to the health trust represent the Company's obligation to fund
the Interstate Hotels Corporation Health & Welfare Plan. This obligation is
affected primarily by the collection of health insurance premiums and health
claims experience, which would include an estimate of incurred but not reported
health claims. The incurred but not reported liability is estimated based on
historical experience and other various factors that are believed to be
reasonable under the circumstances. Actual liabilities may differ from estimated
amounts and any changes in estimated losses and settlements are reflected in
current earnings.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash and cash equivalent assets were $39.0 million at
December 31, 2001 compared to $51.3 million at December 31, 2000, and current
assets exceeded current liabilities by $33.1 million at December 31, 2001
compared to $23.6 million at December 31, 2000. The Company has committed to
invest $25.0 million of its cash and cash equivalents into the Joint Venture.

Net cash used in operating activities was $1.4 million during 2001 compared
to net cash provided by operating activities of $10.1 million during 2000. The
decrease of $11.5 million resulted primarily from an increase in operating
income (adjusted for non-cash items) of $5.0 million from 2000 to 2001, offset
by a decrease of $16.5 million in cash used in changes in assets and
liabilities, primarily as a result of the payment of accrued rent and other
current liabilities associated with the previously leased hotels. If the
Company's managed hotels continue to experience declines in occupancy and weaker
hotel operating performance in the future, the Company's management fee revenues
could decrease and additional losses from the Company's minority investments may
arise, which could negatively impact the Company's cash flows from operations.

Net cash used in investing activities was $1.1 million during 2001 compared
to net cash used in investing activities of $11.4 million during 2000. During
2001, the Company invested $8.7 million for a 50% non-controlling equity
interest in eight hotels and $2.2 million for a 15% non-controlling equity
interest in two hotels. These amounts were offset by an aggregate repayment of
$8.3 million on two notes receivable in 2001, which were made by the owner of
The Charles Hotel Complex in favor of the Company in 1999. During 2000, the
Company invested $9.0 million for non-controlling equity interests in three
hotels.

During 2001, the Company finalized the Wyndham transactions and settled all
amounts due to and due from Wyndham including all escrowed amounts required
under the Spin-off and Wyndham Redemption. As part of the final settlement,
approximately $0.9 million of contingent assets were settled and accounted for
in accordance with SFAS No. 38, "Accounting for Preacquisition Contingencies in
a Purchase Transaction." The settlement of these contingent assets reduced the
Company's investment in management agreements.

The Company's capital expenditure budget for the year ending December 31,
2002 is approximately $0.5 million consisting primarily of expenditures for
computer and systems-related equipment. In addition, the Company has committed
to invest $25.0 million into the Joint Venture. The Company is required to
maintain, and does maintain, sufficient liquidity for this investment, which may
be accomplished through lines of credit or other means. Such amount is expected
to be invested incrementally, concurrently with the closings of hotel property
acquisitions by the Joint Venture. As of April 16, 2002, no funds have been
invested.

During the third quarter of 2001, the Company recorded a non-cash
impairment loss of $3.0 million related to the Company's 20% non-controlling
equity interest in a partnership that owns the Renaissance Worldgate Hotel in
Kissimmee, Florida. The impairment loss was the result of a permanent impairment
of the future profitability of this hotel. Since its acquisition in the fourth
quarter of 2000, the hotel had experienced lower than expected operating cash
flows, primarily due to decreased occupancy rates and average daily room rates
that affected this hotel and the Orlando lodging market in general. In addition,
the weakness in the U.S. economy during 2001 coupled with the severe downturn in
the Florida lodging market after the September 11th terrorist attacks had
resulted in significant financial difficulties for the hotel. As a result, the
hotel was unable to satisfy debt service obligations, which resulted in mortgage
defaults. As of December 31, 2001, the Company's accounts receivable owed from
this hotel amounted to approximately $1.2 million, which relates primarily to
the reimbursement of costs.

The Company's management currently believes that the remaining accounts and
note receivable will be collected, however, there can be no assurance that the
amounts will be collected or, if so, the timing or terms thereof. The Company's
management will continue to evaluate the collectibility of the accounts and note
receivable on a quarterly basis.

Net cash used in financing activities was $9.8 million during 2001 compared
to net cash provided by financing activities of $30.2 million during 2000. In
March 2001, the Company entered into a $4.2 million promissory note to fund the
acquisition of a 50% non-controlling equity interest in eight hotels. Interest
on the note is payable monthly at the rate of 12% per annum and the outstanding
principal balance is due and payable on December 31, 2010. In July 2001, the
Company paid $8.25 million plus accrued interest to Wyndham in connection with
the Company's redemption of Wyndham's preferred membership interest in IH LLC.

During 2000, the Company entered into a $7.6 million limited-recourse
mortgage note that is collateralized by the Owned Hotel. The note contains
restrictive covenants, including financial ratios, which are required to be
maintained by the Company as borrower and guarantor. During the third quarter of
2001, the Company was not in compliance with the minimum net worth covenant of
the guarantor. During the fourth quarter of 2001, the Company obtained a waiver
of compliance and the existing minimum net worth covenant was modified by the
bank. As of December 31, 2001, the Company was in compliance with all debt
covenant requirements under the limited recourse mortgage note.

In accordance with the terms of IH LLC's limited liability company
agreement, and prior to the Wyndham Redemption, the Company was required to
distribute 55% of IH LLC's cash flows from operations to Wyndham through October
31, 2000. This amount totaled approximately $2.5 million and was paid in the
fourth quarter of 2001. Thereafter, the Company's required distribution to
Wyndham is 1.6627% of IH LLC's
20

cash flows from operations based on Wyndham's remaining common interest in IH
LLC. The Company's required distribution to Wyndham for the period from November
1, 2000 through October 31, 2001 totaled $145,000 and was also paid in the
fourth quarter of 2001. The distribution payable to Wyndham through December 31,
2001 approximated $49,000.

In February 2001, the Company's Board of Directors approved a stock
repurchase program providing for the purchase of shares of its Class A Common
Stock. Pursuant to the stock repurchase program, the Company purchased, and
subsequently cancelled, 826,000 shares of its Class A Common Stock for an
aggregate purchase price of $2.0 million during 2001.

During the third quarter of 2001, the Company entered into a $40.0 million
senior secured credit facility co-arranged by Lehman Brothers Holdings Inc.,
d/b/a Lehman Capital, and Credit Lyonnais New York Branch. The credit facility,
which may be used to obtain management agreements for hotel properties and to
finance the acquisition of hotel properties, has a two-year term and carries
varying rates of interest. In addition to mandatory prepayment provisions, the
credit facility contains restrictive covenants, including the maintenance of
financial ratios, restrictions on the payment of dividends, restrictions on the
imposition of liens and limitations on additional indebtedness. Transaction
costs of approximately $1.5 million were incurred in connection with the credit
facility during 2001. These costs were deferred and are being amortized over a
two-year period. In addition, a nonrefundable commitment fee ranging from 0.375%
to 0.5% of the unused portion of the credit facility is payable quarterly.
During 2001, the Company incurred $84,000 of interest expense related to the
commitment fee. As of April 16, 2002, there were no borrowings against the
credit facility and the Company was in compliance with all of the restrictive
covenants.

The following table summarizes the Company's contractual obligations at
December 31, 2001 and the effect that such obligations are expected to have on
the Company's liquidity and cash flows in future periods.

<Table>
<Caption>
AS OF DECEMBER 31, 2001 LESS THAN ONE-THREE
(IN THOUSANDS) TOTAL ONE YEAR YEARS THEREAFTER
- ----------------------- ------- --------- --------- ----------

Long-Term Debt:
Investor Notes............................... $25,000 $ -- $ -- $25,000
Wyndham Redemption Notes..................... 4,432 750 3,682 --
Mortgage Note................................ 7,379 851 6,528 --
Promissory Note.............................. 4,170 -- -- 4,170
------- ------- ------- -------
Total Long-Term Debt.................... 40,981 1,601 10,210 29,170
Lease commitments............................ 4,414 2,126 2,288 --
Joint Venture commitment..................... 25,000 -- -- --
Management agreement commitments............. 4,050 -- -- --
Equity investment funding.................... -- -- -- --
</Table>

Long-Term Debt: For principal repayment and debt service obligations with
respect to the Company's long-term debt, see Note 5 to the Company's
Consolidated Financial Statements and Supplementary Data contained on pages F-13
through F-14 of this Report. All such information is incorporated herein by
reference.

Lease Commitments: The Company has entered into leases of office space and
certain equipment. These leases expire at varying times through 2005.

Joint Venture Commitment: The Company has committed to invest $25.0
million into the Joint Venture. The Company is required to maintain, and does
maintain, sufficient liquidity for this investment, which may be accomplished
through lines of credit or other means. As of April 16, 2002, the Company has
not invested any funds into the Joint Venture. Such amounts are expected to be
invested incrementally, concurrent with the closings of hotel property
acquisitions by the Joint Venture. The timing of such investments is unknown.

Management Agreement Commitments: Under the provisions of certain
management agreements between the Company and hotel owners, the Company has
outstanding commitments to provide an aggregate of up to $4.1 million to these
hotel owners in the form of investments or working capital loans, which may be

forgiven or repaid based upon the specific terms of each management agreement.
The timing of future investments or working capital loans to hotel owners is
unknown.

Equity Investment Funding: In connection with the Company's equity
investments in hotel real estate, the Company is party to various unconsolidated
partnerships or limited liability companies. The terms of such partnership or
limited liability company agreements provide that the Company contributes
capital as specified. The timing and amount of such contributions of capital is
unknown. Currently, the Company has non-controlling equity interests in five
hotel real estate limited partnerships and limited liability companies. For
information regarding the Company's percentage ownership and its total
investment in these entities, see Note 8 to the Company's Consolidated Financial
Statements and Supplementary Data contained on pages F-16 through F-17 of this
Report. All such information in incorporated herein by reference.

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 Preferred Stock and the Notes, together with the credit
facility, 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.

NEW ACCOUNTING PRONOUNCEMENTS

During the second quarter of 2001, the SEC issued Topic No. D-96,
"Accounting for Management Fees Based on a Formula." This pronouncement provides
for two methods of recording management fee revenue. The Company adopted Method
#2, which was consistent with previous methods and provides for revenue
recognition as its earned based on the profitability of the managed hotel,
subject to the specific terms of each individual management agreement.

In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." These
standards require that all business combinations be accounted for using the
purchase method of accounting and that goodwill and other intangible assets with
indefinite useful lives should not be amortized, but should be tested for
impairment at least annually, and they provide guidelines for new disclosure
requirements. These standards outline the criteria for initial recognition and
measurement of intangibles, assignment of assets and liabilities including
goodwill to reporting units and goodwill impairment testing. The provisions of
SFAS Nos. 141 and 142 apply to all business combinations after June 30, 2001.
The implementation of the provisions of SFAS No. 142 for existing goodwill and
other intangible assets is required effective January 1, 2002. Management of the
Company does not expect the implementation of SFAS No. 142 to have a significant
impact on the Company's financial position or its results of operations.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement establishes standards for accounting for
obligations associated with the retirement of tangible long-lived assets. The
implementation of the provisions of SFAS No. 143 is required effective January
1, 2003. Management of the Company does not expect the implementation of SFAS
No. 143 to have a significant impact on the Company's financial position or its
results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement addresses financial
accounting and reporting for the impairment and disposal of long-lived assets.
The implementation of the provisions of SFAS No. 144 is required effective
January 1, 2002. Management of the Company does not expect the implementation of
SFAS No. 144 to have a significant impact on the Company's financial position or
its results of operations.

preparing a plan of implementation. The implementation of this pronouncement
could have a significant impact on the operating revenues and expenses that are
reported by the Company, but should not impact its results of operations.

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.

The Company's current investment policy is to invest in highly liquid
investments with a maturity of 90 days or less. Such financial instruments
consist of cash and cash equivalents, individual municipal bonds and corporate
government bonds. The Company believes it minimizes its risk through proper
diversification along with the requirements that the securities must be of
investment grade with an average rating of "A" or better by Standard and Poor's.
The Company believes that earnings and cash flows are not materially affected by
changes in interest rates, due to the nature and short-term investment horizon
for which these securities are invested.

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:

<Table>
<Caption>
PAGE
----

Report of Independent Accountants........................... F-1
Consolidated Balance Sheets as of December 31, 2000 and
2001...................................................... F-2
Consolidated Statements of Operations for the years ended
December 31, 1999, 2000 and 2001.......................... F-3
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1999, 2000 and 2001.............. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 2000 and 2001.......................... F-5
Notes to Consolidated Financial Statements.................. F-6
Consolidated Financial Statements of FCH/IHC Hotels, L.P. as
of December 31, 2001 and for the period from March 27,
2001 (inception) through December 31, 2001................ Appendix A
</Table>

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The directors and executive officers of the Company are as follows:

<Table>
<Caption>
NAME AGE POSITION
---- --- --------

Thomas F. Hewitt 58 Chairman of the Board and Chief Executive Officer; Director
J. William Richardson 54 Vice Chairman and Chief Financial Officer; Director
Kevin P. Kilkeary 50 President and Chief Operating Officer
Henry L. Ciaffone 61 Senior Executive Vice President, International Operations
and Development
Glyn F. Aeppel 43 Executive Vice President, Business Development and
Acquisitions
Timothy Q. Hudak 39 Senior Vice President and General Counsel
Charles R. Tomb 47 Senior Vice President, Development and Acquisitions
Karim J. Alibhai 38 Director
Joseph J. Flannery 40 Director
Benjamin D. Holloway 77 Director
Stephen P. Joyce 42 Director
Alan J. Kanders 37 Director
Mahmood J. Khimji 41 Director
Phillip H. McNeill, Sr. 63 Director
John J. Russell, Jr. 55 Director
Sherwood M. Weiser 71 Director
</Table>

THOMAS F. HEWITT, age 58, became the Company's Chairman of the Board and
Chief Executive Officer in March 1999. Mr. Hewitt previously was President and
Chief Operating Officer of Carnival Resorts & Casinos, where he headed all hotel
and resort operations. At Carnival, Mr. Hewitt was responsible for over 80
hotels and 17,000 employees in the United States, South America, the Caribbean
and Mexico. Mr. Hewitt joined Carnival in 1985 (when it was known as The
Continental Companies) after a career spanning more than 20 years with Sheraton
Corporation, most recently as the President of its North American division from
1983 to 1985. Mr. Hewitt's term as a Class A-3 director expires on the date of
the 2002 annual meeting of stockholders of the Company, and upon the election
and qualification of his successor.

J. WILLIAM RICHARDSON, age 54, joined the Board in July 2000 and has served
as the Company's Vice Chairman and Chief Financial Officer since July 1999.
Previously, Mr. Richardson was the Company's Chief Financial Officer and
Executive Vice President, Finance and Administration, and also served in those
capacities for Interstate Hotels Company, the predecessor company ("Old
Interstate"), from 1994 until June 1998. Before that, Mr. Richardson served as
Controller and Treasurer of Old Interstate since 1988. Prior to 1988, Mr.
Richardson was Vice President and a partner in an Atlanta-based hotel management
and development company and also worked with Marriott Corporation. His
experience in the hospitality industry spans over a period of 29 years. He
served as our acting President and Chief Executive Officer from January to March
of 1999. Mr. Richardson's term as a Class A-1 director expires on the date of
the 2003 annual meeting of stockholders of the Company, and upon the election
and qualification of his successor.

KEVIN P. KILKEARY, age 50, became the Company's President and Chief
Operating Officer in April 1999. Mr. Kilkeary previously served as Executive
Vice President and as Senior Vice President, as well as President and Chief
Operating Officer of the Company's subsidiary, Crossroads Hospitality Company.
Mr. Kilkeary joined Old Interstate in 1972 and has held a variety of other
positions in hotels and at the corporate office, including executive positions
as General Manager, Regional Vice President of Operations, Vice President of
Sales and Marketing and Vice President of Staff Operations.

HENRY L. CIAFFONE, age 61, became the Company's Senior Executive Vice
President, International Operations and Development in January 2002. Mr.
Ciaffone previously served as an Executive Vice President

of the Company beginning in January 1999. Mr. Ciaffone, who joined Old
Interstate in 1989, previously served as Senior Vice President and Treasurer.
Prior to joining Old Interstate, Mr. Ciaffone held positions in hotel finance
and real estate development at Koala Inns of America, Sheraton Corporation and
the Howard Johnson Company.

GLYN F. AEPPEL, age 43, became the Company's Executive Vice President,
Business Development and Acquisitions in March 2001. From July 1998 to March
2001, Ms. Aeppel served as Senior Vice President of Acquisitions and Development
for FFC Hospitality, LLC. From 1995 to July 1998, she was Vice President of
Development for Old Interstate's Crossroads division. Prior to joining Old
Interstate, Ms. Aeppel held financial and development positions with Lodging
Evaluation Group, Holiday Inn Worldwide and Marriott Corporation.

TIMOTHY Q. HUDAK, age 39, joined Old Interstate in 1992 as Assistant
General Counsel and now serves as our Senior Vice President and General Counsel.
Prior to joining Old Interstate, Mr. Hudak held the position of Associate
General Counsel for Cyclops Industries, Inc. and, prior to that, practiced law
at the firm of Tucker Arensberg.

CHARLES R. TOMB, age 47, is the Company's Senior Vice President,
Development and Acquisitions. He joined Old Interstate in 1992, and most
recently, he oversaw Old Interstate's development activities in the Western
Region as Vice President of Development. Mr. Tomb has approximately 20 years of
experience in the hotel industry, including prior positions with Holiday Inns
Worldwide, Americana Hotels & Resorts and Hyatt Hotels.

KARIM J. ALIBHAI, age 38, joined the Board in October 2000. Mr. Alibhai is
presently a Principal of the Gencom Group, which he rejoined in June 1999. He
served as President, Chief Operating Officer and a Director of Wyndham
International, Inc. from October 1997 through May 1999. Prior to October 1997,
Mr. Alibhai served as President and Chief Executive Officer of the Gencom Group.
Mr. Alibhai's term as a Series B Preferred Director expires on the date of the
2002 annual meeting of stockholders of the Company, and upon the election and
qualification of his successor.

