As filed with the Securities and Exchange Commission on December 28 2001
Registration No. 333-75580

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

___________

AMENDMENT NO. 1
TO
FORM S-11
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933

HERSHA HOSPITALITY TRUST
(Exact Name of Registrant as Specified in its Governing Instruments)

148 SHERATON DRIVE, BOX A
NEW CUMBERLAND, PA 17070
(717) 770-2405
(Address, Including Zip Code, and Telephone Number, including
Area Code, of Registrant's Principal Executive Offices)

ASHISH R. PARIKH
CHIEF FINANCIAL OFFICER
HERSHA HOSPITALITY TRUST
148 SHERATON DRIVE, BOX A
NEW CUMBERLAND, PA 17070
(717) 770-2405
(717) 774-7383 (TELECOPY)
(Name, Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent for Service)

___________

COPIES TO:
DAVID C. WRIGHT, ESQ.
HUNTON & WILLIAMS
RIVERFRONT PLAZA, EAST TOWER
951 E. BYRD STREET
RICHMOND, VIRGINIA 23219-4074
(804) 788-8200
(804) 788-8218 (TELECOPY)

___________

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

THIS REGISTRATION HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.

PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED ____________.

HERSHA HOSPITALITY TRUST

_________ SHARES

PRIORITY CLASS A COMMON SHARES

___________________________

We are offering directly _______ of our Priority Class A Common Shares by
this prospectus supplement at an offering price of $______ per share. Our
priority common shares are listed on the American Stock Exchange under the
symbol "HT." On ____________, the last reported sale price of our priority
common shares on the American Stock Exchange was $______ per share.

___________________________

INVESTING IN OUR PRIORITY CLASS A COMMON SHARES INVOLVES RISKS. YOU SHOULD
READ THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 6 OF THE ACCOMPANYING
PROSPECTUS BEFORE BUYING OUR PRIORITY CLASS A COMMON SHARES.

___________________________

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

This prospectus is dated _______________.

The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED DECEMBER 28, 2001

HERSHA HOSPITALITY TRUST
2,000,000 SHARES
PRIORITY CLASS A COMMON SHARES

___________________________

Hersha Hospitality Trust is a Maryland real estate investment trust that
invests in limited service and full service hotels with strong, national
franchise affiliations or hotels with the potential to obtain these franchises
in the mid-scale market segment in the eastern United States. A privately-owned
company owned by some of our executive officers, trustees and their affiliates
provides management services to us.

We are offering up to 2,000,000 of our Priority Class A Common Shares. We
will receive all of the net proceeds from the sale of the shares.

The priority common shares that we are offering pursuant to this prospectus
may be offered from time to time directly by us, through agents designated by us
or to or through underwriters or dealers.

We will file, as required by applicable law, prospectus supplements setting
forth the specific terms of any offering of the priority common shares.

___________________________

INVESTING IN OUR PRIORITY CLASS A COMMON SHARES INVOLVES RISKS. YOU SHOULD
READ THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 6 BEFORE BUYING OUR
PRIORITY CLASS A COMMON SHARES.

___________________________

This prospectus is dated _______________.

This prospectus incorporates by reference exhibits to the registration
statement that we have filed with the SEC. You may request copies of those
exhibits, free of charge, by calling or writing Mr. Ashish R. Parikh, Hersha
Hospitality Trust, 148 Sheraton Drive, Box A, New Cumberland, Pennsylvania
17070, (717) 770-2405.

Table of Contents

PROSPECTUS SUMMARY 1
RISK FACTORS 6
THE COMPANY 15
USE OF PROCEEDS 15
DISTRIBUTIONS 16
SELECTED FINANCIAL INFORMATION 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 18
Overview 18
Results of Operations 19
Liquidity and Capital Resources 20
Inflation 21
Seasonality 21
Mortgage Debt 21
BUSINESS AND PROPERTIES 22
Description of our Hotels 22
Re-pricing 26
Our Lessees 27
Business Strategy 27
Financing 29
The Percentage Leases 29
Franchise Licenses 34
Environmental Matters 35
MANAGEMENT 36
Trustees and Executive Officers 36
Independent Trustees 38
Audit Committee 38
Compensation Committee 38
Compensation 39
Exculpation and Indemnification 39
The Option Plan 40
The Trustees' Plan 41
Executive Compensation 42
PERFORMANCE GRAPH 42
CERTAIN RELATIONSHIPS AND TRANSACTIONS 43
Guarantees by Mr. Shah and the Limited Partnerships That Hold Our Hotels 43
Transactions Between Us and Mr. Shah, some of our Executive Officers,
Trustees or Their Affiliates 43
The Option Agreement 44
Certain Leases 45
Payments to Shah Law Firm 45
Loans to Some of Our Executive Officers, Trustees and Their Affiliates 45
Loans From Shreenathji Enterprises, Ltd. 45
Sales of Hotels Back to Some of Our Executive Officers, Trustees and Their
Affiliates 45
Administrative Services Agreement with HHMLP 46
Payments to Hersha Construction Company 46
Payments to Hersha Hotel Supply Company 46
HERSHA HOSPITALITY MANAGEMENT LIMITED PARTNERSHIP 46
Management of Hersha Hospitality Management, LP 47
PRINCIPAL SHAREHOLDERS 48
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST 49
General 49
The Priority Common Shares 49
The Class B Common Shares 51
Voting Rights of Priority Common Shares and Class B Common Shares 52
Preferred Shares 53
Classification or Reclassification of Common Shares or Preferred Shares 53
Restrictions on Ownership and Transfer 53
Other Matters 54
CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR DECLARATION OF TRUST AND
BYLAWS 55
Classification of the Board of Trustees 55
Removal of Trustees 55
Business Combinations 55
Control Share Acquisitions 56
Amendment 56
Limitation of Liability and Indemnification 56
Certain Provisions of Maryland Law 57
Operations 58
Dissolution of the Company 58
Advance Notice of Trustees Nominations and New Business 58
Possible Anti-takeover Effect of Certain Provisions of Maryland Law and
of our Declaration of Trust and Bylaws 58
Maryland Asset Requirements 58
PARTNERSHIP AGREEMENT 58
Management 58
Transferability of Interests 59
Capital Contribution 59
Redemption Rights 59
Distributions 61
Allocations 61
Term 62
Tax Matters 62
FEDERAL INCOME TAX CONSEQUENCES OF OUR STATUS AS A REIT 62
Taxation 63
Requirements for Qualification 64
Income Tests 65
Asset Tests 70
Distribution Requirements 71
Record-keeping Requirements 72
Failure to Qualify 72
Taxation of Taxable U.S. Shareholders 72

Taxation of U.S. Shareholders on the Disposition of Priority Common Shares 73
Capital Gains and Losses 73
Information Reporting Requirements and Backup Withholding 74
Taxation of Tax-Exempt Shareholders 74
Taxation of Non-U.S. Shareholders 75
OTHER TAX CONSEQUENCES 76
Tax Aspects of Our Investments in Our Operating Partnership and the
Subsidiary Partnerships 76
Income Taxation of the Partnerships and their Partners 77
Sale of a Partnership's Property 79
State and Local Taxes 79
PLAN OF DISTRIBUTION 79
Agents 80
Underwriters 80
Stabilization Activities 80
Other 81
EXPERTS 81
REPORTS TO SHAREHOLDERS 81
LEGAL MATTERS 81
INDEX TO FINANCIAL STATEMENTS F-1

Hersha Hospitality Trust has not authorized anyone to give you any
information other than that which is included in this document. Hersha
Hospitality Trust has not authorized anyone to make any representations to you
other than those that are included in this document. If anyone gives you
additional information, or makes additional representations, you must not rely
on it or them at all.

This prospectus is not an offer to sell or the solicitation of an offer to
buy any securities other than those to which it relates, nor is it an offer or
solicitation of any person in any jurisdiction to whom it would be unlawful to
make an offer or solicitation. The delivery of this prospectus at any time does
not imply that the information herein is correct as of any time after ____,____.

PROSPECTUS SUMMARY

The following summary highlights only a few of the facts that you will need
to make an informed decision about investing in Hersha Hospitality Trust. We
encourage you to read the entire prospectus, and the other documents to which it
refers, very carefully. The statements that we make about the contents of any
other documents are not necessarily complete and are qualified in their entirety
by referring you to the copy of that document, which is filed as an exhibit to
the registration statement of which this prospectus is a part.

THE COMPANY

Hersha Hospitality Trust is a Maryland real estate investment trust that
invests in limited service and full service hotels with strong, national
franchise affiliations, or hotels with the potential to obtain these franchises,
in the mid-scale market segment in the eastern United States. Since our initial
public offering in January 1999, we have concentrated on owning economy,
mid-scale and upper-economy hotels located in diverse markets. We recently have
re-focused our business strategy toward acquiring mid-scale hotels in leading
central business districts, in close proximity to airports and in suburban areas
around major metropolitan markets.

We own our hotels through our operating partnership, Hersha Hospitality
Limited Partnership, of which we are the general partner and own 31% of the
partnership interests. In order for us to qualify as a REIT, we cannot operate
our hotels. Therefore, we lease each of our hotels to management companies to
operate our hotels. We lease 14 of our hotels to Hersha Hospitality Management,
L.P. (HHMLP), a Pennsylvania limited partnership. HHMLP is owned in part by
three of our executive officers, two of our trustees and their affiliates. We
lease the remaining four hotels located in Atlanta, Georgia to subsidiaries of
Noble Investment Group, Ltd., an unaffiliated third party real estate
development and hotel management company. In addition, HHMLP provides
administrative services to us for a fixed annual fee.

The leases are designed to allow us to participate in revenue growth at our
hotels by providing for percentage rent based on hotel revenues. The percentage
rent calculation in each of these leases is based upon incentive thresholds.
These thresholds are designed to provide incentive to our lessees to generate
higher revenues at each hotel by reducing the rent percentage due above the
incentive threshold.

Our acquisition policy is to acquire hotels for which we expect to receive
rents at least equal to 12% of the purchase price paid for each hotel, net of
certain costs. In addition, we intend to acquire hotels that meet one or more
of the following criteria:

- nationally-franchised hotels such as Comfort Inn(R), Fairfield Inn(R),
Marriott Courtyard(R), Hampton Inn(R), Hilton Garden Inn(R), Holiday Inn(R)
and Holiday Inn Express(R) hotels, and limited service extended-stay hotels
such as Comfort Suites(R), Homewood Suites(R), Main Stay Suites(R),
Staybridge Suites(R), Embassy Suites(R), Summerfield Suites(R) and
Residence Inn by Marriott(R) hotels;

- hotels with significant barriers to entry, such as high development
costs, limited availability of land and the presence of similarly branded
hotels;

- poorly-managed hotels, which could benefit from new management, a new
marketing strategy and association with a national franchisor;

- hotels in deteriorated physical condition that could benefit
significantly from renovations; and

- hotels in attractive locations that we believe could benefit
significantly by changing franchises to a superior brand.

Future acquisitions may include hotels newly developed by some of our executive
officers, trustees and their affiliates.

As of December 18, 2001, we owned the following 18 hotels:

NUMBER OF NUMBER OF
HOTELS ROOMS HOTELS ROOMS
- ------------------------- --------- ---------------------------------------- ---------

HOLIDAY INN EXPRESS: HOLIDAY INN EXPRESS AND SUITES:
Hershey, PA 85 Harrisburg, PA 77
Duluth, GA 68 CLARION SUITES:
Long Island City, NY 79 Philadelphia, PA 96
New Columbia, PA 81 MAINSTAY SUITES:
HAMPTON INN: King of Prussia, PA 69
Carlisle, PA 95 SLEEP INN:
Danville, PA 72 King of Prussia, PA 87
Hershey, PA 110 Corapolis, PA 143
Newnan, GA 91 COMFORT SUITES:
Peachtree, GA 61 Duluth, GA 85
Selinsgrovee, PA 75 HOLIDAY INN HOTEL AND CONFERENCE CENTER:
COMFORT INN: Harrisburg, PA 196
Harrisburg, PA 81
- ------------------------- --------- ---------------------------------------- ---------
Total Rooms 1,651
---------

We will evaluate our hotels on a periodic basis to determine if these
hotels continue to satisfy our investment criteria. We may sell hotels
opportunistically based upon management's forecast and review of the cash flow
potential for the hotel and re-deploy the proceeds of sale into debt reduction
or acquisitions. We utilize several criteria to determine the long-term
potential of our hotels. Hotels are identified for sale based upon management's
forecast of the strength of the hotel's cash flows and its ability to remain
accretive to our portfolio. Our decision to sell an asset is often predicated
upon the size of the hotel, strength of the franchise, property condition and
related costs to renovate the property, strength of market demand generators,
projected supply of hotel rooms in the market, probability of increased
valuation and geographic profile of the hotel.

SUMMARY RISK FACTORS

AN INVESTMENT IN THE PRIORITY COMMON SHARES INVOLVES VARIOUS RISKS, AND
INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED IN THE SECTION
ENTITLED "RISK FACTORS" ON PAGE 6 OF THIS PROSPECTUS, INCLUDING, AMONG OTHERS,
THE FOLLOWING:

- - Economic conditions and recent terrorist incidents have substantially
reduced travel in the United States, which could adversely affect hotel
revenues, our lessees' ability to pay rent and our operating results and
financial condition.

- - Risks, including economic and other conditions affecting the real
estate or hospitality industries generally, such as the relative
illiquidity of real estate, competition, uninsured or underinsured losses
and the potential liability for unknown or future environmental
liabilities, may adversely affect our real estate investments and our
lessees' ability to make lease payments, which could adversely affect the
amount of cash available for distribution to our shareholders.

- - Our lack of control over the daily operations of our hotels could
affect the value of our investments.

- - We depend on our lessees to make rent payments under the percentage
leases. In the event that there is a reduction in revenues at the hotels,
our rent will decrease, adversely affecting the amount of cash available
for distribution to our shareholders.

- - We have substantial debt, some of which is secured by our hotels. If
we fail to meet our debt service obligations, we could lose our hotels to
foreclosure. Increases in interest rates will increase our debt service
requirements with respect to variable rate debt.

- - Some of our executive officers, trustees and their affiliates have
equity interests and positions in both Hersha Hospitality Management
Limited Partnership, our principal lessee, and us, which may create
conflicts of interest in the negotiation and enforcement of the leases for
our hotels.

- - We have agreed to re-price certain newly-developed or newly-renovated
hotels acquired from some of our executive officers, trustees and their
affiliates after the first year or two of acquisition through either
payment of cash or issuance of additional partnership interests if the
hotels meet certain performance requirements, which could dilute the equity
interests of our shareholders.

- - We purchased a substantial number of our hotels from some of our
executive officers, trustees and their affiliates. As a result, the prices
and other terms of these purchases were not negotiated on an arm's-length
basis. The purchase prices we paid for these hotels with limited operating
history were based upon projections by management as to the expected
operating results of these hotels. In addition, we may use some of the
proceeds from this offering to purchase hotels that have limited operating
history. These hotels may not achieve anticipated operating results and the
rent we receive from these hotels could be less than anticipated, which
could adversely affect the amount of cash available for distribution to our
shareholders.

- - Some of our executive officers, trustees and their affiliates own 69%
of the partnership interests in Hersha Hospitality Limited Partnership, our
operating subsidiary partnership, which may create conflicts of interest
regarding the sale or refinancing of our hotels.

- - Some of our trustees, executive officers and their affiliates own
sufficient partnership interests in our operating partnership to veto a
sale of all or substantially all of the assets of the partnership or a
merger or consolidation of the partnership, which would otherwise be
beneficial to our shareholders.

- - Our Declaration of Trust generally prohibits direct or indirect
ownership of more than 9.9% of the outstanding shares of any class of our
securities, including the priority common shares, by any person, which
could have the effect of inhibiting a change of control of our company,
even when a change of control would be beneficial to our shareholders.

- - The bankruptcy of any third party guarantor of our debt would
constitute a default under the related loan documents, which default would
cause some or all of this indebtedness to become immediately due and
payable and could adversely affect our liquidity and cash available for
distribution to our shareholders.

- - If we are unable to pay out 90% of our taxable income, we would be
unable to maintain our REIT status, resulting in adverse tax consequences.

- - If we were to fail to qualify as a REIT, our taxation as a regular
corporation would adversely affect the amount of cash available for
distribution to our shareholders.

RE-PRICING OUR HOTELS

We have acquired, and expect to acquire in the future, from affiliates of
certain of our executive officers and trustees, newly-developed or
newly-renovated hotels that do not have an operating history that would allow us
to make purchase price decisions based on historical performance. In buying
these hotels we have utilized, and expect to continue to utilize, a "re-pricing"
methodology that, in effect, adjusts the initial purchase price for the hotel,
one or two years after we initially purchase the hotel, based on the actual
operating performance of the hotel during the previous twelve months. All
purchase price adjustments are approved by a majority of our independent
trustees.

pro forma basis. If the pro forma percentage rent formula would not have yielded
a pro forma annual return to us of 11.5% to 12.5% based on this calculated
value, this value is adjusted either upward or downward to produce a pro forma
return of either 11.5% or 12.5%, as applicableIf this final purchase price is
higher than the initial purchase price, then the seller of the hotel will
receive consideration in an amount equal to the increase in price. If the final
purchase price is lower than the initial purchase price, then the sellers of the
hotel will return to us consideration in an amount equal to the difference. Any
purchase price adjustment will be made either in operating partnership units or
cash as determined by our Board of Trustees, including the independent trustees.
Any operating partnership units issued by us or returned to us as a result of
the purchase price adjustment historically have been valued at $6.00 per unit.
Any future adjustments will be based upon a value per unit approved by our Board
of Trustees, including our independent trustees. The sellers are entitled to
receive quarterly distributions on the operating partnership units prior to the
units being returned to us in connection with a downward purchase price
adjustment.

We re-priced seven of our hotels acquired in connection with our initial
public offering based upon operating results as of December 31, 1999 or December
31, 2000. Before we implemented the current pricing methodology in December
2000, our pricing methodology provided for re-pricing of a hotel if there was
any variance from our initial forecasted 12% return. Under this previous pricing
methodology, as of January 1, 2000, we issued an aggregate of 235,026 additional
operating partnership units in connection with the re-pricing of the Holiday
Inn, Milesburg; the Comfort Inn, Denver; and the Comfort Inn, Harrisburg, each
of which subsequently was sold. In addition, on January 1, 2001, we issued an
aggregate of 531,559 additional operating partnership units in connection with
the re-pricing of the Holiday Inn Express, Hershey; Hampton Inn, Carlisle;
Holiday Inn Express, New Columbia; and the Comfort Inn, Harrisburg. We also
issued 175,538 operating partnership units at a value equal to approximately $1
million in connection with the repricing of the Comfort Inn, Jamaica, New York
located at John F. Kennedy International Airport prior to its sale in June 2001.
Since our initial public offering, we have acquired seven additional hotels from
some of our executive officers, trustees and their affiliates for initial prices
that will be adjusted based upon operating results at December 31, 2001 or 2002.

RECENT DEVELOPMENTS

In the period from January 1, 2001 to September 30, 2001, we sold three
hotels for an aggregate of $11.3 million. We received aggregate cash proceeds
of approximately $3 million, after selling and transfer costs of $0.5 million,
redeemed 76,252 operating partnership units for approximately $0.5 million and
paid down outstanding mortgages in the aggregate amount of approximately $7.3
million. In the same period we purchased two hotels for approximately $9.5
million.

On October 26, 2001, we paid an $0.18 per priority common share quarterly
dividend to shareholders of record on September 28, 2001 and a distribution of
$0.18 per unit to the holders of operating partnership units.

Since November 1, 2001, we have sold three hotels for an aggregate of $10
million. We received aggregate cash proceeds of $9.3 million, after selling and
transfer costs of $0.7 million, and paid down approximately $6.7 million of
outstanding debt. During the same period, we purchased one hotel for $8.5
million.

On November 7, 2001, our Board of Trustees declared an $0.18 per priority
common share quarterly dividend payable on January 25, 2002 to shareholders of
record on December 28, 2001.

DISTRIBUTIONS

We have made and intend to make regular quarterly distributions to holders
of the priority common shares. The current quarterly distribution rate is $0.18
per share, which on an annualized basis would be equal to $0.72 per share per
year. Future distributions will be declared by our Board of Trustees based upon
a number of factors, including the amount of funds from operations, our
partnership's financial condition, debt service requirements, capital
expenditure requirements for our hotels, the annual distribution requirements
under the REIT provisions of the Internal Revenue Code and such other factors as
the trustees deem relevant. Our ability to make distributions will depend on
our receipt of distributions from our operating partnership and lease payments
from our lessees with respect to our hotels. We rely on our lessees to generate
sufficient cash flow from the operation of our hotels to meet their rent
obligations under the percentage leases.

The priority common shares have a priority period which expires on the
earlier of (i) January 26, 2004 and (ii) an election by us to end the priority
period within 15 days if the share price remains over $7.00 per share for these
15 days. During the priority period, the holders of the priority common shares
are entitled to receive, prior to any distributions either to the holders of the
operating partnership units or to the holders of the Class B Common Shares,
cumulative dividends in an amount per priority common share equal to $0.18 per
quarter. After the holders of the operating partnership units and the Class B
Common Shares have received an amount per unit or per share equal to this
distribution, the holders of the priority common shares and the holders of the
operating partnership units and the Class B Common Shares are entitled to
receive further distributions on a pro rata basis. As of the date of this
prospectus, no Class B Common Shares are outstanding. Thus, the priority common
shares have priority rights only with respect to the outstanding operating
partnership units. In the future, we may issue additional priority common
shares, securities senior to the priority common shares and the partnership may
issue units that are not subordinated to the priority common shares.

TAX STATUS

As a REIT, we will not incur federal income tax on our earnings to the
extent that we distribute those earnings to our shareholders, and as long as we
meet the asset, income, stock ownership and minimum distribution tests of the
federal tax laws. We will, however, be subject to tax at normal corporate rates
on net income or capital gains not distributed to shareholders. See "Federal
Income Tax Consequences of Our Status as a REIT."

THE OFFERING

Priority common shares offered by us in this offering. . . . . . . .2,000,000

Priority common shares to be outstanding after this offering . . . .4,275,000(1)

Symbol on the American Stock Exchange . . . . . . . . . . . . ."HT"
________________________________
(1) Assuming the sale of all 2,000,000 priority common shares offered hereby;
does not include 5,094,851 outstanding units of limited partnership interest in
Hersha Hospitality Limited Partnership at December 1, 2001, that are redeemable
on a one-for-one basis for our Class B Common Shares.

USE OF PROCEEDS

We intend to use the net proceeds of this offering, subject to maintaining
our REIT qualification, to continue our acquisition of hotels consistent with
our current business strategy, to fund renovations on, or capital improvements
to, our existing hotels, to pay down our indebtedness and for other general
corporate purposes.

The amount and timing of our use of the net proceeds of this offering will
depend on a number of factors, including the success of locating suitable
acquisition properties and the amount of cash we generate from operations. As a
result, we will retain broad discretion in the allocation of the net proceeds
from this offering. Pending the use of proceeds referenced above, the net
proceeds will be invested in interest-bearing, short-term investment grade
securities or money market accounts, which are consistent with our intention to
qualify as a REIT. Such investments may include, for example, government and
government agency securities, certificates of deposit, interest-bearing bank
deposits and mortgage loan participations.

RISK FACTORS

An investment in our priority common shares involves significant risks,
including the risk of losing your entire investment. In evaluating our
business, prospective investors should carefully consider the following risk
factors in addition to the other information contained in this prospectus.

RISKS RELATING TO OUR BUSINESS, STRUCTURE, GROWTH STRATEGY AND COMPANY

AS A REIT WE ARE UNABLE TO OPERATE THE HOTELS AND WILL NOT HAVE DIRECT CONTROL
OF OUR STRATEGIC DECISIONS.

As a result of our status as a REIT, we are not and will not be able to
operate our hotels. We are not and will not be able to make and implement
strategic business decisions with respect to our hotels, such as decisions with
respect to the repositioning of a franchise, repositioning of food and beverage
operations and other similar decisions, even if such decisions are in the best
interests of a particular hotel. Accordingly, there can be no assurance that
our lessees will operate our hotels in a manner that is in our best interests.

DEPENDENCE ON OUR LESSEES FOR RENT MAY IMPACT DISTRIBUTIONS TO SHAREHOLDERS.

We rely on our lessees to make rent payments in order to make distributions
to shareholders. Our lessees' obligations under the percentage leases,
including the obligation to make rent payments, are unsecured. Reductions in
revenues from our hotels or in the net operating income of our lessees may
adversely affect the ability of our lessees to make these rent payments and thus
our ability to make anticipated distributions to our shareholders. Although
failure on the part of our lessees to comply materially with the terms of a
percentage lease would give us the right to terminate any or all of their
percentage leases with that lessee, to repossess the applicable hotels and to
enforce the payment obligations under the percentage leases, we then would be
required to find another lessee. There can be no assurance that we would be
able to find another lessee or that, if another lessee were found, we would be
able to enter into a lease on favorable terms.

INDEBTEDNESS CAN REDUCE CASH AVAILABLE FOR DISTRIBUTION AND CAUSE LOSSES.

Although our policy is to limit consolidated indebtedness to less than 67%
of the total purchase prices paid by us for the hotels in which we have
invested, our Declaration of Trust does not limit the amount of indebtedness we
may incur. Debt, whether with recourse to us generally or only with respect to
a particular property, creates an opportunity for increased net income, but at
the same time creates risks. For example, variable rate debt can reduce the
cash available for distribution to shareholders in periods of rising interest
rates. We incur debt only when we believe it will enhance our risk-adjusted
returns. However, we cannot be sure that our use of leverage will prove to be
beneficial. At September 30, 2001, we had debt outstanding of $61.9 million.
We may borrow additional amounts from the same or other lenders in the future,
or may issue corporate debt securities in public or private offerings. Some of
these additional borrowings may be secured by our hotels. There can be no
assurance that we will be able to meet our debt service obligations and, to the
extent that we cannot, we risk the loss of some or all of our hotels to
foreclosure.

WE FACE RISKS ASSOCIATED WITH THE USE OF DEBT, INCLUDING REFINANCING RISK.

We are subject to the risks normally associated with debt financing,
including the risk that our cash flow will be insufficient to meet required
payments of principal and interest. We anticipate that a portion of the
principal of our debt will not be paid prior to maturity. Therefore, we will
likely need to refinance at least a portion of our outstanding debt as it
matures. There is a risk that we may not be able to refinance existing debt or
that the terms of any refinancing will not be as favorable as the terms of the
existing debt. If principal payments due at maturity cannot be refinanced,
extended or repaid with proceeds from other sources, such as new equity capital
or sales of properties, our cash flow may not be sufficient to repay all
maturing debt in years when significant "balloon" payments come due.

CONFLICTS OF INTEREST MAY HAVE LED TO THE PERCENTAGE LEASES, CONTRIBUTION
AGREEMENTS, THE ADMINISTRATIVE SERVICES AGREEMENT AND THE OPTION AGREEMENT NOT
HAVING BEEN NEGOTIATED ON AN ARM'S-LENGTH BASIS.

Some of our trustees and executive officers had ownership interests in
entities from which we have purchased hotels and in Hersha Hospitality
Management, L.P., one of our lessees, at the time we entered into leases.
Consequently, the terms of the percentage leases, the contribution agreements
pursuant to which we and our partnership acquired some of our hotels, the
Administrative Services Agreement and the Option Agreement between the
partnership and some of the trustees and executive officers may not have been
negotiated on an arm's-length basis, which may have resulted in agreements that
are not in the best interest of all our shareholders.

CONFLICTS OF INTEREST WITH OTHER ENTITIES MAY RESULT IN DECISIONS THAT DO NOT
REFLECT OUR BEST INTERESTS.

Some of our trustees, executive officers and their affiliates have
ownership interests in and/or positions with our operating partnership, HHMLP
and us. Conflicts of interest may arise in regards to the ongoing lease,
acquisition, disposition and operation of our hotels including, but not limited
to, the percentage leases and enforcement of the contribution agreements, the
Administrative Services Agreement and Option Agreement. Consequently, the
interests of shareholders may not be reflected fully in all decisions made or
actions taken by our officers and trustees.

CONFLICTS OF INTEREST RELATING TO SALES OR REFINANCING OF HOTELS ACQUIRED FROM
SOME OF OUR INSIDER TRUSTEES AND SOME OF OUR EXECUTIVE OFFICERS MAY LEAD TO
DECISIONS THAT ARE NOT IN OUR BEST INTEREST.

Some of our trustees and executive officers have unrealized gains
associated with their interests in the hotels acquired by us from them and, as a
result, any sale of the these hotels or refinancing or prepayment of principal
on the indebtedness assumed in purchasing these hotels by us may cause adverse
tax consequences to some of our trustees and executive officers. Therefore, our
interests and the interests of these individuals may be different in connection
with the disposition or refinancing of these hotels.

ADJUSTMENTS TO THE PURCHASE PRICE TO OUR HOTELS MAY LEAD TO SUBSTANTIAL
SHAREHOLDER DILUTION.

In the event that any of the purchase prices of the newly-renovated hotels
or the newly-developed hotels are increased on an adjustment date, owners of the
priority common shares at such time will experience dilution.

OUR ACQUISITIONS MAY NOT PERFORM UP TO THE LEVEL FORECASTED, WHICH MAY HARM OUR
FINANCIAL CONDITION AND OPERATING RESULTS, AND WE MAY NOT BE ABLE TO MAKE THE
DISTRIBUTIONS REQUIRED TO MAINTAIN OUR REIT STATUS.

We intend to pursue acquisitions of additional hotel properties.
Acquisitions entail risks that investments will fail to perform in accordance
with expectations and that estimates of the cost of improvements necessary to
market and acquire properties will prove inaccurate, as well as general
investment risks associated with any new real estate investment. We anticipate
that acquisitions will largely be financed through externally generated funds
such as borrowings under credit facilities and other secured and unsecured debt
financing and from issuances of equity securities. Because we must distribute
at least 90% of our taxable income to maintain our qualification as a REIT, our
ability to rely upon income from operations or cash flow from operations to
finance our growth and acquisition activities will be limited. Accordingly,
were we unable to obtain funds from borrowings or the capital markets to finance
our growth and acquisition activities, our ability to grow could be curtailed,
amounts available for distribution to shareholders could be adversely affected
and we could be required to reduce distributions.

NEED FOR CERTAIN CONSENTS FROM THE LIMITED PARTNERS MAY NOT RESULT IN DECISIONS
ADVANTAGEOUS TO SHAREHOLDERS.

Under our operating partnership's amended and restated partnership
agreement, the holders of at least two-thirds of the interests in the
partnership must approve a sale of all or substantially all of the assets of the
partnership or a merger or consolidation of the partnership, provided, however,
that such approval shall no longer be required if we fail to pay a distribution
of $0.72 per share to the holders of the priority common shares for any 12-month
period. As of December 1, 2001, some of our trustees, executive officers and
their affiliates own approximately a 69% interest in the partnership and thus
hold veto power over such extraordinary transactions, which could result in the
disapproval of a transaction that would be beneficial to our shareholders.

OUR OWNERSHIP LIMITATION MAY RESTRICT BUSINESS COMBINATION OPPORTUNITIES.

To qualify as a REIT under the Code, no more than 50% of our outstanding
capital stock may be owned, directly or indirectly, by five or fewer individuals
during the last half of each taxable year. To preserve our REIT qualification,
our Declaration of Trust generally prohibits direct or indirect ownership of
more than 9.9% of the number of outstanding shares of any class of our
securities, including the priority common shares, by any person. Generally,
priority common shares owned by affiliated owners will be aggregated for
purposes of the ownership limitation. The ownership limitation could have the
effect of delaying, deferring or preventing a change in control or other
transaction in which holders of some, or a majority, of priority common shares
might receive a premium for their priority common shares over the then
prevailing market price or which such holders might believe to be otherwise in
their best interests.

THE BANKRUPTCY OF GUARANTORS OF THE INDEBTEDNESS RELATING TO SOME OF OUR HOTELS
COULD TRIGGER A DEFAULT UNDER OUR LOAN DOCUMENTS.

Mr. Hasu P. Shah, chairman of our Board of Trustees, and some of the
limited partnerships that hold the hotels acquired by us guarantee the
indebtedness of four of our hotels. The bankruptcy of any of the guarantors
would constitute a default under the related loan documents, and such default
would cause some or all of the assumed indebtedness to become immediately due
and payable. In the event that the lender accelerates the payment, such
acceleration could adversely affect our cash available for distribution. If we
are unable to make such payment, we may be forced to sell the hotels that serve
as collateral for the indebtedness in order to make such payment.

ACQUISITION OF HOTELS WITH LIMITED OPERATING HISTORY MAY NOT ACHIEVE FORECASTED
RESULTS.

Newly-developed or newly-renovated hotels do not have the operating history
that would allow our management to make objective pricing decisions in acquiring
these hotels (including hotels which may be acquired from certain of our
executive officers, trustees and their affiliates). The purchase prices of
these hotels are based upon projections by management as to the expected
operating results of such hotels, subjecting us to risks that such hotels may
not achieve anticipated operating results or may not achieve these results
within anticipated time frames. As a result, the lessees may not generate
enough net operating income from these hotels to make the fixed rent payments
or, after the adjustment date, to make the base rent payments. In addition,
after the adjustment date, room revenues may be less than that required to
provide us with our anticipated return on investment under the percentage
leases. In either case, the amounts available for distribution to our
shareholders could be reduced.

THE DECLARATION OF TRUST CONTAINS A PROVISION THAT CREATES STAGGERED TERMS FOR
OUR BOARD OF TRUSTEES.

Our Board of Trustees is divided into two classes. The terms of the first
and second classes expire in 2002 and 2003, respectively. Trustees of each
class are elected for two-year terms upon the expiration of their current terms
and each year one class of trustees will be elected by the shareholders. The
staggered terms of trustees may delay, defer or prevent a tender offer, a change
in control of us or other transaction, even though such a transaction might be
in the best interest of the shareholders.

OUR LIMITED OPERATING HISTORY DOES NOT INDICATE FUTURE RESULTS.

We became a public reporting company in early 1999 and have a limited
operating history. Because of this limited history, investors should be
especially cautious before drawing conclusions about our future performance.
Our past performance is not necessarily indicative of future results.

WE OWN A LIMITED NUMBER OF HOTELS AND SIGNIFICANT ADVERSE CHANGES AT ONE MAY
IMPACT OUR LESSEES' ABILITY TO PAY RENT AND OUR ABILITY TO MAKE DISTRIBUTIONS TO
SHAREHOLDERS.

We own only eighteen hotels. Significant adverse changes in the operations
of any hotel could have a material adverse effect on our lessees' ability to
make rent payments and, accordingly, on our ability to make expected
distributions to our shareholders.

WE MAY BE UNABLE TO ACQUIRE OR MAY BE DELAYED IN ACQUIRING PROPERTIES WITH THE
PROCEEDS OF THE OFFERING.

We currently have no specific properties under contract for acquisition and
we may be unable to acquire or may be delayed in acquiring appropriate
properties with the proceeds of the offering that will generate returns
consistent with our historical returns on our other hotels. Pending the use of
the net proceeds to acquire properties, we intend to use the net proceeds to
reduce outstanding indebtedness, fund renovations on, capital improvements to or
pay leasing costs in connection with our existing properties and make
investments in short-term income producing securities. Reducing outstanding
indebtedness and making short-term investments generally will provide us with a
lower rate of return than investing in income producing real estate. As a
result, our inability to acquire, or delays in acquiring, appropriate properties
may likely dilute the amount of cash available per share for distributions to
our shareholders.

MARYLAND BUSINESS COMBINATION LAW MAY DISCOURAGE A THIRD PARTY FROM ACQUIRING
US.

Under the Maryland General Corporation Law, as amended (MGCL), as
applicable to real estate investment trusts, certain "business combinations"
(including certain issuances of equity securities) between a Maryland real
estate investment trust and any person who beneficially owns ten percent or more
of the voting power of the trust's shares or an affiliate thereof are prohibited
for five years after the most recent date on which this shareholder acquired at
least ten percent of the voting power of the trust's shares. Thereafter, any
such business combination must be approved by two super-majority shareholder
votes unless, among other conditions, the trust's common shareholders receive a
minimum price (as defined in the MGCL) for their shares and the consideration is
received in cash or in the same form as previously paid by the interested
shareholder for its common shares. These provisions could delay, defer or
prevent a transaction or change of control of our company in which our
shareholders might otherwise receive a premium for their shares above
then-current market prices or might otherwise deem to be in their best
interests. Some of our trustees, executive officers and their affiliates may
control a sufficient percentage of the voting power to block a proposal
respecting a business combination under these provisions.

THE BOARD OF TRUSTEES MAY CHANGE OUR INVESTMENT AND OPERATIONAL POLICIES WITHOUT
A VOTE OF THE PRIORITY COMMON SHAREHOLDERS.

Our major policies, including our policies with respect to acquisitions,
financing, growth, operations, debt limitation and distributions, are determined
by the trustees. The trustees may amend or revise these and other policies from
time to time without a vote of the holders of the priority common shares.
Although four of the trustees currently are independent trustees, our
Declaration of Trust only requires three of our trustees to be independent.
Consequently, in the future a majority of the Board of Trustees may not be
independent and thus such policies could be changed by the non-independent
trustees. Investment and operational policy changes could adversely affect the
market price of our priority common shares and our ability to make distributions
to our shareholders. Under the Declaration of Trust, we cannot change our
policy of seeking to maintain our qualification as a REIT without the approval
of the holders of two-thirds of the outstanding priority common shares.

WE FOCUS ON ACQUIRING HOTELS OPERATING UNDER A LIMITED NUMBER OF FRANCHISE
BRANDS, WHICH CREATES GREATER RISK AS THE INVESTMENTS ARE MORE CONCENTRATED.

We intend to place particular emphasis in our acquisition strategy on
hotels similar to our current hotels. We invest in select franchises and
therefore will be subject to risks inherent in concentrating investments in a
particular franchise brand, which could have an adverse effect on our lease
revenues and amounts available for distribution to shareholders. These risks
include, among others, the risk of a reduction in hotel revenues following any
adverse publicity related to a specific franchise brand.

MANY OF OUR HOTELS ARE LOCATED IN PENNSYLVANIA, WHICH MAY INCREASE THE EFFECT
OF ANY LOCAL ECONOMIC CONDITIONS.

Thirteen of our eighteen hotels are located in Pennsylvania. As a result,
localized adverse events or conditions, such as an economic recession, could
have a significant adverse effect on the operations of our hotels, and
ultimately on the amounts available for distribution to shareholders.

COMPETING HOTELS OWNED OR ACQUIRED BY SOME OF OUR TRUSTEES, EXECUTIVE OFFICERS
AND THEIR AFFILIATES MAY HINDER THESE INDIVIDUALS FROM SPENDING ADEQUATE TIME ON
OUR BUSINESS.

Some of our trustees, executive officers and their affiliates own hotels
and may develop or acquire new hotels, subject to certain limitations. Such
ownership, development or acquisition activities may materially affect the
amount of time these officers and trustees have to devote to our affairs. Some
of our trustees, executive officers and their affiliates operate hotels that are
not owned by us, which may materially affect the amount of time that they devote
to managing our hotels.

In addition, there may be conflicting demands on Mr. Shah caused by his
overlapping management of us and Hersha Enterprises Ltd. Hersha Enterprises Ltd.
owns and operates properties other than our hotels, and Mr. Shah, who serves as
our Chairman of the Board and Chief Executive Officer and President of Hersha
Enterprises, Ltd., may experience a conflict in allocating his time between
these entities.

WE DEPEND ON KEY PERSONNEL.

We depend on the services of our existing senior management to carry out
our business and investment strategies. As we expand, we will continue to need
to attract and retain qualified additional senior management. The loss of the
services of any of our key management personnel, or our inability to recruit and
retain qualified personnel in the future, could have an adverse effect on our
business and financial results.

WE FACE INCREASING COMPETITION FOR THE ACQUISITION OF HOTEL PROPERTIES AND OTHER
ASSETS, WHICH MAY IMPEDE OUR ABILITY TO MAKE FUTURE ACQUISITIONS OR MAY INCREASE
THE COST OF THESE ACQUISITIONS.

We face competition for investment opportunities in mid-scale hotels from
entities organized for purposes substantially similar to our objectives, as well
as other purchasers of hotels. We compete for such investment opportunities
with entities that have substantially greater financial resources than we do,
including access to capital or better relationships with franchisors, sellers or
lenders. Our policy is to limit consolidated indebtedness to less than 67% of
the total purchase prices paid by us for the hotels in which we have invested.
Because of the amount of our indebtedness, the success of our acquisition
strategy will depend primarily on our ability to access additional capital
through issuances of equity securities. Our competitors may generally be able
to accept more risk than we can manage prudently and may be able to borrow the
funds needed to acquire hotels. Competition may generally reduce the number of
suitable investment opportunities offered to us and increase the bargaining
power of property owners seeking to sell.

WE RELY ON TRUSTEES AND MANAGEMENT TO MAKE DECISIONS ON OUR BEHALF.

Common shareholders have no right or power to take part in our management
except through the exercise of voting rights on certain specified matters. The
Board of Trustees is responsible for our management and strategic business
direction. The policies of the Board of Trustees may not coincide with the
immediate best interests of shareholders.

POSSIBLE ADVERSE EFFECT OF SHARES AVAILABLE FOR FUTURE SALE ON PRICE OF PRIORITY
COMMON SHARES.

After termination of the priority period, any outstanding Class B Common
Shares automatically will be converted into Priority Class A Common Shares on a
one-for-one basis. Sales of a substantial number of priority common shares or
Class B Common Shares, or the perception that such sales could occur, could
adversely affect prevailing market prices of the priority common shares. As of
December 1, 2001, there are [5,094,851] outstanding operating partnership units.
These units currently are convertible into Class B Common Shares. Upon the
redemption of operating partnership units, the Class B Common Shares or priority
common shares received therefor may be sold in the public market pursuant to
shelf registration statements that we are obligated to file on behalf of the
limited partners of our operating partnership, or pursuant to any available
exemptions from registration.

WE ARE THE GENERAL PARTNER OF OUR OPERATING PARTNERSHIP AND MAY BECOME LIABLE
FOR THE DEBTS AND OTHER OBLIGATIONS OF THIS PARTNERSHIP BEYOND THE AMOUNT OF OUR
INVESTMENT.

We are the general partner of our operating partnership, Hersha Hospitality
Limited Partnership, and own approximately a 31% interest. As a general
partner, we are liable for the partnership's debts and other obligations. If
this partnership is unable to pay its debts and other obligations, as general
partner, we will be liable for such debts and other obligations beyond the
amount of our investment in this partnership, including unforeseen contingent
liabilities.

OUR BOARD OF TRUSTEES MAY ISSUE ADDITIONAL SHARES THAT MAY CAUSE DILUTION.

Our Declaration of Trust authorizes the Board of Trustees, without
shareholder approval, to:

(i) amend the Declaration of Trust to increase or decrease the aggregate
number of shares of beneficial interest or the number of shares of beneficial
interest of any class that we have the authority to issue,

(ii) cause us to issue additional authorized but unissued priority common
shares, Class B common shares or preferred shares and

(iii) classify or reclassify any unissued common or preferred shares and to
set the preferences, rights and other terms of such classified or reclassified
shares, including the issuance of additional priority common shares or preferred
shares that have preference rights over the priority common shares with respect
to dividends, liquidation, voting and other matters.

Future equity offerings may cause the purchasers of the priority common
shares sold in this offering to experience further dilution.

OUR BOARD OF TRUSTEES MAY ISSUE PREFERRED SHARES WITH TERMS THAT MAY DISCOURAGE
A THIRD PARTY FROM ACQUIRING US.

Our Board of Trustees can establish one or more series of preferred shares
that could, depending on the terms of such series, delay, defer or prevent a
transaction or a change in control of the us that might involve a premium price
for the priority common shares or otherwise not be in the best interest of
holders of priority common shares.

TAX RISKS

IF WE FAIL TO QUALIFY AS A REIT, OUR DIVIDENDS WILL NOT BE DEDUCTIBLE TO US, AND
OUR INCOME WILL BE SUBJECT TO TAXATION.

We have operated and intend to continue to operate so as to qualify as a
REIT for federal income tax purposes. Our continued qualification as a REIT
will depend on our continuing ability to meet various requirements concerning,
among other things, the ownership of our outstanding shares of beneficial
interest, the nature of our assets, the sources of our income, and the amount of
our distributions to our shareholders. If we were to fail to qualify as a REIT
in any taxable year, we would not be allowed a deduction for distributions to
our shareholders in computing our taxable income and would be subject to federal
income tax (including any applicable alternative minimum tax) on our taxable
income at regular corporate rates. Unless entitled to relief under certain Code
provisions, we also would be disqualified from treatment as a REIT for the four
taxable years following the year during which qualification was lost. As a
result, amounts available for distribution to shareholders would be reduced for
each of the years involved. Although we currently intend to operate in a manner
designed to qualify as a REIT, it is possible that future economic, market,
legal, tax or other considerations may cause the trustees, with the consent of
two-thirds of the shareholders, to revoke the REIT election.

FAILURE TO MAKE REQUIRED DISTRIBUTIONS WOULD SUBJECT US TO TAX.

In order to qualify as a REIT, each year we must distribute to our
shareholders at least 90% (95% for taxable years before 2001) of our taxable
income, other than any net capital gain. To the extent that we satisfy the
distribution requirement, but distribute less than 100% of our taxable income,
we will be subject to federal corporate income tax on our undistributed income.

In addition, we will incur a 4% nondeductible excise tax on the amount, if any,
by which our distributions in any year are less than the sum of:

- 85% of our ordinary income for that year;

- 95% of our capital gain net income for that year; and

- 100% of our undistributed taxable income from prior years.

We have paid out, and intend to continue to pay out, our income to our
shareholders in a manner intended to satisfy the distribution requirement and to
avoid corporate income tax and the 4% excise tax. Differences in timing between
the recognition of income and the related cash receipts or the effect of
required debt amortization payments could require us to borrow money or sell
assets to pay out enough of our taxable income to satisfy the distribution
requirement and to avoid corporate income tax and the 4% tax in a particular
year. In the past we have borrowed, and in the future we may borrow, to pay
distributions to our shareholders and the limited partners of our operating
partnership. Such borrowings subject us to risks from borrowing as described
herein.

HOTEL INDUSTRY RISKS

THE VALUE OF OUR HOTELS DEPENDS ON CONDITIONS BEYOND OUR CONTROL.

Our hotels are subject to varying degrees of risk generally incident to the
ownership of hotels. The underlying value of our hotels, our income and ability
to make distributions to our shareholders are dependent upon the ability of our
lessees to operate the hotels in a manner sufficient to maintain or increase
revenues in excess of operating expenses to enable our lessees to make rent
payments. Hotel revenues may be adversely affected by adverse changes in
national economic conditions, adverse changes in local market conditions due to
changes in general or local economic conditions and neighborhood
characteristics, competition from other hotels, changes in interest rates and in
the availability, cost and terms of mortgage funds, the impact of present or
future environmental legislation and compliance with environmental laws, the
ongoing need for capital improvements, particularly in older structures, changes
in real estate tax rates and other operating expenses, adverse changes in
governmental rules and fiscal policies, civil unrest, acts of terrorism, acts of
God, including earthquakes, hurricanes and other natural disasters (which may
result in uninsured losses), acts of war, adverse changes in zoning laws, and
other factors that are beyond our control. In particular, general and local
economic conditions may be adversely affected by the recent terrorist incidents
in New York and Washington, D.C. Our management is unable to determine the
long-term impact, if any, of these incidents or of any acts war or terrorism in
the United States or worldwide, on the U.S. economy, on us or our hotels or on
the market price of our priority common shares.

OUR HOTELS ARE SUBJECT TO GENERAL HOTEL INDUSTRY OPERATING RISKS, WHICH MAY
IMPACT LESSEES' ABILITY TO MAKE RENT PAYMENTS AND ON OUR ABILITY TO MAKE
DISTRIBUTIONS TO SHAREHOLDERS.

Our hotels are subject to all operating risks common to the hotel industry.
The hotel industry has experienced volatility in the past, as have our hotels,
and there can be no assurance that such volatility will not occur in the future.
These risks include, among other things, competition from other hotels;
over-building in the hotel industry that could adversely affect hotel revenues;
increases in operating costs due to inflation and other factors, which may not
be offset by increased room rates; reduction in business and commercial travel
and tourism; strikes and other labor disturbances of hotel employees; increases
in energy costs and other expenses of travel; adverse effects of general and
local economic conditions; and adverse political conditions. These factors
could reduce revenues of the hotels and adversely affect the lessees' ability to
make rent payments, and therefore, our ability to make distributions to our
shareholders.

COMPETITION FOR GUESTS IS HIGHLY COMPETITIVE.

The hotel industry is highly competitive. Our hotels compete with other
existing and new hotels in their geographic markets. Many of our competitors
have substantially greater marketing and financial resources than we do. If
their marketing strategies are effective, our lessees may be unable to make rent
payments and we may be unable to make distributions to our shareholders.

OUR INVESTMENTS ARE CONCENTRATED IN A SINGLE INDUSTRY.

Our current business strategy is to own and acquire hotels primarily in the
mid-scale segment of the hotel industry. We are subject to risks inherent in
concentrating investments in a single industry and in a specific market segment
within that industry. The adverse effect on rent under the percentage leases
and amounts available for distribution to shareholders resulting from a downturn
in the hotel industry in general or the mid-scale segment in particular could be
more pronounced than if we had diversified our investments outside of the hotel
industry or in additional hotel market segments.

THE HOTEL INDUSTRY IS SEASONAL IN NATURE.

The hotel industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth quarters.
Our hotels' operations historically reflect this trend. We believe that we will
be able to make distributions necessary to maintain REIT status through cash
flow from operations; but if we are unable to do so, we may not be able to make
the necessary distributions or we may have to generate cash by a sale of assets,
increasing indebtedness or sales of securities to make the distributions.

RISKS OF OPERATING HOTELS UNDER FRANCHISE LICENSES, WHICH MAY BE TERMINATED OR
NOT RENEWED, MAY IMPACT OUR LESSEES' ABILITY TO MAKE RENT PAYMENTS AND OUR
ABILITY TO MAKE DISTRIBUTIONS TO SHAREHOLDERS.

The continuation of the franchise licenses is subject to specified
operating standards and other terms and conditions. All of the franchisors of
our hotels periodically inspect our hotels to confirm adherence to their
operating standards. The failure of our partnership or our lessees to maintain
such standards or to adhere to such other terms and conditions could result in
the loss or cancellation of the applicable franchise license. It is possible
that a franchisor could condition the continuation of a franchise license on the
completion of capital improvements that the trustees determine are too expensive
or otherwise not economically feasible in light of general economic conditions,
the operating results or prospects of the affected hotel. In that event, the
trustees may elect to allow the franchise license to lapse or be terminated.

There can be no assurance that a franchisor will renew a franchise license
at each option period. If a franchisor terminates a franchise license, we, our
partnership and our lessees may be unable to obtain a suitable replacement
franchise, or to successfully operate the hotel independent of a franchise
license. The loss of a franchise license could have a material adverse effect
upon the operations or the underlying value of the related hotel because of the
loss of associated name recognition, marketing support and centralized
reservation systems provided by the franchisor. Although the percentage leases
require our lessees to maintain the franchise licenses for each hotel, our
lessees' loss of a franchise license for one or more of the hotels could have a
material adverse effect on our partnership's revenues and our amounts available
for distribution to shareholders.

OPERATING COSTS AND CAPITAL EXPENDITURES FOR HOTEL RENOVATION MAY BE GREATER
THAN FORECASTED AND MAY ADVERSELY IMPACT RENT PAYMENTS BY OUR LESSEES' AND OUR
ABILITY TO MAKE DISTRIBUTIONS TO SHAREHOLDERS.

Hotels generally have an ongoing need for renovations and other capital
improvements, particularly in older structures, including periodic replacement
of furniture, fixtures and equipment. Under the terms of the leases, we are
obligated to pay the cost of expenditures for items that are classified as
capital items under generally accepted accounting principles that are necessary
for the continued operation of our hotels. If these expenses exceed our
estimate, the additional cost could have an adverse effect on amounts available
for distribution to shareholders. In addition, we may acquire hotels in the
future that require significant renovation. Renovation of hotels involves
certain risks, including the possibility of environmental problems, construction
cost overruns and delays, uncertainties as to market demand or deterioration in
market demand after commencement of renovation and the emergence of
unanticipated competition from hotels.

THE MARKET VALUE OF OUR PRIORITY COMMON SHARES COULD DECREASE BASED ON OUR
PERFORMANCE AND MARKET PERCEPTION AND CONDITIONS.

The market value of our priority common shares may be based primarily upon
the market's perception of our growth potential and current and future cash
dividends, and may be secondarily based upon the real estate market value of our
underlying assets. The market price of our priority common shares is influenced

by the dividend on our priority common shares relative to market interest rates.
Rising interest rates may lead potential buyers of our priority common shares to
expect a higher dividend rate, which would adversely affect the market price of
our priority common shares. In addition, rising interest rates would result in
increased interest expense on variable rate debt, thereby adversely affecting
cash flow and our ability to service our indebtedness and pay dividends.

REAL ESTATE INVESTMENT RISKS

ILLIQUIDITY OF REAL ESTATE INVESTMENTS COULD SIGNIFICANTLY IMPEDE OUR ABILITY TO
RESPOND TO ADVERSE CHANGES IN THE PERFORMANCE OF OUR PROPERTIES AND HARM OUR
FINANCIAL CONDITION.

Real estate investments are relatively illiquid. Our ability to vary our
portfolio in response to changes in economic and other conditions will be
limited. No assurances can be given that the fair market value of any of our
hotels will not decrease in the future.

IF WE SUFFER LOSSES THAT ARE NOT COVERED BY INSURANCE OR THAT ARE IN EXCESS OF
OUR INSURANCE COVERAGE LIMITS, WE COULD LOSE INVESTMENT CAPITAL AND ANTICIPATED
PROFITS.

Each lease specifies comprehensive insurance to be maintained on each of
the our hotels, including liability and fire and extended coverage in amounts
sufficient to permit the replacement of the hotel in the event of a total loss,
subject to applicable deductibles. Leases for hotels subsequently acquired by
us will contain similar provisions. However, there are certain types of losses,
generally of a catastrophic nature, such as earthquakes, floods, hurricanes and
acts of terrorism, that may be uninsurable or not economically insurable.
Inflation, changes in building codes and ordinances, environmental
considerations and other factors also might make it impracticable to use
insurance proceeds to replace the applicable hotel after such applicable hotel
has been damaged or destroyed. Under such circumstances, the insurance proceeds
received by us might not be adequate to restore our economic position with
respect to the applicable hotel. If any of these or similar events occur, it
may reduce the return from the attached property and the value of our
investment.

REITS ARE SUBJECT TO PROPERTY TAXES.

Each hotel is subject to real and personal property taxes. The real and
personal property taxes on hotel properties in which we invest may increase or
decrease as property tax rates change and as the properties are assessed or
reassessed by taxing authorities. If property taxes increase, our ability to
make expected distributions to our shareholders could be adversely affected.

ENVIRONMENTAL MATTERS COULD ADVERSELY AFFECT OUR RESULTS.

Operating costs may be affected by the obligation to pay for the cost of
complying with existing environmental laws, ordinances and regulations, as well
as the cost of future legislation. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal or remediation
of hazardous or toxic substances on, under or in such property. Such laws often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. The cost
of complying with environmental laws could materially adversely affect amounts
available for distribution to shareholders. Phase I environmental assessments
have been obtained on all of our hotels. The Phase I environmental assessment
reports have not revealed any environmental contamination that we believe would
have a material adverse effect on our business, assets, results of operations or
liquidity, nor are we aware of any such liability. Nevertheless, it is possible
that these reports do not reveal all environmental liabilities or that there are
material environmental liabilities of which we are unaware.

COST ASSOCIATED WITH COMPLYING WITH THE AMERICANS WITH DISABILITIES ACT MAY
ADVERSELY AFFECT OUR FINANCIAL CONDITION AND OPERATING RESULTS.

Under the Americans with Disabilities Act of 1993 (ADA), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While we believe that our hotels are
substantially in compliance with these requirements, a determination that we are
not in compliance with the ADA could result in imposition of fines or an award
of damages to private litigants. In addition, changes in governmental rules and

regulations or enforcement policies affecting the use and operation of the
hotels, including changes to building codes and fire and life-safety codes, may
occur. If we were required to make substantial modifications at the hotels to
comply with the ADA or other changes in governmental rules and regulations, our
ability to make expected distributions to our shareholders could be adversely
affected.

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT

This prospectus contains "forward-looking" statements, as defined in the
Private Securities Litigation Reform Act of 1995, which are based on our current
expectations, estimates and projections. Statements that are not historical
facts are forward-looking statements and typically are identified by words like
"believe," "anticipate," "could," "estimate," "expect," "intend," "plan,"
"project," "will" and similar terms. These statements are not guarantees of
future performance, events or results and involve potential risks and
uncertainties. Accordingly, our actual results may differ from our current
expectations, estimates and projections. We undertake no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.

Important factors that may impact our actual results are set forth above
under the heading "Risk Factors."

THE COMPANY

We completed an initial public offering of 2,275,000 shares of our priority
common shares in January 1999 at $6.00 per share. Our priority common shares
trade on the American Stock Exchange under the symbol "HT."

We contributed substantially all of the net proceeds from our initial
public offering to our operating partnership subsidiary, Hersha Hospitality
Limited Partnership, of which we are the sole general partner. We currently own
approximately 31% of the partnership interests in this partnership, and some of
our trustees, executive officers and affiliates own the remaining approximately
69% of the partnership interests. Our hotel properties are owned by subsidiary
partnerships of our operating partnership. Our operating partnership owns a 99%
limited partnership interest and Hersha Hospitality Limited Liability Company, a
wholly-owned subsidiary of our operating partnership, owns a 1% general
partnership interest in these subsidiary partnerships.

In connection with our initial public offering of priority common shares,
our operating partnership acquired ten initial hotels in exchange for (i)
4,032,431 subordinated units of operating partnership interest in the
partnership that are redeemable for the same number of Class B Common Shares
with a value of approximately $24.2 million based on the initial public offering
price, and (ii) the assumption of approximately $23.3 million of indebtedness of
which approximately $6.1 million was repaid immediately after the acquisition of
the hotels using the proceeds of the offering.

Our address is 148 Sheraton Drive, Box A, New Cumberland, Pennsylvania
17070.

USE OF PROCEEDS

securities or money market accounts, which are consistent with our intention to
qualify as a REIT. Such investments may include, for example, government and
government agency securities, certificates of deposit, interest-bearing bank
deposits and mortgage loan participations.

DISTRIBUTIONS

We have made eleven consecutive quarterly distributions to the holders of
our priority common shares since our initial public offering in January 1999 and
intend to continue to make regular quarterly distributions to our shareholders.

Our Board of Trustees will determine the amount of our future distributions
and its decision will depend on a number of factors, including the amount of
funds from operations, our partnership's financial condition, debt service
requirements, capital expenditure requirements for our hotels, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the trustees deem relevant. Our ability to make distributions will
depend on our receipt of distributions from our operating partnership and lease
payments from our lessees with respect to the hotels. We rely on our lessees to
generate sufficient cash flow from the operation of the hotels to meet their
rent obligations under the percentage leases.

The priority common shares have a priority period which expires on the
earlier of (i) January 26, 2004 and (ii) an election by us to end the priority
period within 15 days if the share price remains over $7.00 per share for these
15 days. During the priority period, holders of the priority common shares are
entitled to receive, prior to any distributions either to the holders of the
operating partnership units or to the holders of the Class B Common Shares,
cumulative dividends in an amount per priority common share equal to $0.18 per
quarter. After holders of the priority common shares have received the $0.18
quarterly distribution, holders of the operating partnership units and the Class
B Common Shares are entitled to receive an amount per operating partnership unit
or Class B Common Share equal to the distribution paid to the holders of the
priority common shares. Thereafter, holders of priority common shares and the
holders of the operating partnership units and the Class B Common Shares are
entitled to receive future distributions on a pro rata basis. As of December 1,
2001, no Class B Common Shares are outstanding. Thus, the priority common shares
have priority distribution rights only with respect to the outstanding operating
partnership units. In the future, we may issue additional priority common
shares, and our partnership may issue operating partnership units that are not
subordinated to the priority common shares.

The hotel business is seasonal in nature and, therefore, revenues from the
hotels in the first and fourth quarters are traditionally lower than those in
the second and third quarters and our lease revenue may be lower in these
quarters. We expect to use excess cash flow from the second and third quarters
to fund distribution shortfalls in the first and fourth quarters. There are no
assurances we will be able to continue to make quarterly distributions at the
current rate.

Our priority common shares trade on the American Stock Exchange under the
symbol "HT." The following table sets forth the high and low sale prices of our
priority common shares as reported by the American Stock Exchange and dividend
payments on our priority common shares on a quarterly basis for each of the
quarters indicated. As of December 17, 2001, there were 2,275,000 priority
common shares outstanding held by 131 persons of record.

Cash Dividend
High Low Per Share
----- ----- ---------------

Fiscal 2001
Fourth quarter (through December 17, 2001) $6.25 $5.20 (1)
Third quarter $6.90 $4.25 $ 0.18
Second quarter $6.00 $5.35 $ 0.18
First quarter $6.06 $5.50 $ 0.18

Fiscal 2000
Fourth quarter $5.94 $5.50 $ 0.18
Third quarter $6.06 $5.38 $ 0.18
Second quarter $6.00 $4.50 $ 0.18
First quarter $5.50 $4.00 $ 0.18

Fiscal 1999
Fourth quarter $5.50 $4.81 $ 0.18
Third quarter $5.88 $5.00 $ 0.18
Second quarter $6.13 $5.13 $ 0.18
First quarter $6.31 $5.75 $ 0.18

_______________
<FN>
(1) On November 7, 2001, our Board of Trustees declared an $0.18 per
priority common share dividend payable on January 25, 2002 to shareholders
of record on December 28, 2001.

SELECTED FINANCIAL INFORMATION

The summary financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto, which are contained
elsewhere in this prospectus.

The selected balance sheet data and the statement of operations data have
been derived from our audited and unaudited financial statements, which are
included elsewhere in this prospectus. These results are not indications of our
future performance.

(IN THOUSANDS)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
---------------------- ----------------------
1999 2000 2000 2001
---------- ---------- ---------- ----------

STATEMENT OF OPERATIONS DATA(1):
Percentage Lease Revenue $ 7,264 $ 12,773 $ 10,714 $ 9,231
Other Revenue $ 106 $ 51 $ 125 $ 24
Total Revenue $ 7,370 $ 12,824 $ 10,839 $ 9,255
Interest Expense $ 1,428 $ 4,712 $ 4,065 $ 3,275
Real Estate Taxes and Insurance $ 450 $ 753 $ 788 $ 541
General and Administrative $ 383 $ 712 $ 445 $ 565
Depreciation and Amortization $ 2,064 $ 3,892 $ 3,335 $ 2,790
Total Expenses $ 4,325 $ 10,069 $ 8,633 $ 7,171
Income Before Minority Interest $ 3,045 $ 2,755 $ 2,206 $ 2,084
Income Allocated to Minority Interest $ 1,707 $ 1,908 $ 1,611 $ 1,314
Net Income (Loss) $ 1,338 $ 847 $ 595 $ 770

(IN THOUSANDS)
AS OF DECEMBER 31 AS OF SEPTEMBER 30
----------------------- ----------------------
1999(1) 2000 2000 2001
----------- ---------- ---------- ----------

BALANCE SHEET DATA(1):
Real Estate Investments, Net of
Accumulated Depreciation $ 51,908 $ 87,671 $ 83,183 $ 89,307
Total Assets 56,382 94,531 90,696 96,542
Total Liabilities 25,597 65,838 61,464 65,683
Minority Interests 18,890 17,679 17,886 17,479
Total Shareholders' Equity 11,805 11,014 11,346 10,380

<FN>
_________________________

(1) We commenced operations on January 26, 1999.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

We own approximately 31% of the partnership interests in our operating
partnership. In order for us to qualify as a REIT, neither we nor our operating
partnership may operate hotels. Therefore, our hotels are leased to HHMLP and
Noble. Our partnership's, and therefore our, principal source of revenue are
rent paid by these lessees under the percentage leases. The lessees ability to
perform their obligations, including making rent payments to our partnership
under the percentage leases, are dependent on the lessees' ability to generate
sufficient room revenues and net cash flow from the operation of our hotels, and
any other hotels leased to these lessees. All numbers in this Section are in
thousands of dollars except share and per share amounts.

RESULTS OF OPERATIONS

Our principal source of revenue is from payments by HHMLP and Noble under
the percentage leases. The principal determinants of percentage rent are the
hotels' room revenue, and to a lesser extent, other revenue. HHMLP's and
Noble's ability to make payments to us under their respective percentage leases
is dependent on the operations of the hotels.

COMPARISON OF THREE-MONTHS ENDED SEPTEMBER 30, 2001 WITH THE THREE-MONTHS ENDED
SEPTEMBER 30, 2000

Our revenues for the three months ended September 30, 2001 and 2000,
substantially consisted of percentage lease revenues recognized pursuant to the
percentage leases. Percentage lease revenues during the three month period
ended September 30, 2001 were $4,148, an increase of $481, or 13.1%, as compared
to percentage lease revenues of $3,667 for the same period during 2000.

Lease revenues were slightly higher for several properties due to the
methodology change in percentage lease revenue recognition versus straight-line
revenue recognition. The Holiday Inn Express, Hershey, Hampton Inn, Carlisle,
Holiday Inn Express, New Columbia and Comfort Inn, West Hanover were re-priced
on January 1, 2001. These properties now receive percentage lease revenues based
upon a percentage lease formula. During each quarter of the fiscal year ended
December 31, 2000, all of these properties received an equivalent amount of
fixed lease revenues although the properties were seasonal in nature. Due to the
seasonality of the hotels that were re-priced, we will receive a higher portion
of the total lease payments during the second and third quarters and lower lease
revenues during the first and fourth quarters. These results reflect the sale of
the Best Western, Indiana, Comfort Inn, Denver and Comfort Inn, JFK Airport.

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000

Our revenues for the nine months ended September 30, 2001 and 2000,
substantially consisted of percentage lease revenues recognized pursuant to the
percentage leases. Percentage lease revenues during the nine month period ended
September 30, 2001 were $10,714, an increase of $1,483, or 16.1%, as compared to
percentage lease revenues of $9,231 for the same period during 2000. The
improvement in lease revenues is primarily attributable to additional percentage
lease revenues derived from a full nine months of operations in several
properties acquired during the first nine months of 2000 and the acquisition of
the Mainstay Suites and Sleep Inn in King of Prussia, Pennsylvania. These
results reflect the sale of the Best Western, Indiana, Comfort Inn, Denver and
Comfort Inn, JFK Airport during the second quarter of 2001.

Net income decreased by $175, or 22.7%, to $595 for the nine months ended
September 30, 2001, as compared to net income of $770 for the same period during
2000. The decrease in net income is primarily attributable to an increase in
interest expense, depreciation expense and real estate taxes and insurance
related to the increase in the number of hotels. Decreases in net income were
partially offset by lower general and administrative expenses during the period.

COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO YEAR ENDED DECEMBER 31, 1999

Our total revenues for the twelve-month period ended December 31, 2000
consisted substantially of percentage lease revenue recognized pursuant to
percentage leases with HHMLP and Noble. Our revenue was approximately
$12,824,332, an increase of 74.0% compared to revenue of $7,369,330 for the year
ended December 31, 1999. Net income for the period was approximately $846,579,
a decrease of 36.7% compared to 1999 net income of approximately $1,337,460.
The increase in revenue is primarily attributable to the acquisition of eight
hotels from January through October of 2000 and a full year of operation in 2000
of hotels acquired in 1999. Net income includes certain one-time charges
related to prepayment penalties on refinanced debt. Net income was also
affected by an increase in interest expense, property taxes, insurance and
depreciation and amortization as a result of the acquisitions during 2000, as
mentioned above.

PRO FORMA RESULTS OF OPERATIONS OF OUR HOTELS

COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998

REVENUE

Room revenue for our hotels increased $4,487,852, or 27.8%, to $20,649,276
in 1999 from $16,161,424 in 1998. The increase resulted from the addition of
80,890 available room nights with an overall increase of 54,776 room nights
sold. The increase in room nights available was a result of opening three new
hotels in 1998, which were open the full year in 1999, and one hotel that opened
in 1999. In addition, a 2% increase in occupancy to 58% in 1999 as well as a
3.5% increase in our average daily rate to $71.64 compared to $69.23 augmented
the available room-nights. REVPAR increased 7.0% to $41.34 from $38.61.

EXPENSES

Total expenses less depreciation, amortization and interest increased by
$2,277,434, or 18.2%, to $14,806,884. Operating income before interest expense,
depreciation and amortization increased by 56.4% to $8,702,136 from $5,563,648.

LIQUIDITY AND CAPITAL RESOURCES

We expect to meet our short-term liquidity requirements generally through
net cash provided by operations, existing cash balances and, if necessary,
short-term borrowings under our line of credit. We believe that our net cash
provided by operations will be adequate to fund operating requirements, debt
service and our payment of dividends in accordance with REIT requirements of the
federal income tax laws. We expect to meet our long-term liquidity
requirements, such as scheduled debt maturities and property acquisitions,
through long-term secured and unsecured borrowings, the issuance of additional
equity securities or, in connection with acquisitions of hotel properties, the
issuance of units of operating partnership interest in our operating partnership
subsidiary.

We currently maintain a $11.5 million line of credit with Sovereign Bank.
We may use the line of credit to fund future acquisitions and for working
capital. Outstanding borrowings under the line of credit bear interest at the
bank's prime rate and are collateralized by certain of our properties. In the
future, we may seek to increase the amount of the line of credit, negotiate
additional credit facilities or issue corporate debt instruments. Any debt
incurred or issued by us may be secured or unsecured, long-term or short-term,
fixed or variable interest rate and may be subject to such other terms as we
deem prudent. The outstanding principal balance on the line of credit was
approximately $9.2 million at December 1, 2001.

We have a debt policy that limits our consolidated indebtedness to less
than 67% of the aggregate purchase prices for the hotels in which we have
invested and our current level is approximately 61%. However, our organizational
documents do not limit the amount of indebtedness that we may incur and our
Board of Trustees may modify our debt policy at any time without shareholder
approval. We intend to repay indebtedness incurred under the line of credit from
time to time, for acquisitions or otherwise, out of cash flow and from the
proceeds of issuances of additional priority common shares and other securities.

We intend to invest in additional hotels only as suitable opportunities
arise and adequate sources of financing are available. Our bylaws require the
approval of a majority of our Board of Trustees, including a majority of the
independent trustees, to acquire any additional hotel in which one of our
trustees or officers, or any of their affiliates, has an interest (other than
solely as a result of his status as our trustee, officer or shareholder). We
expect that future investments in hotels will depend on and will be financed by,
in whole or in part, the proceeds from additional issuances of priority common
shares, issuances of operating partnership units or other securities or
borrowings. Because of the level of our indebtedness, the success of our
acquisition strategy will depend primarily on our ability to access additional
capital through issuances of equity securities. We currently have no agreement
or understanding to invest in any hotel and there can be no assurance that we
will make any investments in any other hotels that meet our investment criteria.

Pursuant to our percentage leases, we are required to make available to the
lessees of our hotels 4% (6% for full service properties) of gross revenues per
quarter, on a cumulative basis, for periodic replacement or refurbishment of

furniture, fixtures and equipment at each of our hotels. We believe that a 4%
(6% for full service hotels) reserve is a prudent estimate for future capital
expenditure requirements. We intend to spend amounts in excess of the obligated
amounts if necessary to comply with the reasonable requirements of any franchise
license under which any of our hotels operate and otherwise to the extent we
deem such expenditures to be in our best interests. We are also obligated to
fund the cost of certain capital improvements to our hotels. We believe that
amounts required to be set aside in our percentage leases will be sufficient to
meet required expenditures for furniture, fixtures and equipment during the term
of the percentage leases. We will use undistributed cash or borrowings under
credit facilities to pay for the cost of capital improvements and any furniture,
fixture and equipment requirements in excess of the set aside referenced above.

INFLATION

Operators of hotels in general possess the ability to adjust room rates
quickly. However, competitive pressures may limit our lessees' ability to raise
room rates in the face of inflation.

SEASONALITY

Our hotels' operations historically have been seasonal in nature,
reflecting higher occupancy rates during the second and third quarters. This
seasonality can be expected to cause fluctuations in our quarterly lease revenue
to the extent that we receive percentage rent.

MORTGAGE DEBT

The following table shows selected information concerning the mortgage debt
relating to our hotels, as of September 30, 2001.

CURRENT PRINCIPAL PRE-PAYMENT
HOTELS AMOUNT OF MORTGAGE INTEREST RATE MATURITY DATE PENALTY
- ----------------------------------------- ------------------- -------------- ------------- -----------

HOLIDAY INN EXPRESS
Hershey, PA $ 4,700,000 8.94% March 2010 Yes
New Columbia, PA $ 1,800,000 8.94% March 2010 Yes
Duluth, GA $ 2,681,817 8.71% May 2010 Yes
Long Island City, NY (3) $ 5,500,000 10 Yr. T + March 2011 Yes
HAMPTON INN: 3.50% (1)
Carlisle, PA $ 3,950,000 8.94% March 2010 Yes
Danville, PA $ 2,500,000 8.94% March 2010 Yes
Selinsgrove, PA $ 3,300,000 8.94% March 2010 Yes
Hershey, PA $ 5,297,238 8.41% February 2005 Yes
Newnan, GA $ 3,443,933 8.70% November 2007 Yes
Peachtree, GA $ 2,278,771 9.43% August 2007 Yes
COMFORT INN:
Harrisburg, PA $ 2,400,000 8.94% March 2010 Yes
COMFORT SUITES:
Duluth, GA $ 3,233,956 8.71% May 2010 Yes
HOLIDAY INN HOTEL AND CONFERENCE CENTER:
Harrisburg, PA $ 3,400,000 8.94% March 2010 Yes
HOLIDAY INN EXPRESS AND SUITES:
Harrisburg, PA $ 2,720,000 Prime (1) August 2002 No
CLARION SUITES:
Philadelphia, PA $ 4,000,000 Prime (1) August 2002 No
MAINSTAY SUITES:
King of Prussia, PA $ 3,352,242 8.86% June 2009 Yes
SLEEP INN:
King of Prussia, PA $ 3,352,242 8.86% June 2009 Yes
Corapolis, PA $ 3,582,719 7.85% August 2008 Yes
-------------------
Total $ 61,492,918
Weighted Average 8.39%
_________________________

<FN>
(1) Variable rate interest

BUSINESS AND PROPERTIES

DESCRIPTION OF OUR HOTELS

Set forth below is descriptive information regarding our hotels, each of
which is currently leased and managed by either HHMLP or Noble and owned by a
subsidiary partnership of our operating partnership.

HOLIDAY INN EXPRESS, HERSHEY, PENNSYLVANIA

Description. The Holiday Inn Express, Hershey, Pennsylvania is located on
Walton Avenue, one and one half miles from Hershey Park. The hotel, which
opened in October 1997, is an 85-room limited service hotel. Amenities include
an indoor pool, hot tub, fitness center, business service center, meeting
facility, complimentary continental breakfast and 24-hour coffee. All rooms
have one king bed or two queen beds and some rooms have refrigerators, coffee
makers and microwaves.

Guest Profile and Local Competition. Approximately 30% of the hotel's
business is related to commercial activity from local business. The hotel's
group business, which accounts for approximately 5% of its business, is
generated from area institutions, local weddings and local social and sporting
events. The remainder of the hotel's business consists of transient guests,
visitors to area residents and demand generated by the hotel's proximity to
Hershey Park. We consider our primary competition to be the Comfort Inn in
Hershey, Pennsylvania.

HOLIDAY INN EXPRESS, NEW COLUMBIA, PENNSYLVANIA

Description. The Holiday Inn Express, New Columbia, Pennsylvania is
located at the intersection of Interstate 80 and Route 15. The hotel, which
opened in December 1997, is an 81-room limited service hotel. Amenities include
an indoor pool, hot tub, fitness center, meeting facility, complimentary
continental breakfast and 24-hour coffee. All rooms have one king bed or two
queen beds, some Jacuzzi suites are available and some rooms have refrigerators,
coffee makers and microwaves. The Holiday Inn Express in New Columbia,
Pennsylvania was ranked number one in its region for GSTS (Guest Satisfaction
Tracking System), for February and March of 1998. This award recognizes the
Holiday Inn Express in New Columbia as the leader in guest satisfaction and
product service out of 32 other Holiday Inns and Holiday Inns Express in the
Eastern region.

Guest Profile and Local Competition. Approximately 80% of the hotel's
business is related to commercial activity from local business. As a result of
its proximity to ski resorts and nearby tourist attractions, recreational
travelers generate approximately 10% of the hotel's business. The remainder of
the hotel's business consists of overnight travelers and visitors to area
residents. We consider our primary competition to be the Comfort Inn in New
Columbia, Pennsylvania.

HOLIDAY INN EXPRESS, DULUTH, GEORGIA

Description. The Holiday Inn Express, Gwinnett Place Mall is located just
off Pleasant Hill Road and Interstate 85 at exit 40. Opened in June 1996, this
68-room hotel features spacious guestrooms equipped with a king size bed or two
double beds. This hotel features an outdoor pool along with a well-equipped
fitness center. Meeting space is also available and accommodates up to 50
people.

Guest Profile and Local Competition. Numerous local business parks in
Duluth, Norcross and Lawrenceville play a vital role in the hotel's success.
Companies such as Scientific Atlanta, Primerica Financial Services, NCR,
Motorola, Hitatchi, and Lucent Technologies all have major offices in the area
and use this hotel frequently for room nights and meeting space. The Gwinnett
Civic and Cultural Center and the millions of Priority Club members worldwide
are also solid contributors of room nights throughout the year. We consider the
hotel's primary competitors to be the Holiday Inn Express, the Hampton Inn &
Suites, the Courtyard Gwinnett Mall and the Fairfield Inn.

HOLIDAY INN EXPRESS AND SUITES, HARRISBURG, PENNSYLVANIA

Description. The Holiday Inn Express and Suites, Harrisburg, Pennsylvania
is located at 5680 Allentown Boulevard and is easily accessible from Interstates
81 and 83. The hotel, which opened in August 1998 as a Clarion Inn and Suites,
is a 77-room limited service hotel. Amenities include an outdoor pool, meeting
facilities, complimentary continental breakfast, and 24-hour coffee. All rooms
have one king bed or two queen beds. Jacuzzi suites are available and some
rooms also have refrigerators and microwaves.

Guest Profile and Local Competition. Approximately 40% of the hotel's
business is comprised of business travelers, 30% is related to group business,
20% is leisure travelers, and 10% is government business. We consider our
primary competition the Best Western and the Baymont Inn, both located in
Harrisburg, Pennsylvania.

HAMPTON INN, CARLISLE, PENNSYLVANIA

Description. The Hampton Inn, Carlisle, Pennsylvania is located at the
intersection of Route 11 and exit 16 off the Pennsylvania Turnpike. The hotel,
which opened in June 1997, is a 95-room limited service hotel. Amenities
include an indoor pool, hot tub, fitness center, meeting facilities,
complimentary continental breakfast and 24-hour coffee. All rooms have one king
bed or two queen beds, some Jacuzzi suites are available and some rooms have
refrigerators, coffee makers and microwaves.

Guest Profile and Local Competition. Approximately 50% of the hotel's
business is related to commercial activity from local businesses. The remainder
of the hotel's business consists of overnight travelers and general demand
generated by the hotel's proximity to the Carlisle Fairgrounds and the Army War
College. We consider our primary competition to be the Holiday Inn in Carlisle,
Pennsylvania.

HAMPTON INN, SELINSGROVE, PENNSYLVANIA

Description. The Hampton Inn, Selinsgrove, Pennsylvania is located on
Pennsylvania Routes 11 and 15. The hotel, which opened in September 1996, is a
75-room, three story, limited service hotel. Amenities include an indoor pool,
hot tub, fitness center, meeting facilities, complimentary continental breakfast
and 24-hour coffee. All rooms have one king bed or two queen beds, some Jacuzzi
suites are available and some rooms have refrigerators, coffee makers and
microwaves. The Hampton Inn in Selinsgrove was recently named one of the top
hotels in the entire Hampton Inn system, receiving the hotel chain's Circle of
Excellence Award. The award recognizes superior quality and guest satisfaction
and is the highest distinction a Hampton Inn hotel can receive.

Guest Profile and Local Competition. Approximately 80% of the hotel's
business is related to commercial activity from local businesses. The remainder
of the hotel's business consists of pleasure travelers, transient guests and
demand generated by the hotel's proximity to area universities and Knoebels
Amusement Park. We consider our primary competition to be the Best Western near
Selinsgrove, Pennsylvania.

HAMPTON INN AND SUITES, HERSHEY, PENNSYLVANIA

Description. The Hampton Inn and Suites is located at 749 East Chocolate
Avenue in Hershey, Pennsylvania. The hotel opened in September 1999 and has 110
rooms, 35 of which are suites. The hotel is located near all of the major
attractions in Hershey, including the amusement park and the Hershey chocolate
factory. Amenities include an indoor pool, exercise room, hot tub, meeting
facilities, complimentary continental breakfast and 24-hour coffee.

Guest Profile and Local Competition. The majority of the hotel guests
consist of tourists and overnight travelers. The hotel's close proximity to all
Hershey attractions makes this property especially attractive to leisure
travelers. The hotel's primary competitors are the Hilton Garden Inn, Comfort
Inn, Holiday Inn Express and Springhill Suites.

HAMPTON INN, NEWNAN, GEORGIA

Description. The Hampton Inn, Newnan, is located in one of Atlanta's
fastest growing counties. This 91-room hotel sits adjacent to Interstate I-85
and features traditional Hampton Inn architecture with three floors on poured
concrete. This hotel features an outdoor pool, fitness centers, and
full-service meeting room.

Guest Profile and Local Competition. The primary demand generators for the
Hampton Inn, Newnan, include several major corporations located in the
industrial park, which include Yokogawa, Johnson-Yokogawa, Yamaha, Kawasaki,
Ryder, Ritchie Brothers, and Southern States Vehicle Auctions. The industrial
park is slated for expansion and Coweta County's population has grown by over
40% since 1991. Leisure demand is generated by weddings, festivals, local
racetracks and a tourist base. The main competition for this hotel includes the
Jameson Inn, Springhill Suites, Comfort Inn, Best Western and Holiday Inn
Express.

HAMPTON INN, PEACHTREE, GEORGIA

Description. This Hampton Inn is located in the Atlanta community of
Peachtree City. This 61-room, limited service hotel opened in 1994. A poured
concrete structure, this two-story building features the traditional Hampton Inn
architecture with metal rooflines and an ample porte-cochere. This hotel
features an outdoor pool and has an oversize fitness facility. The hotel has a
meeting room that can accommodate 25 persons.

Guest Profile and Local Competition. Peachtree City is home to over ten
Fortune 500 companies and boasts a two million square foot industrial park.
Several major Japanese companies, including Panasonic, Hoshizaki, TDK and
Shinsei, are headquartered in Peachtree City. The hotel's primary competitors
are the Holiday Inn, Sleep Inn, and Days Inn located in Peachtree City.

HOLIDAY INN EXPRESS, LONG ISLAND CITY (MIDTOWN TUNNEL), NEW YORK

Description. This Holiday Inn Express is located adjacent to the entrance
of the Midtown Tunnel in Long Island City and is within minutes from midtown
Manhattan. This 79-room, limited service hotel opened in 2001. A poured
concrete structure, this three-story building is conveniently located alongside
the Long Island Expressway.

Guest Profile and Local Competition. Long Island City is within minutes of
midtown Manhattan and is accessible via car or via direct access to the subway
line into Times Square. The hotel also serves numerous corporate headquarters
and businesses within Queens and is located within six miles of La Guardia
airport and within 13 miles of the JFK International Airport. The hotel competes
directly with the Best Western and numerous other limited service hotels within
Long Island City and Manhattan.

HOLIDAY INN HOTEL AND CONFERENCE CENTER, HARRISBURG, PENNSYLVANIA

Description. The Holiday Inn Hotel and Conference Center, Harrisburg,
Pennsylvania is located at the intersection of the Pennsylvania Turnpike exit 18
and Interstate 83, ten minutes from downtown, Harrisburg International Airport
and Hershey Park. The hotel opened in 1970 as a Sheraton Inn and was converted
to a Ramada Inn in 1984. It was completely renovated and converted to a Holiday
Inn in September 1995. This hotel has 196 deluxe guest units and is a full
service hotel, including a full service restaurant as well as a nightclub.
Amenities include an indoor tropical courtyard with a pool and Jacuzzi as well
as a banquet and conference facility for up to 700 people.

Guest Profile and Local Competition. Approximately 40% of the hotel's
business is related to commercial activity from local businesses. The remainder
of the hotel's business consists of overnight travelers visiting Hershey and
Harrisburg. We consider our primary competition to be the Radisson Penn Harris
in Camp Hill, Pennsylvania.

Additional Information Regarding Depreciation. This is our only hotel that
generates more than 10% of our revenue. The federal tax basis is $1,238,000. The
depreciation method used is Modified Accelerated Recovery System and the
depreciation rate is based upon tables issued by the Internal Revenue Service
for properties utilizing this depreciation method. The life claimed with respect
to this property for purposes of depreciation is 39 years.

COMFORT INN, HARRISBURG, PENNSYLVANIA

Description. The Comfort Inn, Harrisburg, Pennsylvania is located 8 miles
north of Hershey, Pennsylvania at 7744 Linglestown Road off exit 27 of
Interstate 81. The hotel opened in May 1998. It is an 81-room limited service
hotel. Amenities include an indoor pool, hot tub, fitness center, meeting
facilities, complimentary continental breakfast and 24-hour coffee. All rooms
have one king bed or two queen beds and some Jacuzzi suites are available.

Guest Profile and Local Competition. Approximately 25% of the hotel's
business is related to commercial activity from local businesses. The hotel's
group business, which accounts for approximately 5% of its business, is
generated from area institutions, local weddings and local social and sporting
events. The remainder of the hotel's business consists of transient and
recreational travelers generated by its proximity to Hershey, Pennsylvania. We
consider our primary competition to be the Holiday Inn in Grantville,
Pennsylvania.

COMFORT SUITES, DULUTH, GEORGIA

Description. The Comfort Suites, Gwinnett Place Mall is located just off
Pleasant Hill Road and Interstate 85 at exit 40. Opened in June 1996, this
85-suite hotel features large spacious guest suites each equipped with a king
size bed or two double beds. Amenities include a fitness center, Jacuzzi within
a large sunroom, indoor pool and meeting facilities with a 60 person capacity.

Guest Profile and Local Competition. Numerous local business parks in
Duluth, Norcross and Lawrenceville play a vital role in the hotel's success.
Companies such as Scientific Atlanta, Primerica Financial Services, NCR,
Motorola, Hitachi, and Lucent Technologies all have major offices in the area
and use this hotel frequently for room nights and meeting space. The leisure
market is fueled by the Gwinnett Place Mall and many local events. We consider
the hotel's primary competitors to be the Holiday Inn Express, the Hampton Inn &
Suites, the Courtyard Gwinnett Mall and the Fairfield Inn.

MAINSTAY SUITES, KING OF PRUSSIA, PENNSYLVANIA

Description. This Mainstay Suites is located just off the Pennsylvania
Turnpike and is part of a unique dual branded hotel, the first to feature a
Mainstay Suites and Sleep Inn under one roof. This unique property combines
many amenities convenient for both the business and leisure traveler. This
69-room hotel opened in 2000 and the suites include fully-equipped kitchens, a
comfortable living room and a spacious work area.

Guest Profile and Local Competition. This hotel serves both the nearby
corporate market as well as the strong leisure demand generators such as the
Valley Forge Historic Park, Valley Forge Convention Center, King of Prussia
Mall. The hotel is within twenty miles of downtown Philadelphia and serves all
of the corporate and leisure demand generators of this market. The hotel's
primary competition includes the Fairfield Inn, Best Western, Comfort Inn and
McIntosh Inn located within King of Prussia.

SLEEP INN, KING OF PRUSSIA, PENNSYLVANIA

Description. This Sleep Inn is located just off the Pennsylvania Turnpike
and is part of a unique dual branded hotel, the first to feature a Mainstay
Suites and Sleep Inn under one roof. This unique property combines many
amenities convenient for both the business and leisure traveler. This 87-room
limited service hotel opened in 2000.

Guest Profile and Local Competition. This hotel serves both the nearby
corporate market as well as the strong leisure demand generators such as the
Valley Forge Historic Park, Valley Forge Convention Center and King of Prussia
Mall. The hotel is within twenty miles of downtown Philadelphia and serves all
of the corporate and leisure demand generators of this market. The hotel's
primary competition includes the Fairfield Inn, Best Western, Comfort Inn and
McIntosh Inn all located within King of Prussia.

SLEEP INN, CORAPOLIS, PENNSYLVANIA

Description. The Sleep Inn is located six miles from the Pittsburgh
International Airport and thirteen miles from downtown Pittsburgh. This hotel
was constructed in 1998 and has 143 guest rooms. The hotel's amenities include
an indoor pool, fitness center, an 800-square foot conference facility, and a
complimentary breakfast.

Guest Profile and Local Competition. The majority of the hotel's business
consists business travelers, leisure travelers and airline employees utilizing
the Pittsburgh International Airport. The hotel's primary competitors are the
Holiday Inn and Comfort Inn located near the airport.

CLARION SUITES, PHILADELPHIA, PENNSYLVANIA

Description. The Clarion Suites, Philadelphia, Pennsylvania is located at
1010 Race Street, one half block from the newly-developed Philadelphia
convention center and six blocks from the Independence Hall historic district
and the Liberty Bell. The hotel is located in the historic Bentwood Rocking
Chair Company building, which was constructed in 1896 and converted to a Quality
Suites hotel in the 1980s. The hotel was purchased by some of our executive
officers, trustees and their affiliates as a Ramada Suites in 1995 and
substantially rehabilitated. These individuals and their affiliates later
converted the hotel to a Clarion Suites. The hotel has 96 executive suites with
fully-equipped kitchens and an eight-story interior corridor with Victorian
style architecture. The hotel has a lounge featuring light fare and a comedy
cabaret. Amenities include two large meeting rooms, boardrooms, a fitness room
and a complimentary continental breakfast.

Guest Profile and Local Competition. Approximately 20% of the hotel's
business is comprised of leisure travelers and transient guests related to its
close proximity to the historic district. The remainder of the hotel's business
is due to commercial activity from local businesses and people visiting area
residents. We consider our primary competition to be all Center City,
Philadelphia hotels.

RE-PRICING

- property and casualty insurance premiums,

- real estate and personal property taxes, and

- a reserve for furniture, fixtures and equipment equal to 4% (6% in the
case of a full-service hotel) of gross revenues per quarter at each
hotel.

At the end of the one- or two-year period, we calculate a value for the hotel,
based on the actual net income during the previous twelve months, net of certain
expenses, such that it would have yielded a 12% return. We then apply the
percentage rent formula to the hotel's historical revenues for the previous
twelve months on a pro forma basis. If the pro forma percentage rent formula
would not have yielded a pro forma annual return to us of 11.5% to 12.5% based
on this calculated value, this value is adjusted either upward or downward to
produce a pro forma return of either 11.5% or 12.5%, as applicable. If this

final purchase price is higher than the initial purchase price, then the seller
of the hotel will receive consideration in an amount equal to the increase in
price. If the final purchase price is lower than the initial purchase price,
then the sellers of the hotel will return to us consideration in an amount equal
to the difference. Any purchase price adjustment will be made either in
operating partnership units or cash as determined by our Board of Trustees,
including the independent trustees. Any operating partnership units issued by
us or returned to us as a result of the purchase price adjustment historically
have been valued at $6.00 per unit. Any future adjustments will be based upon a
value per unit approved by our Board of Trustees, including our independent
trustees. The sellers are entitled to receive quarterly distributions on the
operating partnership units prior to the units being returned to us in
connection with a downward purchase price adjustment.

We re-priced seven of our hotels acquired in connection with our initial
public offering based upon operating results as of December 31, 1999 or December
31, 2000. Before we implemented the current pricing methodology in December
2000, our pricing methodology provided for re-pricing of a hotel if there was
any variance from our initial forecasted 12% return. Under this previous
pricing methodology, as of January 1, 2000, we issued an aggregate of 235,026
additional operating partnership units in connection with the re-pricing of the
Holiday Inn, Milesburg; the Comfort Inn, Denver; and the Comfort Inn,
Harrisburg, each of which subsequently was sold. In addition, on January 1,
2001, we issued an aggregate of 531,559 additional operating partnership units
in connection with the re-pricing of the Holiday Inn Express, Hershey; Hampton
Inn, Carlisle; Holiday Inn Express, New Columbia; and the Comfort Inn,
Harrisburg. We also issued 175,538 operating partnership units at a value equal
to approximately $1 million in connection with the repricing of the Comfort Inn,
Jamaica, New York located at John F. Kennedy International Airport prior to its
sale in June 2001. Since our initial public offering, we have acquired seven
additional hotels from some of our executive officers, trustees and their
affiliates for initial prices that will be adjusted based upon operating results
at December 31, 2001 or 2002.

OUR LESSEES

In order for us to qualify as a REIT, we cannot operate hotels. Therefore,
we lease each of our hotels to management companies to operate our hotels. We
lease 14 of our hotels to HHMLP, a Pennsylvania limited partnership. HHMLP, our
affiliated lessee. HHMLP is owned by Messrs. Hasu P. Shah, our chairman, chief
executive officer and trustee, K.D. Patel, one of our trustees, Rajendra O.
Gandhi, our treasurer, Kiran P. Patel, our secretary, certain officers of HHMLP
and other affiliated individuals. We lease our four hotels located in Atlanta
to subsidiaries of Noble Investment Group, Ltd., an unaffiliated third party
real estate development and hotel management company. In addition, HHMLP
provides administrative services to us for a fixed annual fee.

BUSINESS STRATEGY

We seek to enhance shareholder value by increasing amounts available for
distribution to our shareholders by (i) acquiring additional hotels that meet
our investment criteria as described below and (ii) participating in any
increased revenue from our hotels through the percentage leases.

ACQUISITION STRATEGY

Since our initial public offering in January 1999, we have concentrated on
economy, mid-scale and upper-economy hotels located in diverse markets. We
recently have re-focused our business strategy to acquiring hotels in leading
central business districts, in close proximity to airports and in suburban areas
around major metropolitan markets.

Our acquisition policy is to acquire hotels for which we expect to receive
rents at least equal to 12% of the purchase price paid for each hotel, net of:

- property and casualty insurance premiums,

- real estate and personal property taxes, and

- a reserve for furniture, fixtures and equipment equal to 4% (6% in the
case of a full-service hotel) of gross revenues per quarter at each
hotel.

Our trustees, however, may change our acquisition policy at any time without the
approval of our shareholders.

In addition, we intend to acquire hotels that meet one or more of the
following criteria:

- hotels with significant barriers to entry, such as high development
costs, limited availability of land and the presence of similarly branded
hotels;

- poorly-managed hotels, which could benefit from new management, a new
marketing strategy and association with a national franchisor;

- hotels in a deteriorated physical condition that could benefit
significantly from renovations; and

- hotels in attractive locations that we believe could benefit
significantly by changing franchises to a superior brand.

New acquisitions may include hotels newly developed by some of our executive
officers, trustees and their affiliates.

In addition to the direct acquisition of hotels, we may make investments in
hotels through joint ventures with strategic partners or through equity
contributions, sales and leasebacks or secured loans. We identify acquisition
candidates located in markets with economic, demographic and supply dynamics
favorable to hotel owners and operators. Through our extensive due diligence
process, we select those acquisition targets where we believe selective capital
improvements and intensive management will increase the hotel's ability to
attract key demand segments, enhance hotel operations and increase long-term
value.

Any additional investments in hotels may be financed, in whole or in part,
with undistributed cash, subsequent issuances of priority common shares or other
securities or borrowings. Our policy is to limit consolidated indebtedness to
less than 67% of the aggregate purchase prices for our hotels. The trustees,
however, may change this policy without the approval of our shareholders. The
aggregate purchase prices for our eighteen hotels, owned as of December 1, 2001,
was approximately $100.0 million and our indebtedness as of December 1, 2001 was
approximately $60.8 million, which represents approximately 60.8% of the
aggregate purchase price of our hotels.

Pursuant to the Option Agreement, our operating partnership has the option
to acquire any hotels owned or developed in the future by some of our executive
officers, trustees and their affiliates within fifteen miles of any of our
hotels for two years after acquisition or development.

DISPOSITION STRATEGY

We will evaluate our core hotels on a periodic basis to determine if these
hotels continue to satisfy our new investment criteria. We may sell hotels
opportunistically based upon management's forecast and review of the cash flow
potential for the hotel and re-deploy the proceeds into debt reduction or
acquisitions of hotels. We utilize several criteria to determine the long-term
potential of our core hotels. Hotels are identified for sale based upon
management's forecast of the strength of the hotel's cash flows and its ability
to remain accretive to our portfolio. Our decision to sell an asset is often
predicated upon the size of the hotel, strength of the franchise, property
condition and related costs to renovate the property, strength of market demand
generators, projected supply of hotel rooms in the market, probability of
increased valuation and geographic profile of the hotel.

We have sold four hotels since the initial public offering to third parties
and have sold two hotels back to some of our executive officers, trustees and
their affiliates to prevent the REIT from having to take on seller financing.
See Section under the Heading: "Certain Relationships and Transactions - Sales
of Hotels Back to Some of Our Executive Officers, Trustees and Their
Affiliates."

All asset sales are comprehensively reviewed by our Board of Trustees,
including our independent trustees. A majority of the independent trustees must
approve the terms of all asset sales.

FINANCING

We may finance additional investments in hotels, in whole or in part, with
undistributed cash, issuances of priority common shares or operating partnership
units, cash received from the disposition of hotels or borrowings. Our debt
policy is to limit consolidated indebtedness to less than 67% of the aggregate
purchase prices paid for the hotels in which we invest. Our Board of Trustees,
however, may change the debt policy without the approval of our shareholders.
The aggregate purchase prices for our eighteen hotels, owned as of December 1,
2001, was approximately $100.0 million, and our indebtedness at December 1, 2001
was approximately $60.8 million, which represents approximately 60.8% of the
aggregate purchase price for our hotels.

In February 2000, we entered into a portfolio refinancing of seven of our
hotel properties for approximately $22.1 million. Outstanding borrowings under
the refinancing bear interest at a fixed rate of 8.94%, have a total loan
amortization period of 23.5 years and have a maturity date of February 2010. The
first eighteen months of the loan is structured to be interest only financing
with no principal pay off during the period. The loan proceeds were utilized to
pay off existing loans, to pay accrued distributions to the limited partners of
our operating partnership and to acquire hotel properties.

We maintain a credit line with Sovereign Bank for $11.5 million.
Outstanding borrowings under the line of credit bear interest at the bank's
prime rate. The line of credit is collateralized by first mortgages on three of
our hotels. The interest rate on borrowings under the line of credit at December
1, 2001 was 5.0%. The line of credit expires on August 8, 2003. We have the
option to extend the line of credit for an additional twelve months upon
expiration. The outstanding principal balance on the line of credit was
approximately $9.2 million at December 1, 2001.

THE PERCENTAGE LEASES

Our hotels are operated by our lessees, HHMLP and Noble, pursuant to
percentage leases. We intend to lease any hotels acquired in the future to
operators, including both our lessees and operators unaffiliated with our
lessees. Future leases with our lessees generally will be similar to the
percentage leases. Future leases with operators unaffiliated with our lessees
may or may not be similar to the percentage leases. We will negotiate the terms
and provisions of each future lease, depending on the purchase price paid,
economic conditions and other factors deemed relevant at the time.

Each percentage lease with HHMLP has an initial non-cancelable term of five
years. All, but not less than all, of these leases may be extended for an
additional five-year term at HHMLP's option. At the end of the first extended
term, HHMLP, at its option, may extend some or all of the leases for an
additional five-year term. The percentage leases are subject to early
termination upon the occurrence of defaults thereunder and certain other events
described therein.

Each percentage lease with Noble has an initial non-cancelable term of
three years. These leases may be extended for an additional three-year period at
Noble's option and upon agreement by both parties for an additional three-year
period.

The percentage leases are designed to allow us to participate in growth in
revenues at our hotels. The percentage lease formulas are based on certain
projections including projected revenues for the newly-developed and
newly-renovated hotels. We can give no assurance that future revenues for the
hotels will be consistent with prior performance or the estimates. With respect
to hotels subject to purchase price adjustment, until the purchase price
adjustment dates the rent is a fixed annual rent payable quarterly. After the
adjustment dates, rent will be computed based on a percentage of revenues of
those hotels. These percentage leases generally provide for the lessees to pay
in each month or calendar quarter the greater of a base rent or percentage rent.
The percentage rent for each hotel leased to HHMLP is comprised of:

- a percentage of room revenues up to a certain threshold amount,

- a percentage of room revenues in excess of the first threshold but
less than a second incentive threshold,

- a percentage of room revenues in excess of the second incentive
threshold and

- a percentage of revenues other than room revenues.