JOSEPH J. FLANNERY, age 40, joined the Board in October 2000. Mr. Flannery
is a Managing Director of Lehman Brothers Inc. Prior to joining Lehman in 1989,
Mr. Flannery held positions with Pannell Kerr Forster and Prudential Life
Insurance Company. Mr. Flannery's term as a Series B Preferred Director expires
on the date of the 2002 annual meeting of stockholders of the Company, and upon
the election and qualification of his successor.

BENJAMIN D. HOLLOWAY, age 77, joined the Board in May 1999. Mr. Holloway is
presently a financial consultant who serves as a member of the Board of
Directors of Alliance Capital Management L.P. Mr. Holloway served in numerous
capacities over a nearly 40-year career with Equitable Life Assurance Society,
where he most recently served as Vice Chairman of the Board (and director) from
1987 to 1990. Mr. Holloway also served as a director or trustee of many
charitable and educational organizations, including Duke University, The
American Academy in Rome and the Cathedral Church of St. John the Divine. Mr.
Holloway's term as a Class A-2 director expires on the date of the 2004 annual
meeting of stockholders of the Company, and upon the election and qualification
of his successor.

STEPHEN P. JOYCE, age 42, joined the Board in May 1999. Mr. Joyce is
Executive Vice President of Franchising for Marriott International, Inc.'s
full-service brands, Marriott Hotels, Resorts and Suites, and Renaissance
Hotels. Mr. Joyce is a 20-year veteran of Marriott. Before joining Marriott
Lodging in 1988, Mr. Joyce was the senior manager of Marriott's Corporate
Finance Group and Partnership and Syndication Group, and has also served as a
financial and operational consultant. He currently serves on the Board of
Directors of the International Franchise Association. Mr. Joyce's term as a
Class B director expires on the date of the 2002 annual meeting of stockholders
of the Company, and upon the election and qualification of his successor.

ALAN J. KANDERS, age 37, joined the Board in October 2000. Mr. Kanders is a
Vice President of Lehman Commercial Group, Inc., an affiliate of Lehman Brothers
Inc. From 1995 to 1997, Mr. Kanders was Vice President of Development for
Wingate Inns, Inc. and from 1992 to 1995, he was Vice President of
25

Development for Rank Hotels, N.A. Mr. Kanders' term as a Series B Preferred
Director expires on the date of the 2002 annual meeting of stockholders of the
Company, and upon the election and qualification of his successor.

MAHMOOD J. KHIMJI, age 41, joined the Board in October 2000. Mr. Khimji
presently is a Principal of Highgate Holdings and has held that position since
1988. He is a member of the Board of Visitors of the Faculty of Law for Columbia
University and he previously served on the Board of Directors of Meristar
Hospitality Corporation. Mr. Khimji's term as a Series B Preferred Director
expires on the date of the 2002 annual meeting of stockholders of the Company,
and upon the election and qualification of his successor.

PHILLIP H. MCNEILL, SR., age 63, joined the Board in May 1999. Mr. McNeill
is Chairman of the Board and Chief Executive Officer of Equity Inns, Inc. and
has been Chairman and President of McNeill Investment Company, Inc. since 1977.
From 1963 to 1977, he served in various capacities, including President and
Chief Executive Officer, with Schumacher Mortgage Company, Inc., a mortgage
banking firm and subsidiary of Time, Inc. Mr. McNeill has served as President
and director of the Memphis Mortgage Bankers Association and the Tennessee State
Mortgage Bankers Association. He is currently serving as a member of the Board
of Directors of National Commerce Financial, a trustee of Rhodes College, a
member of the Board of Visitors of the University of Memphis and board member of
the Society of Entrepreneurs. Mr. McNeill's term as a Class A-3 director expires
on the date of the 2002 annual meeting of stockholders of the Company, and upon
the election and qualification of his successor.

JOHN J. RUSSELL, JR., age 55, joined the Board in June 2001. Mr. Russell is
Chief Executive Officer of Hospitality Artists, LLC and the immediate past
Chairman of the Board of the American Hotel & Lodging Association (the "AH&LA").
Prior to serving in these positions, Mr. Russell was Vice Chairman of the Travel
Division of Cendant Corporation and President and Chief Executive Officer of
Resort Condominium International LLC, Global Operations. Before that, he served
as Chairman and Chief Executive Officer of Cendant's Hotel Division. From 1995
to 1996, he was Executive Vice President of Franchise Sales for the Century 21
Real Estate Corporation, and from 1992 to 1995, he served as President of Days
Inns of America. Mr. Russell has more than 28 years of experience in the
hospitality industry during which he has held positions with, among others,
Benchmark Management Company, Radisson Hotels International and Sheraton
Corporation. Mr. Russell also serves as a member of the Board of Directors of
the Educational Institute of the AH&LA and the University of Delaware's Hotel
and Restaurant Program. He also previously served as President of the
Hospitality, Sales and Marketing Association International. Mr. Russell is a
graduate of the United States Military Academy at West Point. Mr. Russell's term
as a Class A-2 director expires on the date of the 2004 annual meeting of
stockholders of the Company, and upon the election and qualification of his
successor.

SHERWOOD M. WEISER, age 71, joined the Board in October 2000. Mr. Weiser is
Chairman, President and Chief Executive Officer of Continental Hospitality
Holdings, LLC. He served as Chairman, President and Chief Executive Officer of
Carnival Resorts & Casinos from March 1994 until April 2001. Mr. Weiser is a
member of the Board of Directors of Carnival Corp. and serves as a member of the
Nominating Committee and the Plan Administration Committee, as well as Chairman
of the Compensation Committee of the Board of Directors of Carnival Corp. He is
also a member of the Board of Directors of Mellon United National Bank, a
subsidiary of Mellon Bank, and Wyndham International, Inc., and is a trustee of
the University of Miami. Mr. Weiser's term as a Series B Preferred Director
expires on the date of the 2002 annual meeting of stockholders of the Company,
and upon the election and qualification of his successor.

COMMITTEES OF THE BOARD

The Board has established five committees--a Compensation Committee, an
Audit Committee, a Nominating Committee, a Capital Committee and a Special
Committee.

Compensation Committee. The Compensation Committee reviews executive
salaries, administers the bonus, incentive compensation and stock option plans
of the Company and approves the salaries and other benefits of the executive
officers of the Company. In addition, the Compensation Committee consults with
the Company's management regarding pension and other benefit plans and the
compensation policies and
26

practices of the Company. The Compensation Committee was formed in June 1999 in
connection with the Spin-off and is composed of Sherwood M. Weiser (Chairman),
Joseph J. Flannery, Stephen P. Joyce and John J. Russell, Jr. The members of the
Compensation Committee are not employed by the Company or any of its affiliates
("Non-Employee Directors") and are not eligible to receive options or other
rights under any employee stock or other benefit plan (other than plans in which
only directors may participate).

Audit Committee. The Audit Committee reviews the professional services
provided by the Company's independent accountants and the independence of such
accountants from the management of the Company. The Audit Committee also reviews
the scope of the audit by the Company's independent accountants, the annual
financial statements of the Company, the Company's system of internal accounting
controls and such other matters with respect to the accounting, auditing and
financial reporting practices and procedures of the Company as it finds
appropriate or as are brought to its attention, and meets from time to time with
members of the Company's internal audit staff. The Audit Committee was formed in
June 1999 in connection with the Spin-off and is required to consist solely of
Non-Employee Directors. The members of the Audit Committee are Benjamin D.
Holloway (Chairman), Karim J. Alibhai, Alan J. Kanders and John J. Russell, Jr.

Nominating Committee. The Nominating Committee was formed in June 1999 in
connection with the Spin-off and is empowered to nominate persons solely for
election as Class A directors at the annual meetings of stockholders. The
Committee will consider candidates for nominees for directors recommended by
Class A common stockholders if such recommendations are submitted in writing to
the Secretary of the Company giving the background and qualifications of the
candidate. The Nominating Committee is composed of Thomas F. Hewitt (Chairman),
Joseph J. Flannery, Stephen P. Joyce and Mahmood J. Khimji.

Capital Committee. The Capital Committee was formed in November 2000 in
connection with the Investor transaction and reviews and makes recommendations
to the Board regarding acquisitions, financings and other capital transactions.
The Capital Committee is composed of Thomas F. Hewitt (Chairman), Karim J.
Alibhai, Joseph J. Flannery, J. William Richardson, John J. Russell, Jr. and
Sherwood M. Weiser.

Special Committee. Following the public announcement by Shaner Hotel Group
Limited Partnership on March 27, 2002, of its intention to commence a partial
tender offer for the Company's Class A Common Stock, the Board of Directors
appointed a Special Committee of its independent directors. The Special
Committee was authorized to evaluate and recommend to the Board of Directors
whether the partial tender offer is in the best interests of the Company's
public stockholders. The Special Committee has retained Merrill Lynch to act as
its financial advisor and Miles & Stockbridge as its legal counsel. The Special
Committee is composed of Benjamin D. Holloway and John J. Russell, Jr.

DIRECTOR NOMINATION PROCEDURES

Nominations for election of directors by the stockholders may be made by
the Board or a designated committee thereof or by any stockholder entitled to
vote in the election of directors generally.

SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE

Based solely on a review of copies of reports furnished to the Company and
written representations signed by all directors and executive officers that no
other reports were required with respect to their beneficial ownership of common
stock during 2001, the Company believes that the directors and executive
officers and all beneficial owners of more than 10% of the Class A Common Stock
outstanding complied with all applicable filing requirements under Section 16(a)
of the Securities Exchange Act of 1934, as amended, with respect to their
beneficial ownership of Class A Common Stock during 2001 except that Mr.
Kilkeary reported a transaction on a Form 4 filed late with the SEC.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth certain information regarding the
compensation paid to Thomas F. Hewitt, who is the Company's Chairman of the
Board and Chief Executive Officer, and each of the four other most highly
compensated executive officers of the Company in 2001 (collectively, the "Named
Executive Officers").

SUMMARY COMPENSATION TABLE

<Table>
<Caption>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ------------------------------------
----------------------------------- RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING LTIP
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS
- --------------------------- ---- -------- -------- ------------- ---------- ----------- --------

Thomas F. Hewitt(1)....... 2001 $390,000 $500,000 $142,355(2) $ -- -- $ 31,200(3)
Chairman of the Board 2000 400,000 680,000 71,446(4) 1,000,000(5) -- 32,000(3)
and Chief Executive 1999 338,462 450,000 113,549(6) 591,230(7) 225,000(8) 27,077(3)
Officer
J. William Richardson..... 2001 316,875 300,000 173,605(9) -- -- 25,350(3)
Vice Chairman and 2000 325,000 552,500 124,900(10) 750,000(11) -- 26,000(3)
Chief Financial Officer 1999 303,654 400,000 59,512(12) 487,500(13) 175,000(8) 24,292(3)
Kevin P. Kilkeary......... 2001 292,500 250,000 370,034(14) -- -- 23,400(3)
President and 2000 300,000 446,250 73,490(15) 500,000(16) -- 24,000(3)
Chief Operating Officer 1999 287,788 325,000 6,700(17) -- 150,000(8) 23,023(3)
Henry L. Ciaffone......... 2001 222,187 200,000 124,541(18) -- 30,000(19) 17,775(3)
Senior Executive Vice 2000 262,159 225,000 182,947(20) -- 50,000(19) 18,000(3)
President, International 1999 237,404 200,000 101,804(21) -- 50,000(19) 17,515(3)
Operations and
Development
Charles R. Tomb........... 2001 192,442 90,000 162,353(22) -- 21,000(19) 15,395(3)
Senior Vice President, 2000 200,000 215,000 169,830(23) -- 35,000(19) 16,000(3)
Development and 1999 195,885 150,000 149,312(24) -- 35,000(19) 15,671(3)
Acquisitions
</Table>

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

(1) Mr. Hewitt became the Chairman of the Board and Chief Executive Officer in
March 1999. Mr. Hewitt's 1999 compensation is for the period from March 1,
1999 through December 31, 1999.

(2) Consists of dividends earned on Preferred Stock of $87,500, compensation
for services as a director of the Company's subsidiary, Northridge
Insurance Company ("Northridge"), of $25,000, imputed interest on a loan by
the Company of $18,480, a car allowance of $9,000 and miscellaneous expense
reimbursements of $2,375.

(3) Consists entirely of compensation under the Company's Executive Retirement
Plan.

(4) Consists of dividends earned on Preferred Stock of $17,500, compensation
for services as a director of Northridge of $25,000, imputed interest on a
loan by the Company of $18,480, a car allowance of $9,000 and miscellaneous
expense reimbursements of $1,466.

(5) Consists of 100,000 shares of the Company's Series B Convertible Preferred
Stock issued in connection with the Investor transaction. The Preferred
Stock pays dividends at 8.75% per annum. These shares are convertible into
the Company's Class A Common Stock at $4.00 per share, subject to
forfeiture restrictions during the three-year period ending on October 16,
2003, and are redeemable for $10.00 per share.

(6) Consists of a reimbursement of costs for relocation of $89,730, imputed
interest on a loan by the Company of $15,400, a car allowance of $7,615 and
miscellaneous expense reimbursements of $804.

(7) Consists of 181,917 restricted shares of the Company's Class A Common stock
granted on October 1, 1999 and valued at $3.25 per share. The restricted
shares originally vested over the four-year period commencing on March 1,
2000, at the rate of $147,807 per year. In connection with the Investor
transaction, all previously unvested restricted shares became fully vested
on October 20, 2000.

(8) Consists of shares underlying stock options granted under the Company's
Equity Incentive Plan, with an exercise price of $4.50 per share. These
options were cancelled in connection with the Investor transaction in 2000.

(9) Consists of dividends earned on Preferred Stock of $65,625, compensation
for services as a director of Northridge of $25,000, amortization of loan
forgiveness of $70,804 and imputed interest on a loan by the Company of
$12,176.

(10) Consists of dividends earned on Preferred Stock of $13,125, compensation
for services as a director of Northridge of $25,000, amortization of loan
forgiveness of $70,804 and imputed interest on a loan by the Company of
$15,971.

(11) Consists of 75,000 shares of the Company's Series B Convertible Preferred
Stock issued in connection with the Investor transaction. The Preferred
Stock pays dividends at 8.75% per annum. These shares are convertible into
the Company's Class A Common Stock at $4.00 per share, subject to
forfeiture restrictions during the three-year period ending on October 16,
2003, and are redeemable for $10.00 per share.

(12) Consists of compensation for services as a director of Northridge of
$25,000, amortization of loan forgiveness of $23,601 and imputed interest
on a loan by the Company of $10,911.

(13) Consists of 150,000 restricted shares of the Company's Class A Common stock
granted on October 1, 1999 and valued at $3.25 per share. The restricted
shares originally vested over the three-year period commencing on June 17,
2000, at the rate of $162,500 per year. In connection with the Investor
transaction, all previously unvested restricted shares became fully vested
on October 20, 2000.

(14) Consists of dividends earned on Preferred Stock of $43,750, amortization of
loan forgiveness of $291,667 and imputed interest on loans by the Company
of $34,617.

(15) Consists of dividends earned on Preferred Stock of $8,750, amortization of
loan forgiveness of $50,000 and imputed interest on a loan by the Company
of $14,740.

(16) Consists of 50,000 shares of the Company's Series B Convertible Preferred
Stock issued in connection with the Investor transaction on October 20,
2000. The Preferred Stock pays dividends at 8.75% per annum. These shares
are convertible into the Company's Class A Common Stock at $4.00 per share,
subject to forfeiture restrictions during the three-year period ending on
October 16, 2003, and are redeemable for $10.00 per share.

(17) Consists entirely of imputed interest on a loan by the Company.

(18) Consists of a housing allowance of $59,261, a cost of living allowance of
$48,837 and a car allowance of $16,443.

(19) Consists of shares underlying options granted under the Company's Equity
Incentive Plan, with an exercise price of $2.00 per share for 2001 and an
exercise price of $4.50 per share for 2000 and 1999, prior to the repricing
of stock options in 2001 as discussed below.

(20) Consists of a housing allowance of $98,110, a cost of living allowance of
$48,837, a car allowance of $16,443 and miscellaneous expense
reimbursements of $19,557.

(21) Consists of a housing allowance of $61,130, a cost of living allowance of
$30,429 and a car allowance of $10,245.

(22) Consists of amortization of loan forgiveness of $149,543, imputed interest
on a loan by the Company of $4,050 and a car allowance of $8,760.

(23) Consists of amortization of loan forgiveness of $149,543, imputed interest
on a loan by the Company of $11,527 and a car allowance of $8,760.

(24) Consists of amortization of loan forgiveness of $74,771, a reimbursement of
costs for relocation of $44,752, imputed interest on a loan by the Company
of $21,029 and a car allowance of $8,760.

The following table sets forth information regarding the values of the
options held by the Named Executive Officers at December 31, 2001.

OPTION VALUES AT DECEMBER 31, 2001

<Table>
<Caption>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
DECEMBER 31, 2001(1) AT DECEMBER 31, 2001(1)(2)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------

Thomas F. Hewitt........................... -- -- $-- $--
J. William Richardson...................... -- -- $-- $--
Kevin P. Kilkeary.......................... -- -- $-- $--
Henry L. Ciaffone.......................... 20,000 10,000 $-- $--
Charles R. Tomb............................ 14,000 7,000 $-- $--
</Table>

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

(1) The stock options held by Messrs. Hewitt, Richardson and Kilkeary were
cancelled as part of their amended and restated employment agreements
entered into in connection with the Investor transaction. Two-thirds of the
stock options held by the other Named Executive Officers at December 31,
2001 were exercisable.

(2) The last sale price as reported on the Nasdaq SmallCap Market on December
31, 2001 was $1.42, which was below the then current option exercise price
of $2.00.

Repricing of Stock Options. Effective February 26, 2001, the Board of
Directors approved the repricing of all outstanding stock options to purchase
shares of the Company's Class A Common Stock. Under the terms of the repricing,
each optionee was given the right to elect to keep their original stock options
at the stated exercise price of $4.50, or to return 40% of their original stock
options and retain the 60% remaining stock options with a new exercise price of
$2.00. The Board of Directors approved the repricing of the options to provide
an incentive to current employees and officers of the Company for their
continued employment. As a result of the repricing, an aggregate of 939,500
stock options were cancelled and replaced with 563,700 stock options at an
exercise price of $2.00. All of the stock options repriced originally contained
exercise prices that were significantly higher than the market price.

The following table sets forth information as to the repricing of stock
options for each of the Named Executive Officers.

<Table>
<Caption>
NUMBER OF MARKET PRICE EXERCISE LENGTH OF
SECURITIES OF STOCK AT PRICE AT NEW ORIGINAL OPTION
REPRICING UNDERLYING TIME OF TIME OF EXERCISE TERM REMAINING
NAME DATE OPTIONS REPRICED REPRICING REPRICING PRICE AT DATE OF REPRICING
---- --------- ---------------- ------------ --------- -------- --------------------

Thomas F. Hewitt...... N/A None N/A N/A N/A N/A
J. William
Richardson.......... N/A None N/A N/A N/A N/A
Kevin P. Kilkeary..... N/A None N/A N/A N/A N/A
Henry L. Ciaffone..... 2/26/2001 50,000 $2.31 $4.50 $2.00 8 years, 5 months
Charles R. Tomb....... 2/26/2001 35,000 $2.31 $4.50 $2.00 8 years, 5 months
</Table>

Outstanding Options. Pursuant to the Equity Incentive Plan, and as of March
31, 2002, the Company has outstanding stock option grants to purchase an
aggregate of 77,000 shares of Class A Common Stock at an exercise price of $4.50
per share, 30,000 shares of Class A Common Stock at an exercise price of $2.25
per share and an aggregate of 539,100 shares of Class A Common Stock at an
exercise price of $2.00 per share. Each of the options has a ten-year term and
becomes exercisable as to one-third of the shares covered thereby on each of the
first three anniversaries of the date of grant so long as the holder thereof
remains a full-time employee of the Company, except that the options become
immediately exercisable in the event of the holder's death, disability or
termination of employment by the Company for any reason other than cause (as

defined) or in the event a change in control occurs, including an event in which
any person or group becomes the beneficial owner of more than 50% of the
outstanding shares of common stock of the Company entitled generally to vote in
the election of directors. Unexercised options terminate 30 calendar days after
the holder's termination of employment by the Company, except that such period
is 180 days in the event of disability and 360 days in the event of death.

COMPENSATION PLANS AND ARRANGEMENTS

Management Bonus Plan. The Company has established a Management Bonus Plan
under which all key management employees who are directly involved in the
Company's growth and success (other than Messrs. Hewitt, Richardson and
Kilkeary, whose bonuses are to be determined pursuant to their employment
agreements) are eligible to receive bonuses based upon the achievement of
specified targets and goals for the Company and the individual employee. Awards
under the Management Bonus Plan are granted by the Compensation Committee of the
Board and range from zero to specified levels depending on the position of the
individual. Currently, 99 corporate employees are eligible for awards under the
Management Bonus Plan, with 96 of such employees eligible to receive a bonus
ranging from 10% to 80% of their base salaries and three of such employees
eligible to receive up to 125% of their base salaries.

Executive Loans. Pursuant to Mr. Hewitt's employment agreement, on March 1,
1999, the Company loaned Mr. Hewitt $400,000, which is due on the earlier of
June 18, 2005 or 30 days after the termination of his employment. If Mr.
Hewitt's employment is terminated by the Company for any reason other than
cause, the loan will be forgiven. In addition, the Company also loaned Mr.
Hewitt $259,254 for payment of his income tax liabilities associated with a
restricted stock grant in 1999. If, on the earlier of June 17, 2003 or the date
Mr. Hewitt's employment is terminated other than for cause, the market value of
the stock granted to Mr. Hewitt is less than $1.5 million, the Company will
forgive this loan in proportion to the amount by which the market value of the
stock granted to Mr. Hewitt is less than $1.5 million.

In 1998, the Company loaned Mr. Richardson $354,018, which was forgiven,
pursuant to his amended and restated employment agreement, once he remained with
the Company for at least 90 days following the Spin-off. The loan forgiveness is
being amortized over a 60-month period beginning on September 16, 1999, so long
as his employment agreement remains in effect.

Pursuant to Mr. Kilkeary's previous employment agreement, the Company
loaned Mr. Kilkeary $300,000, $50,000 of which was forgiven on June 17, 2000,
$125,000 of which was forgiven on June 17, 2001, and the remaining balance of
which will be forgiven on June 17, 2002, so long as his employment is not
terminated by the Company for cause or voluntarily by Mr. Kilkeary prior to such
date. Also pursuant to his amended and restated employment agreement, on October
20, 2000, the Company loaned Mr. Kilkeary $500,000, which will be forgiven over
the three-year period commencing October 16, 2001 at the rate of $166,666 per
year, so long as his employment is not terminated by the Company without cause
or voluntarily without good reason by Mr. Kilkeary prior to such dates.

Pursuant to Mr. Ciaffone's employment agreement the Company loaned Mr.
Ciaffone $500,000. This loan will be forgiven over the five-year period ending
on March 1, 2007, at the rate of $100,000 per year, so long as his employment is
not terminated by the Company for cause or voluntarily terminated by Mr.
Ciaffone, and Mr. Ciaffone does not breach his non-compete and confidentiality
agreements.

Pursuant to Mr. Tomb's employment agreement, Mr. Tomb received a loan of
$373,857 from the Company, which was an amount equal to 50% of the severance
compensation he was entitled to receive under his severance agreement with Old
Interstate. This loan amortized over a 30-month period beginning on June 18,
1999 and, as a result, was fully forgiven as of December 31, 2001. In addition,
the Company also loaned $238,000 to Mr. Tomb in 1998 to cover expenses incurred
in his relocation to Pittsburgh, which loan was repaid in full.

Executive Retirement Plan. Each of the General Managers of the Company's
hotels who are employees of the Company and other employees holding job
classifications of Vice President or above, including the Named Executive
Officers, are eligible to participate in the Company's Executive Retirement
Plan. The plan

is intended to be a non-qualified and unfunded plan maintained primarily for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees. Actual participation in the plan is determined by
the Board or the Compensation Committee.

The Company annually contributes 8.0% of each participant's base salary to
the plan and may make discretionary contributions of up to an additional 5.0% of
each participant's base salary. These discretionary contributions are based on
the Company's net increase in earnings per share in a given year. In addition,
plan participants are eligible to designate a portion (to be specified by the
Board or the Compensation Committee) of their annual cash bonus to be
contributed to the plan.

The funds contributed by the Company or participants are held in a grantor
trust established by the Company. Unless the Board or the Compensation Committee
determines that the amounts contributed to the plan on behalf of a participant
are payable earlier, in general, a participant in the plan will receive his plan
benefits one year after his retirement or termination of employment. Plan
benefits are paid out in a lump sum and are deductible by the Company and
taxable to the plan participant as ordinary income upon receipt by the
participant.

Employee Stock Purchase Plan. On January 11, 2001, the Compensation
Committee of the Board authorized the Company to terminate the Employee Stock
Purchase Plan due to the depletion of the number of shares authorized for
issuance under the plan and accordingly, the Company terminated the plan
effective February 12, 2001. The final allocation of 152,696 shares to the
participants, valued at $214,982, occurred on February 12, 2001 for the purchase
period ended December 31, 2000.

Equity Incentive Plan. The Company's Equity Incentive Plan is designed to
attract and retain qualified officers and other key employees. The Equity
Incentive Plan authorizes the grant of:

- options to purchase Company shares;

- restricted shares;

- unrestricted shares; and

- deferred shares.

The Compensation Committee of the Board administers the Equity Incentive
Plan and determines to whom grants will be made and the terms and conditions
thereof.

The number of Company shares that may be issued or transferred and covered
by outstanding awards granted under the Equity Incentive Plan was initially
2,300,000 shares. At December 31, 1999 and each June 30 and December 31
thereafter, an additional positive number equal to 20% of the additional shares
of Class A Common Stock issued during that six-month period will be added to the
total number of Company shares subject to the plan. Officers, directors, key
employees and consultants of the Company and those of the Company's subsidiaries
may be selected to receive benefits under the Equity Incentive Plan. Pursuant to
the amended and restated employment agreements of Messrs. Hewitt and Richardson
entered into in connection with the Investor transaction, all 331,917 of the
restricted shares of Class A Common Stock previously granted to Messrs. Hewitt
and Richardson became fully vested on October 20, 2000. In addition,
approximately 1,400,000 shares are available for additional awards under the
Equity Incentive Plan.

DIRECTOR COMPENSATION

Directors who are non-employee directors are paid an annual retainer of
$15,000 plus $1,000 for each Board meeting or working session attended in
person, as well as $500 for each Board meeting in which the director
participates by telephone. In addition, members of directorate committees are
paid $1,000 for each committee meeting attended in person on days on which the
Board does not also meet, as well as $500 for each committee meeting in which
the director participates by telephone.

EMPLOYMENT AND CHANGE-IN-CONTROL AGREEMENTS

We have entered into an employment agreement with Mr. Hewitt pursuant to
which:

-- He serves as the Company's Chairman of the Board and Chief Executive
Officer.

-- Mr. Hewitt is employed for a four-year term which began on February
12, 2002. In addition, on February 12, 2004 and every even-numbered
anniversary thereafter, Mr. Hewitt's agreement will be automatically
extended for two-years, unless either party gives 90 days' prior
written notice otherwise.

-- Mr. Hewitt was previously issued 181,917 restricted shares of the
Company's Class A Common Stock. All previously unvested shares vested
on October 20, 2000, in connection with the Investor transaction, in
exchange for his waiver of stock option rights and severance payments
owed to him by the Company under his previous employment agreement. In
addition, the Company also loaned Mr. Hewitt $259,254 for payment of
his income tax liabilities associated with a restricted stock grant in
1999. If, on the earlier of June 17, 2003 or the date Mr. Hewitt's
employment is terminated other than for cause, the market value of the
stock granted to Mr. Hewitt is less than $1.5 million, the Company
will forgive this loan in proportion to the amount by which the market
value of the stock granted to Mr. Hewitt is less than $1.5 million.

-- Additionally, the Company loaned Mr. Hewitt $400,000 which is due on
June 18, 2005 or 30 days after the termination of Mr. Hewitt's
employment, whichever is earlier. If Mr. Hewitt's employment is
terminated by the Company for any reason other than for cause, the
loan will be forgiven.

-- Mr. Hewitt was granted 100,000 shares of the Preferred Stock (the
"Hewitt Preferred Stock"), subject to the forfeiture restrictions
described below, in connection with the Investor transaction, in
exchange for his waiver of stock option rights and severance payments
owed to him by the Company under his previous employment agreement. In
connection with the grant, Mr. Hewitt executed a Stockholders
Agreement with the Investor which provides for certain rights and
restrictions in connection with Mr. Hewitt's ownership.

-- Mr. Hewitt was also granted a 3% partnership interest as a limited
partner ("Hewitt JV Interest") in CGLH-IHC Fund I, L.P., the joint
venture formed with the Investor (the "Joint Venture"), in connection
with the Investor transaction, in exchange for his waiver of stock
option rights and severance payments owed to him by the Company under
his previous employment agreement.

-- Upon Mr. Hewitt's termination of employment, he will be entitled to
receive:

- his minimum bonus, if he resigns without good reason;

- (1) his minimum bonus, an amount equal to the greater of (a) twice
his base pay and the average of each of his annual performance
bonuses during the term of his agreement (but in no event less than
his minimum bonus) and (b) his base pay and the average of each of
his annual performance bonuses during the term of his agreement (but
in no event less than his minimum bonus) for the remainder of the
term, (2) continuation for 24 months of his health and welfare
benefits and (3) immediate vesting and nonforfeiture of the Hewitt
Preferred Stock and Hewitt JV Interest, if his employment is
terminated by the Company for any reason other than cause, or death
or disability or if his employment is terminated voluntarily by Mr.
Hewitt for good reason; and

- his minimum bonus for the year of termination of his employment, his
base pay and minimum bonus for a period of 12 months following the
termination of his employment, and immediate vesting and
nonforfeiture of the Hewitt Preferred Stock and Hewitt JV Interest,
if his employment is terminated as a result of his death or
disability.

-- Upon Mr. Hewitt's termination of employment by the Company for cause
or voluntary termination by Mr. Hewitt without good reason,

- prior to October 16, 2001, Mr. Hewitt would have forfeited the
Hewitt Preferred Stock and the Hewitt JV Interest;

- on or after October 16, 2001 but prior to October 16, 2002, Mr.
Hewitt will forfeit two-thirds of the Hewitt Preferred Stock and the
Hewitt JV Interest;

- on or after October 16, 2002 but prior to October 16, 2003, Mr.
Hewitt will forfeit one-third of the Hewitt Preferred Stock and the
Hewitt JV Interest;

- on or after October 16, 2003, Mr. Hewitt will not be subject to
forfeiting either the Hewitt Preferred Stock or the Hewitt JV
Interest.

-- Upon Mr. Hewitt's termination of employment for any reason, the
Company may purchase the vested Hewitt Preferred Stock, to the extent
not subject to forfeiture, for its fair market value and the Joint
Venture may purchase the vested Hewitt JV Interest for an amount which
varies based on the reason for termination.

-- If Mr. Hewitt is taxed on "excess parachute payments" under the
Internal Revenue Code as a result of a change in control of the
Company, Mr. Hewitt will be entitled to a gross-up payment.

-- Mr. Hewitt was previously entitled to certain payments on account of a
change in control of the Company. Under his amended and restated
employment agreement, Mr. Hewitt is no longer entitled to these
payments.

-- Mr. Hewitt has agreed to non-compete and non-solicitation provisions.

-- Mr. Hewitt is obligated to keep in strict confidence any trade secrets
and confidential business and technical information of the Company.

-- Mr. Hewitt is entitled to have his legal fees and related expenses
paid by the Company in connection with the interpretation, enforcement
or defense of his rights under the employment agreement.

We have also entered into employment agreements with Mr. Richardson, Mr.
Kilkeary, Mr. Ciaffone and Mr. Tomb.

Pursuant to the terms of Mr. Richardson's employment agreement:

-- He serves as the Company's Vice Chairman and Chief Financial Officer.

-- Mr. Richardson is employed for a three-year term which began on
October 20, 2000. In addition, on October 20, 2002 and every
anniversary thereafter, Mr. Richardson's agreement will be
automatically extended for one-year, unless either party gives 90
days' prior written notice otherwise.

-- Mr. Richardson was previously issued 150,000 restricted shares of the
Company's Class A Common Stock. All previously unvested shares vested
on October 20, 2000, in connection with the Investor transaction, in
exchange for his waiver of stock option rights and severance payments
owed to him by the Company under his previous employment agreement.

-- The Company forgave a loan in the amount of $354,018 once Mr.
Richardson had remained with the Company for at least 90 days
following the Company's Spin-off. The loan forgiveness is being
amortized over a 60-month period beginning on September 16, 1999, so
long as his employment agreement remains in effect.

-- Mr. Richardson was granted 75,000 shares of the Preferred Stock (the
"Richardson Preferred Stock"), subject to the forfeiture restrictions
described below, in connection with the Investor transaction, in
exchange for his waiver of stock option rights and severance payments
owed to him by the Company under his previous employment agreement. In
connection with the grant, Mr. Richardson executed a Stockholders
Agreement with the Investor which provides for certain rights and
restrictions in connection with Mr. Richardson's ownership.

-- Mr. Richardson was also granted a 2.25% partnership interest in the
Joint Venture as a limited partner ("Richardson JV Interest"), in
connection with the Investor transaction, in exchange for his waiver
of stock option rights and severance payments owed to him by the
Company under his previous employment agreement.
34

-- Upon Mr. Richardson's termination of employment, he will be entitled
to receive:

- (1) the greater of (a) his salary and bonus for the year preceding
termination and (b) his salary and bonus for the remainder of the
term of the agreement, (2) the continuation of health and welfare
benefits for one year following termination of employment and (3)
immediate vesting and nonforfeiture of the Richardson Preferred
Stock and Richardson JV Interest, if his employment is terminated by
the Company for any reason other than cause, death or disability, or
if his employment is terminated voluntarily by Mr. Richardson for
good reason; and

- his base pay for a period of 12 months following the termination of
his employment, and immediate vesting and nonforfeiture of the
Richardson Preferred Stock and Richardson JV Interest, if his
employment is terminated as a result of his death or disability.

-- Upon Mr. Richardson's termination of employment by the Company for
cause,

- prior to October 16, 2001, Mr. Richardson would have forfeited the
Richardson Preferred Stock and the Richardson JV Interest;

- on or after October 16, 2001 but prior to October 16, 2002, Mr.
Richardson will forfeit two-thirds of the Richardson Preferred Stock
and the Richardson JV Interest;

- on or after October 16, 2002 but prior to October 16, 2003, Mr.
Richardson will forfeit one-third of the Richardson Preferred Stock
and the Richardson JV Interest; and

- on or after October 16, 2003, Mr. Richardson will not be subject to
forfeiting the Richardson Preferred Stock or the Richardson JV
Interest.

-- Upon the voluntary termination of Mr. Richardson's employment by Mr.
Richardson without good reason during the nine-month period ended July
16, 2001, Mr. Richardson would have forfeited the Richardson Preferred
Stock and the Richardson JV Interest.

-- Upon Mr. Richardson's termination of employment for any reason, the
Company may purchase the vested Richardson Preferred Stock, to the
extent not subject to forfeiture, for its fair market value and the
Joint Venture may purchase the vested Richardson JV Interest for an
amount which varies based on the reason for termination.

-- If Mr. Richardson is taxed on "excess parachute payments" under the
Internal Revenue Code as a result of a change in control of the
Company, Mr. Richardson will be entitled to a gross-up payment.

-- Mr. Richardson was previously entitled to certain payments on account
of a change in control of the Company. Under his amended and restated
employment agreement, Mr. Richardson is no longer entitled to these
payments.

-- Mr. Richardson has agreed to non-compete and non-solicitation
provisions.

-- Mr. Richardson is obligated to keep in strict confidence any trade
secrets and confidential business and technical information of the
Company.

-- Mr. Richardson is entitled to have his legal fees and related expenses
paid by the Company in connection with the interpretation, enforcement
or defense of his rights under the employment agreement.

Pursuant to the terms of Mr. Kilkeary's employment agreement:

-- Mr. Kilkeary serves as the Company's President and Chief Operating
Officer.