The percentage rent for each hotel leased to Noble is comprised of:

- a percentage of room revenues up to an incentive threshold and

- a percentage of room revenues above this threshold amount.

The incentive thresholds are designed to provide incentive to our lessees to
generate higher revenues at each hotel by reducing the percentage of revenue
paid as rent above certain thresholds. In the case of any newly-renovated
hotels or newly-developed hotels, our lessees pay a fixed rent until an
adjustment date, after which our lessees pay the greater of the base rent or
percentage rent.

The following table sets forth (i) room revenue, (ii) other revenue, (iii)
the fixed rent, if applicable, (iv) the annual base rent and (v) the percentage
rent formulas:

Room Other Initial Annual Percentage
Hotel Revenue(1) Revenue(1) Fixed Rent Base Rent Rent Formula
- ---------------------- ----------- ----------- ------------- ---------- ---------------------------------------------------

HOLIDAY INN EXPRESS

Hershey, PA $1,913,248 $ 49,577 $ 794,686(2) $ 364,000 42.1% of room revenue up to $1,479,523, plus
65.0% of room revenue in excess of $1,479,523
but less than $1,740,615, plus 29.0% of room
revenue in excess of $1,740,615, plus 8.0% of
all non-room revenue.

Long Island City, NY --(5) --(5) $1,179,389(4) $ 552,468 43.96% of room revenue up to $2,117,542, plus
65.0% of room revenue in excess of $2,117,542
but less than $2,491,226, plus 29.0% of room
revenue in excess of $2,491,226, plus 8.0% of
all non-room revenue.

New Columbia, PA $1,175,841 $ 29,110 $ 498,198(2) $ 227,500 46.7% of room revenue up to $850,986, plus
65.0% of room revenue in excess of $850,986 but
less than $1,001,160, plus 29.0% of room
revenue in excess of $1,001,160, plus 8.0% of
all non-room revenue.

Duluth, GA $1,273,535 $ 55,383 N/A $ 533,000 43.47% of room revenue up to $1,226,000, plus
40% of room revenues in excess of $1,226,000.

HAMPTON INN:

Carlisle, PA $ 659,861 $ 8,421 $ 699,062(2) $ 325,000 42.3% of room revenue up to $1,293,906, plus
65.0% of room revenue in excess of $1,293,906
but less than $1,522,242, plus 29.0% of room
revenue in excess of $1,522,242, plus 8.0% of
all non-room revenue.

Danville, PA $1,456,573 $ 31,924 $ 504,116(3) $ 234,000 43.2% of room revenue up to $916,749, plus 65%
of room revenue in excess of $916,749 but less
than $1,078,528, plus 29.0% of room revenue in
excess of $1,078,528, plus 8.0% of all non-room
revenue.

Selinsgrove, PA $1,271,943 $ 46,148 N/A $ 308,469 49.0% of room revenue up to $1,081,152, plus
65.0% of room revenue in excess of $1,081,152
but less than $1,271,943, plus 29.0% of room
revenue in excess of $1,271,943, plus 8.0% of
all non-room revenue.

Hershey, PA $2,094,432 $ 55,150 $1,040,476(3) $ 487,528 51.2% of room revenue up to $1,643,560, plus
65% of room revenue in excess of $1,643,560 but
less than $1,993,600, plus 29.0% of room reve
nue in excess of 1,933,600, plus 8.0% of all
non-room revenue.

Newnan, GA $1,548,757 $ 66,905 N/A $ 965,000 53.76% of room revenue up to $1,795,000, plus
40% of room revenues in excess of $1,795,000.

Peachtree City, GA $1,081,909 $ 38,034 N/A $ 557,000 46.85% of room revenue up to $1,189,000, plus
40% of room revenues in excess of $1,189,000.

COMFORT INN:

Harrisburg, PA $1,382,002 $ 40,528 $ 514,171(2) $ 234,000 40.7% of room revenue up to $980,050, plus
65.0% of room revenue in excess of $980,050 but
less than $1,153,000, plus 29.0% of room reve
nue in excess of $1,153,000, plus 8.0% of all non-
room revenue.

COMFORT SUITES:

Duluth, GA $1,561,630 $ 54,460 N/A $ 745,000 47.54% of room revenue up to $1,567,000, plus
40% of room revenue in excess of $1,567,000.

HOLIDAY INN EXPRESS
& SUITES:

Harrisburg, PA $1,360,163 $ 36,970 $ 404,031(3) $ 175,500 35.3% of room revenue up to $855,611, plus 65%
of room revenue in excess of $855,611 but less
than $1,006,601, plus 29.0% of room revenue in
excess of $1,006,601, plus 8.0% of all non-room
revenue.

HOLIDAY INN HOTEL AND
CONFERENCE CENTER:

Harrisburg, PA $3,103,820 $1,787,958 N/A $ 675,921 44.3% of room revenue up to $2,638,247, plus
65% of room revenue in excess of $2,638,247 but
less than $3,103,820, plus 31.0% of room
revenues in excess of $3,103,820, plus 8.0% of
all non-room revenue.

SLEEP INN:

Corapolis, PA 1,763,185 44,826 $ 838,280(4) $ 357,500 37.6% of room revenue up to $1,700,000 plus
65% of room revenues in excess of $1,700,000
but less than $2,000,000, plus 29.0% of room
revenue in excess of $2,000,000, plus 8.0% of
all non-room revenue.

CLARION SUITES:

Philadelphia, PA $2,350,702 $ 319,950 N/A $ 418,593 36.1% of room revenue up to $1,998,097, plus
65.0% of room revenue in excess of $1,998,097
but less than $2,350,702, plus 29.0% of room
revenue in excess of $2,350,702, plus 8.0% of
all non-room revenue.

MAINSTAY SUITES AND
SLEEP INN:

King of Prussia, PA(6) $ 684,074 $ 33,400 $1,352,010(4) $ 613,798 43.7% of room revenue up to $2,434,590 plus
65% of room revenues in excess of $2,434,590
but less than $2,864,224 plus 29.0% of room
revenue in excess of $2,864,224, plus 8.0% of
all non-room revenue.
__________________
<FN>

(1) For year ended December 31, 2000.
(2) Initial fixed rent period expired on December 31, 2000, at which time this hotel was re-priced according to our re-pricing
methodology. See "Business and Properties-Re-pricing."
(3) Initial fixed rent period expires on December 31, 2001, at which time this hotel will be re-priced according to our
re-pricing methodology. See "Business and Properties - Re-pricing."
(4) Initial fixed rent period expires on December 31, 2002, at which time this hotel will be re-priced according to our
re-pricing methodology. See "Business and Properties-Re-pricing."
(5) Hotel commenced operations as of March 1, 2001.

(6) Dual branded hotel that includes both a Mainstay Suites and a Sleep Inn under one roof. We entered into one lease with
respect to these two hotels.

Other than real estate and personal property taxes; ground lease rent
(where applicable); the cost of certain furniture, fixtures and equipment;
certain capital expenditures; and property and casualty insurance premiums, all
of which are our obligations, the percentage leases require our lessees to pay
the operating expenses of the hotels (including insurance other than property
and casualty insurance, all costs, expenses, utility and other charges incurred
in the operation of the hotels) during the term of the percentage leases. The
percentage leases also provide for rent reductions and abatements in certain
cases in the event of damage, destruction or a partial taking of any of our
hotels.

Under the percentage leases, we make available to our lessees for the
replacement and refurbishment of furniture, fixtures and equipment and other
capital improvements, determined in accordance with generally accepted
accounting principles, when and as deemed necessary by the lessees, an amount
equal to 4% (6% for the Holiday Inn Hotel and Conference Center, Harrisburg, PA)
of gross revenues per quarter on a cumulative basis. Our obligation will be
carried forward to the extent that the lessees have not expended such amount,
and any unexpended amounts will remain our property upon termination of the
percentage leases. Other than as described above, our lessees are responsible
for all repair and maintenance of the hotels and any capital improvements
thereto.

Our lessees, at their expense, may make non-capital and capital additions,
modifications or improvements to the hotels, provided that such action does not
significantly alter the character or purposes of the hotels or significantly
detract from the value or operating efficiencies of the hotels. All of these
alterations, replacements and improvements are subject to all the terms and
provisions of the percentage leases and will become our property upon
termination of the leases. We own substantially all personal property (other
than inventory, linens and other non-depreciable personal property) not affixed
to, or deemed a part of, the real estate or improvements on the hotels, except
to the extent that ownership of such personal property would cause the rent
under a percentage lease not to qualify as "rents from real property" for REIT
income test purposes.

We are responsible for paying or reimbursing our lessees for real estate
and personal property taxes on our hotels (except to the extent that personal
property associated with the hotels is owned by the lessees), and all premiums
for property and casualty insurance. Our lessees are required to pay for all
other insurance on the hotels, including comprehensive general public liability,
workers' compensation and other insurance appropriate and customary for
properties similar to our hotels, and to name us as an additional named insured.

Our lessees are not permitted to sublet all or any part of our hotels or
assign their interest under any of the percentage leases without our prior
written consent. No assignment or subletting will release our lessees from any
of their obligations under the percentage leases.

In the event of damage to or destruction of any hotel, covered by
insurance, that renders the hotel unsuitable for its primary intended use, the
percentage lease will terminate as of the date of the casualty, neither we nor
our lessees shall have any further liability under the percentage lease, and we
will retain all insurance proceeds. In the event of damage to or destruction of
any hotel covered by insurance that does not render that hotel unsuitable for
its primary intended use, we (or, at our election, our lessees) will restore the
hotel, the percentage lease will not terminate and we will retain all insurance
proceeds (if, however, our lessees restore the hotel, the insurance proceeds
will be paid out by us to the lessees). If the cost of restoration exceeds the
amount of insurance proceeds received by us, we will contribute any excess
amounts prior to requiring our lessees to commence work. In the event of damage
to or destruction of any hotel not covered by insurance, whether or not such
damage or destruction renders the hotel unsuitable for its primary intended use,
we at our option either (i) will restore the hotel at our cost and expense and
the percentage lease will not terminate or (ii) will terminate the percentage
lease and neither we nor our lessees shall have any further liability under the
percentage lease. Any damage or destruction notwithstanding, and provided the
percentage lease has not been terminated, our lessees' obligation to pay rent
will remain unabated by any damage or destruction that does not result in a
reduction of gross revenues at the hotel. If any damage or destruction results
in a reduction of such gross revenues, we will receive all loss of income
insurance and our lessees will not have an obligation to pay rent in excess of
the amount of percentage rent, if any, realizable from gross revenues generated
by the operation of the hotel during the existence of such damage or
destruction.

In the event of a total condemnation of any of our hotels, or in the event
of a partial taking that renders the hotel unsuitable for its primary intended
use, either we or our lessees will have the option to terminate the relevant
percentage lease as of the date of taking, and we and our lessees will be
entitled to their shares of the condemnation award in accordance with the
provisions of the percentage lease. In the event of a partial taking that does
not render the hotel unsuitable for its primary intended use, we (or, at our
option, our lessees) will restore the untaken portion of the hotel to a complete
architectural unit and we shall contribute the cost of such restoration in
accordance with the provisions of the percentage lease. In the event of a
partial taking, the base rent will be abated taking into consideration, among
other factors, the number of usable rooms, the amount of square footage, or the
revenues affected by the partial taking.

Events of default under the percentage leases include, among others, the
following:

(i) the failure by our lessees to pay base rent, percentage rent (or,
fixed rent, as applicable) or any additional charges when due and the
continuation of such failure for a period of 10 days after receipt by our
lessees of notice from us that the same has become due and payable,
provided that we shall not be required to give any such notice more than
twice in any lease year and that any third or subsequent failure by our
lessees during such lease year to make any payment of base rent or
percentage rent (or, fixed rent, as applicable) on the date the same
becomes due and payable shall constitute an immediate event of default;

(ii) the failure by our lessees to observe or perform any other term
of a percentage lease and the continuation of such failure for a period of
30 days after receipt by our lessees of notice from us thereof, unless: (A)
such failure cannot be cured within such period and our lessees commences
appropriate action to cure such failure within such 30-day period and
thereafter acts, with diligence, to correct such failure within such time
as is necessary, provided in no event shall such period exceed 120 days,
which 120-day period shall cease to run during any period that a cure of
such failure is prevented by certain unavoidable delays and shall resume
running upon the cessation of such unavoidable delay; and (B) such failure
does not result in a notice or declaration of default under any material
contract or agreement to which we or any affiliate thereof is a party or by
which any of our assets are bound;

(iii) if our lessees shall file a petition in bankruptcy or
reorganization pursuant to any federal or state bankruptcy law or any
similar federal or state law; shall be adjudicated a bankrupt; shall make
an assignment for the benefit of creditors; shall admit in writing its
inability to pay its debts generally as they become due; if a petition or
answer proposing the adjudication of our lessees as a bankrupt or their its
reorganization pursuant to any federal or state bankruptcy law or any
similar federal or state law shall be filed in any court and our lessees
shall be adjudicated a bankrupt and such adjudication shall not be vacated
or set aside or stayed within 60 days after the entry of an order in
respect thereof; if a receiver of our lessees or of the whole or
substantially all of the assets of our lessees shall be appointed in any
proceeding brought by our lessees; or if any such receiver, trustee or
liquidator shall be appointed in any proceeding brought against our lessees
and shall not be vacated or set aside or stayed within 60 days after such
appointment;

(iv) if our lessees liquidate or dissolve; begin proceedings toward
such liquidation or dissolution, or in any manner cease to do business or
permit the sale or divestiture of substantially all of their assets;

(v) if the estate or interest of our lessees in the percentage lease
or any part thereof is voluntarily or involuntarily transferred, assigned,
conveyed, levied upon or attached in any proceeding (for this purpose, a
change in control of our lessees constitutes an assignment of the lease);

(vi) if our lessees voluntarily discontinue operations of any of our
hotels except as a result of damage, destruction or condemnation;

(vii) if the franchise license with respect to any of our hotels is
terminated by the franchisor as a result of any action or failure to act by
our lessees or their agents, other than the failure to complete
improvements required by a franchisor because our operating partnership
fails to pay the costs of such improvements; or

(viii) the occurrence of an event of default occurs under any other
percentage lease between us and our lessees.

If an event of default occurs and continues beyond any curative period, we
will have the option of terminating the percentage lease and any or all other
percentage leases by giving our lessees 10 days' written notice of the date for
termination of the percentage leases and, unless such event of default is cured
prior to the termination date set forth in such notice, the percentage leases
shall terminate on the date specified in our notice and the lessees shall be
required to surrender possession of the affected hotels.

In the event we enter into an agreement to sell or otherwise transfer one
of our hotels to a third party, we have the right to terminate the percentage
lease with respect to such hotel if within six months after the closing of such
sale we either (i) pay our lessee the fair market value of our lessees'
leasehold interest in the remaining term of the percentage lease to be
terminated, or (ii) offer to lease to our lessee one or more substitute hotels
on terms that would create a leasehold interest in such hotels with a fair
market value equal to or exceeding the fair market value of our lessee's
remaining leasehold interest under the percentage lease to be terminated.

Upon notice from our lessees that we have breached any of the leases, we
will have 30 days to cure the breach or proceed to cure the breach, which period
may be extended in the event of certain specified, unavoidable delays.

All inventory required in the operation of our hotels is and will be
purchased and owned by our lessees at their expense. We will have the option to
purchase all inventory related to a particular hotel at fair market value upon
termination of the percentage lease for that hotel.

FRANCHISE LICENSES

Holiday Inn Express and Holiday Inn are registered trademarks of Six
Continents Hotels Plc; Hampton Inn is a registered trademark of Hilton Hotels
Corporation, and Comfort Inn, Comfort Suites, Mainstay Suites, Sleep Inn and
Clarion Suites are registered trademarks of Choice Hotels International.

We anticipate that most of the additional hotels in which we invest will be
operated under franchise licenses. We believe that the public's perception of
quality associated with a franchisor is an important feature in the operation of
a hotel. Franchisors provide a variety of benefits for franchisees, which
include national advertising, publicity and other marketing programs designed to
increase brand awareness, training of personnel, continuous review of quality
standards and centralized reservation systems.

The franchise licenses generally specify certain management, operational,
record-keeping, accounting, reporting and marketing standards and procedures
with which the franchisee must comply. The franchise licenses obligate our
lessees to comply with the franchisors' standards and requirements with respect
to training of operational personnel, safety, maintaining specified insurance,
the types of services and products ancillary to guest room services that may be
provided by our lessees, display of signage, and the type, quality and age of
furniture, fixtures and equipment included in guest rooms, lobbies and other
common areas.

The following table sets forth certain information in connection with the
franchise licenses:

HOTEL EFFECTIVE DATE EXPIRATION DATE FRANCHISE FEE(1)
- ------------------------------------------- ------------------ ------------------ ----------------

Holiday Inn Express, Long Island City, NY December 28, 2000 December 28, 2010 8.00%
Holiday Inn Express, Hershey, PA September 30, 1997 September 30, 2007 8.00%
Holiday Inn Express, New Columbia, PA December 3, 1997 December 3, 2007 8.00%
Holiday Inn Express, Duluth, GA May 20, 2000 May 20, 2010 8.00%
Holiday Inn Hotel and Conference Center,
Harrisburg, PA September 29, 1995 September 29, 2005 7.50%
Holiday Inn Express and Suites, Harrisburg,
PA December 22, 1999 December 22, 2009 8.00%

Hampton Inn, Danville, PA March 28, 1997 March 27, 2018 8.00%
Hampton Inn, Carlisle, PA June 16, 1997 June 15, 2017 8.00%
Hampton Inn, Selinsgrove, PA September 12, 1996 September 11, 2016 8.00%
Hampton Inn & Suites, Hershey, PA September 24, 1998 September 23, 2019 8.00%
Hampton Inn, Newnan, GA April 20, 2000 April 19, 2021 8.00%
Hampton Inn, Peachtree, GA April 20, 2000 April 19, 2021 8.00%
Mainstay/Sleep Inn, King of Prussia, PA November 30, 1997 November 30, 2017 7.50%
Comfort Inn, Harrisburg, PA May 15, 1998 May 15, 2018 8.85%
Comfort Suites, Duluth, GA May 19, 2000 May 19, 2020 8.00%
Clarion Suites, Philadelphia, PA August 4, 1995 August 4, 2015 6.05%
Sleep Inn, Corapolis, PA June 29, 1998 June 29, 2018 8.35%

<FN>
(1) Percentage of room revenues payable to the franchisors.

HOLIDAY INN EXPRESS(R) AND HOLIDAY INN(R) ARE REGISTERED TRADEMARKS OF SIX
CONTINENTS, PLC. SIX CONTINENTS, PLC. HAS NOT ENDORSED OR APPROVED THE OFFERING.
A GRANT OF A HOLIDAY INN EXPRESS OR HOLIDAY INN FRANCHISE LICENSE IS NOT
INTENDED, AND SHOULD NOT BE INTERPRETED, AS AN EXPRESS OR IMPLIED APPROVAL OR
ENDORSEMENT BY SIX CONTINENTS, PLC. (OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR
DIVISIONS) OF THE COMPANY, OUR OPERATING PARTNERSHIP OR THE PRIORITY COMMON
SHARES OFFERED HEREBY.

HAMPTON INN(R) IS A REGISTERED TRADEMARK OF HILTON HOTELS CORPORATION.
HILTON HOTELS CORPORATION HAS NOT ENDORSED OR APPROVED THE OFFERING. A GRANT OF
A HAMPTON INN FRANCHISE LICENSE IS NOT INTENDED, AND SHOULD NOT BE INTERPRETED,
AS AN EXPRESS OR IMPLIED APPROVAL OR ENDORSEMENT BY HILTON HOTELS CORPORATION
(OR ANY OF ITS AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY, OUR
OPERATING PARTNERSHIP OR THE PRIORITY COMMON SHARES OFFERED HEREBY.

COMFORT INN(R), COMFORT SUITES(R), MAINSTAY SUITES(R), SLEEP INN(R) AND
CLARION SUITES(R) ARE REGISTERED TRADEMARKS OF CHOICE HOTELS INTERNATIONAL.
CHOICE HOTELS INTERNATIONAL HAS NOT ENDORSED OR APPROVED THE OFFERING. A GRANT
OF A COMFORT INN, COMFORT SUITES, MAINSTAY SUITES, SLEEP INN OR CLARION SUITES
FRANCHISE LICENSE IS NOT INTENDED, AND SHOULD NOT BE INTERPRETED, AS AN EXPRESS
OR IMPLIED APPROVAL OR ENDORSEMENT BY CHOICE HOTELS INTERNATIONAL (OR ANY OF ITS
AFFILIATES, SUBSIDIARIES OR DIVISIONS) OF THE COMPANY, OUR OPERATING PARTNERSHIP
OR THE PRIORITY COMMON SHARES OFFERED HEREBY.

ENVIRONMENTAL MATTERS

Under various federal, state and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation of
certain hazardous or toxic substances on such property. These laws often impose
such liability without regard to whether the owner knew of, or was responsible
for, the presence of hazardous or toxic substances. Furthermore, a person that
arranges for the disposal or transports for disposal or treatment a hazardous
substance at a property owned by another may be liable for the costs of removal
or remediation of hazardous substances released into the environment at that
property. The costs of remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to promptly
remediate such substances, may adversely affect the owner's ability to sell such
real estate or to borrow using such real estate as collateral. In connection
with the ownership and operation of our hotels, we, our operating partnership or
our lessees may be potentially liable for any such costs.

Phase I environmental assessments have been obtained on all of our hotels.
The Phase I environmental assessments were intended to identify potential
environmental contamination for which our hotels may be responsible. The Phase I

environmental assessments included historical reviews of the hotels, reviews of
certain public records, preliminary investigations of the sites and surrounding
properties, screening for the presence of hazardous substances, toxic substances
and underground storage tanks, and the preparation and issuance of a written
report. The Phase I environmental assessments do not include invasive
procedures, such as soil sampling or ground water analysis.

The Phase I environmental assessments have not revealed any environmental
liability that we believe would have a material adverse effect on our business,
assets, results of operations or liquidity, nor are we aware of any such
liability. Nevertheless, it is possible that these environmental assessments do
not reveal all environmental liabilities or that there are material
environmental liabilities of which we are not aware. Moreover, no assurances can
be given that (i) future laws, ordinances or regulations will not impose any
material environmental liability, or (ii) the current environmental condition of
the hotels will not be affected by the condition of the properties in the
vicinity of our hotels (such as the presence of leaking underground storage
tanks) or by third parties unrelated to us, our partnership or our lessees.

We believe that our hotels are in compliance in all material respects with
all federal, state and local ordinances and regulations regarding hazardous or
toxic substances and other environmental matters. Neither we nor, to our
knowledge, have any of the current owners of any hotels we have sold been
notified by any governmental authority of any material noncompliance, liability
or claim relating to hazardous or toxic substances or other environmental matter
in connection with any of our present or former properties.

MANAGEMENT

TRUSTEES AND EXECUTIVE OFFICERS

Our Board of Trustees consists of seven members, four of whom are
independent trustees. All of the trustees serve staggered terms of two years
and the trustees are divided into two classes. Each trustee in Class I holds
office for a term expiring at the 2002 annual meeting of shareholders and each
trustee in Class II holds office initially for a term expiring at the 2003
annual meeting of shareholders. Certain information regarding our trustees and
executive officers is set forth below.

Name Age Position
- --------------------------------- --- -----------------------

Hasu P. Shah (Class II) 57 Chairman of the Board, Chief Executive
Officer and Trustee

Ashish R. Parikh 32 Chief Financial Officer

Kiran P. Patel 52 Secretary

Rajendra O. Gandhi 52 Treasurer

K.D. Patel (Class II) 58 Trustee

L. McCarthy Downs, III (Class II) 49 Trustee

Michael A. Leven (Class II) 64 Independent Trustee

William Lehr, Jr. (Class I) 62 Independent Trustee

Thomas S. Capello (Class I) 58 Independent Trustee

Donald J. Landry (Class I) 53 Independent Trustee

Hasu P. Shah was our sole promoter and is now our Chairman of the Board,
Chief Executive Officer and Trustee, as well as the President and CEO of Hersha
Enterprises, Ltd. and has held that position since its inception in 1984. He
started Hersha Enterprises, Ltd. with the purchase of the 125-room Quality Inn
Riverfront in Harrisburg, Pennsylvania. His interest in construction and
renovations of hotels initiated the development of Hersha Construction Company
for the construction and renovation of new properties and Hersha Hotel Supply
Company to supply furniture, fixtures and equipment supplies to the properties.
Mr. Shah and his wife, Hersha, are active members of the community. Mr. Shah
serves on the Board of Directors of several organizations including the
Pennsylvania State University Capital Campus in Harrisburg, Pennsylvania, the
Harrisburg Foundation, Human Enrichment by Love and Peace (H.E.L.P.), the
Capital Region Chamber of Commerce and the Vraj Hindu Temple. Mr. Shah recently
completed his Executive MBA from Harvard University. Mr. Shah received a
Bachelors of Science degree in Chemical Engineering from Tennessee Technical
University and obtained a Masters degree in Administration from Pennsylvania
State University.

K.D. Patel has been a principal of Hersha Enterprises, Ltd. since 1989. Mr.
Patel currently serves as the President of Hersha Hospitality Management, L.P.
He has received national recognition from Holiday Inn Worldwide for the
successful management of Hersha's Holiday Inn Express Hotels. In 1996, Mr. Patel
was appointed by Holiday Inn Worldwide to serve as an advisor on its Sales and
Marketing Committee. Prior to joining Hersha Enterprises, Ltd., Mr. Patel was
employed by Dupont Electronics in New Cumberland, Pennsylvania from 1973 to
1990. He is a member of the Board of Directors of a regional chapter of the
American Red Cross and serves on the Advisory Board of Taneytown Bank and Trust.
Mr. Patel received a Bachelor of Science degree in Mechanical Engineering from
the M.S. University of India and a Professional Engineering License from the
Commonwealth of Pennsylvania in 1982.

Kiran P. Patel is our Secretary and has been a principal of Hersha
Enterprises, Ltd. since 1993. Mr. Patel is currently the partner in charge of
Hersha's Land Development and Business Services Divisions. Prior to joining
Hersha Enterprises, Ltd., Mr. Patel was employed by AMP Incorporated, in
Harrisburg, Pennsylvania. Mr. Patel serves on various Boards for community
service organizations. Mr. Patel received a Bachelor of Science degree in
Mechanical Engineering from M.S. University of India and obtained a Masters of
Science degree in Industrial Engineering from the University of Texas in
Arlington.

Rajendra O. Gandhi is our Treasurer and has been a principal of Hersha
Enterprises, Ltd. since 1986. Mr. Gandhi currently serves as President of Hersha
Hotel Supply, Inc., which provides furnishings, case goods and interior
furnishing materials to hotels and nursing homes in several states. Mr. Gandhi
is a graduate of the University of Bombay, India and obtained an MBA degree from
the University of West Palm Beach, Florida.

Ashish R. Parikh joined us in 1999 as the Chief Financial Officer. Prior to
joining Hersha Hospitality Trust, Mr. Parikh was an Assistant Vice President in
the Mergers and Acquisition Group for Fleet Financial Group where he developed
expertise in numerous forms of capital raising activities including leveraged
buyouts, bank syndications and venture financing. Mr. Parikh has also been
employed by Tyco International Ltd. (diversified industrial conglomerate) and
Ernst & Young LLP (accounting and consulting firm). Mr. Parikh received an MBA
from New York University and a BBA from the University of Massachusetts at
Amherst. Mr. Parikh is a licensed Certified Public Accountant.

L. McCarthy Downs, III, one of our Trustees, is Chairman of the Board for
Anderson & Strudwick Investment Corporation, the parent company of Anderson &
Strudwick Inc., the underwriter of our initial public offering. He has been the
manager of the firm's Corporate Finance department since 1990 and has been
involved in several public and private financings for REITs. Prior to 1990, Mr.
Downs was employed by another investment banking and brokerage firm for seven
years. Mr. Downs received a Bachelor of Science degree in Business
Administration from The Citadel and obtained an MBA from The College of William
and Mary.

Michael A. Leven, one of our Trustees, is the Chairman and Chief Executive
Officer of US Franchise Systems, Inc. (USFS), which franchises the Microtel,
Hawthorn and Best Inns & Suites hotel brands. Prior to forming USFS in 1995, he
was president and chief operating officer of Holiday Inn Worldwide. During his
five-year tenure, the new Holiday Inn Express brand grew from zero to 330 open
hotels, with a backlog of approximately 500 units. From 1985 to 1990, Mr. Leven
was president of Days Inn of America. Mr. Leven led the company through a
reorganization resulting in growth from a 225-unit regional chain to one of the
largest brands in the world with over 1,000 open units and 400 signed franchise
agreements. Mr. Leven is a co-founder of the Asian American Hotel Owners

Association (AAHOA) which now has over 7,500 members. Mr. Leven is a trustee of
National Realty Trust, The Marcus Foundation and The Chief Executive Leadership
Institute. Mr. Leven holds a Bachelor of Arts from Tufts University and a Master
of Science from Boston University.

William Lehr, Jr., one of our Trustees, was previously with Hershey Foods
Corporation as a Senior Vice President, Corporate Secretary and Treasurer.
During his tenure with Hershey Foods, Mr. Lehr had a multitude of diverse
responsibilities including corporate governance, law, finance, human resources,
and public affairs. Mr. Lehr currently devotes a substantial amount of his time
in leadership positions with various nonprofit organizations such as The Greater
Harrisburg Foundation, National AIDS Fund and the Whitaker Center for Science
and the Arts. Mr. Lehr holds a Bachelor's degree in Business Administration from
the University of Notre Dame, where he graduated cum laude, and a law degree
from Georgetown University Law Center. Mr. Lehr is also a graduate of the
Stanford Executive Program and successfully completed The Governing for
Nonprofit Excellence Course at Harvard University's Graduate School of Business
Administration.

Thomas S. Capello, one of our Trustees, is a Private Investor and a
Consultant specializing in Strategic Planning, Mergers and Acquisitions. From
1988 to 1999, Mr. Capello was the President, Chief Executive Officer and
Director of First Capitol Bank in York, Pennsylvania. From 1983 to 1988, Mr.
Capello served as Vice President and Manager of the Loan Production Office of
The First National Bank of Maryland. Prior to his service at The First National
Bank of Maryland, Mr. Capello served as Vice President and Senior Regional
Lending Officer at Commonwealth National Bank and worked at the Pennsylvania
Development Credit Corporation. Mr. Capello is an active member for the board of
WITF, Martin Library, Motter Printing Company, and Eastern York Dollars for
Scholars. Mr. Capello has served on the Board of Trustees since the our initial
public offering in January 1999. Mr. Capello is a graduate of the Stonier
Graduate School of Banking at Rutgers University and holds an undergraduate
degree with a major in Economics from the Pennsylvania State University.

Donald J. Landry, one of our Trustees, has over thirty years of lodging and
hospitality experience in a variety of leadership positions. Most recently, Mr.
Landry was the Chief Executive Officer, President and Vice Chairman of Sunburst
Hospitality Inc. Mr. Landry has also served as an executive officer for Choice
Hotels International, Inc., Manor Care Hotel Division and Richfield Hotel
Management. Mr. Landry is a frequent guest lecturer at the Harvard Business
School, Cornell University and University of New Orleans. Mr. Landry holds a
Bachelor of Science from the University of New Orleans and was the University's
Alumnus of the Year in 1999. Mr. Landry is a Certified Hotel Administrator.

INDEPENDENT TRUSTEES

Our independent trustees are persons who are not officers, directors,
trustees or employees of the company, any lessee or any underwriter or placement
agent of our shares that has been engaged by us within the past three years or
any affiliates thereof.

AUDIT COMMITTEE

The Board of Trustees has established an Audit Committee, which currently
consists of Messrs. Capello (Chairperson), Lehr and Landry, all of whom are
independent trustees. The Audit Committee makes recommendations concerning the
engagement of independent public accountants, reviews with the independent
public accountants the plans and results of the audit engagement, approves
professional services provided by the independent public accountants, reviews
the independence of the independent public accountants, considers the range of
audit and non-audit fees and reviews the adequacy of our internal accounting
controls.

COMPENSATION COMMITTEE

The Compensation Committee consists of Messrs. Capello (Chairperson), Lehr
and Landry, all of whom are independent trustees. The Compensation Committee
determines compensation for our executive officers and administers our option
plan.

COMPENSATION

Each independent trustee is paid $10,000 per year and each affiliated
trustee is paid $7,500 per year. In addition, we reimburse all trustees for
reasonable out-of-pocket expenses incurred in connection with their services on
the Board of Trustees.

On the effective date of our initial public offering, Mr. Capello received
options to purchase 3,000 Class B Common Shares at $6.00 per share. The options
were granted under the Hersha Hospitality Trust Non-Employee Trustees' Option
Plan, which may be amended by our Board of Trustees to provide for other awards,
including awards to future independent trustees. Notwithstanding the foregoing,
an option granted under the Trustees' Plan is exercisable only if (i) we obtain
a per share closing price on the priority common shares of $9.00 for 20
consecutive trading days and (ii) the per share closing price on the priority
common shares for the prior trading day was $9.00 or higher. Options issued
under the Trustees' Plan are exercisable for five years from the date of grant.

A trustee's outstanding options will become fully exercisable if the
trustee ceases to serve on our Board of Trustees due to death or disability. All
awards granted under the Trustees' Plan shall be subject to board or other
approval sufficient to provide exempt status for such grants under Section 16 of
the Securities Exchange Act of 1934. No option may be granted under the
Trustees' Plan more than 10 years after the date that our Board of Trustees
approved the Plan. Our Board of Trustees may amend or terminate the Trustees'
Plan at any time but an amendment will not become effective without shareholder
approval if the amendment increases the number of shares that may be issued
under the Trustees' Plan (other than equitable adjustments upon certain
corporate transactions).