-- Mr. Kilkeary is employed for a three-year term which began on October
20, 2000. In addition, on October 20, 2002 and every anniversary
thereafter, Mr. Kilkeary's agreement will be automatically extended
for one year, unless either party gives 90 days' prior written notice
otherwise.

-- Pursuant to Mr. Kilkeary's previous employment agreement, the Company
loaned Mr. Kilkeary $300,000, $50,000 of which was forgiven on June
17, 2000, $125,000 of which was forgiven on June 17,
35

2001, and the remaining balance of which will be forgiven on June 17,
2002, so long as his employment is not terminated by the Company for
cause or voluntarily by him prior to such date.

-- On October 20, 2000 the Company loaned Mr. Kilkeary $500,000, in
connection with the Investor transaction, in exchange for his waiver
of stock option rights and severance payments owed to him by the
Company under his previous employment agreement. This loan will be
forgiven over the three-year period commencing on October 16, 2000, at
the rate of $166,666 per year, so long as his employment is not
terminated by the Company for cause or voluntarily by Mr. Kilkeary
without good reason or voluntarily by him prior to such dates.

-- Mr. Kilkeary was granted 50,000 shares of the Preferred Stock (the
"Kilkeary Preferred Stock"), subject to the forfeiture restrictions
described below, in connection with the Investor transaction, in
exchange for his waiver of stock option rights and severance payments
owed to him by the Company under his previous employment agreement. In
connection with the grant, Mr. Kilkeary executed a Stockholders
Agreement with Investor which provides for certain rights and
restrictions in connection with Mr. Kilkeary's ownership.

-- Upon Mr. Kilkeary's termination of employment, he will be entitled to
receive:

- (1) the greater of (a) his salary and bonus for the year preceding
termination and (b) his salary and bonus for the remainder of the
agreement, (2) the continuation of health and welfare benefits for
one year following termination of employment and (3) immediate
vesting and nonforfeiture of the Kilkeary Preferred Stock, if his
employment is terminated by the Company for any reason other than
cause, death or disability or if his employment is terminated
voluntarily by Mr. Kilkeary for good reason; and

- his base pay for a period of 12 months following the termination of
his employment, and immediate vesting and nonforfeiture of the
Kilkeary Preferred Stock, if his employment is terminated as a
result of his death or disability.

-- Upon the termination of Mr. Kilkeary's employment by the Company for
cause or by Mr. Kilkeary without good reason:

- prior to October 16, 2001, Mr. Kilkeary would have forfeited the
Kilkeary Preferred Stock;

- on or after October 16, 2001 but prior to October 16, 2002, Mr.
Kilkeary will forfeit two-thirds of the Kilkeary Preferred Stock;

- on or after October 16, 2002 but prior to October 16, 2003, Mr.
Kilkeary will forfeit one-third of the Kilkeary Preferred Stock; and

- on or after October 16, 2003, Mr. Kilkeary will not be subject to
forfeiting the Kilkeary Preferred Stock.

-- Upon Mr. Kilkeary's termination of employment for any reason, the
Company may purchase the Kilkeary Preferred Stock for its fair market
value.

-- If Mr. Kilkeary is taxed on "excess parachute payments" under the
Internal Revenue Code as a result of a change in control of the
Company, Mr. Kilkeary will be entitled to a gross-up payment.

-- Mr. Kilkeary was previously entitled to certain payments on account of
a change in control of the Company. Under his amended and restated
employment agreement, Mr. Kilkeary is no longer entitled to these
payments.

-- Mr. Kilkeary has agreed to non-compete and non-solicitation
provisions.

-- Mr. Kilkeary is obligated to keep in strict confidence any trade
secrets and confidential business and technical information of the
Company.

-- Mr. Kilkeary is entitled to have his legal fees and related expenses
paid by the Company in connection with the interpretation, enforcement
or defense of his rights under the employment agreement.
36

Pursuant to the terms of Mr. Ciaffone's employment agreement:

-- He serves as the Company's Senior Executive Vice President,
International Development and Operations.

-- The term of Mr. Ciaffone's employment is three years, ending March 1,
2005. In addition, on March 1, 2004, and every anniversary thereafter,
Mr. Ciaffone's agreement will be automatically extended for additional
one-year terms unless either party gives 90 days' prior written notice
otherwise.

-- The Company loaned Mr. Ciaffone $500,000. This loan will be forgiven
over the five-year period ending on March 1, 2007, at the rate of
$100,000 per year, so long as his employment is not terminated by the
Company for cause or voluntarily terminated by Mr. Ciaffone, and Mr.
Ciaffone does not breach his non-compete and confidentiality
agreements.

-- In the event of the termination of Mr. Ciaffone's employment for any
reason other than cause or disability, he will be entitled to: (1) the
greater of (a) his salary and bonus for the immediately preceding
one-year and (b) his salary and bonus for the remainder of the term of
the agreement, (2) the continuation of health and welfare benefits for
18 months following termination of employment and (3) forgiveness of
all amounts outstanding under the loan to Mr. Ciaffone.

-- Mr. Ciaffone has agreed to non-compete and non-solicitation
provisions.

-- Mr. Ciaffone is obligated to keep in strict confidence any trade
secrets and confidential business and technical information of the
Company.

-- Mr. Ciaffone is entitled to have his legal fees and related expenses
paid by the Company in connection with the interpretation, enforcement
or defense of his rights under the employment agreement.

Pursuant to the terms of Mr. Tomb's employment agreement:

-- He serves as the Company's Senior Vice President, Development and
Acquisitions.

-- Mr. Tomb's employment may be terminated by the Company or Mr. Tomb at
any time, with or without cause.

-- As a result of the change in control triggered by the merger of Old
Interstate into Wyndham, Mr. Tomb received 50% of the severance
compensation he was entitled to receive under his severance agreement
with Old Interstate.

-- Mr. Tomb received a forgivable loan of $373,857, an amount equal to
the remaining 50% of such severance compensation, which amortized over
a 30-month period beginning June 18, 1999 and as a result, was
completely forgiven as of December 31, 2001.

-- In the event the Company terminates Mr. Tomb without cause (including
as the result of a change in control), he will be entitled to: (1) his
base pay and car allowance for a period of six months, (2)
continuation of business development incentive bonuses for previously
completed transactions (in accordance with the terms and conditions of
the Company's business development incentive plan) and (3)
continuation of health and welfare benefits for a period of six
months.

-- Mr. Tomb has agreed to non-compete and non-solicitation provisions.

-- Mr. Tomb is obligated to keep in strict confidence any trade secrets
and confidential business and technical information of the Company.

-- Mr. Tomb is entitled to have his legal fees and related expenses paid
by the Company in connection with the interpretation, enforcement or
defense of his rights under the employment agreement.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee was formed in June 1999 and currently is
composed of Sherwood M. Weiser (Chairman), Joseph J. Flannery, Stephen P. Joyce
and John J. Russell, Jr.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

BENEFICIAL OWNERSHIP OF COMMON STOCK

The following table sets forth certain information regarding the beneficial
ownership of Class A Common Stock as of April 16, 2002 by (1) each person known
by the Company to own beneficially more than 5% of the Class A Common Stock, (2)
each director and Named Executive Officer of the Company, and (3) all directors
and executive officers of the Company as a group. The figures in the following
table are based on 5,487,885 shares of Class A Common Stock outstanding as of
April 16, 2002 and, where required by the applicable rules governing the
presentation of the information contained in this table, assume the conversion
of the Notes and/or shares of the Preferred Stock beneficially owned by such
person into shares of Class A Common Stock. Unless indicated otherwise, the
address for each of the persons named in the table is c/o Interstate Hotels
Corporation, Foster Plaza Ten, 680 Andersen Drive, Pittsburgh, Pennsylvania
15220. For purposes of the table, a person or group of persons is deemed to have
"beneficial ownership" of any shares as of a given date which such person has
the right to acquire within 60 days after such date.

<Table>
<Caption>
NUMBER OF PERCENTAGE OF
CLASS A CLASS A
NAME SHARES OWNED SHARES OWNED
---- ------------ -------------

Thomas F. Hewitt(1)......................................... 441,434 7.7%
J. William Richardson(2).................................... 341,776 6.0%
Kevin P. Kilkeary(3)........................................ 170,166 3.0%
Henry L. Ciaffone........................................... -- --
Charles R. Tomb............................................. 123 *
Karim J. Alibhai(4)......................................... 5,359,183 49.5%
Joseph J. Flannery.......................................... 7,000 *
Benjamin D. Holloway........................................ 4,000 *
Stephen P. Joyce............................................ -- --
Alan J. Kanders(5).......................................... 9,000 *
Mahmood J. Khimji........................................... -- --
Phillip H. McNeill, Sr...................................... 36,230 *
John J. Russell, Jr. ....................................... -- --
Sherwood M. Weiser(6)....................................... 5,351,825 49.5%
Odessa Limited(7)........................................... 607,000 11.1%
Gary M. Goldberg and affiliates(8).......................... 310,033 5.6%
Shaner Hotel Group Limited Partnership(9)................... 333,500 6.1%
The PNC Financial Services Group, Inc.(10).................. 455,942 8.3%
Raffles Associates, L.P.(11)................................ 288,855 5.3%
CGLH Partners I LP and CGLH Partners II LP as a group(12)... 5,329,183 49.3%
All directors and executive officers as a group (16
persons)(13).............................................. 6,392,688 56.2%
</Table>

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

* Less than 1%

(1) Includes 250,000 shares issuable upon the conversion of their shares of the
Preferred Stock into shares of Class A Common Stock.

(2) Includes 43 shares held by Mr. Richardson's daughter and 187,500 shares
issuable upon the conversion of their shares of the Preferred Stock into
shares of Class A Common Stock.

(3) Includes 125,000 shares issuable upon the conversion of their shares of the
Preferred Stock into shares of Class A Common Stock.

(4) Includes 5,329,183 shares issuable upon the conversion of the Notes and/or
shares of the Preferred Stock into shares of Class A Common Stock (adjusted
to reflect 5,487,885 shares of Class A Common Stock outstanding as of April
16, 2002) held indirectly through Mr. Alibhai's indirect interests in CGLH
Partners I LP and CGLH Partners II LP. See Note (12) below.

(5) Includes 2,000 shares held in trust for the benefit of Mr. Kanders'
daughter.

(6) Includes 5,329,183 shares issuable upon the conversion of the Notes and/or
shares of the Preferred Stock into shares of Class A Common Stock (adjusted
to reflect 5,487,885 shares of Class A Common Stock outstanding as of April
16, 2002) held indirectly through Mr. Weiser's indirect interests in CGLH
Partners I LP and CGLH Partners II LP. See Note (12) below.

(7) As reported in a Schedule 13D filed with the SEC on October 5, 2000. The
address of Odessa Limited is International House, Victoria Road, Douglas,
Isle of Man, British Isles.

(8) As reported in an amended Schedule 13D filed with the SEC on October 5,
2000. Represents shares held in managed discretionary and non-discretionary
accounts for clients advised by Gary M. Goldberg & Co., Inc., VIP 100, L.P.
and/or Gary Goldberg VIP 100, Inc. Gary M. Goldberg is a controlling person
of all of these entities and, as such, is deemed to be the beneficial owner
of any shares of the Company's Class A Common Stock of which these entities
may be deemed to beneficially own. This information is based solely upon
the contents of joint filings made by Mr. Goldberg and his affiliates
pursuant to Section 13 of the Securities Exchange Act of 1934. The address
of the Gary M. Goldberg group is c/o Gary M. Goldberg, Montebello Park, 75
Montebello Road, Suffern, New York 10901.

(9) As reported in a Schedule TO-T/A filed with the SEC on April 11, 2002. The
address of Shaner Hotel Group Limited Partnership is 303 North Science Park
Road, State College, Pennsylvania 16803.

(10) As reported in a Schedule 13G filed with the SEC on February 12, 2002.
Represents shares held by affiliates of The PNC Financial Services Group,
Inc., whose addresses are as follows: (a) The PNC Financial Services Group,
Inc., One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-
2707; (b) PNC Bancorp, Inc., 222 Delaware Avenue, Wilmington, Delaware
19899; and (c) PNC Bank, National Association, One PNC Plaza, 249 Fifth
Avenue, Pittsburgh, Pennsylvania 15222-2707.

(11) As reported in a Schedule 13G filed with the SEC on February 13, 2002. The
address of Raffles Associates, L.P., is 450 Seventh Avenue, Suite 509, New
York, New York 10123.

(12) As reported in an amended Schedule 13D filed with the SEC on November 6,
2000, adjusting the percentage to reflect 5,487,885 shares of Class A
Common Stock outstanding as of April 16, 2002, the following entities
beneficially own the Company's Class A Common Stock that the Investor has
the right to acquire pursuant to the terms of the Preferred Stock and the
Notes held by the Investor: (i) CGLH Partners I LP (sole voting power over
1,250,000 shares); (ii) CGLH Partners II LP (sole voting power over
5,329,183 shares); (iii) LB Interstate GP LLC; (iv) LB Interstate LP LLC;
(v) PAMI LLC; (vi) Property Asset Management Inc.; (vii) Lehman ALI Inc.;
(viii) Lehman Brothers Holdings Inc.; (ix) MK/CG GP LLC; (x) MK/CG LP LLC;
(xi) CG Interstate Associates LLC; (xii) Continental Gencom Holdings, LLC;
(xiii) KFP Interstate, LLC; (xiv) Grosvenor, LLC; (xv) KFP Holdings, Ltd.;
(xvi) Quadrangle Trust Company (BVI) Limited; (xvii) Sherwood M. Weiser
(sole voting power over 22,642 shares); (xviii) Donald E. Lefton (sole
voting power over 21,390 shares); (xix) Karim J. Alibhai (sole voting power
over 30,000 shares). Each of the foregoing entities (other than CGLH
Partners I LP and CGLH Partners II LP) have shared voting power over
5,329,183 shares of the Company's Class A Common Stock. CGLH Partners I LP
and CGLH Partners II LP have sole voting power over the shares listed in
clauses (i) and (ii) above, but do not have any shared voting power over
any other shares. The terms of the Preferred Stock and the Notes prohibit
any single holder and its affiliates or any group of which any of them is a
member from converting into more than 49% of the Company's common stock. If
this restriction were not applicable, the Preferred Stock and the Notes
held by the foregoing entities initially would be convertible into an
aggregate of 7,500,000 shares of Class A Common Stock or approximately 57%
of the Company's total outstanding common stock as of April 16, 2002. For
more information, see the amended Schedule 13D, filed with the SEC on
November 6, 2000. The address of CGLH Partners I LP and CGLH Partners II LP
is c/o Lehman Brothers Holdings Inc., 1285 Avenue of the Americas, 13th
floor, New York, New York 10019.

(13) Includes 5,329,183 shares (adjusted to reflect 5,487,885 shares of Class A
Common Stock outstanding as of April 16, 2002) held indirectly through Mr.
Alibhai's and Mr. Weiser's indirect interests in CGLH Partners I LP and
CGLH Partners II LP, 250,000 shares held directly by Mr. Hewitt, 187,500
shares

held directly by Mr. Richardson and 125,000 shares held directly by Mr.
Kilkeary (all of such shares issuable upon the conversion of the Notes
and/or shares of the Preferred Stock into shares of Class A Common Stock).

All of the 242,555 outstanding shares of Class B Common Stock of the
Company are beneficially owned by Marriott Hotel Services, Inc. The address of
Marriott Hotel Services, Inc. is One Marriott Drive, Washington, D.C. 20058.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

VOTING AGREEMENT

General. Upon consummation of the Spin-off, three directors and/or
executive officers of Wyndham and entities with which the directors and/or
officers are affiliated entered into a Voting Agreement with the Company. Such
directors, officers and affiliated entities are referred to in this section as
the "Voting Stockholders."

Voting Provisions. The Voting Agreement applies to all stockholder votes
taken at any time when the Voting Stockholders, together with Wyndham and other
identified directors and executive officers of Wyndham (collectively referred to
in this section as the "Affiliated Stockholders"), own greater than 9.9% of the
outstanding shares of the Company's Class A Common Stock. The Voting Agreement
provides that, in such circumstances, the Voting Stockholders will vote their
Company shares in proportion with the results of voting on the particular matter
by all Company Class A stockholders other than the Voting Stockholders and the
Affiliated Stockholders. This proportional voting will have the effect of
nullifying the impact of voting by the Voting Stockholders on the particular
matter and reducing the impact of voting by the Affiliated Stockholders on such
matter.

Divestiture Provisions. The Voting Agreement also provides that the Voting
Stockholders will use reasonable efforts to sell or otherwise dispose of a
number of shares of the Company's Class A Common Stock such that the Voting
Stockholders and the Affiliated Stockholders will collectively own 9.9% or less
of the outstanding shares of the Company's Class A Common Stock by the first
anniversary of the Spin-off. The Voting Stockholders are thus obligated under
the Voting Agreement to sell an aggregate of approximately 690,000 Company
shares, or 10.8% of the outstanding shares of the Company's Class A Common
Stock, by June 18, 2000. Thereafter, the Voting Stockholders' selling
obligations will become effective again at any time within five years after the
Spin-off that the Voting Stockholders are informed by the Company that the
Voting Stockholders and the Affiliated Stockholders collectively own greater
than 9.9% of the outstanding shares of the Company's Class A Common Stock.

The Company's Call Right. In the event that the Voting Stockholders fail to
comply with their obligations to sell Company shares as described above within
five years after the Spin-off, the Company has a call right to purchase from the
Voting Stockholders for fair market value the number of shares of the Company's
Class A Common Stock the Voting Stockholders were obligated to sell. Marriott
has the right to compel the Company to exercise its call right if the Company
fails to do so.

TRANSACTIONS WITH OFFICERS AND DIRECTORS

The Company has granted loans from time to time to its senior executives,
including each of the Named Executive Officers. Such loans are payable upon
demand and, in general, do not bear interest until such demand is made. See
"--Compensation Plans and Arrangements--Executive Loans and--Employment and
Change-in-Control Agreements" for a description of loans from the Company to the
Named Executive Officers.