EXCULPATION AND INDEMNIFICATION

The Maryland REIT Law permits a Maryland real estate investment trust to
include in its Declaration of Trust a provision limiting the liability of its
trustees and officers to the trust and its shareholders for money damages except
for liability resulting from (i) actual receipt of an improper benefit or profit
in money, property or services or (ii) active and deliberate dishonesty
established by a final judgment and that is material to the cause of action.
Our Declaration of Trust contains such a provision that eliminates such
liability to the maximum extent permitted by the Maryland REIT Law.

Our Declaration of Trust authorizes us, to the maximum extent permitted by
Maryland law, to obligate ourselves to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (i) any
present or former shareholder, trustee or officer or (ii) any individual who,
while our trustee and at our request, serves or has served another real estate
investment trust, corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a trustee, director, officer or partner
of such real estate investment trust, corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise from and against any claim or
liability to which such person may become subject or which such person may incur
by reason of his status as our present or former shareholder, trustee or
officer. Our Bylaws obligate us, to the maximum extent permitted by Maryland
law, to indemnify: (i) any present or former trustee, officer or shareholder
(including any individual who, while our trustee, officer or shareholder and at
our express request, serves another entity as a director, officer, shareholder,
partner or trustee of such entity) who has been successful, on the merits or
otherwise, in the defense of a proceeding to which he was made a party by reason
of service in such capacity, against reasonable expenses incurred by him in
connection with the proceeding; (ii) subject to certain limitations under
Maryland law, any present or former trustee or officer against any claim or
liability to which he may become subject by reason of such status; and (iii)
each present or former shareholder against any claim or liability to which he
may become subject by reason of such status. In addition, the Bylaws obligate
us, subject to certain provisions of Maryland law, to pay or reimburse, in
advance of final disposition of a proceeding, reasonable expenses incurred by a
present or former trustee, officer or shareholder made a party to a proceeding
by reason of such status. We may, with the approval of our trustees, provide
such indemnification or payment or reimbursement of expenses to any present or
former trustee, officer or shareholder of us or any predecessor of us and to any
employee or agent of us or predecessor of us.

The Maryland REIT Law permits a Maryland real estate investment trust to
indemnify and advance expenses to its trustees, officers, employees and agents
to the same extent as permitted by the MGCL for directors and officers of
Maryland corporations. The MGCL permits a corporation to indemnity its present

and former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a) the
act or omission of the director or officer was material to the matter giving
rise to the proceeding and (i) was committed in bad faith or (ii) was the result
of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation or for a judgment of liability on the basis that
personal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In accordance with the MGCL, our
Bylaws require us, as a condition to advancing expenses, to obtain (a) a written
affirmation by the trustee or officer of his good faith belief that he has met
the standard of conduct necessary for indemnification by us as authorized by the
Bylaws and (b) a written undertaking by him or on his behalf to repay the amount
paid or reimbursed by us if it shall ultimately be determined that the standard
of conduct was not met.

THE OPTION PLAN

We have established the option plan for the purpose of attracting and
retaining our executive officers and employees and the operating partnership and
other persons and entities that provide services to us or the operating
partnership. The option plan authorizes the issuance of options to purchase
Class B Common Shares and options to purchase operating partnership units.
Administration of the option plan is carried out by (i) the Compensation
Committee of the Board of Trustees, with respect to grants of options to
purchase Class B shares; and (ii) our operating partnership or its delegate,
with respect to grants of options to purchase operating partnership units. The
Compensation Committee may not delegate its authority with respect to option
awards to individuals subject to Section 16 of the Exchange Act. As used in
this summary, the term "Administrator" means the Board of Trustees, the
Compensation Committee or its delegate, or our operating partnership, as
appropriate.

Our officers and employees and those of our operating partnership and other
persons and entities that provide services to us or the operating partnership
are eligible to participate in the option plan.

Under the option plan, an aggregate of 650,000 Class B Common Shares and
operating partnership units are available for issuance. The option plan provides
for, in the event Class B Common Shares are converted into another of our
securities, the issuance of equivalent amounts of such security and options to
purchase such security into which the Class B Common Shares are converted. The
plan provides for the grant of (i) options intended to qualify as incentive
stock options under Section 422 of the Code, and (ii) options not intended to so
qualify. All options to purchase operating partnership units granted under the
plan will be nonqualified options; options to purchase Class B shares may be
either incentive stock options or nonqualified options.

Code Section 422 imposes various requirements in order for an option to
qualify as an incentive stock option, including allowing a maximum ten-year term
of the option and an option price not less than the fair market value of the
underlying shares on the date of grant. In addition, under Code Section 422, no
participant may receive incentive stock options (under all of our incentive
share option plans and its parent or subsidiary corporations) that are first
exercisable in any calendar year for Class B or priority common shares having an
aggregate fair market value (determined as of the date the incentive stock
option is granted) that exceeds $100,000. To the extent options first become
exercisable by a participant in any calendar year for a number of Class B or
priority common shares in excess of the $100,000 limit, they will be treated as
nonqualified options.

The principal difference between options qualifying as incentive stock
options under Code Section 422 and nonqualified options is that a participant
generally will not recognize ordinary income at the time an incentive stock
option is granted or exercised, but rather at the time the participant disposes
of shares acquired under the incentive stock option. In contrast, the exercise
of a nonqualified option generally is a taxable event that requires the
participant to recognize, as ordinary income, the difference between the shares'
(or operating partnership units') fair market value and the option price. The
employer will not be entitled to a federal income tax deduction on account of
the grant or the exercise of an incentive stock option, whereas the employer is
entitled to a federal income tax deduction on account of the exercise of a
nonqualified option equal to the ordinary income recognized by the participant.
The employer may claim a federal income tax deduction on account of certain
dispositions of shares acquired upon the exercise of an incentive stock option.

Options under the option plan may be awarded by the administrator, and the
administrator will determine the option exercise period and any conditions on
exercisability. The options granted under the option plan are exercisable only
if (i) we obtain a per share closing price on the priority common shares of
$9.00 or higher for 20 consecutive trading days and (ii) the closing price on
the priority common shares for the prior trading day was $9.00 or higher. In
addition, no option granted under the option plan may be exercised more than
five years after the date of grant. The exercise price for options granted under
the option plan are determined by the administrator at the time of grant, but
are not less than the fair market value of the Class B Common Shares on the date
of grant (in the case of options to purchase Class B shares), or less than the
fair market value of the option to purchase operating partnership units on the
date of grant (in the case of options to purchase operating partnership units).

An option may be exercised for any number of Class B Common Shares or
operating partnership units up to the full number for which the option could be
exercised. A participant will have no rights as a shareholder with respect to
Class B Common Shares subject to a option to purchase a share until the option
to purchase a share is exercised, and will have no rights as a unitholder with
respect to the option to purchase operating partnership units subject to an
option to purchase operating partnership units until the option to purchase
operating partnership units is exercised. Any Class B Common Shares or operating
partnership units subject to options which are forfeited (or expire without
exercise) pursuant to the terms established at the time of grant will again be
available for grant under the option plan.

Payment of the exercise price of an option granted under the option plan
may be made in cash, cash equivalents acceptable to the administrator or, if
permitted by the option agreement (i) in the case of options to purchase Class B
shares, by exchanging Class B Common Shares having a fair market value equal to
the option exercise price of the option to purchase a share; and (ii) in the
case of options to purchase operating partnership units, by exchanging units
having a fair market value equal to the option exercise price of the option to
purchase operating partnership units. If an agreement provides, an option that
is not an incentive stock option may be transferred by a participant to one or
more persons or entities on terms permitted by the agreement and by Rule 16b-3
of the Exchange Act as in effect from time to time.

No option award may be granted under the option plan more than 10 years
after the earlier of the date that the Board of Trustees adopted, or our
shareholders approved, the option plan. The Board of Trustees and the
partnership may amend or terminate the option plan at any time, but an amendment
will not become effective without the approval of our shareholders if it
increases the number of Class B Common Shares or operating partnership units
that may be issued under the option plan (other than equitable adjustments upon
certain corporate transactions). No amendment will affect a participant's
outstanding awards without the participant's consent.

As of December 1, 2001, options for an aggregate of 500,000 Class B Common
Shares and operating partnership units have been granted to our employees and
other service providers and those of our operating partnership. Of that total,
Hasu P. Shah has received options to purchase 21,850 shares, intended to qualify
as incentive stock options, and K. D. Patel has received options to purchase
20,850 shares, intended to qualify as incentive stock options.

THE TRUSTEES' PLAN

We have adopted the Trustees' Plan to provide incentives to attract and
retain independent trustees. The Trustees' Plan authorizes the issuance of up
to 200,000 Class B Common Shares. The Trustees' Plan provides for, in the event
the Class B Common Shares are converted into another of our securities, the
issuance of equivalent amounts of such security and options to purchase such
security into which the Class B Common Shares are converted.

The Trustees' Plan provided for the grant of nonqualified options for the
following Class B Common Shares to our independent trustees who were members of
the Board on the effective date of the initial offering: Mr. Allen, one of our
former trustees, 30,000; Mr. Capello, 3,000; and Mr. Parthemer, one of our
former trustees, 1,000. The exercise price of each such option was the offering
price. Options issued under the Trustees' Plan are exercisable for five years
from the date of grant.

A trustee's outstanding options will become fully exercisable if the
trustee ceases to serve on the Board due to death or disability. All awards
granted under the Trustees' Plan shall be subject to Board or other approval

sufficient to provide exempt status for such grants under Section 16 of the
Exchange Act. No option may be granted under the Trustees' Plan more than 10
years after the date that the Board of Trustees approved the plan. The Board may
amend or terminate the Trustees' Plan at any time but an amendment will not
become effective without shareholder approval if the amendment increases the
number of shares that may be issued under the Trustees' Plan (other than
equitable adjustments upon certain corporate transactions).

EXECUTIVE COMPENSATION

Ashish R. Parikh, our chief financial officer, is paid a salary of $90,000
by our affiliated lessee, Hersha Hospitality Management, L.P. We have entered
into an Administrative Services Agreement with HHMLP for HHMLP to provide
accounting and securities reporting services to us. The terms of the agreement
provide for a fixed annual fee of $55,000 with an additional $10,000 per
property per year (pro-rated from the time of acquisition) for each hotel added
to our portfolio. Based upon the revised 11.5% to 12.5% pricing methodology,
the administrative services agreement was reduced by $75,000 per year as of
January 1, 2001. A portion of these fees, charged by HHMLP, are allocated to
the services of Mr. Parikh.

None of our other officers have received or is scheduled to receive any
cash compensation from us other than the trustees' fees for those officers who
are trustees, provided, however, that the Chairman of the Board of Trustees
shall be entitled to receive a salary of not more than $100,000 per year
provided that the priority common shares have a bid price of $9.00 per share or
higher for 20 consecutive trading days and remains at or above $9.00 per share.

The following table presents information relating to total compensation of
our Chief Executive Officer and our other three executive officers for the
fiscal years ended December 31, 2000 and 1999.

Annual Compensation Long Term Compensation
-------------------------- --------------------------------------
Securities
Restricted Underlying All Other
Name and Principal Position Year Salary Bonus Share Award Options/SAR Compensation
- ----------------------------- ------- ---------- ----- ----------- ----------- ------------

Hasu P. Shah (2) 2000 -- -- -- -- --
Chairman and Chief 1999(1) -- -- -- 21,850 --
Executive Officer
Ashish R. Parikh 2000 $55,000(3) -- -- -- --
Chief Financial Officer 1999(1) $55,000(3) -- -- -- --
Kiran P. Patel 2000 -- -- -- -- --
Secretary 1999(1) -- -- -- 20,865 --
Rajendra O. Gandhi 2000 -- -- -- -- --
Treasurer 1999(1) -- -- -- -- --

<FN>
________________
(1) We commenced operations on January 26, 1999.
(2) Mr. Shah is entitled to receive a salary of not more than $100,000 per year
provided that the priority common shares have a bid price of $9.00 per
share or higher for 20 consecutive trading days and remain at or higher
than $9.00 per share.
(3) As of October 1, 2001, of Mr. Parikh's $90,000 salary that is paid by
HHMLP, $75,000 has been designated as related to the services provided by
HHMLP to us per the terms of the Administrative Services Agreement between
HHMLP and us. The terms of the agreement provide for a fixed annual fee of
$55,000 with an additional $10,000 per property per year (prorated from the
time of acquisition) for each hotel added to our portfolio, less $75,000.

PERFORMANCE GRAPH

The following graph compares the cumulative total shareholder return on the
priority common shares for the period from January 26, 1999 (commencement of
operations) through December 31, 2000, with the cumulative total shareholder
return for the Standard and Poor's 500 Stock Index and the Standard and Poor's
Composite REIT Index for the same period, assuming $100 is invested in the
priority common shares and each index and dividends are reinvested quarterly.
The performance graph is not necessarily indicative of future investment
performance.

HERSHA HOSPITALITY TRUST
TOTAL RETURN PERFORMANCE

[INSERT GRAPH HERE]

INDEX 1/26/99 (1) 12/31/99 12/31/00
- ------------------------ ----------- -------- --------
HERSHA HOSPITALITY TRUST 100.0 93.6 114.8
S&P Composite REIT Index 100.0 87.6 104.6
S&P 500 INDEX 100.0 119.9 106.9

(1) We commenced operations on January 26, 1999.

CERTAIN RELATIONSHIPS AND TRANSACTIONS

We and our operating partnership have entered into a number of transactions
with some of our trustees, executive officers and their affiliates. Our
officers, trustees and their affiliates collectively own approximately 69% of
our operating partnership. HHMLP, our primary lessee which is owned by some of
our trustees, executive officers and their affiliates, is entitled to all income
from the hotels after payment of operating expenses and lease payments. There
are no assurances that the terms of these transactions are as favorable as those
that we could have received from third parties.

GUARANTEES BY MR. SHAH AND THE LIMITED PARTNERSHIPS THAT HOLD OUR HOTELS

Mr. Shah and several of the limited partnerships that hold our hotels
guarantee the indebtedness related to four of the hotels, and the bankruptcy of
any of the guarantors would constitute a default under the related loan
documents.

TRANSACTIONS BETWEEN US AND MR. SHAH, SOME OF OUR EXECUTIVE OFFICERS, TRUSTEES
OR THEIR AFFILIATES

Since December 31, 2000, we have acquired three hotels from limited
partnerships owned by some of our executive officers, trustees and their
affiliates. We purchased the Holiday Inn Express, Long Island City, New York
from Metro Two Hotel, LLC, a New York limited liability company owned by Hasu P.
Shah, Kiran P. Patel, Rajendra O. Gandhi, K.D. Patel and their affiliates, for
approximately $8.5 million effective November 1, 2001. We financed this
purchase through the assumption of approximately $6.5 million of mortgage debt,
the payment of cash of approximately $1.5 million and issuance of limited
partnership units valued at approximately $0.5 million. We purchased the
Mainstay Suites and Sleep Inn hotels located in King of Prussia, Pennsylvania
from 3244 Associates, a Pennsylvania limited partnership owned by Hasu P. Shah,
Kiran P. Patel, Rajendra O. Gandhi, K.D. Patel and their affiliates, for
approximately $9.4 million effective August 1, 2001. We financed this purchase
through the assumption of approximately $6.8 million of mortgage debt and the
use of borrowings under our line of credit.

We acquired four hotels from limited partnerships owned by some of our
executive officers, trustees and their affiliates during the fiscal year ended
December 31, 2000. We purchased the Sleep Inn, Corapolis, Pennsylvania from 1944
Associates, a Pennsylvania limited partnership owned by Hasu P. Shah, our
chairman and chief executive officer, Kiran P. Patel, our secretary, Rajendra O.
Gandhi, our treasurer, K.D. Patel, one of our trustees, and their affiliates,
for $5.5 million effective October 1, 2000. We financed this transaction through
the assumption of mortgage debt of $3.8 million and the use of borrowings under
our line of credit. We purchased the Best Western, Indiana, Pennsylvania from
1844 Associates, a Pennsylvania limited partnership owned by Hasu P. Shah, Kiran
P. Patel, Rajendra O. Gandhi, K.D. Patel and their affiliates, for $2.2 million
effective January 1, 2000. We financed this purchase through the assumption of
$1.4 million of mortgage debt and the use of borrowings under our line of
credit. We purchased the Comfort Inn, McHenry, Maryland from 1544 Associates, a
Pennsylvania limited partnership owned by Hasu P. Shah, Kiran P. Patel, Rajendra
O. Gandhi, K.D. Patel and their affiliates, for $1.8 million effective January
1, 2000. We financed this purchase through the assumption of $1.2 million of
mortgage debt and the use of borrowings under our line of credit. We purchased
the Hampton Inn & Suites located in Hershey, Pennsylvania from 3144 Associates,
a Pennsylvania limited partnership owned by Hasu P. Shah, Kiran P. Patel,
Rajendra O. Gandhi, K.D. Patel and their affiliates, for approximately $7.5
million effective January 1, 2000. We financed this purchase through the
assumption of approximately $5.5 million of mortgage debt and the use of
borrowings under our line of credit.

In conjunction with the initial public offering, we acquired ten initial
hotels from affiliates and entered into percentage lease agreements with HHMLP.
HHMLP is owned by Messrs. Hasu P. Shah, Kiran P. Patel, Rajendra O. Gandhi, K.D.
Patel and some other of their affiliates. We have acquired eleven properties
subsequent to our public offering. We have entered into percentage leases
relating to fourteen of the hotels with HHMLP. Each percentage lease with HHMLP
has an initial non-cancelable term of five years. All, but not less than all, of
the percentage leases for these hotels may be extended for an additional
five-year term at HHMLP's option. At the end of the first extended term, HHMLP,
at its option, may extend some or all of the percentage leases for these hotels
for an additional five-year term. Pursuant to the terms of the percentage
leases, HHMLP is required to pay initial fixed rent, base rent or percentage
rent and certain other additional charges and is entitled to all profits from
the operations of the hotel after the payment of certain operating expenses. In
the year ended December 31, 2000, HHMLP paid us approximately $10.9 million in
rent and had a net loss of approximately $147,000.

The initial purchase price for each of these hotels was based upon
management's projections of the hotel's performance for one or two years
following our purchase. The leases for these hotels provide for fixed initial
rent for the one- or two-year adjustment period that provides us with a 12%
annual yield on the initial purchase price, net of certain expenses. At the end
of the one- or two-year period, we calculate a value for the hotel, based on the
actual net income during the previous twelve months, net of certain expenses,
such that it would have yielded a 12% return. We then apply the percentage rent
formula to the hotel's historical revenues for the previous twelve months on a
pro forma basis. If the pro forma percentage rent formula would not have yielded
a pro forma annual return to us of 11.5% to 12.5% based on this calculated
value, this value is adjusted either upward or downward to produce a pro forma
return of either 11.5% or 12.5%, as applicable. If this final purchase price is
higher than the initial purchase price, then the seller of the hotel will
receive consideration in an amount equal to the increase in price. If the final
purchase price is lower than the initial purchase price, then the sellers of the
hotel will return to us consideration in an amount equal to the difference. Any
purchase price adjustment will be made either in operating partnership units or
cash as determined by our Board of Trustees, including the independent trustees.
Any operating partnership units issued by us or returned to us as a result of
the purchase price adjustment historically have been valued at $6.00 per unit.
Any future adjustments will be based upon a value per unit approved by our Board
of Trustees, including our independent trustees. The sellers are entitled to
receive quarterly distributions on the operating partnership units prior to the
units being returned to us in connection with a downward purchase price
adjustment.

THE OPTION AGREEMENT

Our operating partnership entered into the Option Agreement with some of
our executive officers, trustees and their affiliates. Pursuant to this
agreement, our operating partnership has the option to purchase any hotels owned

or developed in the future by these individuals or entities that are within
fifteen miles of any of our hotels or any hotel subsequently acquired by us for
two years after acquisition or development. Of the 14 hotel properties
purchased since our initial public offering, six of the hotels have been
purchased under this Option Agreement.

CERTAIN LEASES

We lease a parcel of land adjacent to the Hampton Inn, Selinsgrove,
Pennsylvania to Hasu P. Shah for a nominal amount per year. This parcel of land
is not subdivided from the hotel property and does not have its own private
access way. The land has not been developed and in its current state is not
believed to maintain significant value.

PAYMENTS TO SHAH LAW FIRM

We paid to the Shah Law Firm, whose senior partner Jay H. Shah is the son
of Hasu P. Shah, legal fees aggregating $199,000 during 2000. Of this amount,
$174,000 was capitalized as real estate settlement costs.

LOANS TO SOME OF OUR EXECUTIVE OFFICERS, TRUSTEES AND THEIR AFFILIATES

We approved the lending of up to $3.0 million to Hasu P. Shah, Kiran P.
Patel, Rajendra O. Gandhi, K.D. Patel and their affiliates to construct hotels
and related improvements on specific hotel projects. As of December 1, 2001,
these entities owe us $0.8 million related to this borrowing, which bears
interest at the rate of 12.0% per annum.

LOANS FROM SHREENATHJI ENTERPRISES, LTD.

We borrowed funds from Shreenathji Enterprises, Ltd., an affiliated company
owned by Hasu P. Shah, Kiran P. Patel, Rajendra O. Gandhi, K.D. Patel and their
affiliates, during the nine months ended September 30, 2001. Our total
borrowings outstanding from Shreenathji Enterprises, Ltd. at September 30, 2001
were approximately $1.1 million at a fixed rate of 9% per annum.

SALES OF HOTELS BACK TO SOME OF OUR EXECUTIVE OFFICERS, TRUSTEES AND THEIR
AFFILIATES

We have sold back three hotels to some of our executive officers, trustees
and their affiliates under the following terms:

On January 1, 2000, we purchased from Hasu P. Shah, our chairman and chief
executive officer, Kiran P. Patel, our secretary, Rajendra O. Gandhi, our
treasurer, K.D. Patel, one of our trustees, and their affiliates the Best
Western in Indiana, PA for approximately $2.2 million, including the assumption
of approximately $1.4 million in indebtedness. On April 1, 2001, we sold this
hotel back to these executive officers, trustees and their affiliates for $2.2
million, including the assumption of approximately $1.4 million in indebtedness.
These individuals and their affiliates sold the hotel on May 1, 2001 for
approximately $2.2 million, including the assumption of approximately $1.4
million in indebtedness and receipt of a seller note in the amount of
approximately $400,000. We did not sell directly to this third party because the
third party was having difficulty obtaining the financing and we did not want to
expose ourselves to the risks associated with carrying an unsecured or secondary
mortgage.

On January 1, 2000, we purchased from Hasu P. Shah, Kiran P. Patel, our
secretary, Rajendra O. Gandhi, K.D. Patel, and their affiliates the Comfort Inn
in McHenry, MD for approximately $1.8 million, including the assumption of
approximately $1.2 million in indebtedness. On November 1, 2001, we sold this
hotel back to these executive officers, trustees and their affiliates for
approximately $1.8 million, including the assumption of approximately $1.2
million in indebtedness. These individuals and their affiliates sold the hotel
on November 10, 2001 for approximately $2.0 million, including the assumption of
approximately $1.2 million in indebtedness and receipt of a seller note in the
amount of approximately $500,000. We did not sell directly to this third party
because the third party was having difficulty obtaining the financing and we did
not want to expose ourselves to the risks associated with carrying an unsecured
or secondary mortgage.

On January 26, 1999, we purchased from Hasu P. Shah, Kiran P. Patel,
Rajendra O. Gandhi, K.D. Patel, and their affiliates the Comfort Inn in
Riverfront, PA for approximately $3.0 million, including the assumption of
approximately $2.1 million in indebtedness. On December 31, 1999, the hotel was
re-priced at approximately $3.4 million. On November 1, 2001, we sold this hotel
back to these executive officers, trustees and their affiliates for
approximately $3.5 million less selling costs, including the assumption of
approximately $2.5 in indebtedness. The buyer is currently looking for a third
party buyer. In light of the current economic conditions, we believe that any
sale would involve seller financing and we did not want to expose ourselves to
the risks associated with carrying an unsecured or secondary mortgage.

ADMINISTRATIVE SERVICES AGREEMENT WITH HHMLP

We have entered into an Administrative Services Agreement with HHMLP for
HHMLP to provide accounting and securities reporting services to us. The terms
of the agreement provide for a fixed annual fee of $55,000 with an additional
fee of $10,000 per property per year (pro-rated from the time of acquisition)
for each hotel added to our portfolio. Based upon the revised 11.5% to 12.5%
pricing methodology, the administrative services agreement was reduced by
$75,000 per year as of January 1, 2001. A portion of these fees, charged by
HHMLP, are allocated to the services of Mr. Parikh.

PAYMENTS TO HERSHA CONSTRUCTION COMPANY

We have engaged Hersha Construction Company, owned by Hasu P. Shah, Kiran
P. Patel, Rajendra O. Gandhi, K.D. Patel and their affiliates, from time to time
to perform construction work related to the renovation of our hotel properties.
Since January 1, 2000, we have paid Hersha Construction Company an aggregate
amount of approximately $39,000.

PAYMENTS TO HERSHA HOTEL SUPPLY COMPANY

We have purchased hotel supplies for our hotel properties from time to time
from Hersha Hotel Supply Company, owned by Hasu P. Shah, Kiran P. Patel,
Rajendra O. Gandhi, K.D. Patel and their affiliates. Since January 1, 2000, we
have paid Hersha Hotel Supply Company an aggregate amount of approximately
$480,000.

HERSHA HOSPITALITY MANAGEMENT LIMITED PARTNERSHIP

Hersha Hospitality Management, LP is a Pennsylvania limited partnership.
HHMLP currently leases 14 of our hotels pursuant to separate percentage leases.
Our operating partnership intends to lease to HHMLP additional hotels acquired
by the partnership on terms and conditions substantially similar to the
percentage leases applicable to our existing hotels. HHMLP's ability to perform
its obligations, including making rent payments under the percentage leases, is
dependent on HHMLP's ability to generate sufficient net cash flow from the
operation of the hotels and any other hotels leased to HHMLP. HHMLP's
obligations under the percentage leases are unsecured. We have no guarantees of
HHMLP's obligations under the percentage leases, but the percentage leases
contain cross-default provisions. Accordingly, HHMLP's failure to make required
payments under any of the percentage leases would allow us to terminate any or
all of the percentage leases. Some of our trustees, executive officers and
their affiliates own 100% of HHMLP. Consequently, they have a conflict of
interest regarding the enforcement of the percentage leases.

HHMLP provides all employees and performs all marketing, accounting and
management functions necessary to operate the hotels pursuant to the percentage
leases. HHMLP has in-house programs for accounting and the management and
marketing of the hotels. HHMLP utilizes its sales management program to
coordinate, direct and manage the sales activities of personnel located at our
hotels.

MANAGEMENT OF HERSHA HOSPITALITY MANAGEMENT, LP

Certain information regarding the management of HHMLP is set forth below:

Name Age Position
------------------ --- --------

K.D. Patel 59 President

Jay H. Shah 33 Vice President, General Counsel
and Secretary

Rajendra O. Gandhi 52 Vice President and Treasurer

David L. Desfor 40 Controller

Tracy L. Kundey 40 Director of Operations

K.D. Patel's biographical information is set forth under
"Management-Trustees and Executive Officers."

Jay H. Shah is a principal and general counsel for Hersha Enterprises, Ltd.
Mr. Shah also takes an active role in the firm's development and construction
activities. Mr. Shah was employed by Coopers & Lybrand LLP as a tax consultant
in 1995 and 1996 and previously served the late Senator John Heinz as a
Legislative Assistant. He also was employed by the Philadelphia District
Attorney's office and two Philadelphia-based law firms. Mr. Shah received a
Bachelor of Science degree from the Cornell University School of Hotel
Administration, a Masters degree from the Temple University School of Business
Management and a Law degree from Temple University School of Law. Mr. Shah is
the son of Hasu P. Shah, our Chairman and Chief Executive Officer.

Rajendra O. Gandhi has been a principal of Hersha Enterprises, Ltd. since
1986. Mr. Gandhi currently serves as President of Hersha Hotel Supply, Inc.,
which provides furnishings, case goods and interior furnishing materials to
hotels and nursing homes in several states. Mr. Gandhi is a graduate of the
University of Bombay, India and obtained an MBA degree from the University of
West Palm Beach, Florida.

David L. Desfor has been a principal of Hersha Enterprises, Ltd. since
1991. Mr. Desfor is currently the Controller of Hersha Enterprises, Ltd. Mr.
Desfor is a graduate of East Stroudsburg University with a Bachelor of Science
degree in Hotel Management.

Tracy L. Kundey was previously with Wellsprings Management Group, Inc., a
company that he founded with a partner. He held the position of President and
was responsible for all aspects of a hospitality management company. Mr. Kundey
has 19 years of experience in the hospitality industry ranging from front desk
attendant to Corporate Rooms Division Manager. He is a Certified Hotel
Administrator and Certified Rooms Division Executive. Mr. Kundey has a Bachelors
of Science Degree from Eastern Washington University.

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of Priority and Class B Common Shares by (i) each of our trustees,
(ii) each of our executive officers and (iii) by all of our trustees and
executive officers as a group as of December 1, 2001. Unless otherwise
indicated, all shares are owned directly and the indicated person has sole
voting and investment power.

Number of Shares
Name of Beneficial Owner Beneficially Owned(1) Percent of Class (1)
- ----------------------------------- --------------------- --------------------

Hasu P. Shah 784,669(2) 25.6%

K.D. Patel 640,507(2) 22.0%

Rajendra O. Gandhi 497,021(3) 17.9%

Kiran P. Patel 406,867(2) 15.2%

Ashish R. Parikh 2,500 (4)

L. McCarthy Downs 71,111(5) 3.0%

Thomas S. Capello 3,000(6) (4)

Donald J. Landry -- --

Michael A. Leven -- --

William Lehr Jr. 1,610(6) (4)

Total for all officers and trustees 2,407,285 51.4%
===================== ====================

_____________________
(1) The number of outstanding priority common shares at December 1, 2001 was
2,275,000. Assumes (i) that all operating partnership units held by such
person or group of persons are redeemed for Class B Common Shares; (ii)
conversion of the Class B Common Shares into priority common shares on a
one-for-one basis; and (iii) that all warrants held by such person are
exercised for priority common shares. The total number of shares
outstanding used in calculating the percentage assumes that none of the
operating partnership units or warrants held by other persons are redeemed
for Class B Common Shares or exercised for priority common shares,
respectively. Operating partnership units generally are not redeemable for
Class B Common Shares until at least one year following issuance. Class B
Common Shares automatically will be converted into priority common shares
upon the earlier of (i) the date that is 15 trading days after we send
notice to the holders of the priority common shares that their priority
period with respect to dividends and liquidation will terminate in 15
trading days, provided that the closing bid price of the priority common
shares is at least $7.00 on each trading day during the 15-day period, or
(ii) January 26, 2004.
(2) Represents operating partnership units owned by such person.
(3) Represents 375 priority common shares and 497,218 operating partnership
units owned by Mr. Gandhi.
(4) Less than 1%.

(5) Represents 10,000 priority common shares owned by Mr. Downs and 61,111
priority common shares that Mr. Downs has the right to acquire for a price
of $9.90 per share upon the exercise of warrants granted to Mr. Downs in
connection with our initial public offering.
(6) Priority common shares that such person has advised us he purchased.

DESCRIPTION OF SHARES OF BENEFICIAL INTEREST

The following summary of the terms of our shares of beneficial interest
does not purport to be complete and is subject to and qualified in its entirety
by reference to our Declaration of Trust and Bylaws, copies of which are
exhibits to the Registration Statement of which this Prospectus is a part. See
"Additional Information."

GENERAL

Our Declaration of Trust provides that we may issue up to 50,000,000
priority common shares of beneficial interest, $0.01 par value per share,
50,000,000 Class B Common Shares of beneficial interest, $0.01 par value per
share, and 10,000,000 preferred shares of beneficial interest, $0.01 par value
per share. Upon completion of this offering, 4,275,000 priority common shares
will be issued and outstanding and no Class B Common or Preferred Shares will be
issued and outstanding. Upon the termination of the priority period (which is
the earlier of (i) the date that is 15 trading days after we send notice to the
holders of the priority common shares that their priority period with respect to
dividends and liquidation will terminate in 15 trading days, provided that the
closing bid price of the priority common shares is at least $7.00 on each
trading day during the 15-day period, or (ii) January 26, 2004), the outstanding
Class B Common Shares will be automatically converted into priority common
shares on a one-for-one basis, subject to adjustment upon the occurrence of
certain events. As permitted by the Maryland statute governing real estate
investment trusts formed under the laws of that state (the "Maryland REIT Law"),
our Declaration of Trust contains a provision permitting our Board of Trustees,
without any action by our shareholders, to amend the Declaration of Trust to
increase or decrease the aggregate number of shares of beneficial interest or
the number of shares of any class of shares of beneficial interest that we have
authority to issue.

Our Declaration of Trust provides that none of our shareholders is
personally liable for any of our obligations solely as a result of his status as
a shareholder. Our Bylaws further provide that we shall indemnify each
shareholder against any claim or liability to which the shareholder, subject to
certain limitations, may become subject by reason of his being or having been a
shareholder or former shareholder and that we shall pay or reimburse each
shareholder or former shareholder for all legal and other expenses reasonably
incurred by him in connection with any claim or liability. Inasmuch as we carry
public liability insurance which we consider adequate, any risk of personal
liability to shareholders is limited to situations in which our assets plus our
insurance coverage would be insufficient to satisfy the claims against us and
our shareholders.

THE PRIORITY COMMON SHARES

GENERAL

The holders of the priority common shares shall be entitled to priority
rights for a priority period. The priority period will end on the earlier of:
(i) the date that is 15 trading days after we send notice to the holders of the
priority common shares that their priority rights will terminate in 15 trading
days, provided that the closing bid price of the priority common shares is at
least $7.00 on each trading day during such 15-day period; or (ii) January 26,
2004. Notwithstanding the foregoing, the priority period shall not end until
the holders of the priority common shares have received any accrued, but unpaid,
priority distributions.