In March 2001, the Company acquired a non-controlling 0.5% general
partnership interest and a non-controlling 49.5% limited partnership interest in
two limited partnerships (the "Partnerships") that own seven Marriott-branded
hotels and one Hampton Inn hotel for a total acquisition cost of approximately
$8.7 million. FelCor Lodging Trust Incorporated owns the remaining 50% of the
Partnerships. As part of the transaction,

the Partnerships simultaneously closed on an aggregate of $52.3 million
non-recourse loans from Lehman Brothers Bank, FSB, an entity related to Lehman
Brothers Holdings Inc. and an affiliate of the Investor, secured by the hotels.
The Company guarantees certain obligations of the borrowers to the lender under
those loans. Messrs. Flannery and Kanders are both employed by Lehman Brothers
Inc.

During 2001, the Company entered into management agreements to manage the
Park Central Hotel in New York, NY and the Raleigh Sheraton Capital Center Hotel
in Raleigh, NC. The owners of these hotels engaged the Company to manage these
properties pursuant to the rights of the principal lender of these hotels to
select a third-party management company. The principal lender of these hotels is
an entity related to Lehman Brothers Holdings Inc. and an affiliate of the
Investor. Messrs. Flannery and Kanders are both employed by Lehman Brothers Inc.

In August 2000, the Company acquired a 25% non-controlling equity interest
in the Houston Astrodome/Medical Center Residence Inn by Marriott in Houston,
Texas for a total acquisition cost of approximately $0.7 million. Prior to the
acquisition, Karim J. Alibhai beneficially owned a 7.53% ownership interest in
the entity that sold the hotel. Following the acquisition, Mr. Alibhai holds a
22.46% ownership interest in the hotel. Mr. Alibhai is also an officer of an
affiliate of the Investor.

In October 2000, the Company issued 500,000 shares of its Preferred Stock
for $5.0 million and Subordinated Convertible Notes for $25.0 million. These
securities were issued to the Investor, which is affiliated with Lehman Brothers
Inc., where Messrs. Flannery and Kanders are both employed, and with Messrs.
Alibhai, Khimji and Weiser, pursuant to a Securities Purchase Agreement dated
August 31, 2000 between the Company and the Investor. Both the Preferred Stock
and the Notes are convertible at any time into the Company's Class A Common
Stock at $4.00 per share. However, neither the Investor nor any other holder of
these securities may convert these securities if that conversion would cause
such holder and its affiliates or any group of which any of them belong to own
more than 49% of the Company's total common stock outstanding after the
conversion. The Company paid $1.0 million to Lehman Brothers Holdings Inc. for
advisory services in connection with the Investor transaction.

In connection with the Investor transaction, the Company entered into
amended and restated employment agreements with Messrs. Hewitt, Richardson and
Kilkeary. These amended and restated employment agreements provided, among other
things, for the issuance of an aggregate of 225,000 shares of the Preferred
Stock valued at $2.25 million to these individuals and the immediate vesting of
restricted stock awards that were issued to Messrs. Hewitt and Richardson under
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, are
convertible into the Company's Class A Common Stock at $4.00 per share, subject
to vesting restrictions, and are redeemable for $10 per share.

Also in connection with the Investor transaction, CRC Holdings loaned funds
to some of the members of the Investor, which loan CRC Holdings has since
assigned to Continental Hospitality Holdings, LLC. Approximately $0.6 million
remains outstanding on the loan. While Mr. Hewitt held an approximate 5%
ownership interest in CRC Holdings at the time of the Investor transaction, Mr.
Hewitt no longer holds such ownership interest. Mr. Hewitt currently holds an
approximate 5% ownership interest in Continental Hospitality Holdings, LLC.

Each of Messrs. Alibhai, Flannery, Kanders, Khimji and Weiser are members
of the Board of Directors and certain committees of the Board of Directors
pursuant to the terms of the Investor transaction.

In October 2000, the Company entered into a management agreement with LB
Beaumont, LLC, an entity related to Lehman Brothers Holdings Inc. and an
affiliate of the Investor, to manage the Beaumont, Texas Hilton Hotel. Messrs.
Flannery and Kanders are both employed by Lehman Brothers Inc.

In October 2000, the Company acquired a 20% non-controlling equity interest
in the Renaissance Worldgate Hotel in Kissimmee, Florida for a total acquisition
cost of approximately $3.9 million. Prior to the acquisition, Mr. Alibhai
beneficially owned a 16.26% ownership interest, and LB Maingate I Inc., an
entity related to the Investor, beneficially owned a 40% interest, in the entity
that owns the hotel. Following the acquisition, Mr. Alibhai, and LB Maingate I
Inc. each holds a 40% respective ownership interest in the hotel. As part of the
transaction, the hotel owner simultaneously closed on a $37 million non-recourse
loan from Lehman Brothers Holdings Inc., an entity related to the Investor,
which is secured by the hotel. Messrs. Flannery and Kanders are both employed by
Lehman Brothers Inc.

In the third quarter of 2001, an impairment loss of approximately $3.0
million was recorded by the Company as a result of a permanent impairment of the
future profitability of this hotel. Since its acquisition in the fourth quarter
of 2000, the hotel had experienced lower than expected operating cash flows,
primarily due to decreased occupancy rates and average daily room rates that
affected this hotel and the Orlando lodging market in general. In addition,
weakness in the U.S. economy during 2001 coupled with the severe downturn in the
Florida lodging market after the September 11th terrorist attacks had resulted
in significant financial difficulties for the hotel. As a result, the hotel was
unable to satisfy debt service obligations, which resulted in mortgage defaults.

Pursuant to a Master Lease Termination Agreement dated September 12, 2000,
between the Company and Equity Inns, Inc., ("Equity Inns"), all of the lease
contracts for the 75 hotels previously 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. By virtue of his positions as Chairman of the Board and Chief Executive
Officer of Equity Inns, Phillip H. McNeill, Sr. may have benefited from the
transaction.

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

<Table>
<Caption>
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(10)
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)
</Table>

<Table>
<Caption>
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 Interstate Hotels Corporation 1999 Equity Incentive Plan(1)
10.17.1 Form of Standard Stock Option Agreement(1)
10.17.2 Form of Stock Option Agreement for certain employees with
employment agreements(1)
10.18 Interstate Hotels Corporation Employee Stock Purchase
Plan(1)
10.19 Asset Purchase Agreement, dated as of May 7, 1999, by and
among IHC/Chaz Corporation, PAH-Management Corporation and
F&H Realty, LLC(7)
10.20 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)
10.21 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)
10.22 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)
10.23 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)
10.24 Loan Agreement by and between Interstate Pittsburgh Hotel
Holdings, L.L.C. and PNC Bank, National Association, dated
as of February 14, 2000(9)
10.24.1 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)
10.25 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)
10.26 Agreement of Guaranty by Suretyship by the Company dated as
of February 14, 2000(9)
10.26.1 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)
10.27 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)
10.28 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)
10.29 Amended and Restated Employment Agreement, dated as of
August 31, 2000, by and between the Company and Kevin P.
Kilkeary(4)
10.30 Amended and Restated Employment Agreement, dated as of
August 31, 2000, by and between the Company and J. William
Richardson(5)
10.31 Amended and Restated Employment Agreement, dated as of
August 31, 2000, by and between the Company and Thomas F.
Hewitt(4)
</Table>

<Table>
<Caption>
EXHIBIT NO. DESCRIPTION
- ----------- -----------

10.32 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)
10.33 Form of 8.75% Subordinated Convertible Note due 2007(3)
10.34 Form of Investor Agreement by and among the Company and CGLH
Partners I LP and CGLH Partners II LP(3)
10.35 Form of Registration Rights Agreement by and among the
Company and CGLH Partners I LP and CGLH Partners II LP(5)
10.36 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)
10.37 Employment Agreement, dated as of March 29, 2001, by and
between the Company and Glyn F. Aeppel(11)
10.38 Senior Secured Revolving Line of Credit Agreement, dated as
of July 31, 2001, by and among the Company, Lehman Brothers
Holdings Inc., Credit Lyonnais New York Branch, PNC Bank,
N.A. and Lehman Commercial Paper, Inc.(12)
10.39 Employment Agreement, dated as of September 19, 2001, by and
between the Company and Charles R. Tomb(12)
21.1 List of Subsidiaries of Interstate Hotels Corporation(13)
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Powers of Attorney(13)
</Table>

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

(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 on
Form 10-Q for the quarterly period ended March 31, 2000, and
incorporated herein by reference.

(10) Filed previously as an exhibit to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2000, and incorporated
herein by reference.

(11) Filed previously as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2001, and
incorporated herein by reference.

(12) Filed previously as an exhibit to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2001, and
incorporated herein by reference.

(13) Filed previously as an exhibit to the Company's Annual Report on Form
10K for the fiscal year ended December 31, 2001, and incorporated
herein by reference.

(b) Reports on Form 8-K

None.

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/A to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Pittsburgh, in the Commonwealth of Pennsylvania, on April 19, 2002.

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/A has been signed below by the following persons on
behalf of the Company and in the capacities and on the dates indicated.

<Table>
<Caption>
SIGNATURES TITLE DATE
---------- ----- ----

* Chief Executive Officer and Chairman April 19, 2002
- ------------------------------------- of the Board of Directors (Principal
Thomas F. Hewitt Executive Officer)

/s/ J. WILLIAM RICHARDSON Vice Chairman, Chief Financial April 19, 2002
- ------------------------------------- Officer and Director (Principal
J. William Richardson Financial and Accounting Officer)

* Director April 19, 2002
- -------------------------------------
Karim J. Alibhai

* Director April 19, 2002
- -------------------------------------
Joseph J. Flannery

* Director April 19, 2002
- -------------------------------------
Benjamin D. Holloway

* Director April 19, 2002
- -------------------------------------
Stephen P. Joyce

* Director April 19, 2002
- -------------------------------------
Alan J. Kanders

* Director April 19, 2002
- -------------------------------------
Mahmood J. Khimji

* Director April 19, 2002
- -------------------------------------
Phillip H. McNeill, Sr.

* Director April 19, 2002
- -------------------------------------
John J. Russell, Jr.

* Director April 19, 2002
- -------------------------------------
Sherwood M. Weiser
</Table>

* The undersigned, by signing his name hereto, does sign and execute this Annual
Report on Form 10-K/A 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

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Interstate
Hotels Corporation and its subsidiaries (the Company) at December 31, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

/S/ PRICEWATERHOUSECOOPERS LLP

600 Grant Street
Pittsburgh, Pennsylvania
February 13, 2002, except for the second paragraph
of Note 7 and the fourth paragraph of Note 8,
as to which the date is February 21, 2002

F-1

INTERSTATE HOTELS CORPORATION

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<Table>
<Caption>
DECEMBER 31,
--------------------
2000 2001
-------- --------

ASSETS
Current assets:
Cash and cash equivalents................................. $ 51,327 $ 39,040
Accounts receivable, net of allowance for doubtful
accounts of $542 in 2000 and
$227 in 2001............................................ 12,624 4,931
Insurance premiums receivable............................. 4,292 4,149
Deferred income taxes..................................... 1,891 2,204
Net investment in direct financing leases................. 248 92
Prepaid expenses and other assets......................... 1,039 1,849
-------- --------
Total current assets.................................. 71,421 52,265
Restricted cash............................................. 2,173 1,348
Marketable securities....................................... 2,289 2,548
Property and equipment, net................................. 15,084 14,390
Officers and employees notes receivable..................... 3,442 2,028
Affiliates notes receivable, net of reserve for
uncollectible notes receivable of $1,016 in 2000 and $666
in 2001................................................... 10,235 1,718
Net investment in direct financing leases................... 495 185
Equity investments in hotel real estate..................... 8,779 11,220
Deferred income taxes....................................... 3,086 5,479
Intangible and other assets................................. 26,519 17,488
-------- --------
Total assets.......................................... $143,523 $108,669
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable -- trade................................. 2,922 1,038
Accounts payable -- health trust.......................... 4,459 4,424
Accounts payable -- related parties....................... 2,473 26
Accrued payroll and related benefits...................... 9,992 5,092
Accrued rent.............................................. 5,227 151
Insurance payables........................................ 2,685 1,384
Other accrued liabilities................................. 11,764 5,487
Current portion of long-term debt......................... 8,343 1,601
-------- --------
Total current liabilities............................. 47,865 19,203
Deferred compensation....................................... 2,289 2,548
Long-term debt.............................................. 36,820 39,380
-------- --------
Total liabilities..................................... 86,974 61,131
Minority interest........................................... 433 433
Mandatorily redeemable preferred stock...................... 4,258 5,070
Commitments and contingencies............................... -- --
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; 725,000 shares issued and outstanding and
classified as mandatorily redeemable preferred stock at
December 31, 2000 and 2001.............................. -- --
Common stock, $.01 par value; 64,939,361 shares
authorized; 6,399,744 and 5,730,440 shares issued and
outstanding at December 31, 2000 and 2001,
respectively............................................ 64 57
Paid-in capital........................................... 66,725 64,955
Retained deficit.......................................... (14,931) (22,977)
-------- --------
Total stockholders' equity............................ 51,858 42,035
-------- --------
Total liabilities and stockholders' equity............ $143,523 $108,669
======== ========
</Table>

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

F-2

INTERSTATE HOTELS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<Table>
YEAR ENDED DECEMBER 31,
------------------------------
1999 2000 2001
-------- -------- --------

Lodging revenues:
Rooms..................................................... $183,695 $191,811 $ 4,277
Other departmental........................................ 10,693 11,661 149
Net management fees......................................... 33,275 29,481 24,525
Other fees.................................................. 12,691 13,159 15,074
-------- -------- --------
240,354 246,112 44,025
-------- -------- --------
Lodging expenses:
Rooms..................................................... 44,237 47,014 1,030
Other departmental........................................ 6,975 7,238 86
Property costs............................................ 56,258 61,767 1,531
General and administrative.................................. 14,069 14,894 11,385
Payroll and related benefits................................ 19,619 22,704 19,738
Lease expense............................................... 89,174 88,594 482
Depreciation and amortization............................... 20,833 16,091 10,394
Joint Venture start-up costs................................ -- 2,096 --
Loss on impairment of investment in hotel lease contracts... 16,406 12,550 --
-------- -------- --------
267,571 272,948 44,646
-------- -------- --------
Operating loss.............................................. (27,217) (26,836) (621)
Other income (expense):
Interest, net............................................. 1,368 1,777 (1,673)
Other, net................................................ (9) 24 38
Earnings (losses) from equity investments in hotel real
estate.................................................. 1,525 (522) (5,169)
Loss on impairment of equity investment in hotel real
estate.................................................. -- -- (3,026)
Loss on sale of investment in hotel real estate........... (876) -- --
-------- -------- --------
Loss before income tax benefit.............................. (25,209) (25,557) (10,451)
Income tax benefit.......................................... (5,078) (5,935) (3,295)
-------- -------- --------
Loss before minority interest............................... (20,131) (19,622) (7,156)
Minority interest........................................... (12,514) (10,719) 194
-------- -------- --------
Net loss.................................................... (7,617) (8,903) (7,350)
Mandatorily redeemable preferred stock:
Dividends................................................. -- 127 634
Accretion................................................. -- 12 62
-------- -------- --------
Net loss available to common stockholders................... $ (7,617) $ (9,042) $ (8,046)
======== ======== ========
Earnings per common share (Note 16):
Basic....................................................... $ (1.40) $ (1.30)
======== ========
Diluted..................................................... $ (1.40) $ (1.30)
======== ========
</Table>

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

F-3

INTERSTATE HOTELS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(IN THOUSANDS)

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

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 available to common
stockholders.................... -- -- (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
Receivable from related party..... -- -- -- -- -- -- (450)
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 4,258
Issuance of common stock.......... 1 214 -- -- -- 215 --
Options exercised................. -- 8 -- -- -- 8 --
Common stock repurchased and
retired......................... (8) (1,992) -- -- -- (2,000) --
Mandatorily redeemable preferred
stock accretion................. -- -- -- -- -- -- 62
Amortization of unearned
compensation.................... -- -- -- -- -- -- 750
Net loss available to common
stockholders.................... -- -- (8,046) -- -- (8,046) --
--- ------- -------- ------- --------- -------- ------
Balance at December 31, 2001........ $57 $64,955 $(22,977) $ -- $ -- $ 42,035 $5,070
=== ======= ======== ======= ========= ======== ======
</Table>

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

F-4

INTERSTATE HOTELS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<Table>
<Caption>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 2000 2001
-------- -------- --------

Cash flows from operating activities:
Net loss.................................................. $ (7,617) $ (8,903) $ (7,350)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 20,833 16,091 10,394
(Earnings) losses from equity investments in hotel real
estate................................................. (1,525) 522 5,169
Loss on impairment of investment in hotel lease
contracts.............................................. 16,406 12,550 --
Loss on impairment of equity investment in hotel real
estate................................................. -- -- 3,026
Loss on sale of investment in hotel real estate......... 876 -- --
Minority interest....................................... (12,514) (10,719) 194
Deferred income taxes................................... (3,867) (6,259) (2,706)
Amortization of restricted common stock and mandatorily
redeemable preferred stock............................. -- 999 750
Other................................................... 165 1,115 948
Cash provided by (used in) assets and liabilities:
Accounts receivable, net................................ 1,324 (164) 7,836
Prepaid expenses and other assets....................... (285) 109 (810)
Accounts payable........................................ 4,625 2,333 (6,819)
Accrued liabilities..................................... 5,372 2,406 (12,043)
-------- -------- --------
Net cash provided by (used in) operating activities... 23,793 10,080 (1,411)
-------- -------- --------
Cash flows from investing activities:
Net investment in direct financing leases................. 1,115 649 466
Change in restricted cash................................. 500 (472) 825
Purchase of property and equipment, net................... (970) (419) (479)
Acquisition of hotel, net of cash received................ (12,981) -- --
Purchases of marketable securities........................ (2,245) (2,435) (3,084)
Proceeds from sale of marketable securities............... 1,958 2,449 3,202
Proceeds from sale of equity investment in hotel real
estate.................................................. 13,654 -- --
Net cash received from (invested for) equity investments
in hotel real estate.................................... 1,176 (9,301) (10,636)
Change in officers and employees notes receivable, net.... (960) (755) 773
Net investment in management agreements................... (291) (881) (471)
Merger-related acquisition costs.......................... (8,941) -- --
Change in affiliates notes receivable, net................ (2,057) (63) 8,517
Deposits and other........................................ (79) (150) (179)
-------- -------- --------
Net cash used in investing activities................. (10,121) (11,378) (1,066)
-------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt.............................. -- 32,560 4,170
Repayment of long-term debt............................... -- (79) (8,352)
Proceeds from issuance of common stock.................... 2,120 617 223
Proceeds from the issuance of mandatorily redeemable
preferred stock......................................... -- 5,000 --
Mandatorily redeemable preferred stock issuance costs
paid.................................................... -- (429) --
Preferred stock dividends paid............................ -- -- (634)
Net contributions from (distributions to) minority
interest................................................ 6,934 (4,592) 915
Accounts payable-related parties.......................... (18,597) -- (2,641)
Net contributions from (distributions to) owners.......... 16,659 -- --
Financing fees paid....................................... -- (2,295) (1,491)
Common stock repurchased and retired...................... -- (597) (2,000)
-------- -------- --------
Net cash provided by (used in) financing activities... 7,116 30,185 (9,810)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 20,788 28,887 (12,287)
Cash and cash equivalents at beginning of year.............. 1,652 22,440 51,327
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 22,440 $ 51,327 $ 39,040
======== ======== ========
</Table>

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

F-5

INTERSTATE HOTELS CORPORATION

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

1. ORGANIZATION AND BASIS OF PRESENTATION:

Interstate Hotels Corporation and its subsidiaries (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, 2001, the Company managed or performed related services,
including insurance and risk management services, purchasing and project
management services and centralized accounting services, for 134 hotels with a
total of 28,316 rooms in 37 states in the United States, and in Canada and
Russia. The Company wholly owns one of these properties, the 156-suite
Pittsburgh Airport Residence Inn by Marriott (the "Owned Hotel"), which it
acquired in 1999, and has non-controlling equity interests in 12 of these
hotels.

In accordance with IH LLC's limited liability company agreement, and prior
to the execution of the Wyndham Redemption discussed in Note 4, 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 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.

Prior to the Spin-off, the Company was not a separate legal entity.
Therefore, the accompanying 1999 consolidated financial statements of the
Company have been carved out of Wyndham's financial statements using Wyndham's
basis of accounting. 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 the year ended December 31, 1999.

Prior to January 1, 2001, the Company included the revenues and expenses
and the working capital of the hotels that were previously leased from Equity
Inns, Inc. (Note 6) in the financial statements because the risk of operating
these hotels was 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

F-6

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

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 included
$7,592 of escrowed funds that were paid to Wyndham in July 2001 in connection
with the Wyndham Redemption (see Note 4).

Restricted Cash:

Restricted cash includes capital restricted under applicable government
insurance regulations representing approximately 20% of the annual insurance
premiums written by the Company. In addition, the mortgage note related to the
Owned Hotel, as discussed in Note 5, provides that certain cash from operations
be restricted for the future acquisition or replacement of property and
equipment each year based on a percentage of gross hotel revenues.

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.

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 in accordance with employment agreements,
and such amounts are expensed ratably over the terms of such employment
agreements.

Equity Investments in Hotel Real Estate:

The Company accounts for investments in hotel real estate using the equity
method of accounting based on management's ability to control the property
through management agreements. The Company measures its equity earnings or
losses under the hypothetical liquidation at book value equity method of
accounting. This accounting method requires the proportionate net income or loss
of the investor to be adjusted for preferred returns or distributions due to the
other investors.

F-7

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

Intangible and Other Assets:

Intangible and other assets consist of the amounts paid to obtain
management agreements, which includes the allocation of the Merger consideration
by Wyndham, and deferred financing fees. Intangibles and other assets are
amortized on the straight-line method over the life of the underlying agreements
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, and if required, such
adjustments would be measured based on discounted cash flows.

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 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 year ended December 31, 1999, 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.

Owners' Equity:

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

Lodging and Management Fee Revenue Recognition:

The owned and previously 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," and Securities and Exchange Commission ("SEC") Topic No.
D-96, "Accounting for Management Fees Based on a Formula" (Method

F-8

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

No. 2), 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.

Other Revenues:

Insurance revenues are earned through reinsurance premiums, direct premiums
written and reinsurance premiums ceded. Reinsurance premiums are recognized when
individual policies are written and any unearned portions of the premium are
recognized to account for the unexpired term of the policy (as-reported basis).
Direct premiums written are recognized in accordance with 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.

In addition, 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.

Insurance:

A provision for outstanding claims is 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 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.

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.

New Accounting Pronouncements:

F-9

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:

effective January 1, 2002. Management of the Company does not expect the
implementation of SFAS No. 142 to have a significant impact on the Company's
consolidated financial statements.

In February 2002, the FASB issued Topic No. D-103, "Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expenses
Incurred." This pronouncement establishes standards for accounting for
reimbursements received for out-of-pocket expenses incurred and the
characterization as revenue and expense in the income statement. The application
of this pronouncement is required effective January 1, 2002. Management of the
Company is currently assessing the details of the pronouncement and is preparing
a plan of implementation. The implementation of this pronouncement could have a
significant impact on the operating revenues and expenses that are reported by
the Company, but should not impact its results of operations.

Reclassifications:

Certain amounts in previously issued financial statements have been
reclassified to conform to the presentation adopted in the 2001 consolidated
financial statements.

3. INVESTOR TRANSACTION:

Securities Purchase Agreement:

On October 20, 2000, the Company issued 500,000 shares of its Series B
Convertible Preferred Stock, par value $.01 per share, (the "Preferred Stock")
for $5,000 and 8.75% Subordinated Convertible Notes (the "Notes") for $25,000.
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 that are 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 on October 20, 2007
for $10 per share. The Notes mature on October 20, 2007 and accrue interest that
is payable quarterly at 8.75% per annum, with up to 25% of the interest payable
in kind (at the option of the Company). If the Company elects to pay up to 25%
of the dividends and interest in kind, a beneficial conversion feature could
result in instances where the fair market value of the Company's common stock is
greater than $4.00 per share at the date of payment. The effect would be that
the Company would record a charge to net income available to common stockholders
for the difference between the fair market value of the Company's common stock
and $4.00 per share.

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, which was in excess of
the fair market value at the date of issuance. Initially, these securities were
convertible into an aggregate of 7,500,000 shares of Class A Common Stock,
however, no holder of either the Preferred Stock or the Notes may convert these
securities if that conversion would cause

F-10

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

3. INVESTOR TRANSACTION, CONTINUED:

such 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 Preferred Stock and the Notes were recorded at fair value of $5,000 and
$25,000, respectively, in the fourth quarter of 2000. 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 a seven-year period. Transaction costs of
$2,141 incurred in connection with the Notes were deferred and are being
amortized over a seven-year period.

In connection with the transactions contemplated under the Securities
Purchase Agreement, the Company 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 that were issued to two of these executives 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, are convertible into
an aggregate of 562,500 shares of Class A Common Stock of the Company, subject
to forfeiture restrictions, and are redeemable, as discussed above, for $10 per
share.

The issuance of the Preferred Stock to the executives was recorded as
deferred compensation at fair value and is being amortized as compensation
expense over the three-year forfeiture period. Compensation expense of $125 and
$750 was recorded in 2000 and 2001, respectively. The vesting of the restricted
stock issued under previous employment agreements was recorded as a compensation
charge of $874 in the fourth quarter of 2000. Other costs of $281 incurred in
connection with the deferred compensation were expensed in the fourth quarter of
2000.

The terms of the Preferred Stock and the Notes 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 Preferred Stock and Notes, 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 the 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:

One purpose of the proceeds received by the Company from the issuance of
the Preferred Stock and the Notes is to invest $25.0 million into a newly formed
joint venture with the Investor (the "Joint Venture") for the acquisition of
hotel properties that will be managed by the Company. The Company is required to
maintain, and does maintain, sufficient liquidity for this investment, which may
be accomplished through lines of credit or other means. The Investor has
committed to invest $20,000 of capital to the Joint Venture. As of December 31,
2001, neither the Company nor the Investor have invested any funds into the
Joint Venture. Such amounts are expected to be invested incrementally,
concurrent with the closings of hotel property acquisitions by 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

F-11

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

3. INVESTOR TRANSACTION, CONTINUED:

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.

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 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.

The Joint Venture was accounted for by the Company using the equity method
of accounting in the fourth quarter of 2000. As a result, the Company recorded
an equity loss from the Joint Venture in the amount of $300 in the fourth
quarter of 2000. 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
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.

4. 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 ownership 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. IH LLC redeemed approximately 9% of Wyndham's 55% interest in IH
LLC and substantially all of the remaining interest 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"). On
July 1, 2001, IH LLC redeemed the preferred membership interest from Wyndham for
$12,682, which was paid with $8,250 in cash and the remaining amount of $4,432
in promissory notes. The promissory notes were included in long-term debt as of
December 31, 2001. Wyndham's remaining 1.6627% common interest in IH LLC that
was not redeemed or converted into a preferred membership interest 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.

F-12

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

4. WYNDHAM REDEMPTION, CONTINUED:

The Wyndham Redemption was accounted for by the Company using the purchase
method of accounting in the fourth quarter of 2000. 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 agreements of $14,092. The remaining
intangible asset continues 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.

<Table>
<Caption>
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)
</Table>

5. LONG-TERM DEBT:

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

<Table>
<Caption>
2000 2001
------- -------

8.75% Subordinated Convertible Notes (Note 3).... $25,000 $25,000
Wyndham Redemption Notes......................... 12,682 4,432
Limited Recourse Mortgage Note................... 7,481 7,379
Promissory Note.................................. -- 4,170
------- -------
45,163 40,981
Less current portion........................... (8,343) (1,601)
------- -------
$36,820 $39,380
======= =======
</Table>

Wyndham Redemption Notes--The Wyndham Redemption Notes balance of $4,432 at
December 31, 2001 (Note 4) bears interest at a rate that 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 matures February 2003, 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 and 2001 was 8.57% and 6.26%,
respectively. 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 remaining outstanding
principal balance on the note is due and payable at maturity.

The note contains restrictive covenants, including financial ratios, which
are required to be maintained by the Company as borrower and guarantor. During
the third quarter of 2001, the Company was not in compliance with the minimum
net worth covenant of the guarantor. During the fourth quarter of 2001, the

F-13

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

5. LONG-TERM DEBT, CONTINUED:

Company obtained a waiver of compliance and the existing minimum net worth
covenant was modified by the bank. As of December 31, 2001, the Company was in
compliance with all debt covenant requirements under the limited recourse
mortgage note.

Promissory Note--In March 2001, a subsidiary of the Company entered into a
promissory note in the amount of $4,170 with FelCor Lodging Trust Incorporated
to fund the acquisition of a 50% non-controlling equity interest in two
partnerships that own eight mid-scale hotels. Interest on the note is payable
monthly at the rate of 12% per annum and the outstanding principal balance is
due and payable on December 31, 2010.

Scheduled maturities of long-term debt for the next five years and
thereafter are as follows:

<Table>

2002........................................................ $ 1,601
2003........................................................ 6,528
2004........................................................ 3,682
2005........................................................ --
2006........................................................ --
Thereafter.................................................. 29,170
-------
$40,981
=======
</Table>

Credit Facility--On July 31, 2001, the Company entered into a $40,000
senior secured credit facility co-arranged by Lehman Brothers Holdings Inc.,
d/b/a Lehman Capital, and Credit Lyonnais New York Branch. The credit facility,
which may be used to obtain management agreements for hotel properties and to
finance the acquisition of hotel properties, has a two-year term and carries
varying rates of interest. In addition to mandatory prepayment provisions, the
credit facility contains restrictive covenants, including the maintenance of
financial ratios, restrictions on the payment of dividends, restrictions on the
imposition of liens and limitations on additional indebtedness. Transaction
costs of approximately $1,497 were incurred in connection with the credit
facility during 2001. These costs were deferred and are being amortized over a
two-year period. In addition, a nonrefundable commitment fee ranging from 0.375%
to 0.5% of the unused portion of the credit facility is payable quarterly. The
Company incurred $84 of interest expense related to the commitment fee for the
year ended December 31, 2001. As of December 31, 2001, there were no borrowings
against the credit facility and the Company was in compliance with all of the
restrictive covenants.

6. 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 contracts 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 contracts for the 75 hotels previously leased from Equity Inns were
terminated effective January 1, 2001, and the Company and Equity Inns
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. However, Equity Inns
renewed several management agreements that were due to expire on January 1,
2002. As a result of this conversion, effective January 1, 2001, the operating
revenues and expenses and the working capital of these hotels were no longer
reflected in the financial statements of the Company. Instead, the Company
recorded revenues from management fees only. The Company also continued to
manage, under a new management agreement, one additional hotel it currently
manages for Equity Inns (but did not lease). The Company accounted for the
transaction as an exchange of nonmonetary assets in accordance with Accounting
Principles Board ("APB") No. 29, "Accounting for Nonmonetary Transactions."

F-14

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

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

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 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.

During the fourth quarter of 2001, the Company and Equity Inns finalized
the conversion of hotel lease contracts for management agreements. Based on the
final settlement with Equity Inns, the Company reversed approximately $1,016 of
estimated accrued liabilities related to the conversion that were established
and recorded as a general and administrative expense in the fourth quarter of
2000. The reversal of the accrued liabilities was recorded as a reduction of
general and administrative expense in 2001.

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 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 significant construction that had occurred
within this industry segment. This recent construction caused a significant
over-supply of mid-scale, upper economy and budget hotels in certain markets.
The long-term impact of this 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.

7. LOSS ON IMPAIRMENT OF EQUITY INVESTMENT IN HOTEL REAL ESTATE:

In the third quarter of 2001, the Company recorded a loss on impairment of
equity investment in hotel real estate in the amount of $3,026. This loss
represents a non-cash impairment loss related to the Company's 20%
non-controlling equity interest in a partnership that owns the Renaissance
Worldgate Hotel in Kissimmee, Florida. The impairment loss was the result of a
permanent impairment of the future profitability of this hotel. Since its
acquisition in the fourth quarter of 2000, the hotel had experienced lower than
expected operating cash flows, primarily due to decreased occupancy rates and
average daily room rates that affected this hotel and the Orlando lodging market
in general. In addition, the weakness in the U.S. economy during 2001 coupled
with the severe downturn in the Florida lodging market after the September 11th
terrorist attacks had resulted in significant financial difficulties for the
hotel. As a result, the hotel was unable to satisfy debt service obligations,
which resulted in mortgage defaults. As of December 31, 2001, the Company's
accounts receivable owed from this hotel amounted to approximately $1,213, which
relates primarily to the reimbursement of costs.

F-15

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

7. LOSS ON IMPAIRMENT OF EQUITY INVESTMENT IN HOTEL REAL ESTATE, CONTINUED:

On February 21, 2002, the ownership and financing for the hotel were
restructured in order to address the financial difficulties of the hotel. As
part of this restructuring, the Company's 20% non-controlling equity interest
was redeemed in exchange for mutual releases with respect to the obligations of
the hotel, and the Company received a $900 cash payment towards the accounts
receivable owed to the Company by the hotel. The hotel owner also issued a
promissory note to the Company for the remaining accounts receivable, which note
bears interest at the rate of nine percent per annum and is payable in equal
quarterly installments beginning January 1, 2003 and ending December 31, 2003.
In addition, the hotel owner and the Company amended the management agreement
for the hotel, pursuant to which, among other things, the Company waived its
management fees for the period from July 1, 2001 through February 21, 2002 and
agreed to reduce its base management fee for periods following February 21,
2002.

The majority owners and the principal lender for the hotel have
representation on the Company's board of directors and are affiliated with the
holders of the Investor.

8. ACQUISITIONS AND DISPOSITIONS:

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
two limited partnerships that own eight mid-scale hotels for a total acquisition
cost, including closing costs, of approximately $8,674. FelCor Lodging Trust
Incorporated ("FelCor") owns the remaining 50% of the partnerships. The two
limited partnerships are FCH/IHC Hotels, L.P. and FCH/IHC Leasing, L.P. The
eight hotels are:

<Table>
<Caption>
HOTEL LOCATION
----- --------

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 of $4,504 and a $4,170 promissory note from
FelCor to fund the acquisition. The promissory note pays interest at the rate of
12% per annum and the principal balance is due and payable on December 31, 2010.
The Company accounts for this investment using the equity method of accounting
and recorded $691 in equity losses related to this investment for the year ended
December 31, 2001. Pro forma financial information of the Company has not been
presented as this transaction would not materially differ the historical
financial statements presented herein.

On November 19, 2001, the Company acquired a non-controlling 15% limited
partnership interest in a limited partnership, CNL IHC Partners, L.P., that owns
two mid-scale hotels for a total acquisition cost, including closing costs, of
approximately $2,201. CNL Hospitality Corp. owns the remaining 85% of the
partnership. The two hotels are the Courtyard by Marriott and the Residence Inn
by Marriott, both of which are located in the greater Hartford, Connecticut
area. The Company used cash on hand to fund the acquisition. The Company
accounts for this investment using the equity method of accounting. Pro forma
financial information of the Company has not been presented as this transaction
would not materially differ the historical financial statements presented
herein.

F-16

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

8. ACQUISITIONS AND DISPOSITIONS, CONTINUED:

During 2000, the Company acquired a 25% non-controlling equity interest in
a limited partnership, MRI Houston Hospitality, L.P., that owns the Houston
Astrodome/Medical Center Residence Inn by Marriott in Houston, Texas for $750; a
20% non-controlling equity interest in the Renaissance Worldgate Hotel in
Kissimmee, Florida for $3,874; and a 10% non-controlling equity interest in a
limited liability company, Interconn Ponte Vedra Company, L.L.C., that owns the
Sawgrass Marriott Resort and Beach Club in Ponte Vedra Beach, Florida for
$4,377. The Company manages all three hotels. The Company accounts for these
investments using the equity method of accounting and recorded $4,478 and $222
in equity losses related to these three equity investments for the years ended
December 31, 2001 and 2000, respectively. On February 21, 2002, in connection
with the restructuring of the ownership and financing for the Renaissance
Worldgate Hotel as discussed in Note 7, the Company's 20% non-controlling equity
interest was redeemed in exchange for mutual releases with respect to the
obligations of the hotel. Pro forma financial information of the Company has not
been presented as these transactions would not materially differ the historical
financial statements presented herein.

One of the former owners of the Houston Astrodome/Medical Center Residence
Inn by Marriott 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 partner of this property. The majority owners
and the principal lender for the Renaissance Worldgate Hotel have representation
on the Company's board of directors and are affiliated with the Investor.