Upon termination of the priority period: (i) the holders of the priority
common shares and Class B Common Shares will be entitled to their pro rata share
of our dividends and amounts payable upon liquidation; and (ii) the Class B
Common Shares automatically will be converted into priority common shares on a
one-for-one basis.

The priority rights consist of the dividend priority and the liquidation
priority.

THE DIVIDEND PRIORITY

The holders of the priority common shares are entitled to receive
dividends, when and as declared by our Board of Trustees, out of assets legally
available for the payment of dividends. During the priority period, the holders
of the priority common shares are entitled to receive, prior to any
distributions to either the holders of the operating partnership units or to the
holders of the Class B Common Shares, cumulative dividends in an amount per
priority common share equal to $0.18 per quarter. After the holders of the
operating partnership units and the Class B Common Shares have received an
amount per operating partnership unit or per Class B Common Share equal to this
priority distribution, the holders of the priority common shares are entitled to
receive any further distributions on a pro rata basis with the holders of the
operating partnership units and the Class B Common Shares. After the priority
period, the holders of the priority common shares are entitled to receive any
further distributions on a pro rata basis with the holders of the operating
partnership units and the Class B Common Shares. The dividends paid to the
holders of the priority common shares are subject to the rights of any class or
series of preferred shares.

Any dividends payable on the priority common shares for any period greater
or less than a full dividend period will be computed on the basis of a 360-day
year consisting of twelve 30-day months. Dividends on the priority common shares
are cumulative from the most recent dividend payment date to which full
dividends have been paid and will accrue whether or not we have earnings,
whether or not there are funds legally available for the payment of such
distributions and whether or not such distributions are authorized. Accrued but
unpaid distributions on the priority common shares do not bear interest and
holders of the priority common shares are not entitled to any distributions in
excess of full cumulative distributions as described above.

During the priority period, no dividend may be declared or paid or other
distribution of cash or other property declared or made directly by us or any
person acting on behalf of us on any shares of beneficial interest that rank
junior to the priority common shares as to the payment of dividends or amounts
upon liquidation, dissolution and winding up unless full cumulative dividends
have been declared and paid or are contemporaneously declared and funds
sufficient for payment set aside on the priority common shares for all prior and
contemporaneous dividend periods; provided, however, that if accumulated and
accrued dividends on the priority common shares for all prior and
contemporaneous dividend periods have not been paid in full then any dividend
declared on the priority common shares for any dividend period and on any of our
shares of beneficial interest that rank on parity with the priority common
shares as to the payment of dividends or amounts upon liquidation, dissolution
and winding up will be declared ratably in proportion to accumulated, accrued
and unpaid dividends on the priority common shares and such shares that rank in
parity.

No distributions on the priority common shares shall be authorized by the
Board of Trustees or paid or set apart for payment by us at such time as the
terms and provisions of any of our agreements, including any agreement relating
to our indebtedness, prohibits such authorization, payment or setting apart for
payment or provides that such authorization, payment or setting apart for
payment would constitute a breach thereof or a default there under, or if such
authorization or payment shall be restricted or prohibited by law.

Any distribution payment made on the priority common shares shall first be
credited against the earliest accrued but unpaid distribution due with respect
to such shares which remains payable.

If, for any taxable year, we elect to designate as "capital gain
distributions" (as defined in Section 857 of the Code) any portion of the
distributions paid or made available for the year to the holders of all classes
of shares, then the portion of the capital gains distribution that will be
allocable to the holders of priority common shares will be the capital gains
distribution amount multiplied by a fraction, the numerator of which will be the
total distributions (within the meaning of the Code) paid or made available to
the holders of the priority common shares for the year and the denominator of
which shall be the distributions paid or made available for the year to the
holders of all classes of shares.

THE LIQUIDATION PRIORITY

In the event of our liquidation, dissolution or winding up, whether
voluntary or involuntary, during the priority period, the holders of the
priority common shares are entitled to receive, prior to any liquidating
payments to the holders of the Class B Common Shares, $6.00 per priority common
share, plus any accumulated and unpaid priority distributions (whether or not
declared) on the priority common shares to the date of distribution. After the

holders of the Class B Common Shares have received an amount equal to the
liquidation preference plus any accumulated and unpaid priority distributions
(whether or not declared) on the Class B Common Shares to the date of
distribution, the holders of the priority common shares shall share ratably with
the holders of the Class B Common Shares in any of our assets. In the event of
our liquidation, dissolution or winding up, whether voluntary or involuntary,
after the priority period, the holders of the priority common shares shall share
ratably with the holders of the Class B Common Shares in our assets. The rights
of the holders of the priority common shares to liquidating payments shall be
subject to rights of any class or series of preferred shares.

If, upon our liquidation, dissolution or winding up, our assets, or
proceeds thereof, distributable among the holders of the priority common shares
are insufficient to pay in full the liquidation preference and all accumulated
and unpaid dividends with respect to any of the parity shares, then such assets
or the proceeds thereof will be distributed among the holders of the priority
common shares and any such parity shares ratably in accordance with the
respective amounts that would be payable on the priority common shares and such
parity shares if all amounts payable thereon were paid in full. None of (i) a
consolidation or merger between us and another corporation, (ii) a statutory
share exchange by us or (iii) a sale or transfer of all or substantially all of
our assets will be considered a liquidation, dissolution or winding up,
voluntary or involuntary.

THE CLASS B COMMON SHARES

GENERAL

Subject to the preferential rights of the priority common shares during the
priority period or of any other shares or series of beneficial interest and to
the provisions of our Declaration of Trust regarding the restriction on the
transfer of shares of beneficial interest, holders of Class B Common Shares are
entitled to receive dividends on shares if, when and as authorized and declared
by our Board of Trustees out of assets legally available therefore and to share
ratably in our assets legally available for distribution to our shareholders in
the event of our liquidation, dissolution or winding-up after payment of, or
adequate provision for, all of our known debts and liabilities. In the event
that during the priority period we at any time are unable to pay to the holders
of the Class B Common Shares an amount per Class B Common Share equal to the
priority distribution, the holders of the Class B Common Shares shall be
entitled to receive such amounts from time to time to the effect that the
cumulative distributions received per Class B Common Share are equal to the
cumulative priority distribution received per priority common share. We shall
pay such amounts at such subsequent dividend payment dates, if any, that we have
cash available for distribution to shareholders to pay such dividends.

Holders of Class B Common Shares have no preference, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any of our securities. Subject to the provisions of our Declaration of Trust
regarding the restriction on transfer of shares of beneficial interest, the
Class B Common Shares have equal voting, dividend, distribution, liquidation and
other rights.

CONVERSION

The Class B Common Shares will be converted automatically upon the
termination of the priority period into authorized but previously unissued
priority common shares on a one-for-one basis, subject to adjustment as
described below. A notice informing holders of the Class B Common Shares of
such conversion will be mailed by us to the holders of record of the Class B
Common Shares as of the dividend payment record date for the next dividend
payable after the expiration of the priority period, together with the dividend
payable on such shares, at their respective addresses as they appear on our
share transfer records. No fewer than all of the outstanding Class B Common
Shares shall be converted.

If the expiration of the priority period falls after a dividend payment
record date and prior to the related payment date, the holders of the Class B
Common Shares at the close of business on such record date will be entitled to
receive the dividend payable on such shares on the corresponding dividend
payment date, notwithstanding the conversion of such shares prior to such
dividend payment date.

Upon expiration of the priority period, each holder of Class B Common
Shares will be, without any further action, deemed a holder of the number of
priority common shares, as the case may be, into which such Class B Common

Shares are convertible. Fractional priority common shares will not be issued
upon conversion of the Class B Common Shares.

CONVERSION RATIO ADJUSTMENTS

The conversion ratio is subject to adjustment upon certain events,
including (i) the payment of dividends (and other distributions) payable in
priority common shares on any class of our shares of beneficial interest, (ii)
subdivisions, combinations and reclassifications of priority common shares and
(iii) distributions to all holders of priority common shares of evidences of our
indebtedness or assets (including securities, but excluding those dividends,
rights, warrants and distributions referred to in clause (i) or (ii) above and
dividends and distributions paid in cash). In addition to the foregoing
adjustments, we are permitted to make such reductions in the conversion ratio as
we consider to be advisable in order that any event treated for Federal income
tax purposes as a dividend of priority common shares or share rights will not be
taxable to the holders of the Class B Common Shares or, if that is not possible,
to diminish any income taxes that are otherwise payable because of such event.

No adjustment of the conversion ratio is required to be made in any case
until cumulative adjustments amount to 1% or more of the conversion ratio. Any
adjustments not so required to be made will be carried forward and taken into
account in subsequent adjustments.

VOTING RIGHTS OF PRIORITY COMMON SHARES AND CLASS B COMMON SHARES

The holders of the priority common shares and the Class B Common Shares
have identical voting rights and vote together as a single class.

Subject to the provisions of the Declaration of Trust regarding the
restriction of the transfer of shares of beneficial interest, each outstanding
common share entitles the holder to one vote on all matters submitted to a vote
of shareholders, including the election of trustees, and, except as provided
with respect to any other class or series of shares of beneficial interest, the
holders of such common shares possess the exclusive voting power. There is no
cumulative voting in the election of trustees, which means that the holders of a
majority of the outstanding common shares, voting as a single class, can elect
all of the trustees then standing for election and the holders of the remaining
shares are not able to elect any trustees.

Under the Maryland REIT Law, a Maryland REIT generally cannot amend its
declaration of trust or merge unless approved by the affirmative vote of
shareholders holding at least two-thirds of the shares entitled to vote on the
matter unless a lesser percentage (but not less than a majority of all the votes
entitled to be cast on the matter) is set forth in the REIT's Declaration of
Trust. Our Declaration of Trust provides for approval by a majority of all the
votes entitled to be cast on the matter in all situations permitting or
requiring action by the shareholders except with respect to: (a) our intentional
disqualification as a REIT or revocation of our election to be taxed as a REIT
(which requires the affirmative vote of two-thirds of the number of common
Shares entitled to vote on such matter at a meeting of our shareholders); (b)
the election of trustees (which requires a plurality of all the votes cast at a
meeting of our shareholders at which a quorum is present); (c) the removal of
trustees (which requires the affirmative vote of the holders of two-thirds of
our outstanding voting shares); (d) the amendment or repeal of certain
designated sections of the Declaration of Trust (which require the affirmative
vote of two-thirds of the outstanding shares entitled to vote on such matters);
(e) the amendment of the Declaration of Trust by shareholders (which requires
the affirmative vote of a majority of votes entitled to be cast on the matter,
except under certain circumstances specified in the Declaration of Trust that
require the affirmative vote of two-thirds of all the votes entitled to be cast
on the matter); and (f) our termination (which requires the affirmative vote of
two-thirds of all the votes entitled to be cast on the matter). Under the
Maryland REIT Law, a declaration of trust may permit the trustees by a
two-thirds vote to amend the declaration of trust from time to time to qualify
as a REIT under the Code or the Maryland REIT Law without the affirmative vote
or written consent of the shareholders. Our Declaration of Trust permits such
action by a majority vote of the trustees. As permitted by the Maryland REIT
Law, our Declaration of Trust contains a provision permitting our trustees,
without any action by our shareholders, to amend the Declaration of Trust to
increase or decrease the aggregate number of shares of beneficial interest or
the number of shares of any class of shares of beneficial interest that we have
authority to issue.

PREFERRED SHARES

The Declaration of Trust authorizes our Board of Trustees to classify any
unissued preferred shares and to reclassify any previously classified but
unissued preferred shares of any series from time to time in one or more series,
as authorized by the Board of Trustees. Prior to issuance of shares of each
series, the Board of Trustees is required by the Maryland REIT Law and our
Declaration of Trust to set for each such series, subject to the provisions of
our Declaration of Trust regarding the restriction on transfer of shares of
beneficial interest, the terms, the preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption for each such series.
Thus, our Board of Trustees could authorize the issuance of preferred shares
with terms and conditions which could have the effect of delaying, deferring or
preventing a transaction or a change in control in us that might involve a
premium price for holders of common shares or otherwise might be in their best
interest. As of the date hereof, no preferred shares are outstanding and we
have no present plans to issue any preferred shares.

CLASSIFICATION OR RECLASSIFICATION OF COMMON SHARES OR PREFERRED SHARES

Our Declaration of Trust authorizes the Board of Trustees to classify or
reclassify any unissued common shares or preferred shares into one or more
classes or series of shares of beneficial interest by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or distributions, qualifications or terms or
conditions of redemption of such new class or series of shares of beneficial
interest.

RESTRICTIONS ON OWNERSHIP AND TRANSFER

Our Declaration of Trust, subject to certain exceptions described below,
provides that no person may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than 9.9% of (i) the number of
outstanding common shares of any class or series of common shares or (ii) the
number of outstanding preferred shares of any class or series of preferred
shares. For this purpose, a person includes a "group" and a "beneficial owner"
as those terms are used for purposes of Section 13(d)(3) of the Exchange Act.
Any transfer of common or preferred shares that would (i) result in any person
owning, directly or indirectly, common or preferred shares in excess of the
ownership limitation, (ii) result in the common and preferred shares being owned
by fewer than 100 persons (determined without reference to any rules of
attribution), (iii) result in us being "closely held" within the meaning of
Section 856(h) of the Code, or (iv) cause us to own, actually or constructively,
10% or more of the ownership interests in a tenant of our or our partnership's
real property, within the meaning of Section 856(d)(2)(B) of the Code, will be
null and void, and the intended transferee will acquire no rights in such common
or preferred shares.

Subject to certain exceptions described below, any common shares or
preferred shares the purported transfer of which would (i) result in any person
owning, directly or indirectly, common shares or preferred shares in excess of
the ownership limitation, (ii) result in the common shares and preferred shares
being owned by fewer than 100 persons (determined without reference to any rules
of attribution), (iii) result in our being "closely held" within the meaning of
Section 856(h) of the Code, or (iv) cause us to own, actually or constructively,
10% or more of the ownership interests in a tenant of our or our partnership's
real property, within the meaning of Section 856(d)(2)(B) of the Code, will be
designated as "shares-in-trust" and transferred automatically to a trust
effective on the day before the purported transfer of such common shares or
preferred shares. The record holder of the common or preferred shares that are
designated as shares-in-trust will be required to submit such number of common
shares or preferred shares to us for registration in the name of the trust. The
trustee will be designated by us, but will not be affiliated with us. The
beneficiary of a trust will be one or more charitable organizations that are
named by us.

Shares-in-trust will remain issued and outstanding common shares or
preferred shares and will be entitled to the same rights and privileges as all
other shares of the same class or series. The record holder will receive all
dividends and distributions on the shares-in-trust and will hold such dividends
or distributions in trust for the benefit of the beneficiary. The record holder
will vote all shares-in-trust. The record holder will designate a permitted
transferee of the shares-in-trust, provided that the permitted transferee (i)
purchases such shares-in-trust for valuable consideration and (ii) acquires such
shares-in-trust without such acquisition resulting in a transfer to another
trust.

The prohibited owner with respect to shares-in-trust will be required to
repay to the record holder the amount of any dividends or distributions received
by the prohibited owner (i) that are attributable to any shares-in-trust and

(ii) the record date of which was on or after the date that such shares became
shares-in-trust. The prohibited owner generally will receive from the record
holder the lesser of (i) the price per share such prohibited owner paid for the
common shares or preferred shares that were designated as shares-in-trust (or,
in the case of a gift or devise, the market price (as defined below) per share
on the date of such transfer) or (ii) the price per share received by the record
holder from the sale of such shares-in-trust. Any amounts received by the record
holder in excess of the amounts to be paid to the prohibited owner will be
distributed to the beneficiary.

The shares-in-trust will be deemed to have been offered for sale to us, or
its designee, at a price per share equal to the lesser of (i) the price per
share in the transaction that created such shares-in-trust (or, in the case of a
gift or devise, the market price per share on the date of such transfer) or (ii)
the market price per share on the date that we, or our designee, accepts such
offer. We will have the right to accept such offer for a period of 90 days after
the later of (i) the date of the purported transfer which resulted in such
shares-in-trust or (ii) the date we determine in good faith that a transfer
resulting in such shares-in-trust occurred.

"Market price" on any date shall mean the average of the last quoted sale
price as reported by the American Stock Exchange for the five consecutive
trading days (as defined below) ending on such date.

Any person who acquires or attempts to acquire common or preferred shares
in violation of the foregoing restrictions, or any person who owned common or
preferred shares that were transferred to a trust, will be required (i) to give
immediately written notice to us of such event and (ii) to provide to us such
other information as we may request in order to determine the effect, if any, of
such transfer on our status as a REIT.

All persons who own, directly or indirectly, more than 5% (or such lower
percentages as required pursuant to regulations under the Code) of the
outstanding common and preferred shares must, within 30 days after December 31
of each year, provide to us a written statement or affidavit stating the name
and address of such direct or indirect owner, the number of common and preferred
shares owned directly or indirectly, and a description of how such shares are
held. In addition, each direct or indirect shareholder shall provide to us such
additional information as we may request in order to determine the effect, if
any, of such ownership on our status as a REIT and to ensure compliance with the
ownership limitation.

The ownership limitation generally does not apply to the acquisition of
common or preferred shares by an underwriter that participates in a public
offering of such shares. In addition, the trustees, upon receipt of advice of
counsel or other evidence satisfactory to the trustees, in their sole and
absolute discretion, may, in their sole and absolute discretion, exempt a person
from the ownership limitation under certain circumstances. The foregoing
restrictions continue to apply until (i) the trustees determines that it is no
longer in our best interests to attempt to qualify, or to continue to qualify,
as a REIT and (ii) there is an affirmative vote of two-thirds of the number of
common and preferred shares entitled to vote on such matter at a regular or
special meeting of our shareholders.

All certificates representing common or preferred shares bear a legend
referring to the restrictions described above.

This ownership limitation could have the effect of delaying, deferring or
preventing a change in control or other transaction in which holders of some, or
a majority, of shares of common shares might receive a premium for their shares
of common shares over the then prevailing market price or which such holders
might believe to be otherwise in their best interest.

OTHER MATTERS

Our transfer agent and registrar for our priority common shares is First
Union National Bank of North Carolina, Charlotte, North Carolina.

CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR DECLARATION
OF TRUST AND BYLAWS

CLASSIFICATION OF THE BOARD OF TRUSTEES

Our Bylaws provide that the number of our trustees may be established by
the Board of Trustees but may not be fewer than three nor more than nine. As of
December 1, 2001, we have seven trustees. The trustees may increase or decrease
the number of trustees by a vote of at least 80% of the members of the Board of
Trustees, provided that the number of trustees shall never be less than the
number required by Maryland law and that the tenure of office of a trustee shall
not be affected by any decrease in the number of trustees. Any vacancy will be
filled, including a vacancy created by an increase in the number of trustees, at
any regular meeting or at any special meeting called for that purpose, by a
majority of the remaining trustees or, if no trustees remain, by a majority of
our shareholders.

Pursuant to our Declaration of Trust, the Board of Trustees is divided into
two classes of trustees. Trustees of each class are chosen for two-year terms
and each year one class of trustees will be elected by the shareholders. We
believe that classification of the Board of Trustees helps to assure the
continuity and stability of our business strategies and policies as determined
by the trustees. Holders of common shares have no right to cumulative voting in
the election of trustees. Consequently, at each annual meeting of shareholders,
the holders of a majority of the common shares are able to elect all of the
successors of the class of trustees whose terms expire at that meeting.

The classified board provision could have the effect of making the
replacement of incumbent trustees more time consuming and difficult. The
staggered terms of trustees may delay, defer or prevent a tender offer or an
attempt to change control in us or other transaction that might involve a
premium price for holders of common shares that might be in the best interest of
the shareholders.

REMOVAL OF TRUSTEES

The Declaration of Trust provides that a trustee may be removed with or
without cause upon the affirmative vote of at least two-thirds of the votes
entitled to be cast in the election of trustees. Absent removal of all of the
trustees, this provision, when coupled with the provision in the Bylaws
authorizing the Board of Trustees to fill vacant trusteeships, precludes
shareholders from removing incumbent trustees, except upon a substantial
affirmative vote, and filling the vacancies created by such removal with their
own nominees.

BUSINESS COMBINATIONS

Under Maryland law, certain business combinations between us and any person
who beneficially owns, directly or indirectly, 10% or more of the voting power
of our shares, an affiliate of ours who, at any time within the previous two
years was the beneficial owner of 10% or more of the voting power of our shares
(who the statute terms an "interested shareholder"), or an affiliate of an
interested shareholder, are prohibited for five years after the most recent date
on which they became such persons. The business combinations that are subject
to this law include mergers, consolidations, share exchanges or, in certain
circumstances, asset transfers or issuances or reclassifications of equity
securities. After the five-year period has elapsed, a proposed business
combination must be recommended by the Board of Trustees and approved by the
affirmative vote of at least:

- 80% of our outstanding voting shares; and

- two-thirds of the outstanding voting shares, excluding shares held by
the interested shareholder,

unless, among other conditions, the shareholders receive a fair price, as
defined by Maryland law, for their shares and the consideration is received in
cash or in the same form as previously paid by the interested shareholder for
its shares.

These provisions do not apply, however, to business combinations that the
Board of Trustees approves or exempts before the time that the interested
shareholder becomes an interested shareholder.

CONTROL SHARE ACQUISITIONS

Maryland law provides that "control shares" acquired in a "control share
acquisition" have no voting rights unless approved by a vote of two-thirds of
our outstanding voting shares, excluding shares owned by the acquiror or by
officers or directors who are employees of ours. "Control shares" are voting
shares which, if aggregated with all other shares previously acquired by the
acquiring person, or in respect of which the acquiring person is able to
exercise or direct the exercise of voting power, other than by revocable proxy,
would entitle the acquiring person to exercise voting power in electing trustees
within one of the following ranges of voting power:

- one-tenth or more but less than one-third;

- one-third or more but less than a majority; or

- a majority of all voting power.

Control shares do not include shares the acquiring person is then entitled
to vote as a result of having previously obtained shareholder approval. A
"control share acquisition" means the acquisition of control shares, subject to
certain exceptions.

A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions, including an undertaking to pay expenses,
may compel our Board of Trustees to call a special meeting of shareholders to be
held within 50 days of demand to consider the voting rights of the shares. If no
request for a meeting is made, we may present the question at any shareholders'
meeting.

If voting rights are not approved at the shareholders' meeting or if the
acquiring person does not deliver the statement required by Maryland law, then,
subject to certain conditions and limitations, we may redeem any or all of the
control shares, except those for which voting rights have previously been
approved, for fair value. Fair value is determined without regard to the absence
of voting rights for the control shares and as of the date of the last control
share acquisition or of any meeting of shareholders at which the voting rights
of the shares were considered and not approved. If voting rights for control
shares are approved at a shareholders' meeting, the acquiror may then vote a
majority of the shares entitled to vote, and all other shareholders may exercise
appraisal rights. The fair value of the shares for purposes of these appraisal
rights may not be less than the highest price per share paid by the acquiror in
the control share acquisition. The control share acquisition statute does not
apply to shares acquired in a merger, consolidation or share exchange if we are
a party to the transaction, nor does it apply to acquisitions approved by our
Board of Trustees or exempted by our Declaration of Trust or Bylaws.

AMENDMENT

Our Declaration of Trust provides that it may be amended with the approval
of at least a majority of all of the votes entitled to be cast on the matter,
but that certain provisions of the Declaration of Trust regarding (i) our Board
of Trustees, including the provisions regarding independent trustee
requirements, (ii) the restrictions on transfer of the common shares and the
preferred shares, (iii) amendments to the Declaration of Trust by the trustees
and our shareholders and (iv) our termination may not be amended, altered,
changed or repealed without the approval of two-thirds of all of the votes
entitled to be cast on these matters. In addition, the Declaration of Trust
provides that it may be amended by the Board of Trustees, without shareholder
approval to (a) increase or decrease the aggregate number of shares of
beneficial interest or the number of shares of any class of beneficial interest
that the Trust has authority to issue or (b) qualify as a REIT under the Code or
under the Maryland REIT law. Our Bylaws may be amended or altered exclusively
by the Board of Trustees.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Our Declaration of Trust limits the liability of our directors and officers
for money damages, except for liability resulting from:

- actual receipt of an improper benefit or profit in money, property or
services; or

- a final judgment based upon a finding of active and deliberate
dishonesty by the director that was material to the cause of action
adjudicated.

Our Declaration of Trust authorizes us, to the maximum extent permitted by
Maryland law, to indemnify, and to pay or reimburse reasonable expenses to, any
of our present or former trustees or officers or any individual who, while a
trustee or officer and at our request, serves or has served another entity,
employee benefit plan or any other enterprise as a trustee, director, officer,
partner or otherwise. The indemnification covers any claim or liability against
the person. Our Bylaws permit us to indemnify each trustee or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to
which he or she is made a party by reason of his or her service to us.

Maryland law permits a corporation to indemnify its present and former
trustees and officers against liabilities and reasonable expenses actually
incurred by them in any proceeding unless:

- the act or omission of the trustee or officer was material to the
matter giving rise to the proceeding; and

- was committed in bad faith; or

- was the result of active and deliberate dishonesty; or

- in a criminal proceeding, the trustee or officer had reasonable cause
to believe that the act or omission was unlawful.

However, a Maryland corporation may not indemnify for an adverse judgment
in a derivative action. Our Bylaws and Maryland law require us, as a condition
to advancing expenses in certain circumstances, to obtain:

- a written affirmation by the trustees or officer of his or her good
faith belief that he or she has met the standard of conduct necessary
for indemnification; and

- a written undertaking to repay the amount reimbursed if the standard
of conduct was not met.

CERTAIN PROVISIONS OF MARYLAND LAW

Maryland law also provides that Maryland corporations that are subject to
the Exchange Act and have at least three outside directors can elect by
resolution of the board of trustees to be subject to some corporate governance
provisions that may be inconsistent with the corporation's charter and bylaws.
Under the applicable statute, a board of trustees may classify itself without
the vote of shareholders. A board of trustees classified in that manner cannot
be altered by amendment to the charter of the corporation. Further, the board
of trustees may, by electing into applicable statutory provisions and
notwithstanding the charter or bylaws:

- provide that a special meeting of shareholders, will be called only at
the request of shareholders, entitled to cast at least a majority of
the votes entitled to be cast at the meeting,

- reserve for itself the right to fix the number of trustees,

- provide that a trustee may be removed only by the vote of the holders
of two-thirds of the shares entitled to vote, and

- retain for itself sole authority to fill vacancies created by the
death, removal or resignation of a trustee.

In addition, a trustee elected to fill a vacancy under this provision will
serve for the balance of the unexpired term instead of until the next annual
meeting of shareholders. A board of trustees may implement all or any of these
provisions without amending the declaration of trust or bylaws and without
shareholder approval. A corporation may be prohibited by its charter or by
resolution of its board of trustees from electing any of the provisions of the
statute. We are is not prohibited from implementing any or all of the statute.

While certain of these trustees to override further changes to the charter or by
laws. If implemented, these provisions could discourage offers to acquire the
our shares and could increase the difficulty of completing an offer.

OPERATIONS

We generally are prohibited from engaging in certain activities, including
acquiring or holding property or engaging in any activity that would cause us to
fail to qualify as a REIT.

DISSOLUTION OF THE COMPANY

Pursuant to our Declaration of Trust, and subject to the provisions of any
of our classes or series of shares of beneficial interest then outstanding, our
shareholders, at any meeting thereof, may terminate us by the affirmative vote
of two-thirds of all of the votes entitled to be cast on the matter after the
authorization, advice and approval thereof by a majority of the Board of
Trustees.

ADVANCE NOTICE OF TRUSTEES NOMINATIONS AND NEW BUSINESS

Our Bylaws provide that (a) with respect to an annual meeting of
shareholders, nominations of persons for election to our Board of Trustees and
the proposal of business to be considered by shareholders may be made only (i)
pursuant to our notice of the meeting, (ii) by the Board of Trustees or (iii) by
a shareholder who was a shareholder of record both at the time of the provision
of notice and at the time of the meeting who is entitled to vote at the meeting
and has complied with the advance notice procedures set forth in the Bylaws and
(b) with respect to special meetings of shareholders, only the business
specified in our notice of meeting may be brought before the meeting of
shareholders and nominations of persons for election to the Board of Trustees
may be made only (i) pursuant to our notice of the meeting, (ii) by the Board of
Trustees or (iii) provided that the Board of Trustees has determined that
trustees shall be elected at such meeting, by a shareholder who was a
shareholder of record both at the time of the provision of notice and at the
time of the meeting who is entitled to vote at the meeting and has complied with
the advance notice provisions set forth in the Bylaws.

POSSIBLE ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR
DECLARATION OF TRUST AND BYLAWS

The business combination provisions and, if the applicable provision in the
Bylaws is rescinded, the control share acquisition provisions of the MGCL, the
provisions of our Declaration of Trust on classification of the Board of
Trustees, the removal of trustees and the restrictions on the transfer of shares
of beneficial interest and the advance notice provisions of the Bylaws could
have the effect of delaying, deferring or preventing a transaction or a change
in the control that might involve a premium price for holders of the priority
common shares or otherwise be in their best interest.

MARYLAND ASSET REQUIREMENTS

To maintain its qualification as a Maryland REIT, the Maryland REIT Law
requires at least 75% of the value of our assets to be held, directly or
indirectly, in real estate assets, mortgages or mortgage related securities,
government securities, cash and cash equivalent items, including high-grade
short term securities and receivables. The Maryland REIT Law also prohibits us
from using or applying land for farming, agricultural, horticultural or similar
purposes.

PARTNERSHIP AGREEMENT

MANAGEMENT

Hersha Hospitality Limited Partnership has been organized as a Virginia
limited partnership. Pursuant to the partnership agreement, we, as the sole
general partner of the operating partnership, have, subject to certain
protective rights of limited partners described below, full, exclusive and
complete responsibility and discretion in the management and control of the
partnership, including the ability to cause the operating partnership to enter
into certain major transactions including acquisitions, dispositions,
refinancings and selection of lessees and to cause changes in the partnership's

line of business and distribution policies. However, any amendment to the
partnership agreement that would affect the redemption rights requires the
consent of limited partners holding more than 50% of the operating partnership
units held by such partners.

The affirmative vote of at least two-thirds of the operating partnership
units, is required for a sale of all or substantially all of the assets of the
partnership, or to approve a merger or consolidation of the partnership,
provided, however, that such approval shall no longer be required if we fail to
pay a distribution of $0.72 per share to the holders of the priority common
shares for any 12-month period. We currently own a 31% interest and limited
partners own a 69% interest in the operating partnership.

TRANSFERABILITY OF INTERESTS

We may not voluntarily withdraw from the partnership or transfer or assign
our interest in the partnership unless the transaction in which such withdrawal
or transfer occurs results in the limited partners receiving property in an
amount equal to the amount they would have received had they exercised their
redemption rights immediately prior to such transaction, or unless our successor
contributes substantially all of its assets to the partnership in return for a
general partnership interest in the partnership. With certain limited
exceptions, the limited partners may not transfer their interests in the
partnership, in whole or in part, without our written consent, which consent we
may withhold in our sole discretion. We may not consent to any transfer that
would cause the partnership to be treated as a corporation for federal income
tax purposes.

CAPITAL CONTRIBUTION

We contributed to the partnership substantially all the net proceeds of the
initial offering as our initial capital contribution in exchange for
approximately a 36% general partnership interest. As of December 1, 2001 we
have approximately a 31% general partnership interest. Some of our trustees,
executive officers and their affiliates made contributions to the partnership
and became limited partners and collectively now own the remaining 69%
partnership interest. The partnership agreement provides that if the
partnership requires additional funds at any time in excess of funds available
to the partnership from borrowing or capital contributions, we may borrow such
funds from a financial institution or other lender and lend such funds to the
partnership on the same terms and conditions as are applicable to our borrowing
of such funds. Under the partnership agreement, we are obligated to contribute
the proceeds of any offering of shares of beneficial interest as additional
capital to the partnership. We are authorized to cause the partnership to issue
partnership interests for less than fair market value if we have concluded in
good faith that such issuance is in both the partnership's and our best
interests. If we contribute additional capital to the partnership, we will
receive additional operating partnership units and our percentage interest will
be increased on a proportionate basis based upon the amount of such additional
capital contributions and the value of the partnership at the time of such
contributions. Conversely, the percentage interests of the limited partners
will be decreased on a proportionate basis in the event of additional capital
contributions by us. In addition, if we contribute additional capital to the
partnership, we will revalue the property of the partnership to its fair market
value (as determined by us) and the capital accounts of the partners will be
adjusted to reflect the manner in which the unrealized gain or loss inherent in
such property (that has not been reflected in the capital accounts previously)
would be allocated among the partners under the terms of the partnership
agreement if there were a taxable disposition of such property for such fair
market value on the date of the revaluation.

REDEMPTION RIGHTS

Pursuant to the partnership agreement, the limited partners receive
redemption rights, which enables them to cause the partnership to redeem their
interests therein in exchange for cash or, at our option, Class B Common Shares
on a one-for-one basis. In the event that the Class B Common Shares are
converted into priority common shares prior to redemption of the operating
partnership units, such outstanding operating partnership units will be
redeemable for priority common shares. If we do not exercise our option to
redeem such interests for Class B Common Shares, then the limited partner may
make a written demand that we redeem such interests for Class B Common Shares.
Notwithstanding the foregoing, a limited partner shall not be entitled to
exercise its redemption rights to the extent that the issuance of common shares
to the redeeming limited partner would

- result in any person owning, directly or indirectly, common shares in
excess of the ownership limitation as per our Declaration of Trust,

- result in the shares of our beneficial interest being owned by fewer
than 100 persons (determined without reference to any rules of
attribution),

- result in our being "closely held" within the meaning of Section
856(h) of the Code,

- cause us to own, actually or constructively, 10% or more of the
ownership interests in a tenant of ours or the partnership's real
property, within the meaning of Section 856(d)(2)(B) of the Code, or

- cause the acquisition of common shares by such redeeming limited
partner to be "integrated" with any other distribution of common
shares for purposes of complying with the Securities Act.