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 IH LLC, received
$13,500 in cash and a $5,750 secured non-recourse promissory note in connection
with the sale. The promissory note, which was repaid in 2001, paid quarterly
interest only, at a rate of 10% per annum. 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.

F-17

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

8. ACQUISITIONS AND DISPOSITIONS, CONTINUED:

The following table represents the summarized financial information of
FCH/IHC Hotels, L.P. and Interconn Ponte Vedra Company, L.L.C. as of and for the
period ended December 31, 2001:

<Table>
<Caption>
INTERCONN
FCH/IHC PONTE VEDRA
HOTELS, L.P. COMPANY, L.L.C.
------------ ---------------

Total assets.............................................. $87,543 $108,294
Total liabilities......................................... 53,954 69,704
Preferred partnership interest............................ 16,581 --
Partners' or members' equity.............................. 17,008 38,590
Lodging or rent revenue................................... 7,420 42,955
Net income................................................ 148 608
</Table>

9. 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:

<Table>
<Caption>
2000 2001
------- -------

Land........................................................ $ 1,344 $ 1,344
Building (40 years)......................................... 9,864 9,917
Leasehold improvements (5 to 15 years)...................... 1,428 1,430
Furniture, fixtures and equipment (5 to 10 years)........... 8,904 9,328
------- -------
21,540 22,019
Less accumulated depreciation............................... (6,456) (7,629)
------- -------
$15,084 $14,390
======= =======
</Table>

Depreciation expense was $890, $1,384 and $1,173 for the years ended
December 31, 1999, 2000 and 2001, respectively.

10. 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:

<Table>
<Caption>
2000 2001
------ -----

Total future minimum lease payments receivable.............. $ 936 $ 345
Less unearned income........................................ (193) (68)
------ -----
743 277
------ -----
Less current portion........................................ (248) (92)
------ -----
$ 495 $ 185
====== =====
</Table>

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

<Table>

2002........................................................ 262
2003........................................................ 83
----
$345
====
</Table>

F-18

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

11. INTANGIBLE AND OTHER ASSETS:

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

<Table>
<Caption>
2000 2001
-------- --------

Management agreements (5 to 20 years)................... $ 26,760 $ 25,938
Deferred financing fees (2 and 7 years)................. 2,295 3,787
Other................................................... 212 391
-------- --------
29,267 30,116
Less accumulated amortization........................... (2,748) (12,628)
-------- --------
$ 26,519 $ 17,488
======== ========
</Table>

Approximately $23,613 and $22,322 of the management agreements at December
31, 2000 and 2001, respectively, will be fully amortized by July 31, 2003.

12. 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 $2,216, $2,103 and $2,277 for the
years ended December 31, 1999, 2000 and 2001, respectively. The following is a
schedule of future minimum lease payments under these leases for each of the
years ending December 31:

<Table>

2002........................................................ $2,126
2003........................................................ 1,661
2004........................................................ 388
2005........................................................ 239
2006........................................................ --
------
$4,414
======
</Table>

As discussed in Note 3, the Company has committed to invest $25,000 into
the Joint Venture. Such amount is expected to be invested incrementally,
concurrent with the closings of hotel property acquisitions by the Joint
Venture.

Under the provisions of certain management agreements between the Company
and hotel owners, the Company has outstanding commitments to provide an
aggregate of up to $4,050 to these hotel owners in the form of investments or
working capital loans, which may be forgiven or repaid based upon the specific
terms of each management agreement. The timing of future investments or working
capital loans to hotel owners is unknown.

F-19

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

12. COMMITMENTS AND CONTINGENCIES, CONTINUED:

of Old Interstate that Wyndham retained. As a result, the Company 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.

13. 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. 725,000 shares of preferred stock have been issued to date and are
described below under the caption mandatorily redeemable preferred stock.

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 3). 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. The Company paid the holders of the Preferred
Stock $634 of dividends for the year ended December 31, 2001. Approximately $127
of dividends were accrued but unpaid as of December 31, 2001. Such amounts were
paid in January 2002.

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 were 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 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 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.

F-20

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

13. PREFERRED AND COMMON STOCK, CONTINUED:

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.

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 purchase price of $597 (see Note 4). In 2001, the
Company purchased and cancelled 826,000 shares of Class A Common Stock through
the Company's stock repurchase program for an aggregate purchase price of
$2,000.

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

<Table>
<Caption>
ISSUED AND
OUTSTANDING
---------------------
PAR VALUE AUTHORIZED 2000 2001
--------- ---------- --------- ---------

Class A Common Stock............ $.01 62,000,000 6,157,189 5,487,885
Class B Common Stock............ $.01 1,500,000 242,555 242,555
Class C Common Stock............ $.01 1,439,361 -- --
---------- --------- ---------
64,939,361 6,399,744 5,730,440
========== ========= =========
</Table>

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

<Table>
<Caption>
2000 2001
--------- ---------

1999 Equity Incentive Plan........................... 2,380,000 2,380,000
Employee Stock Purchase Plan......................... 400,000 --
--------- ---------
2,780,000 2,380,000
========= =========
</Table>

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.

Prior to February 2001, the Company elected to account for stock-based
employee compensation arrangements under the provisions of APB No. 25,
"Accounting for Stock Issued to Employees," rather than

F-21

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

13. PREFERRED AND COMMON STOCK, CONTINUED:

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.

In February 2001, the Board of Directors approved the repricing of all
outstanding options to purchase shares of the Company's Class A Common Stock.
Under the terms of the repricing, each optionee was given the right to elect to
keep their original stock options at the stated exercise price of $4.50, or to
return 40% of their original stock options and retain the 60% remaining stock
options with a new exercise price of $2.00. As a result of the repricing, an
aggregate of 939,500 stock options granted on July 15, 1999, August 9, 1999,
September 13, 1999 and September 28, 1999 were cancelled and replaced with
563,700 stock options at an exercise price of $2.00. Therefore, the original
stock options previously accounted for under the provisions of APB No. 25 are
now accounted for under variable plan accounting in accordance with FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation." Any additional stock options granted during 2001 continued to be
accounted for under the provisions of APB No. 25. For the year ended December
31, 2001, the Company did not incur a non-cash expense under variable plan
accounting for the repricing as the closing market price for the Company's
common stock at December 31, 2001 was below the exercise price of $2.00.

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

<Table>
<Caption>
2000 2001
---- ----

Weighted average risk-free interest rate.................... 5.4% 6.0%
Expected dividend yield..................................... -- --
Expected volatility......................................... 60.0% 60.0%
Expected life (number of years)............................. 8.5 7.7
</Table>

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

<Table>
<Caption>
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
Cancelled........................... (30,000) $4.50 $4.50
---------
Outstanding, December 31, 1999...... 1,738,000 9.5 $3.25 $4.50 $4.50
Cancelled........................... (675,000)
---------
Outstanding, December 31, 2000...... 1,063,000 8.5 $ .98 $4.50 $4.50
Granted............................. 593,700 $2.01 $2.00-$2.25
Exercised........................... (4,000) $2.00 $2.00
Cancelled........................... (998,200) $4.47 $2.00-$4.50
---------
Outstanding, December 31, 2001...... 654,500 7.7 $ .87 $2.31 $2.00-$4.50
=========
Exercisable, December 31, 2001...... 417,535
Shares reserved for future options
at December 31, 2001.............. 1,393,583
</Table>

F-22

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

14. 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
years ended December 31 were as follows:

<Table>
<Caption>
1999 2000 2001
------- ------- -------

Base management fees.................................. $25,107 $20,444 $18,702
Incentive management fees............................. 8,656 9,691 6,603
------- ------- -------
33,763 30,135 25,305
Less:
Administrative fees................................. (488) (654) (780)
------- ------- -------
$33,275 $29,481 $24,525
======= ======= =======
</Table>

15. INCOME TAXES:

Income tax expense (benefit) consisted of the following for the years ended
December 31:

<Table>
<Caption>
1999 2000 2001
------- ------- -------

Current:
Federal............................................. $ 1,113 $ 366 $ (605)
State............................................... 195 (42) 16
------- ------- -------
1,308 324 (589)
------- ------- -------
Deferred:
Federal............................................. (5,552) (5,477) (2,681)
State............................................... (834) (782) (25)
------- ------- -------
(6,386) (6,259) (2,706)
------- ------- -------
Income tax benefit.................................. $(5,078) $(5,935) $(3,295)
======= ======= =======
</Table>

A reconciliation of the Company's effective tax rate to the federal
statutory rate for the years ended December 31 was as follows:

<Table>
<Caption>
1999 2000 2001
---- ---- ----

Federal statutory rate.......................... 35% 35% 35%
State taxes, net of federal benefit............. 3 3 1
Minority interest............................... (17) (17) --
Valuation allowance............................. -- -- (4)
Other........................................... (1) 2 --
--- --- --
Effective tax rate.............................. 20% 23% 32%
=== === ==
</Table>

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.

F-23

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

15. INCOME TAXES, CONTINUED:

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

<Table>
<Caption>
2000 2001
------ ------

Depreciation and amortization............................... $2,296 $3,833
Payroll and related benefits................................ 418 266
Self-insured health trust................................... 1,151 1,080
Retirement plan............................................. 43 165
Other....................................................... 554 (41)
Equity investment in hotel real estate...................... 515 1,963
Net operating loss carryforward............................. -- 812
------ ------
4,977 8,078
Valuation allowance......................................... -- (395)
------ ------
$4,977 $7,683
====== ======
</Table>

The Company has net operating loss carryforwards of approximately $2,136
that can be utilized to offset taxable income through 2022. These net operating
loss carryforwards may be limited upon a significant change in control of the
Company. The Company also has other tax credits of approximately $1,044 that can
be utilized to offset taxable income through 2006. During 2001, a full valuation
allowance was established on the anticipated capital loss that was generated
through the impairment of the Renaissance Worldgate Hotel equity investment in
hotel real estate (Note 7). A valuation allowance has not been recorded on the
net operating losses as management of the Company believes it is more likely
than not that these assets are realizable.

16. 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. 128 are not meaningful
for periods prior to the Spin-off and, therefore, have not been provided.

F-24

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

16. EARNINGS PER SHARE, CONTINUED:

Basic earnings per common share was calculated by dividing net loss
available to common stockholders by the weighted average number of shares of
common shares 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 and the Class A shares issuable upon the exercise of outstanding
stock options are considered to be anti-dilutive. The details of basic and
diluted earnings per common share for the years ended December 31, 2000 and 2001
were as follows:

<Table>
<Caption>
2000 2001
----------- -----------

Net loss available to common stockholders... $ (9,042) $ (8,046)
----------- -----------
Weighted average number of common shares
outstanding............................... 6,474,003 6,200,093
----------- -----------
Basic earnings per common share............. $ (1.40) $ (1.30)
----------- -----------
Shares issuable upon exercise of dilutive
outstanding stock options................. -- --
----------- -----------
Weighted average number of diluted common
shares outstanding........................ 6,474,003 6,200,093
----------- -----------
Diluted earnings per common share........... $ (1.40) $ (1.30)
=========== ===========
</Table>

17. SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid for interest amounted to $570 and $3,863 for the years ended
December 31, 2000 and 2001, respectively. No cash was paid for interest for the
year ended December 31, 1999. Cash paid for income taxes amounted to $392, $559
and $499 for the years ended December 31, 1999, 2000 and 2001, respectively.

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 4,
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-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 3.

In 2001, the Company reclassified $450 of amounts due from a related party
from accounts receivable to mandatorily redeemable preferred stock. The Company
also reduced long-term management agreement intangible assets by $915 for the
resolution of contingent assets related to the Spin-off and Wyndham Redemption.

F-25

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

18. INSURANCE:

The Company provides certain insurance coverage to its managed hotels under
the terms of each individual management agreement. 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 $3,374 and $3,973 in the related Health Trust as of December 31, 2000 and
2001, 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 $1,361 and $1,089
at December 31, 2000 and 2001, 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 years ended December 31:

<Table>
<Caption>
1999 2000 2001
------ ------ ------

Reinsurance premiums written............................. $3,907 $5,772 $5,332
Direct premiums written.................................. 800 200 200
Reinsurance premiums ceded............................... (100) (355) (200)
Change in unearned premiums reserve...................... 2 90 47
Loss sharing premiums.................................... 10 -- --
------ ------ ------
Insurance income......................................... $4,619 $5,707 $5,379
====== ====== ======
</Table>

19. EMPLOYEE BENEFIT PLANS:

In addition to the IHC Employee Health and Welfare Plan described in Note
18, 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 $221,
$227 and $213 for the years ended December 31, 1999, 2000 and 2001,
respectively.

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
$699, $743 and $735 for the years ended December 31, 1999, 2000 and 2001,
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

F-26

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

19. EMPLOYEE BENEFIT PLANS, CONTINUED:

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 2001.

20. FINANCIAL INSTRUMENTS:

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

<Table>
<Caption>
2000 2001
------------------- -------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ------- -------- -------

Cash and cash equivalents................... $51,327 $51,327 $39,040 $39,040
Restricted cash............................. 2,173 2,173 1,348 1,348
Officers and employees notes receivable..... 3,442 3,442 2,028 2,028
Notes receivable............................ 10,235 10,235 1,718 1,718
Marketable securities....................... 2,289 2,289 2,548 2,548
Mandatorily redeemable preferred stock...... 4,258 4,258 5,070 5,070
Long-term debt.............................. 45,163 45,163 40,981 40,981
</Table>

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.

Mandatorily redeemable preferred stock: The fair value of mandatorily
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.

21. RELATED PARTY TRANSACTIONS:

Wyndham Transactions:

Net management and other fees in the accompanying consolidated statements
of operations include fee revenues that were earned pursuant to management
agreements between the Company and affiliates of Old Interstate and/or Wyndham
that owned the hotels. The net management fees earned from these hotels amounted
to $7,410 and $2,050 for the years ended December 31, 1999 and 2000,
respectively. Revenues from other fees include primarily insurance revenues and
purchasing fees. Other fees earned from these hotels amounted to $1,107 and $646
for the years ended December 31, 1999 and 2000, respectively. The Company did
not earn fee revenues from these hotels for the year ended December 31, 2001.
Accounts receivable owed from these hotels was not significant at December 31,
2000.

Investor Transactions:

In October 2000, the Company entered into a management agreement with an
affiliate of the Investor to manage the Beaumont, Texas Hilton Hotel. The net
management fees earned from this hotel amounted to $36

F-27

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

21. RELATED PARTY TRANSACTIONS, CONTINUED:

and $173 for the years ended December 31, 2000 and 2001, respectively. Accounts
receivable owed from this hotel was not significant at December 31, 2000 and
2001.

During 2001, the Company entered into management agreements to manage the
Park Central Hotel in New York, NY and the Raleigh Sheraton Capital Center Hotel
in Raleigh, NC. The owners of these hotels engaged the Company to manage these
properties pursuant to the rights of the principal lender of these hotels to
select a third-party management company. The principal lender of these hotels is
affiliated with the Investor. The net management fees earned from these hotels
amounted to $611 for the year ended December 31, 2001. Accounts receivable owed
from these hotels, which includes the reimbursement of costs, was $204 at
December 31, 2001.

Mandatorily redeemable preferred stock in the accompanying consolidated
balance sheets includes a receivable from a related party in the amount of $450
at December 31, 2000 and 2001. This amount represents a receivable due to the
Company from the Investor for the reimbursement of transaction costs associated
with the Joint Venture.

The majority owners and the principal lender for the Renaissance Worldgate
Hotel have representation on the Company's board of directors and are affiliated
with the Investor (see Note 7).

The principal lender for the eight FelCor hotels is affiliated with the
Investor.

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.

Concentration of Risk:

Notes receivable -- affiliates at December 31, 2000 included two notes
receivable from the owner of The Charles Hotel Complex, which were loaned in
1999, in the amounts of $5,750 and $2,500, and were scheduled to mature on June
18, 2002 and October 1, 2002, respectively. Both notes, which were repaid in
August 2001, paid quarterly interest only, at a rate of 10% per annum.

The Company manages three hotels located in Russia. The net management fees
earned from these hotels amounted to $2,026, $3,056 and $3,656 for the years
ended December 31, 1999, 2000 and 2001, respectively. Accounts receivable owed
from to these hotels, which includes the reimbursement of costs, was $2,688 at
December 31, 2000, and was not significant at December 31, 2001. In addition,
notes receivable -- affiliates at December 31, 2000 and 2001 included notes
receivable from the owners of these hotels in the aggregate amounts of $1,849
and $943, 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 and Chief Executive
Officer 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 passu with
Equity Inns. The Company recorded a reserve for uncollectible accounts for the
full amount of the loan during 2000.

F-28

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

21. RELATED PARTY TRANSACTIONS, CONTINUED:

Accounts Payable -- Related Parties:

Accounts payable -- related parties at December 31, 2000 and 2001
represents the Company's required distribution to Wyndham 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 effective November 1, 2000.

22. SEGMENT INFORMATION:

The Company's reportable segments are: (i) operations of luxury and upscale
hotels, and (ii) operations of mid-scale, upper economy and budget hotels. The
luxury and upscale hotels segment derives revenues from management fees and
other services which directly relate to providing management services, including
insurance and risk management services, purchasing and project management
services, MIS support, training and relocation programs and equipment leasing.
The mid-scale, upper economy and budget hotels segment derives revenues from
management fees and certain specialized support services, such as centralized
accounting services, as well as the operating revenues for the Pittsburgh
Airport Residence Inn by Marriott.

The table below presents revenue and operating income (loss) information
for each reportable segment for the years ended December 31:

<Table>
<Caption>
1999 2000 2001
-------- -------- -------

REVENUES:
Luxury and Upscale Hotels........................... $ 41,808 $ 37,332 $31,191
Mid-Scale, Upper Economy and Budget Hotels(3)....... 198,546 208,780 12,834
-------- -------- -------
Consolidated totals............................... $240,354 $246,112 $44,025
======== ======== =======
OPERATING INCOME (LOSS):
Luxury and Upscale Hotels(1)........................ $ 2,868 $ (6,532) $(1,104)
Mid-Scale, Upper Economy and Budget Hotels(2)(3).... (30,085) (20,304) 483
-------- -------- -------
Consolidated totals............................... $(27,217) $(26,836) $ (621)
======== ======== =======
</Table>

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

(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.

(3) The 2000 amounts include the operating revenues and expenses of previously
leased hotels that are no longer reflected in the financial statements of
the Company as a result of the Equity Inns Conversion. In 2001, the Company
records revenues earned from management fees only.

F-29

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

22. SEGMENT INFORMATION, CONTINUED:

Depreciation and amortization included in segment operating income (loss)
for the years ended December 31 were as follows:

<Table>
<Caption>
1999 2000 2001
------- ------- -------

Luxury and Upscale Hotels........................... $13,569 $12,548 $ 8,375
Mid-Scale, Upper Economy and Budget Hotels.......... 7,264 3,543 2,019
------- ------- -------
Consolidated totals............................... $20,833 $16,091 $10,394
======= ======= =======
</Table>

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

<Table>
<Caption>
2000 2001
------- -------

Luxury and Upscale Hotels................................... $30,028 $14,198
Mid-Scale, Upper Economy and Budget Hotels.................. 5,270 14,510
------- -------
Consolidated totals....................................... $35,298 $28,708
======= =======
</Table>

The following table reconciles the Company's measure of operating loss to
consolidated net loss for the years ended December 31:

<Table>
<Caption>
1999 2000 2001
-------- -------- --------

Total after-tax operating income (loss).................... $(16,330) $(16,101) $ (385)
Unallocated amounts, net of tax:
Interest, net............................................ 821 1,066 (1,037)
Other, net............................................... (5) 14 23
Earnings (losses) from equity investments in hotel real
estate................................................ 915 (313) (3,204)
Loss on impairment of equity investment in hotel real
estate................................................ -- -- (2,627)
Loss on sale of investment in hotel real estate.......... (526) -- --
Minority interest........................................ 7,508 6,431 (120)
-------- -------- --------
Consolidated net loss...................................... $ (7,617) $ (8,903) $ (7,350)
======== ======== ========
</Table>

23. 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, 2000 and 2001.

<Table>
<Caption>
FIRST SECOND THIRD FOURTH
------- ------- ------- -------

2000:
Total revenues (1)................................. $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)

2001:
Total revenues (1)................................. $11,085 $12,264 $10,060 $10,616
Operating income (loss)............................ (594) 259 (804) 518
Net loss available to common stockholders.......... (486) (56) (4,365) (3,139)
Basic earnings per common share.................... (.07) (.01) (.72) (.55)
Diluted earnings per common share.................. (.07) (.01) (.72) (.55)
</Table>

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

(1) The 2000 amounts include the operating revenues of previously leased hotels
that are no longer reflected in the financial statements of the Company as a
result of the Equity Inns Conversion. In 2001, the Company records revenues
earned from management fees only.

F-30

APPENDIX A

FCH/IHC HOTELS, L.P.
(A LIMITED PARTNERSHIP)
CONSOLIDATED FINANCIAL STATEMENTS
PERIOD MARCH 27, 2001 (INCEPTION) TO DECEMBER 31, 2001

REPORT OF INDEPENDENT ACCOUNTANTS

To the General Partners of
FCH/IHC Hotels, L.P.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and partners' capital and of cash flows
present fairly, in all material respects, the financial position of FCH/IHC
Hotels, L.P. and its subsidiaries (the Partnership) at December 31, 2001 and the
results of their operations and their cash flows for the period March 27, 2001
(inception) to December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Partnership's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

/S/ PRICEWATERHOUSECOOPERS LLP

600 Grant Street
Pittsburgh, Pennsylvania
February 13, 2002

A-1

FCH/IHC HOTELS, L.P.
(A LIMITED PARTNERSHIP)

CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001

<Table>

ASSETS
Investment in hotel properties, net......................... $75,480,752
Cash and cash equivalents................................... 2,224,443
Restricted cash............................................. 6,708,920
Due from lessee -- related party............................ 1,578,396
Accounts receivable -- related party........................ 23,200
Other assets................................................ 3,504
Deferred expenses, net...................................... 1,524,051
-----------
Total assets........................................... $87,543,266
===========
LIABILITIES AND PARTNERS' CAPITAL
Long-term debt.............................................. 51,805,313
Accounts payable............................................ 40,234
Accrued liabilities:
Interest payable.......................................... 1,351,614
Real estate taxes payable................................. 736,567
Accrued land rent......................................... 20,298
-----------
Total liabilities...................................... 53,954,026
Preferred partnership interest (Notes 1 and 7).............. 16,581,000
Commitment and contingencies................................ --
Partners' capital........................................... 17,008,240
-----------
Total liabilities and partners' capital................ $87,543,266
===========
</Table>

The accompanying notes are an integral part of these consolidated financial
statements.
A-2

FCH/IHC HOTELS, L.P.
(A LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENT OF OPERATIONS AND PARTNERS' CAPITAL
PERIOD MARCH 27, 2001 (INCEPTION) TO DECEMBER 31, 2001

<Table>

Revenues:
Base lease revenue........................................ $ 4,880,144
Percentage lease revenue.................................. 2,539,613
-----------
7,419,757
-----------
Expenses:
Depreciation and amortization............................. 2,020,305
Interest, net............................................. 2,998,130
Real estate and personal property taxes................... 887,593
General and administrative................................ 240,298
-----------
Total expenses......................................... 6,146,326
-----------
Net income............................................. 1,273,431
Preferred partnership interest expense.................... 1,125,691
-----------
Net income available to partners....................... 147,740
Partners' capital:
Beginning of period....................................... --
Capital contributions..................................... 16,860,500
-----------
End of period.......................................... $17,008,240
===========
</Table>

The accompanying notes are an integral part of these consolidated financial
statements.
A-3

FCH/IHC HOTELS, L.P.
(A LIMITED PARTNERSHIP)

CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD MARCH 27, 2001 (INCEPTION) TO DECEMBER 31, 2001

<Table>

Cash flows from operating activities:
Net income................................................ $ 1,273,431
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 2,132,409
Changes in assets and liabilities:
Due from lessee -- related party..................... (1,578,396)
Other assets......................................... (3,504)
Accounts payable..................................... 40,234
Real estate taxes payable............................ 736,567
Interest payable..................................... 225,923
Accrued land rent.................................... 20,298
------------
Net cash provided by operating activities......... 2,846,962
------------
Cash flows from investing activities:
Restricted cash........................................... (6,708,920)
Purchase of property and equipment........................ (52,250,000)
Improvements and additions in hotel properties............ (495,450)
Franchise fees paid....................................... (145,000)
------------
Net cash used in investing activities............. (59,599,370)
------------
Cash flows from financing activities:
Initial capital contributions............................. 8,169,000
Additional capital contributions.......................... 522,500
Proceeds from long-term debt.............................. 52,250,000
Payment of long-term debt................................. (444,687)
Financing fees paid....................................... (1,496,762)
Accounts receivable -- related party...................... (23,200)
------------
Net cash provided by financing activities......... 58,976,851
------------
Net change in cash and cash equivalents..................... 2,224,443
Cash and cash equivalents at beginning of period............ --
------------
Cash and cash equivalents at end of period.................. $ 2,224,443
============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 2,800,532
============
Noncash investing and financing activities:
Initial partner capital contributions..................... $ 8,169,000
============
Preferred partnership interest............................ $ 16,581,000
============
Preferred partnership interest payable.................... $ 1,125,691
============
</Table>

The accompanying notes are an integral part of these consolidated financial
statements.
A-4

FCH/IHC HOTELS, L.P.
(A LIMITED PARTNERSHIP)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD MARCH 27, 2001 (INCEPTION) TO DECEMBER 31, 2001
1. ORGANIZATION AND BASIS OF PRESENTATION

FCH/IHC Hotels, L.P. and its subsidiaries (the Partnership), a limited
partnership, was formed effective March 27, 2001 by Interstate/Dallas, GP,
L.L.C. (Interstate GP), a Delaware limited liability company, and FelCor Hotel
Asset Company, L.L.C. (FelCor GP), a Delaware limited liability company, as
General Partners, and Interstate/Dallas Partnership, L.P. (Interstate LP) and
FelCor Lodging Limited Partnership (FelCor LP), as Limited Partners. FelCor GP
and FelCor LP are majority owned by FelCor Lodging Trust, Inc. (FLT) and
collectively have a 50% partnership interest. Interstate GP and Interstate LP
are wholly owned by Interstate Hotels Corporation (IHC) and collectively have a
50% partnership interest. The partnership interests of FLT and IHC have
identical voting and distribution rights. FelCor LP also has a preferred
partnership interest as described in Note 7. The Partnership owns eight
limited-service hotels (the Hotels) through a series of wholly-owned
subsidiaries of the Partnership.

The Partnership was formed to acquire and lease the Hotels which are
limited-service hotels located in Georgia, Texas and Arizona. The Hotels are:

<Table>
<Caption>
HOTEL LOCATION
- ------------------------------------------------------------ -------------------

The Hotels are leased by FCH/IHC Leasing, L.P. (Lessee), an affiliate of
the general and limited partners, and are managed by IHC.

These consolidated financial statements are presented for the period from
March 27, 2001 to December 31, 2001 to coincide with the inception of the
Partnership and the purchase of the Hotels on March 27, 2001. Revenues and
expenses from the operation of the hotels are not included in the accompanying
consolidated financial statements.

The term of the Partnership shall continue until March 26, 2011; however,
the dissolution will occur earlier upon a disabling event as defined by the
Partnership agreement. In accordance with the terms of the Partnership
agreement, subsequent capital contributions from the partners may be required.
Such capital contributions are to be made by the limited partners and the
general partners at the discretion of the general partners and paid in
proportion to their respective partnership interests. The Partnership agreement
also provides for the exchange of partnership interests in the event of the
failure of a partner to make subsequent capital contribution.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the
Partnership as described in Note 1. All significant intercompany transactions
and balances have been eliminated in consolidation.

A-5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

Use of Estimates

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

Balance Sheet Presentation

The balance sheet of the Partnership is presented as unclassified to
conform to industry practice for real estate entities.

Investment in Hotel Properties

The hotel properties are recorded at cost and are depreciated primarily on
the straight-line method over their estimated useful lives. 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. Maintenance and repairs are the responsibility of the Lessee; major
renewals and improvements are capitalized. Upon disposition, both the asset and
accumulated depreciation accounts are relieved, and the related gain or loss is
credited or charged to the statement of operations and partners' capital.

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
Partnership 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.

Restricted Cash

The Notes discussed in Note 6 provide that certain cash from operations be
restricted for the future acquisition of or for the replacement of property and
equipment.

Deferred Expenses

Deferred expenses consist primarily of loan acquisition costs and franchise
fees, which are being amortized on the straight-line method over the life of the
underlying agreements, which range from 10 to 20 years. Accumulated amortization
was $117,711 at December 31, 2001.

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 deferred expenses, are evaluated periodically in relation to the
operating performance and future undiscounted cash flows of the underlying
assets. Adjustments are made if the sum of expected future net cash flows is
less than book value.

Revenue Recognition

The Hotels are leased by the Partnership to the Lessee under a percentage
lease agreement which provides for minimum base rent ("Base Rent") and
percentage rent based on fixed percentages of room revenue in excess of certain
specified levels ("Percentage Rent"). Base lease revenue is recognized on a
straight-line basis over the term of the related leases. Base Rent is paid
monthly and Percentage Rent is paid

A-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

on a schedule set forth in each percentage lease agreement. Percentage lease
revenue is reported as income over the lease term as it becomes receivable from
the Lessee in accordance with the provisions of the leases.

Income Tax Status

For federal and state tax purposes, the Partnership is considered a
partnership. Partnerships are generally not subject to state and federal income
taxes. Accordingly, net income or loss and any available tax credits are
allocated to the partners in proportion to their income and loss rates of
participation.

New Accounting Pronouncements

In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment and disposal of long-lived assets. This
statement is required to be adopted by the Partnership beginning on January 1,
2002. Management is currently assessing the details of this statement and is
preparing a plan of implementation.

3. RELATED PARTY TRANSACTIONS

The Hotels are leased to the Lessee, an affiliate of the Partnership. The
initial term of the leases are for 10 years and expire on December 31, 2010. The
leases can be extended by the mutual consent of the parties on the same terms
for 2 periods of 5 years. Lease revenue represents base lease revenue and
percentage lease revenue that is based on a percentage of rooms, food, beverage,
telephone and other revenues from the Hotels, which is annually increased by the
consumer price index and expire on December 31, 2010.

Minimum future lease revenue is computed based on the Base Rent of each
lease, as defined, and is as follows for the years ending December 31:

<Table>

2002........................................................ $ 6,392,300
2003........................................................ 6,392,300
2004........................................................ 6,392,300
2005........................................................ 6,392,300
2006........................................................ 6,392,300
Thereafter.................................................. 25,569,200
-----------
$57,530,700
===========
</Table>

Lease payments due at December 31, 2001 are reported separately on the
accompanying balance sheet. Accounts receivable -- related party include amounts
receivable from FLT arising in the purchase transaction.

4. ACQUISITION

On March 27, 2001, the Partnership purchased the Hotels from FLT. The
purchase price paid to FLT included cash of $52,250,000 and non-cash interest in
the hotels contributed in exchange for a partnership interest of $8,169,000 and
preferred partnership interest of $16,581,000. The noncash purchase price
amounts contributed in exchange for partnership interests were determined by
reference to the cash paid by Interstate GP and Interstate LP for their 50%
partnership interest. The noncash purchase price exchanged for the preferred
partnership interest was determined based on the face value of the preferred
partnership interest, and such face value approximates fair value.

A-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED

4. ACQUISITION, CONTINUED

The acquisition was accounted for using the purchase method of accounting.
Net assets including the land, building improvements, furniture, fixtures and
equipment, were purchased for $77,000,000. The Property was acquired through the
issuance of a mortgage notes payable totaling $52,250,000. The purchase price of
$77,000,000 was allocated as follows:

<Table>

Land........................................................ $ 7,416,232
Building and improvements................................... 67,122,492
Furniture, fixtures and equipment........................... 2,461,276
------------
77,000,000
Less -- Initial capital contribution -- noncash............. (8,169,000)
Less -- Preferred partnership interest -- noncash........... (16,581,000)
------------
$ 52,250,000
============
</Table>

5. INVESTMENT IN HOTEL PROPERTIES

Investment in hotel properties consisted of the following at December 31:

<Table>

Land........................................................ $ 7,416,232
Building (40 years)......................................... 67,259,894
Land improvements (15 years)................................ 25,345
Furniture, fixtures and equipment (5 to 10 years)........... 2,793,979
-----------
Total.................................................. 77,495,450
Less accumulated depreciation............................... (2,014,698)
-----------
$75,480,752
===========
</Table>

Depreciation expense was $2,014,698 for the period March 27, 2001
(inception) to December 31, 2001.

6. LONG-TERM DEBT

On March 27, 2001, the wholly-owned subsidiaries of the Partnership
borrowed a total of $52,250,000 through a series of notes from Lehman Brothers
Bank, FSB (the Notes). The proceeds from the Notes were used to purchase the
Hotels. Additionally, $5,000,000 from the loan proceeds was deposited into an
escrow account to finance property improvements at the Hotels.

The Notes requires monthly principal and interest payments, with monthly
interest payments beginning on March 27, 2001 and monthly principal payments
beginning on April 11, 2001, pursuant to a twenty-five year amortization
schedule. Interest is payable based on a fixed rate of 7.48%.

The Notes contains certain restrictive covenants including the limitations
on the assumptions of additional indebtedness, change in the Partnership
agreement, changes in the managing agent of the Hotels and the maintenance of
compliance with the Americans with Disabilities Act. The Notes are cross-
collateralized by substantially all of the Hotels' assets, including the
franchise agreements.

A-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED

6. LONG-TERM DEBT, CONTINUED

Aggregate scheduled maturities of the Notes for the next five years ending
December 31 and thereafter are as follows:

<Table>

2002........................................................ $ 721,880
2003........................................................ 778,539
2004........................................................ 786,301
2005........................................................ 859,757
2006........................................................ 928,003
Thereafter.................................................. 47,730,833
-----------
$51,805,313
===========
</Table>

7. PREFERRED PARTNERSHIP INTEREST

As consideration for its contribution of the Hotels, FelCor LP received
$16,581,000 of a preferred partnership interest and $8,169,000 of partnership
interest. The preferred partnership interest contains certain privileges that
include preferred return, profit and loss allocations and distributions. The
preferred partnership interest is redeemable at face value at the option of
Partnership. The preferred interest is cumulative, accrues interest at 8.85% per
annum and is payable from available cash flow, as defined in the Partnership
agreement. As of December 31, 2001, interest payable was approximately
$1,125,700 and included in interest payable on the accompanying balance sheet.

8. FINANCIAL INSTRUMENTS

The carrying values and fair values of the Partnership's financial
instruments consisted of the following at December 31, 2001:

<Table>
<Caption>
CARRYING FAIR
VALUE VALUE
----------- -----------

Cash and cash equivalents.................................. $ 2,224,443 $ 2,224,443
Restricted cash............................................ 6,708,920 6,708,920
Long-term debt............................................. 51,805,313 51,805,313
Preferred partnership interest............................. 16,581,000 16,581,000
</Table>

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.

Long-term debt and preferred partnership interest -- The fair value of
long-term debt is estimated to approximate face value.

9. COMMITMENTS AND CONTINGENCIES

The Hotels are operated under franchise agreements and are licensed as
Courtyard by Marriott hotels (2), Fairfield Inn by Marriott hotels (5), and a
Hampton Inn (1). The franchisors agreements require the payment of fees based on
a percentage of hotel room revenue, beverage revenue and food revenue, if
applicable, which fees are paid by the Lessee, and therefore are not included in
the accompanying consolidated financial statements.

A-9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED

9. COMMITMENTS AND CONTINGENCIES, CONTINUED

The Partnership has future lease commitments under a ground lease for one
of the Hotels through April 30, 2068. Future minimum ground rent payable under
this lease for each of the years ending December 31 and thereafter are as
follows:

<Table>

2002........................................................ $ 42,000
2003........................................................ 42,000
2004........................................................ 42,000
2005........................................................ 42,000
2006........................................................ 42,000
Thereafter.................................................. 2,576,000
----------
$2,786,000
==========
</Table>

A-10