With respect to the operating partnership units that were issued in
connection with the acquisition of our hotels, the redemption rights may be
exercised by the limited partners at any time after one year following the
acquisition of these hotels. With respect to the operating partnership units
issued in connection with the acquisition of newly-renovated hotels and
newly-developed hotels, the redemption rights may not be exercised by the
limited partners until after the adjustment date. In all cases, however,

- each limited partner may not exercise the redemption right for fewer
than 1,000 units or, if such limited partner holds fewer than 1,000
operating partnership units, all of the units held by such limited
partner,

- each limited partner may not exercise the redemption right for more
than the number of operating partnership units that would, upon
redemption, result in such limited partner or any other person owning,
directly or indirectly, common shares in excess of the ownership
limitation and

- each limited partner may not exercise the redemption right more than
two times annually.

The aggregate number of common shares issuable upon exercise of the
redemption rights is approximately 5.1 million. The number of common shares
issuable upon exercise of the redemption rights will be adjusted our account of
share splits, mergers, consolidations or similar pro rata share transactions.

The partnership agreement requires that the partnership be operated in a
manner that enables us to satisfy the requirements for being classified as a
REIT, to avoid any federal income or excise tax liability imposed by the Code
(other than any federal income tax liability associated with our retained
capital gains) and to ensure that the partnership will not be classified as a
"publicly traded partnership" for purposes of Section 7704 of the Code.

In addition to the administrative and operating costs and expenses incurred
by the partnership, the partnership will pay all of our administrative costs and
expenses and these expenses will be treated as expenses of the partnership. Our
expenses generally include

- all expenses relating to our continuity of existence,

- all expenses relating to offerings and registration of securities,

- all expenses associated with the preparation and filing of any of our
periodic reports under federal, state or local laws or regulations,

- all expenses associated with our compliance with laws, rules and
regulations promulgated by any regulatory body and

- all of our other operating or administrative costs incurred in the
ordinary course of its business on behalf of the partnership.

The company expenses, however, do not include any of our administrative and
operating costs and expenses incurred that are attributable to hotel properties
that are owned by us directly.

DISTRIBUTIONS

The partnership agreement provides that, during the priority period (which
is the earlier of (i) January 26, 2004 and (ii) an election by us to end the
priority period within 15 days if the share price remains over $7.00 per share
for these 15 days), the partnership will distribute cash available for
distribution (including net sale or refinancing proceeds, but excluding net
proceeds from the sale of the partnership's property in connection with the
liquidation of the partnership) on a quarterly (or, at our election, more
frequent) basis, in amounts determined by us in our sole discretion, in the
following order of priority:

(i) first, to us until we have received, on a cumulative basis, $0.18 per
quarter per operating partnership unit held by us,

(ii) second, to the limited partners in accordance with their respective
percentage interests in the partnership until each limited partner has received
an amount equal to our distribution, and

(iii) finally, to us and the limited partners in accordance with the
respective percentage interests in the partnership.

After the priority period, the partnership will distribute cash from
operations (including net sale or refinancing proceeds, but excluding net
proceeds from the sale of the partnership's property in connection with the
liquidation of the partnership) on a quarterly (or, at our election, more
frequent) basis, in amounts determined by us in our sole discretion, to us and
the limited partners in accordance with their respective percentage interests in
the partnership.

Upon liquidation of the partnership during the priority period, after
payment of, or adequate provision for, the debts and obligations of the
partnership, including any partner loans, any remaining assets of the
partnership will be distributed in the following order of priority:

(i) first, to us until we have received any unpaid distributions plus an
amount equal to $6.00 per operating partnership unit held by us,

(ii) second, to the limited partners in accordance with their respective
percentage interests in the partnership until each limited partner has received
an amount equal to any distribution paid to us plus $6.00 per operating
partnership unit held by the limited partner, and

(iii) finally, to us and the limited partners with positive capital
accounts in accordance with their respective positive capital account balances.

Upon liquidation of the partnership after the priority period, after
payment of, or adequate provision for, debts and obligations of the partnership,
including any partner loans, any remaining assets of the partnership will be
distributed to us and the limited partners with positive capital accounts in
accordance with their respective positive capital account balances. If we have a
negative balance in our capital account following a liquidation of the
partnership, we will be obligated to contribute cash to the partnership equal to
the negative balance in our capital account.

ALLOCATIONS

Depreciation and amortization deductions of the partnership for each fiscal
year are allocated to us and the limited partners in accordance with the
respective percentage interests in the partnership. Profits of the partnership
(excluding depreciation and amortization deductions) for each fiscal year is
allocated in the following order of priority:

(i) first, to us until the aggregate amount of profit allocated to us under
this clause (i) for the current and all prior years equals the aggregate amount
of our distributions distributed to us for the current and all prior years,

(ii) second, to the limited partners in accordance with their respective
percentage interests in the partnership until the aggregate amount of profit
allocated to the limited partners under this clause (ii) for the current and all
prior years equals the aggregate amount the distributions distributed to the
limited partners for the current and all prior years, and

(iii) finally, to us and the limited partners in accordance with their
respective percentage interests in the partnership.

Losses of the partnership (excluding depreciation and amortization
deductions) for each fiscal year generally are allocated to us and the limited
partners in accordance with the respective percentage interests in the
partnership. All of the foregoing allocations are subject to compliance with the
provisions of Code Sections 704(b) and 704(c) and Treasury Regulations
promulgated thereunder.

TERM

The partnership will continue until December 31, 2050, or until sooner
dissolved upon:

- our bankruptcy, dissolution or withdrawal (unless the limited partners
elect to continue the partnership),

- the sale or other disposition of all or substantially all the assets
of the partnership,

- the redemption of all operating partnership units (other than those
held by us, if any) or

- an election by us as the General Partner.

TAX MATTERS

Pursuant to the partnership agreement, we are the tax matters partner of
the partnership and, as such, have authority to handle tax audits and to make
tax elections under the Code on behalf of the partnership.

FEDERAL INCOME TAX CONSEQUENCES OF OUR STATUS AS A REIT

This section summarizes the federal income tax issues that you, as a
shareholder, may consider relevant. Because this section is a summary, it does
not address all of the tax issues that may be important to you. In addition,
this section does not address the tax issues that may be important to certain
types of shareholders that are subject to special treatment under the federal
income tax laws, such as insurance companies, tax-exempt organizations (except
to the extent discussed in "Taxation of Tax-Exempt Shareholders" below),
financial institutions or broker-dealers, and non-U.S. individuals and foreign
corporations (except to the extent discussed in "Taxation of Non-U.S.
Shareholders" below).

The statements in this section are based on the current federal income tax
laws governing qualification as a REIT. We cannot assure you that new laws,
interpretations of law or court decisions, any of which may take effect
retroactively, will not cause any statement in this section to be inaccurate.

In connection with this offering of our priority common shares, Hunton &
Williams is rendering an opinion, which will be filed as an exhibit to the
registration statement of which this prospectus is a part, that we qualified to
be taxed as a REIT under the federal income tax laws for our taxable years ended
December 31, 1999 through December 31, 2000, and our organization and current
and proposed method of operation will enable us to continue to qualify as a REIT
for our taxable year ending December 31, 2001 and in the future. You should be
aware that the opinion is based on current law and is not binding on the
Internal Revenue Service or any court. In addition, the opinion is based on
customary assumptions and on our representations as to factual matters, all of
which are described in the opinion. Moreover, we urge you to consult your own
tax advisor regarding the specific tax consequences to you of investing in our
priority common shares and of our election to be taxed as a REIT. Specifically,
you should consult your own tax advisor regarding the federal, state, local,
foreign and other tax consequences of such investment and election, and
regarding potential changes in applicable tax laws.

TAXATION

We elected to be taxed as a REIT under the federal income tax laws
beginning with our taxable year ended December 31, 1999. We believe that we
have operated in a manner qualifying us as a REIT since our election and intend
to continue to so operate. This section discusses the laws governing the
federal income tax treatment of a REIT and its shareholders. These laws are
highly technical and complex.

Our qualification as a REIT depends on our ability to meet, on a continuing
basis, qualification tests in the federal tax laws. Those qualification tests
involve the percentage of income that we earn from specified sources, the
percentages of our assets that fall within specified categories, the diversity
of our share ownership and the percentage of our earnings that we distribute. We
describe the REIT qualification tests in more detail below.

If we qualify as a REIT, we generally will not be subject to federal income
tax on the taxable income that we distribute to our shareholders. The benefit of
that tax treatment is that it avoids the "double taxation," or taxation at both
the corporate and shareholder levels, that generally results from owning shares
in a corporation. However, we will be subject to federal tax in the following
circumstances:

- We will pay federal income tax on taxable income, including net
capital gain, that we do not distribute to shareholders during, or
within a specified time period after, the calendar year in which the
income is earned;

- We may be subject to the "alternative minimum tax" on any items of tax
preference that we do not distribute or allocate to shareholders;

- We will pay income tax at the highest corporate rate on:

- net income from the sale or other disposition of property
acquired through foreclosure ("foreclosure property") that we
hold primarily for sale to customers in the ordinary course of
business, and

- other non-qualifying income from foreclosure property.

- We will pay a 100% tax on net income from sales or other dispositions
of property, other than foreclosure property, that we hold primarily
for sale to customers in the ordinary course of business.

- If we fail to satisfy the 75% gross income test or the 95% gross
income test, as described below under "Requirements for
Qualification--Income Tests," and nonetheless continue to qualify as a
REIT because we meet other requirements, we will pay a 100% tax on:

- the gross income attributable to the greater of the amounts by
which we fail the 75% and 95% gross income tests, multiplied by

- a fraction intended to reflect our profitability.

- If we fail to distribute during a calendar year at least the sum of:

- 85% of our REIT ordinary income for the year,

- 95% of our REIT capital gain net income for the year, and

- any undistributed taxable income from earlier periods, we will
pay a 4% excise tax on the excess of the required distribution
over the amount we actually distributed.

- We may elect to retain and pay income tax on our net long-term capital
gain.

- We will be subject to a 100% excise tax on transactions with a taxable

REIT subsidiary that are not conducted on an arm's-length basis.

- If we acquire any asset from a C corporation, or a corporation that
generally is subject to full corporate-level tax, in a merger or other
transaction in which we acquire a basis in the asset that is
determined by reference either to the C corporation's basis in the
asset or to another asset, we will pay tax at the highest regular
corporate rate applicable if we recognize gain on the sale or
disposition of the asset during the 10-year period after we acquire
the asset. The amount of gain on which we will pay tax is the lesser
of:

- the amount of gain that we recognize at the time of the sale or
disposition, and

- the amount of gain that we would have recognized if we had sold
the asset at the time we acquired it.

The rules described here will apply assuming that we make an election under
the Treasury regulations.

REQUIREMENTS FOR QUALIFICATION

A REIT is an entity that meets each of the following requirements:

1. It is managed by trustees or directors.

2. Its beneficial ownership is evidenced by transferable shares, or by
transferable certificates of beneficial interest.

3. It would be taxable as a domestic corporation, but for the REIT provisions
of the federal income tax laws.

4. It is neither a financial institution nor an insurance company subject to
special provisions of the federal income tax laws.

5. At least 100 persons are beneficial owners of its shares or ownership
certificates.

6. Not more than 50% in value of its outstanding shares or ownership
certificates is owned, directly or indirectly, by five or fewer
individuals, which the federal income tax laws define to include certain
entities, during the last half of any taxable year.

7. It elects to be a REIT, or has made such election for a previous taxable
year, and satisfies all relevant filing and other administrative
requirements established by the Internal Revenue Service that must be met
to elect and maintain REIT status.

8. It meets certain other qualification tests, described below, regarding the
nature of its income and assets.

We must meet requirements 1 through 4 during our entire taxable year and
must meet requirement 5 during at least 335 days of a taxable year of 12 months,
or during a proportionate part of a taxable year of less than 12 months. If we
comply with all the requirements for ascertaining the ownership of our
outstanding shares in a taxable year and have no reason to know that we violated
requirement 6, we will be deemed to have satisfied requirement 6 for that
taxable year. For purposes of determining share ownership under requirement 6,
an "individual" generally includes a supplemental unemployment compensation
benefits plan, a private foundation, or a portion of a trust permanently set
aside or used exclusively for charitable purposes. An "individual," however,
generally does not include a trust that is a qualified employee pension or
profit sharing trust under the federal income tax laws, and beneficiaries of
such a trust will be treated as holding our shares in proportion to their
actuarial interests in the trust for purposes of requirement 6.

We have issued sufficient priority common shares with sufficient diversity
of ownership to satisfy requirements 5 and 6. In addition, our Declaration of
Trust restricts the ownership and transfer of our shares of beneficial interest
so that we should continue to satisfy these requirements.

An unincorporated domestic entity, such as a partnership, that has a single
owner, generally is not treated as an entity separate from its parent for
federal income tax purposes. An unincorporated domestic entity with two or more
owners is generally treated as a partnership for federal income tax purposes. In
the case of a REIT that is a partner in a partnership that has other partners,
the REIT is treated as owning its proportionate share of the assets of the
partnership and as earning its allocable share of the gross income of the
partnership for purposes of the applicable REIT qualification tests. Thus, our
proportionate share of the assets, liabilities and items of income of our
operating partnership and any other partnership, joint venture, or limited
liability company that is treated as a partnership for federal income tax
purposes in which we have acquired or will acquire an interest, directly or
indirectly (a "subsidiary partnership"), will be treated as our assets and gross
income for purposes of applying the various REIT qualification requirements.

Tax legislation enacted in 1999 allows a REIT to own up to 100% of the
stock of a "taxable REIT subsidiary," or TRS, in taxable years beginning on or
after January 1, 2001. A TRS may earn income that would not be qualifying income
if earned directly by the parent REIT. Both the subsidiary and the REIT must
jointly elect to treat the subsidiary as a TRS. A TRS will pay income tax at
regular corporate rates on any income that it earns. In addition, the new rules
limit the deductibility of interest paid or accrued by a TRS to its parent REIT
to assure that the TRS is subject to an appropriate level of corporate taxation.
Further, the rules impose a 100% excise tax on transactions between a TRS and
its parent REIT or the REIT's tenants that are not conducted on an arm's-length
basis. We do not currently have any TRSs, but may form one or more TRSs in the
future.

INCOME TESTS

We must satisfy two gross income tests annually to maintain our
qualification as a REIT. First, at least 75% of our gross income for each
taxable year must consist of defined types of income that we derive, directly or
indirectly, from investments relating to real property or mortgages on real
property or qualified temporary investment income. Qualifying income for
purposes of that 75% gross income test generally includes:

- rents from real property;

- interest on debt secured by mortgages on real property, or on
interests in real property;

- dividends or other distributions on, and gain from the sale of, shares
in other REITs; and

- gain from the sale of real estate assets.

Second, in general, at least 95% of our gross income for each taxable year
must consist of income that is qualifying income for purposes of the 75% gross
income test, other types of interest and dividends, gain from the sale or
disposition of stock or securities, income from hedging instruments or any
combination of these. Gross income from our sale of property that we hold
primarily for sale to customers in the ordinary course of business is excluded
from both the numerator and the denominator in both income tests. The following
paragraphs discuss the specific application of the gross income tests to us.

Rents from Real Property. Rent that we receive from our real property will
qualify as "rents from real property," which is qualifying income for purposes
of the 75% and 95% gross income tests, only if the following conditions are met:

- First, the rent must not be based, in whole or in part, on the income
or profits of any person, but may be based on a fixed percentage or
percentages of receipts or sales.

- Second, neither we nor a direct or indirect owner of 10% or more of
our shares may own, actually or constructively, 10% or more of a
tenant from whom we receive rent other than a TRS.

- Third, all of the rent received under a lease of real property will
not qualify as "rents from real property" unless the rent attributable
to the personal property leased in connection with such lease is no
more than 15% of the total rent received under the lease.

- Finally, we generally must not operate or manage our real property or
furnish or render services to our tenants, other than through an
"independent contractor" who is adequately compensated and from whom
we do not derive revenue. However, we need not provide services
through an "independent contractor," but instead may provide services
directly, if the services are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not
considered to be provided for the tenants' convenience. In addition,
we may provide a minimal amount of "non-customary" services to the
tenants of a property, other than through an independent contractor,
as long as our income from the services does not exceed 1% of our
income from the related property. Furthermore, we may own up to 100%
of the stock of a TRS, which can provide customary and noncustomary
services to our tenants without tainting our rental income.

Pursuant to percentage leases, our lessees lease the land, buildings,
improvements, furnishings and equipment comprising our hotels, for terms of
three to five years, with options to renew for terms of three to five years.
The percentage leases provide that the lessees are obligated to pay (1) the
greater of a minimum base rent or percentage rent and (2) "additional charges"
or other expenses, as defined in the leases. Percentage rent is calculated by
multiplying fixed percentages by gross room revenues and gross food and beverage
revenues for each of the hotels. Both base rent and the thresholds in the
percentage rent formulas are adjusted for inflation. Base rent and percentage
rent accrue and are due monthly or quarterly.

In order for the base rent, percentage rent and additional charges to
constitute "rents from real property," the percentage leases must be respected
as true leases for federal income tax purposes and not treated as service
contracts, joint ventures or some other type of arrangement. The determination
of whether the percentage leases are true leases depends on an analysis of all
the surrounding facts and circumstances. In making such a determination, courts
have considered a variety of factors, including the following:

- the intent of the parties;

- the form of the agreement;

- the degree of control over the property that is retained by the
property owner, or whether the lessee has substantial control over the
operation of the property or is required simply to use its best
efforts to perform its obligations under the agreement; and

- the extent to which the property owner retains the risk of loss with
respect to the property, or whether the lessee bears the risk of
increases in operating expenses or the risk of damage to the property
or the potential for economic gain or appreciation with respect to the
property.

In addition, federal income tax law provides that a contract that purports
to be a service contract or a partnership agreement will be treated instead as a
lease of property if the contract is properly treated as such, taking into
account all relevant factors, including whether or not:

- the service recipient is in physical possession of the property;

- the service recipient controls the property;

- the service recipient has a significant economic or possessory
interest in the property, or whether the property's use is likely to
be dedicated to the service recipient for a substantial portion of the
useful life of the property, the recipient shares the risk that the
property will decline in value, the recipient shares in any
appreciation in the value of the property, the recipient shares in
savings in the property's operating costs or the recipient bears the
risk of damage to or loss of the property;

- the service provider bears the risk of substantially diminished
receipts or substantially increased expenditures if there is
nonperformance under the contract;

- the service provider uses the property concurrently to provide
significant services to entities unrelated to the service recipient;
and

- the total contract price substantially exceeds the rental value of the
property for the contract period.

Since the determination whether a service contract should be treated as a lease
is inherently factual, the presence or absence of any single factor will not be
dispositive in every case.

We believe that the percentage leases will be treated as true leases for
federal income tax purposes. Such belief is based, in part, on the following
facts:

- we and the lessees intend for our relationship to be that of a lessor
and lessee and such relationship is documented by lease agreements;

- the lessees have the right to the exclusive possession, use and quiet
enjoyment of the hotels during the term of the percentage leases;

- the lessees bear the cost of, and are responsible for, day-to-day
maintenance and repair of the hotels, other than the cost of
maintaining underground utilities, structural elements and capital
improvements, and generally dictate how the hotels are operated,
maintained and improved;

- the lessees bear the costs and expenses of operating the hotels,
including the cost of any inventory used in their operation, during
the term of the percentage leases, other than real estate and personal
property taxes and property and casualty insurance premiums;

- the lessees benefit from any savings in the cost of operating the
hotels during the term of the percentage leases;

- The lessees generally have indemnified us against all liabilities
imposed on us during the term of the percentage leases by reason of
(1) injury to persons or damage to property occurring at the hotels,
(2) the lessees' use, management, maintenance or repair of the hotels,
(3) any environmental liability cause by acts or grossly negligent
failures to act of the lessees, (4) taxes and assessments in respect
of the hotels that are the obligations of the lessees or (5) any
breach of the percentage leases or of any sublease of a hotel by the
lessees;

- the lessees are obligated to pay substantial fixed rent for the period
of use of the hotels;

- the lessees stand to incur substantial losses or reap substantial
gains depending on how successfully they operate the hotels;

- we cannot use the hotels concurrently to provide significant services
to entities unrelated to the lessees; and

- the total contract price under the percentage leases does not
substantially exceed the rental value of the hotels for the term of
the percentage leases.

Investors should be aware that there are no controlling Treasury
regulations, published rulings or judicial decisions involving leases with terms
substantially the same as the percentage leases that discuss whether such leases
constitute true leases for federal income tax purposes. If the percentage
leases are characterized as service contracts or partnership agreements, rather
than as true leases, part or all of the payments that we receive from the
lessees may not be considered rent or may not otherwise satisfy the various
requirements for qualification as "rents from real property." In that case, we
likely would not be able to satisfy either the 75% or 95% gross income test and,
as a result, would lose our REIT status.

As described above, in order for the rent that we receive to constitute
"rents from real property," several other requirements must be satisfied. One
requirement is that the percentage rent must not be based in whole or in part on
the income or profits of any person. The percentage rent, however, will qualify
as "rents from real property" if it is based on percentages of receipts or sales
and the percentages:

- are fixed at the time the percentage leases are entered into;

- are not renegotiated during the term of the percentage leases in a
manner that has the effect of basing percentage rent on income or
profits; and

- conform with normal business practice.

More generally, the percentage rent will not qualify as "rents from real
property" if, considering the percentage leases and all the surrounding
circumstances, the arrangement does not conform with normal business practice,
but is in reality used as a means of basing the percentage rent on income or
profits. Since the percentage rent is based on fixed percentages of the gross
revenue from the hotels that are established in the percentage leases, and we
have represented that the percentages (1) will not be renegotiated during the
terms of the percentage leases in a manner that has the effect of basing the
percentage rent on income or profits and (2) conform with normal business
practice, the percentage rent should not be considered based in whole or in part
on the income or profits of any person. Furthermore, we have represented that,
with respect to other hotel properties that we acquire in the future, we will
not charge rent for any property that is based in whole or in part on the income
or profits of any person, except by reason of being based on a fixed percentage
of gross revenues, as described above.

Another requirement for qualification of the rent as "rents from real
property" is that we must not own, actually or constructively, 10% or more of
the stock or the assets or net profits of any lessee (a "related party tenant")
other than a TRS. The constructive ownership rules generally provide that, if
10% or more in value of our shares is owned, directly or indirectly, by or for
any person, we are considered as owning the stock owned, directly or indirectly,
by or for such person. We do not own any stock or any assets or net profits of
any lessee directly. In addition, our charter prohibits transfers of our shares
that would cause us to own actually or constructively, 10% or more of the
ownership interests in a lessee. Based on the foregoing, we should never own,
actually or constructively, 10% or more of any lessee other than a TRS.
Furthermore, we have represented that, with respect to other hotel properties
that we acquire in the future, we will not rent any property to a related party
tenant. However, because the constructive ownership rules are broad and it is
not possible to monitor continually direct and indirect transfers of our shares,
no absolute assurance can be given that such transfers or other events of which
we have no knowledge will not cause us to own constructively 10% or more of a
lessee other than a TRS at some future date.

A third requirement for qualification of the rent as "rents from real
property" is that the rent attributable to the personal property leased in
connection with the lease of a hotel must not be greater than 15% of the total
rent received under the lease. The rent attributable to the personal property
contained in a hotel is the amount that bears the same ratio to total rent for
the taxable year as the average of the fair market values of the personal
property at the beginning and at the end of the taxable year bears to the
average of the aggregate fair market values of both the real and personal
property contained in the hotel at the beginning and at the end of such taxable
year (the "personal property ratio"). Prior to January 1, 2001, the personal
property ratio was computed based on relative adjusted tax bases instead of fair
market values. With respect to each hotel, we believe either that the personal
property ratio is less than 15% or that any income attributable to excess
personal property will not jeopardize our ability to qualify as a REIT. There
can be no assurance, however, that the Internal Revenue Service would not
challenge our calculation of a personal property ratio, or that a court would
not uphold such assertion. If such a challenge were successfully asserted, we
could fail to satisfy the 95% or 75% gross income test and thus lose our REIT
status.

A fourth requirement for qualification of the rent as "rents from real
property" is that, other than within the 1% de minimis exception described above
and other than through a TRS, we cannot furnish or render noncustomary services
to the tenants of our hotels, or manage or operate our hotels, other than
through an independent contractor who is adequately compensated and from whom we
do not derive or receive any income. Provided that the percentage leases are
respected as true leases, we should satisfy that requirement, because we do not
perform any services other than customary ones for the lessees. Furthermore, we
have represented that, with respect to other hotel properties that we acquire in
the future, we will not perform noncustomary services for the lessee of the
property. However, any TRS in which we acquire an interest can provide customary
and noncustomary services to our lessees without tainting our rental income from
the related properties.

If a portion of the rent that we receive from a hotel does not qualify as
"rents from real property" because the rent attributable to personal property
exceeds 15% of the total rent for a taxable year, the portion of the rent that
is attributable to personal property will not be qualifying income for purposes
of either the 75% or 95% gross income test. Thus, if such rent attributable to
personal property, plus any other income that is nonqualifying income for
purposes of the 95% gross income test, during a taxable year exceeds 5% of our

gross income during the year, we would lose our REIT status. If, however, the
rent from a particular hotel does not qualify as "rents from real property"
because either (1) the percentage rent is considered based on the income or
profits of the related lessee, (2) the lessee is a related party tenant or (3)
we furnish noncustomary services to the tenants of the hotel, or manage or
operate the hotel, other than through a qualifying independent contractor or a
TRS, none of the rent from that hotel would qualify as "rents from real
property." In that case, we might lose our REIT status because we would be
unable to satisfy either the 75% or 95% gross income test.

In addition to the rent, the lessees are required to pay certain additional
charges. To the extent that such additional charges represent either (1)
reimbursements of amounts that we are obligated to pay to third parties or (2)
penalties for nonpayment or late payment of such amounts, such charges should
qualify as "rents from real property." However, to the extent that such charges
do not qualify as "rents from real property," they instead will be treated as
interest that qualifies for the 95% gross income test.

Interest. The term "interest" generally does not include any amount
received or accrued, directly or indirectly, if the determination of such amount
depends in whole or in part on the income or profits of any person. However, an
amount received or accrued generally will not be excluded from the term
"interest" solely by being based on a fixed percentage or percentages of
receipts or sales. Furthermore, to the extent that interest from a loan that is
based on the residual cash proceeds from the sale of the property securing the
loan constitutes a "shared appreciation provision," income attributable to such
participation feature will be treated as gain from the sale of the secured
property.

Prohibited Transactions. A REIT will incur a 100% tax on the net income
derived from any sale or other disposition of property, other than foreclosure
property, that the REIT holds primarily for sale to customers in the ordinary
course of a trade or business. We believe that none of our assets are held
primarily for sale to customers and that a sale of any of our assets would not
be in the ordinary course of our business. Whether a REIT holds an asset
"primarily for sale to customers in the ordinary course of a trade or business"
depends, however, on the facts and circumstances in effect from time to time,
including those related to a particular asset. Nevertheless, we will attempt to
comply with the terms of safe-harbor provisions in the federal income tax laws
prescribing when an asset sale will not be characterized as a prohibited
transaction. We cannot assure you, however, that we can comply with the
safe-harbor provisions or that we will avoid owning property that may be
characterized as property that we hold "primarily for sale to customers in the
ordinary course of a trade or business."

Foreclosure Property. We will be subject to tax at the maximum corporate
rate on any income from foreclosure property, other than income that otherwise
would be qualifying income for purposes of the 75% gross income test, less
expenses directly connected with the production of that income. However, gross
income from foreclosure property will qualify under the 75% and 95% gross income
tests. Foreclosure property is any real property, including interests in real
property, and any personal property incident to such real property:

- that is acquired by a REIT as the result of the REIT having bid on
such property at foreclosure, or having otherwise reduced such
property to ownership or possession by agreement or process of law,
after there was a default or default was imminent on a lease of such
property or on indebtedness that such property secured;

- for which the related loan was acquired by the REIT at a time when the
default was not imminent or anticipated; and

- for which the REIT makes a proper election to treat the property as
foreclosure property.

We have no foreclosure property as of the date of this prospectus.

However, a REIT will not be considered to have foreclosed on a property
where the REIT takes control of the property as a mortgagee-in-possession and
cannot receive any profit or sustain any loss except as a creditor of the
mortgagor. Property generally ceases to be foreclosure property at the end of
the third taxable year following the taxable year in which the REIT acquired the
property, or longer if an extension is granted by the Secretary of the Treasury.
This grace period terminates and foreclosure property ceases to be foreclosure
property on the first day:

- on which a lease is entered into for the property that, by its terms,
will give rise to income that does not qualify for purposes of the 75%
gross income test, or any amount is received or accrued, directly or
indirectly, pursuant to a lease entered into on or after such day that
will give rise to income that does not qualify for purposes of the 75%
gross income test;

- on which any construction takes place on the property, other than
completion of a building or any other improvement, where more than 10%
of the construction was completed before default became imminent; or

- which is more than 90 days after the day on which the REIT acquired
the property and the property is used in a trade or business which is
conducted by the REIT, other than through an independent contractor
from whom the REIT itself does not derive or receive any income.

Failure to Satisfy Gross Income Tests. If we fail to satisfy one or both
of the gross income tests for any taxable year, we nevertheless may qualify as a
REIT for that year if we qualify for relief under certain provisions of the
federal income tax laws. Those relief provisions generally will be available
if:

- our failure to meet such tests is due to reasonable cause and not due
to willful neglect;

- we attach a schedule of the sources of our income to our tax return;
and

- any incorrect information on the schedule was not due to fraud with
intent to evade tax.

We cannot predict, however, whether in all circumstances we would qualify
for the relief provisions. In addition, as discussed above in "Taxation," even
if the relief provisions apply, we would incur a 100% tax on the gross income
attributable to the greater of the amounts by which we fail the 75% and 95%
gross income tests, multiplied by a fraction intended to reflect our
profitability.

ASSET TESTS

To maintain our qualification as a REIT, we also must satisfy two asset
tests at the end of each quarter of each taxable year. First, at least 75% of
the value of our total assets must consist of:

- cash or cash items, including certain receivables;

- government securities;

- interests in real property, including leaseholds and options to
acquire real property and leaseholds;

- interests in mortgages on real property;

- stock in other REITs; and

- investments in stock or debt instruments during the one-year period
following our receipt of new capital that we raise through equity
offerings or offerings of debt with at least a five-year term.

Under the second asset test, except for securities in the 75% asset class,
securities in a TRS or qualified REIT subsidiary, and specified partnership
interests and debt obligations:

- not more than 5% of the value of our total assets may be represented
by securities of any one issuer;

- we may not own securities that possess more than 10% of the total
voting power of the outstanding securities of any one issuer; and

- we may not own securities that have a value of more than 10% of the
total value of the outstanding securities of any one issuer (the "10%
value test").

In addition, not more than 20% of the value of our total assets may be
represented by securities of one or more TRSs.

We believe that our existing assets are qualifying assets for purposes of
the 75% asset test. We also believe that any additional real property that we
acquire and temporary investments that we make generally will be qualifying
assets for purposes of the 75% asset test. We will monitor the status of our
acquired assets for purposes of the various asset tests and will manage our
portfolio in order to comply at all times with such tests. If we fail to
satisfy the asset tests at the end of a calendar quarter, we will not lose our
REIT status if:

- we satisfied the asset tests at the end of the preceding calendar
quarter; and

- the discrepancy between the value of our assets and the asset test
requirements arose from changes in the market values of our assets and
was not wholly or partly caused by the acquisition of one or more
non-qualifying assets.

If we did not satisfy the condition described in the first item, above, we
still could avoid disqualification by eliminating any discrepancy within 30 days
after the close of the calendar quarter in which it arose.

As described above, in taxable years beginning after December 31, 2000, we
may own up to 100% of the stock of one or more TRSs. TRSs can perform activities
unrelated to our tenants, such as third-party management, development, and other
independent business activities, as well as provide services to our tenants. We
and a subsidiary must elect for the subsidiary to be treated as a TRS. A
corporation of which a TRS directly or indirectly owns more than 35% of the
voting power or value of the stock will automatically be treated as a TRS. The
deductibility of interest paid or accrued by a TRS to us is limited to assure
that the TRS is subject to an appropriate level of corporate taxation. Further,
there is a 100% excise tax on transactions between a TRS and us or our tenants
that are not conducted on an arm's-length basis. We may not own more than 10% of
the voting power or value of the stock of a taxable subsidiary that is not
treated as a TRS. Overall, no more than 20% of our assets can consist of
securities of TRSs. We do not currently have any TRSs, but may form one or more
TRSs in the future.

DISTRIBUTION REQUIREMENTS

Each taxable year, we must distribute dividends, other than capital gain
dividends and deemed distributions of retained capital gain, to our shareholders
in an aggregate amount at least equal to:

- the sum of

- 90% of our "REIT taxable income," computed without regard to the
dividends paid deduction and our net capital gain or loss, and

- 90% of our after-tax net income, if any, from foreclosure
property, minus

- the sum of certain items of non-cash income.

The foregoing percentages were reduced from 95% to 90% commencing with our
2001 taxable year.

We must pay such distributions in the taxable year to which they relate, or
in the following taxable year if we declare the distribution before we timely
file our federal income tax return for the year and pay the distribution on or
before the first regular dividend payment date after such declaration.

We will pay federal income tax on taxable income, including net capital
gain, that we do not distribute to shareholders. Furthermore, if we fail to
distribute during a calendar year, or by the end of January following the
calendar year in the case of distributions with declaration and record dates
falling in the last three months of the calendar year, at least the sum of:

- 85% of our REIT ordinary income for such year,

- 95% of our REIT capital gain income for such year, and

- any undistributed taxable income from prior periods,

We will incur a 4% nondeductible excise tax on the excess of such required
distribution over the amounts we actually distribute. We may elect to retain
and pay income tax on the net long-term capital gain we receive in a taxable
year. See "Taxation of Taxable U.S. Shareholders." If we so elect, we will be
treated as having distributed any such retained amount for purposes of the 4%
excise tax described above. We have made, and we intend to continue to make,
timely distributions sufficient to satisfy the annual distribution requirements.

It is possible that, from time to time, we may experience timing
differences between:

- the actual receipt of income and actual payment of deductible
expenses, and

- the inclusion of that income and deduction of such expenses in
arriving at our REIT taxable income.

Under certain circumstances, we may be able to correct a failure to meet
the distribution requirement for a year by paying "deficiency dividends" to our
shareholders in a later year. We may include such deficiency dividends in our
deduction for dividends paid for the earlier year. Although we may be able to
avoid income tax on amounts distributed as deficiency dividends, we will be
required to pay interest to the Internal Revenue Service based upon the amount
of any deduction we take for deficiency dividends.

RECORD-KEEPING REQUIREMENTS

We must maintain certain records in order to qualify as a REIT. In
addition, to avoid a monetary penalty, we must request on an annual basis
information from our shareholders designed to disclose the actual ownership of
our outstanding shares of beneficial interest. We have complied, and we intend
to continue to comply, with these requirements.

FAILURE TO QUALIFY

If we fail to qualify as a REIT in any taxable year, and no relief
provision applies, we would be subject to federal income tax and any applicable
alternative minimum tax on our taxable income at regular corporate rates. In
calculating our taxable income in a year in which we fail to qualify as a REIT,
we would not be able to deduct amounts paid out to shareholders. In fact, we
would not be required to distribute any amounts to shareholders in that year.
In such event, to the extent of our current and accumulated earnings and
profits, all distributions to shareholders would be taxable as ordinary income.
Subject to certain limitations of the federal income tax laws, corporate
shareholders might be eligible for the dividends received deduction. Unless we
qualified for relief under specific statutory provisions, we also would be
disqualified from taxation as a REIT for the four taxable years following the
year during which we ceased to qualify as a REIT. We cannot predict whether in
all circumstances we would qualify for such statutory relief.

TAXATION OF TAXABLE U.S. SHAREHOLDERS

As long as we qualify as a REIT, a taxable "U.S. shareholder" must take
into account as ordinary income distributions made out of our current or
accumulated earnings and profits that we do not designate as capital gain
dividends or retained long-term capital gain. A U.S. shareholder will not
qualify for the dividends received deduction generally available to
corporations. The term "U.S. shareholder" means a holder of priority common
shares that, for United States federal income tax purposes, is:

- a citizen or resident of the United States,

- an entity created or organized under the laws of the United States or
of a political subdivision of the United States,

- an estate whose income from sources outside the United States is
includible in gross income for United States federal income tax
purposes regardless of its source, or

- any trust with respect to which

- a United States court is able to exercise primary supervision
over its administration, and

- one or more United States persons have the authority to control
all of its substantial decisions.

A U.S. shareholder generally will recognize distributions that we designate
as capital gain dividends as long-term capital gain without regard to the period
for which the U.S. shareholder has held its priority common shares. A corporate
U.S. shareholder, however, may be required to treat up to 20% of certain capital
gain dividends as ordinary income.

We may elect to retain and pay income tax on the net long-term capital gain
that we receive in a taxable year. In that case, a U.S. shareholder would be
taxed on its proportionate share of our undistributed long-term capital gain.
The U.S. shareholder would receive a credit or refund for its proportionate
share of the tax we paid. The U.S. shareholder would increase the basis in its
priority common shares by the amount of its proportionate share of our
undistributed long-term capital gain, minus its share of the tax we paid.

A U.S. shareholder will not incur tax on a distribution in excess of our
current and accumulated earnings and profits if the distribution does not exceed
the adjusted basis of the U.S. shareholder's priority common shares. Instead,
the distribution will reduce the adjusted basis of such priority common shares.
A U.S. shareholder will recognize a distribution in excess of both our current
and accumulated earnings and profits and the U.S. shareholder's adjusted basis
in his or her priority common shares as long-term capital gain, or short-term
capital gain if the shares of priority common shares have been held for one year
or less, assuming the priority common shares are a capital asset in the hands of
the U.S. shareholder.

Shareholders may not include in their individual income tax returns any of
our net operating losses or capital losses. Instead, these losses are generally
carried over by us for potential offset against our future income. Taxable
distributions from us and gain from the disposition of the priority common
shares will not be treated as passive activity income and, therefore,
shareholders generally will not be able to apply any "passive activity losses,"
such as losses from certain types of limited partnerships in which the
shareholder is a limited partner, against such income. In addition, taxable
distributions from us and gain from the disposition of priority common shares
generally will be treated as investment income for purposes of the investment
interest limitations. We will notify shareholders after the close of our taxable
year as to the portions of the distributions attributable to that year that
constitute ordinary income, return of capital and capital gain.

TAXATION OF U.S. SHAREHOLDERS ON THE DISPOSITION OF PRIORITY COMMON SHARES

In general, a U.S. shareholder who is not a dealer in securities must treat
any gain or loss realized upon a taxable disposition of his or her priority
common shares as long-term capital gain or loss if the U.S. shareholder has held
the priority common shares for more than one year. However, a U.S. shareholder
must treat any loss upon a sale or exchange of priority common shares held by
such shareholder for six-months or less as a long-term capital loss to the
extent of capital gain dividends and other distributions from us that such U.S.
shareholder treats as long-term capital gain. All or a portion of any loss that
a U.S. shareholder realizes upon a taxable disposition of the priority common
shares may be disallowed if the U.S. shareholder purchases other priority common
shares within 30 days before or after the disposition.

CAPITAL GAINS AND LOSSES

The tax rate differential between capital gain and ordinary income for
non-corporate taxpayers may be significant. A taxpayer generally must hold a
capital asset for more than one year for gain or loss derived from its sale or
exchange to be treated as long-term capital gain or loss. The highest marginal
individual income tax rate is currently 39.1% and, under current law, is to be
reduced in the future. The maximum tax rate on long-term capital gain
applicable to non-corporate taxpayers is 20% for sales and exchanges of assets
held for more than one year. The maximum tax rate on long-term capital gain

from the sale or exchange of "section 1250 property," or depreciable real
property, is 25% to the extent that such gain would have been treated as
ordinary income if the property were "section 1245 property." With respect to
distributions that we designate as capital gain dividends and any retained
capital gain that we are deemed to distribute, we generally may designate
whether such a distribution is taxable to our non-corporate shareholders at a
20% or 25% rate. In addition, the characterization of income as capital gain or
ordinary income may affect the deductibility of capital losses. A non-corporate
taxpayer may deduct capital losses not offset by capital gains against its
ordinary income only up to a maximum annual amount of $3,000. A non-corporate
taxpayer may carry forward unused capital losses indefinitely. A corporate
taxpayer must pay tax on its net capital gain at ordinary corporate rates. A
corporate taxpayer can deduct capital losses only to the extent of capital
gains, with unused losses being carried back three years and forward five years.

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING

We will report to our shareholders and to the Internal Revenue Service the
amount of distributions we pay during each calendar year, and the amount of tax
we withhold, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at a rate of up to 30.5% with respect to
distributions unless the holder:

- is a corporation or comes within certain other exempt categories and,
when required, demonstrates this fact; or

- provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with the
applicable requirements of the backup withholding rules.

A shareholder who does not provide us with its correct taxpayer
identification number also may be subject to penalties imposed by the Internal
Revenue Service. Any amount paid as backup withholding will be creditable
against the shareholder's income tax liability. In addition, we may be required
to withhold a portion of capital gain distributions to any shareholders who fail
to certify their non-foreign status to us. For a discussion of the backup
withholding rules as applied to non-U.S. shareholders. See "Taxation of
Non-U.S. Shareholders."

TAXATION OF TAX-EXEMPT SHAREHOLDERS

Tax-exempt entities, including qualified employee pension and profit
sharing trusts and individual retirement accounts, generally are exempt from
federal income taxation. However, they are subject to taxation on their
unrelated business taxable income. While many investments in real estate
generate unrelated business taxable income, the Internal Revenue Service has
issued a ruling that dividend distributions from a REIT to an exempt employee
pension trust do not constitute unrelated business taxable income so long as the
exempt employee pension trust does not otherwise use the shares of the REIT in
an unrelated trade or business of the pension trust. Based on that ruling,
amounts that we distribute to tax-exempt shareholders generally should not
constitute unrelated business taxable income. However, if a tax-exempt
shareholder were to finance its acquisition of priority common shares with debt,
a portion of the income that it receives from us would constitute unrelated
business taxable income pursuant to the "debt-financed property" rules.
Furthermore, social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts and qualified group legal services plans that are
exempt from taxation under special provisions of the federal income tax laws are
subject to different unrelated business taxable income rules, which generally
will require them to characterize distributions that they receive from us as
unrelated business taxable income. Finally, in certain circumstances, a
qualified employee pension or profit sharing trust that owns more than 10% of
our shares must treat a percentage of the dividends that it receives as
unrelated business taxable income. Such percentage is equal to the gross income
we derive from an unrelated trade or business, determined as if we were a
pension trust, divided by our total gross income for the year in which we pay
the dividends. That rule applies to a pension trust holding more than 10% of
our shares only if:

- the percentage of our dividends that the tax-exempt trust must treat
as unrelated business taxable income is at least 5%;

- we qualify as a REIT by reason of the modification of the rule
requiring that no more than 50% of our shares of beneficial interest
be owned by five or fewer individuals that allows the beneficiaries of

the pension trust to be treated as holding our shares of beneficial
interest in proportion to their actuarial interests in the pension
trust; and

- either

- one pension trust owns more than 25% of the value of our shares
of beneficial interest; or

- a group of pension trusts individually holding more than 10% of
the value of our shares of beneficial interest collectively owns
more than 50% of the value of our shares of beneficial interest.

TAXATION OF NON-U.S. SHAREHOLDERS

The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and other foreign
shareholders are complex. This section is only a summary of such rules. We
urge non-U.S. shareholders to consult their own tax advisors to determine the
impact of federal, state, and local income tax laws on ownership of the priority
common shares, including any reporting requirements.

A non-U.S. shareholder that receives a distribution that is not
attributable to gain from our sale or exchange of U.S. real property interests,
as defined below, and that we do not designate as a capital gain dividend or
retained capital gain will recognize ordinary income to the extent that we pay
the distribution out of our current or accumulated earnings and profits. A
withholding tax equal to 30% of the gross amount of the distribution ordinarily
will apply unless an applicable tax treaty reduces or eliminates the tax.
However, if a distribution is treated as effectively connected with the non-U.S.
shareholder's conduct of a U.S. trade or business, the non-U.S. shareholder
generally will be subject to federal income tax on the distribution at graduated
rates, in the same manner as U.S. shareholders are taxed on distributions and
also may be subject to the 30% branch profits tax in the case of a corporate
non-U.S. shareholder. We plan to withhold U.S. income tax at the rate of 30% on
the gross amount of any distribution paid to a non-U.S. shareholder unless
either:

- a lower treaty rate applies and the non-U.S. shareholder files the
required form evidencing eligibility for that reduced rate with us, or

- the non-U.S. shareholder files the required form with us claiming that
the distribution is effectively connected income.

A non-U.S. shareholder will not incur tax on a distribution in excess of
our current and accumulated earnings and profits if the distribution does not
exceed the adjusted basis of its priority common shares. Instead, the
distribution will reduce the adjusted basis of those priority common shares. A
non-U.S. shareholder will be subject to tax on a distribution that exceeds both
our current and accumulated earnings and profits and the adjusted basis of its
priority common shares, if the non-U.S. shareholder otherwise would be subject
to tax on gain from the sale or disposition of its priority common shares, as
described below. Because we generally cannot determine at the time we make a
distribution whether or not the distribution will exceed our current and
accumulated earnings and profits, we normally will withhold tax on the entire
amount of any distribution at the same rate as we would withhold on a dividend.
However, a non-U.S. shareholder may obtain a refund of amounts that we withhold
if we later determine that a distribution in fact exceeded our current and
accumulated earnings and profits.

We must withhold 10% of any distribution that exceeds our current and
accumulated earnings and profits. Consequently, although we intend to withhold
at a rate of 30% on the entire amount of any distribution, to the extent that we
do not do so, we will withhold at a rate of 10% on any portion of a distribution
not subject to withholding at a rate of 30%.

For any year in which we qualify as a REIT, a non-U.S. shareholder will
incur tax on distributions that are attributable to gain from our sale or
exchange of "U.S. real property interests" under special provisions of the
federal income tax laws known as "FIRPTA." The term "U.S. real property
interests" includes interests in real property and shares in corporations at
least 50% of whose assets consists of interests in real property. Under those
rules, a non-U.S. shareholder is taxed on distributions attributable to gain
from sales of U.S. real property interests as if the gain were effectively
connected with a U.S. business of the non-U.S. shareholder. A non-U.S.

shareholder thus would be taxed on this distribution at the normal capital gain
rates applicable to U.S. shareholders, subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of a nonresident alien
individual. A non-U.S. corporate shareholder not entitled to treaty relief or
exemption also may be subject to the 30% branch profits tax on such a
distribution. We must withhold 35% of any distribution that we could designate
as a capital gain dividend. A non-U.S. shareholder may receive a credit against
our tax liability for the amount we withhold.

A non-U.S. shareholder generally will not incur tax under FIRPTA as long as
at all times non-U.S. persons hold, directly or indirectly, less than 50% in
value of our shares of beneficial interest. We cannot assure you that that test
will be met. However, a non-U.S. shareholder that owned, actually or
constructively, 5% or less of the priority common shares at all times during a
specified testing period will not incur tax under FIRPTA if the priority common
shares are "regularly traded" on an established securities market. Because the
priority common shares are regularly traded as on established securities market,
a non-U.S. shareholder will not incur tax under FIRPTA unless it owns more than
5% of the priority common shares. If the gain on the sale of the priority common
shares were taxed under FIRPTA, a non-U.S. shareholder would be taxed on that
gain in the same manner as U.S. shareholders subject to applicable alternative
minimum tax, a special alternative minimum tax in the case of nonresident alien
individuals, and the possible application of the 30% branch profits tax in the
case of non-U.S. corporations. Furthermore, a non-U.S. shareholder generally
will incur tax on gain not subject to FIRPTA if:

- the gain is effectively connected with the non-U.S. shareholder's U.S.
trade or business, in which case the non-U.S. shareholder will be
subject to the same treatment as U.S. shareholders with respect to
such gain, or

- the non-U.S. shareholder is a nonresident alien individual who was
present in the U.S. for 183 days or more during the taxable year and
has a "tax home" in the United States, in which case the non-U.S.
shareholder will incur a 30% tax on his or her capital gains.

OTHER TAX CONSEQUENCES

TAX ASPECTS OF OUR INVESTMENTS IN OUR OPERATING PARTNERSHIP AND THE SUBSIDIARY
PARTNERSHIPS

The following discussion summarizes certain federal income tax
considerations applicable to our direct or indirect investments in our operating
partnership and the subsidiary partnerships (each individually a "Partnership"
and, collectively, the "Partnerships"). The discussion does not cover state or
local tax laws or any federal tax laws other than income tax laws.

CLASSIFICATION AS PARTNERSHIPS. We are entitled to include in our income
our distributive share of each Partnership's income and to deduct our
distributive share of each Partnership's losses only if such Partnership is
classified for federal income tax purposes as a partnership rather than as a
corporation or an association taxable as a corporation. An organization will be
classified as a partnership, rather than as a corporation, for federal income
tax purposes if it:

- is treated as a partnership under Treasury regulations, effective
January 1, 1997, relating to entity classification (the "check-the-box
regulations"); and

- is not a "publicly traded" partnership.

Under the check-the-box regulations, an unincorporated entity with at least
two members may elect to be classified either as an association taxable as a
corporation or as a partnership. If such an entity fails to make an election,
it generally will be treated as a partnership for federal income tax purposes.
Each Partnership intends to be classified as a partnership for federal income
tax purposes and no Partnership will elect to be treated as an association
taxable as a corporation under the check-the-box regulations.

A publicly traded partnership is a partnership whose interests are traded
on an established securities market or are readily tradable on a secondary
market or the substantial equivalent thereof. A publicly traded partnership will
not, however, be treated as a corporation for any taxable year if 90% or more of

the partnership's gross income for such year consists of certain passive-type
income, including real property rents, gains from the sale or other disposition
of real property, interest, and dividends (the "90% passive income exception").

Treasury regulations (the "PTP regulations") provide limited safe harbors
from the definition of a publicly traded partnership. Pursuant to one of those
safe harbors (the "private placement exclusion"), interests in a partnership
will not be treated as readily tradable on a secondary market or the substantial
equivalent thereof if (1) all interests in the partnership were issued in a
transaction or transactions that were not required to be registered under the
Securities Act of 1933, as amended, and (2) the partnership does not have more
than 100 partners at any time during the partnership's taxable year. In
determining the number of partners in a partnership, a person owning an interest
in a partnership, grantor trust, or S corporation that owns an interest in the
partnership is treated as a partner in such partnership only if (1)
substantially all of the value of the owner's interest in the entity is
attributable to the entity's direct or indirect interest in the partnership and
(2) a principal purpose of the use of the entity is to permit the partnership to
satisfy the 100-partner limitation. Each Partnership qualifies for the private
placement exclusion.

We have not requested, and do not intend to request, a ruling from the
Internal Revenue Service that the Partnerships will be classified as
partnerships for federal income tax purposes. Instead, Hunton & Williams has
delivered an opinion to us providing that each Partnership has been since its
formation, and continues to be, treated for federal income tax purposes as a
partnership and not as a corporation or association taxable as a corporation.
Unlike a tax ruling, an opinion of counsel is not binding upon the Internal
Revenue Service, and no assurance can be given that the Internal Revenue Service
will not challenge the status of the Partnerships as partnerships for federal
income tax purposes. If such challenge were sustained by a court, the
Partnerships would be treated as corporations for federal income tax purposes,
as described below. The opinion of Hunton & Williams is based on existing law,
which to a great extent consists of administrative and judicial interpretation.
No assurance can be given that subsequent administrative or judicial changes
will not modify the conclusions expressed in the opinions.

If for any reason a Partnership were taxable as a corporation, rather than
as a partnership, for federal income tax purposes, we likely would not be able
to qualify as a REIT. See "Federal Income Tax Consequences of Our Status as a
REIT-Requirements for Qualification-Income Tests" and "-Requirements for
Qualification-Asset Tests." In addition, any change in a Partnership's status
for tax purposes might be treated as a taxable event, in which case we might
incur tax liability without any related cash distribution. See "Federal Income
Tax Consequences of Our Status as a REIT-Requirements for
Qualification-Distribution Requirements." Further, items of income and deduction
of such Partnership would not pass through to its partners, and its partners
would be treated as stockholders for tax purposes. Consequently, such
Partnership would be required to pay income tax at corporate rates on its net
income, and distributions to its partners would constitute dividends that would
not be deductible in computing such Partnership's taxable income.

INCOME TAXATION OF THE PARTNERSHIPS AND THEIR PARTNERS

PARTNERS, NOT THE PARTNERSHIPS, SUBJECT TO TAX. A partnership is not a
taxable entity for federal income tax purposes. Rather, we are required to take
into account our allocable share of each Partnership's income, gains, losses,
deductions, and credits for any taxable year of such Partnership ending within
or with our taxable year, without regard to whether we have received or will
receive any distribution from such Partnership.

PARTNERSHIP ALLOCATIONS. Although a partnership agreement generally will
determine the allocation of income and losses among partners, such allocations
will be disregarded for tax purposes if they do not comply with the provisions
of the federal income tax laws governing partnership allocations. If an
allocation is not recognized for federal income tax purposes, the item subject
to the allocation will be reallocated in accordance with the partners' interests
in the partnership, which will be determined by taking into account all of the
facts and circumstances relating to the economic arrangement of the partners
with respect to such item. Each Partnership's allocations of taxable income,
gain, and loss are intended to comply with the requirements of the federal
income tax laws governing partnership allocations.

TAX ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTIES. Income, gain, loss,
and deduction attributable to appreciated or depreciated property that is
contributed to a partnership in exchange for an interest in the partnership must
be allocated in a manner such that the contributing partner is charged with, or
benefits from, respectively, the unrealized gain or unrealized loss associated
with the property at the time of the contribution. The amount of such unrealized

gain or unrealized loss ("built-in gain" or "built-in loss") is generally equal
to the difference between the fair market value of the contributed property at
the time of contribution and the adjusted tax basis of such property at the time
of contribution (a "book-tax difference"). Such allocations are solely for
federal income tax purposes and do not affect the book capital accounts or other
economic or legal arrangements among the partners. The U.S. Treasury Department
has issued regulations requiring partnerships to use a "reasonable method" for
allocating items with respect to which there is a book-tax difference and
outlining several reasonable allocation methods.

Under our operating partnership's partnership agreement, depreciation or
amortization deductions of the operating partnership generally will be allocated
among the partners in accordance with their respective interests in the
operating partnership, except to the extent that the operating partnership is
required under the federal income tax laws governing partnership allocations to
use a method for allocating tax depreciation deductions attributable to
contributed properties that results in our receiving a disproportionate share of
such deductions. In addition, gain or loss on the sale of a property that has
been contributed, in whole or in part, to the operating partnership will be
specially allocated to the contributing partners to the extent of any built-in
or loss gain with respect to such property for federal income tax purposes.

BASIS IN PARTNERSHIP INTEREST. Our adjusted tax basis in our partnership
interest in the operating partnership generally is equal to:

- the amount of cash and the basis of any other property contributed by
us to the operating partnership;

- increased by our allocable share of the operating partnership's income
and our allocable share of indebtedness of the operating partnership;
and

- reduced, but not below zero, by our allocable share of the operating
partnership's loss and the amount of cash distributed to us, and by
constructive distributions resulting from a reduction in our share of
indebtedness of the operating partnership.

If the allocation of our distributive share of the operating partnership's
loss would reduce the adjusted tax basis of our partnership interest below zero,
the recognition of such loss will be deferred until such time as the recognition
of such loss would not reduce our adjusted tax basis below zero. To the extent
that the operating partnership's distributions, or any decrease in our share of
the indebtedness of the operating partnership, which is considered a
constructive cash distribution to the partners, reduce our adjusted tax basis
below zero, such distributions will constitute taxable income to us. Such
distributions and constructive distributions normally will be characterized as
long-term capital gain.

DEPRECIATION DEDUCTIONS AVAILABLE TO OUR OPERATING PARTNERSHIP. To the
extent that the operating partnership acquired its hotels in exchange for cash,
its initial basis in such hotels for federal income tax purposes generally was
or will be equal to the purchase price paid by the operating partnership. The
operating partnership depreciates such depreciable hotel property for federal
income tax purposes under the modified accelerated cost recovery system of
depreciation ("MACRS"). Under MACRS, the operating partnership generally
depreciates furnishings and equipment over a seven-year recovery period using a
200% declining balance method and a half-year convention. If, however, the
operating partnership places more than 40% of its furnishings and equipment in
service during the last three months of a taxable year, a mid-quarter
depreciation convention must be used for the furnishings and equipment placed in
service during that year. Under MACRS, the operating partnership generally
depreciates buildings and improvements over a 39-year recovery period using a
straight line method and a mid-month convention. The operating partnership's
initial basis in hotels acquired in exchange for units in the operating
partnership should be the same as the transferor's basis in such hotels on the
date of acquisition by the operating partnership. Although the law is not
entirely clear, the operating partnership generally depreciates such depreciable
hotel property for federal income tax purposes over the same remaining useful
lives and under the same methods used by the transferors. The operating
partnership's tax depreciation deductions are allocated among the partners in
accordance with their respective interests in the operating partnership, except
to the extent that the operating partnership is required under the federal
income tax laws governing partnership allocations to use a method for allocating
tax depreciation deductions attributable to contributed properties that results
in our receiving a disproportionate share of such deductions.

SALE OF A PARTNERSHIP'S PROPERTY

Generally, any gain realized by a Partnership on the sale of property held
by the Partnership for more than one year will be long-term capital gain, except
for any portion of such gain that is treated as depreciation or cost recovery
recapture. Any gain or loss recognized by a Partnership on the disposition of
contributed properties will be allocated first to the partners of the
Partnership who contributed such properties to the extent of their built-in gain
or loss on those properties for federal income tax purposes. The partners'
built-in gain or loss on such contributed properties will equal the difference
between the partners' proportionate share of the book value of those properties
and the partners' tax basis allocable to those properties at the time of the
sale. Any remaining gain or loss recognized by the Partnership on the
disposition of the contributed properties, and any gain or loss recognized by
the Partnership on the disposition of the other properties, will be allocated
among the partners in accordance with their respective percentage interests in
the Partnership.

Our share of any gain realized by a Partnership on the sale of any property
held by the Partnership as inventory or other property held primarily for sale
to customers in the ordinary course of the Partnership's trade or business will
be treated as income from a prohibited transaction that is subject to a 100%
penalty tax. Such prohibited transaction income also may have an adverse effect
upon our ability to satisfy the income tests for REIT status. See "Federal
Income Tax Consequences of Our Status as a REIT-Requirements for
Qualification-Income Tests." We, however, do not presently intend to acquire or
hold or to allow any Partnership to acquire or hold any property that represents
inventory or other property held primarily for sale to customers in the ordinary
course of our or such Partnership's trade or business.

STATE AND LOCAL TAXES

We and/or our shareholders may be subject to taxation by various states and
localities, including those in which we or a shareholder transacts business,
owns property or resides. The state and local tax treatment may differ from the
federal income tax treatment described above. Consequently, shareholders should
consult their own tax advisors regarding the effect of state and local tax laws
upon an investment in the priority common shares.

PLAN OF DISTRIBUTION

This prospectus covers the sale by us of 2,000,000 shares of priority
common shares. We may sell the securities in one or more of the following
methods from time to time:

- direct sales of shares to investors in privately negotiated
transactions;

- sale to underwriters for resale to the public or to investors;

- any combination of these methods of sale; or

- any other legal method.

Any of these transactions may be effected at market prices prevailing at
the time of sale, prices related to such prevailing market prices, negotiated
prices or fixed prices. If we effect these transactions by selling shares to or
through brokers, dealers or agents, these brokers, dealers or agents may receive
compensation in the form of discounts, concessions or commissions from us or
commissions from purchasers of shares for whom they may act as agent (which
discounts, concessions or commissions as to particular brokers, dealers or
agents might be in excess of those customary in the types of transactions
involved). Brokers, dealers or agents that participate in the distribution of
the shares may be deemed to be underwriters and any profit on the sale of shares
by them and any discounts, concessions or commissions received by any such
brokers, dealers or agents may be deemed to be underwriting discounts and
commissions under the Securities Act.

We will set forth in a prospectus supplement the terms of the offering of
the priority common shares, if required by applicable law, including:

- the name or names of any agents or underwriters;

- the purchase price of the securities being offered and the
proceeds we will receive from the sale;

- any over-allotment options under which underwriters may purchase
additional securities from us;

- any agency fees or underwriting discounts and other items
constituting agents' or underwriters' compensation; and

- any discounts or concessions allowed or re-allowed or paid to
dealers.

AGENTS

We may designate agents who agree to use their reasonable efforts to
solicit purchases for the period of their appointment or to sell priority common
shares on a continuing basis.

UNDERWRITERS

If we use underwriters for a sale of priority common shares, we will
identify in the applicable prospectus supplement any underwriters, dealers or
agents and will describe their compensation. Underwriters, dealers and agents
that participate in the distribution of the priority common shares may be
underwriters as defined in the Securities Act and any discounts or commissions
they receive from us and any profit on their resale of the priority common
shares may be treated as underwriting discounts and commissions under the
Securities Act. The underwriters may resell the priority common shares in one
or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale. The
obligations of the underwriters to purchase the securities will be subject to
the conditions set forth in the applicable underwriting agreement. The
underwriters may change from time to time any public offering price and any
discounts or concessions the underwriters allow or re-allow or pay to dealers.
We may use underwriters with whom we have a material relationship. We will
describe in the prospectus supplement, naming the underwriter, the nature of any
such relationship.

We may have agreements with the underwriters, dealers and agents to
indemnify them against specified civil liabilities, including liabilities under
the Securities Act. Underwriters, dealers and agents may engage in transactions
with or perform services for us in the ordinary course of their businesses.

STABILIZATION ACTIVITIES

An underwriter may engage in over-allotment, stabilizing transactions,
short covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Over-allotment involves sales in excess of the offering
size, which create a short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Short covering transactions involve purchases of the
securities in the open market after the distribution is completed to cover short
positions. Penalty bids permit the underwriters to reclaim a selling concession
from a dealer when the securities originally sold by the dealer are purchased in
a covering transaction to cover short positions. Those activities may cause the
price of the securities to be higher than it would otherwise be. If commenced,
the underwriters may discontinue any of the activities at any time.

Under the Exchange Act and applicable rules and regulations promulgated
thereunder, any person engaged in a distribution of any of the shares may not
simultaneously engage in market making activities with respect to the shares for
a period, depending upon certain circumstances, of either two days or nine days
prior to the commencement of such distribution. In addition and without limiting
the foregoing, we will be subject to applicable provisions of the Exchange Act
and the rules and regulations promulgated thereunder, including without
limitation Regulation M (Rules 100-106), which provisions may limit the timing
of purchases and sales of priority common shares by us.

OTHER

Under the securities laws of certain states, the shares may be sold in such
states only through registered or licensed brokers or dealers. In addition, in
certain states the shares may not be sold unless the shares have been registered
or qualify for sale in such state or an exemption from registration or
qualification is available and is complied with.

EXPERTS

Our consolidated balance sheets as of December 31, 2000 and 1999 and our
consolidated statements of operations, cash flows and shareholders' equity for
each of the years ended December 31, 2000, 1999 and 1998 included in this
Prospectus, have been audited by Moore Stephens, P.C., independent certified
public accountants, whose report is included in this prospectus and given upon
their authority as experts in accounting and auditing.

REPORTS TO SHAREHOLDERS

We furnish our shareholders with annual reports containing consolidated
financial statements audited by its independent certified public accountants.

LEGAL MATTERS

Certain legal matters in connection with this offering will be passed upon
for us by Hunton & Williams. In addition, the summary of legal matters
contained in the section of this Prospectus under the heading "Federal Income
Tax Consequences of Our Status as a REIT" is based on the opinion of Hunton &
Williams.

INDEX TO FINANCIAL STATEMENTS

Page
----

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
Independent Auditor's Report. . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999. . . . . . . . . F-3
Consolidated Statements of Operations for the years ended
December 31, 2000 and 1999. . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2000 and 1999. . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2000 and 1999. . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . F-9

Schedule III - Real Estate and Accumulated Depreciation for the
year ended December 31, 2000. . . . . . . . . . . . . . . . . . . . . . . . . F-27

HERSHA HOSPITALITY MANAGEMENT, L.P.
Independent Auditor's Report. . . . . . . . . . . . . . . . . . . . . . . . . F-29
Balance Sheets as of December 31, 2000 and 1999 . . . . . . . . . . . . . . . F-30
Statements of Operations for the years ended December 31, 2000 and 1999 . . . F-31
Statements of Partners Capital for the years ended December 31, 2000 and 1999 F-32
Statements of Cash Flows for the years ended December 31, 2000 and 1999 . . . F-33
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . F-35

COMBINED ENTITIES - INITIAL HOTELS
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . . . . F-41
Combined Balance Sheets as of December 31, 1998 and 1997. . . . . . . . . . . F-42
Combined Statements of Operations for the years ended
December 31, 1998, 1997, and 1996 . . . . . . . . . . . . . . . . . . . . . . F-43
Combined Statements of Owners' Equity for the years ended
December 31, 1998, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . . . F-44
Combined Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . F-45
Notes to Combined Financial Statements. . . . . . . . . . . . . . . . . . . . F-46

HERSHA HOSPITALITY TRUST - INTERIM REPORTS
Independent Accountant's Report . . . . . . . . . . . . . . . . . . . . . . . F-56
Consolidated Balance Sheets as of September 30, 2001 [Unaudited]
and December 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-57
Consolidated Statements of Operations for the three and nine months ended
September 30, 2001 and 2000 [Unaudited] . . . . . . . . . . . . . . . . . . . F-58
Consolidated Statement of Cash Flows for the nine months ended
September 30, 2001 and 2000 [Unaudited] . . . . . . . . . . . . . . . . . . . F-59
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . F-62

HERSHA HOSPITALITY MANAGEMENT, L.P. - INTERIM REPORTS
Independent Accountant's Report . . . . . . . . . . . . . . . . . . . . . . . F-70
Balance Sheets as of September 30, 2001 [Unaudited] and
December 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-71
Statement of Operations for the three and nine months ended
September 30, 2001 and 2000 [Unaudited] . . . . . . . . . . . . . . . . . . . F-72
Statement of Cash Flows for the nine months ended
September 30, 2001 and 2000 [Unaudited] . . . . . . . . . . . . . . . . . . . F-73
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . F-74

F-1

INDEPENDENT AUDITOR'S REPORT

To the Shareholders and Board of Trustees of
Hersha Hospitality Trust
New Cumberland, Pennsylvania

We have audited the accompanying consolidated balance sheets of Hersha
Hospitality Trust and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years then ended. These consolidated financial statements and
consolidated financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Hersha Hospitality Trust and subsidiaries as of December 31, 2000 and 1999, and
the consolidated results of their operations and their cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the consolidated
financial statement schedule referred to above, when considered in relationship
to the consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein as of
December 31, 2000.

MOORE STEPHENS, P. C.
Certified Public Accountants.

New York, New York
March 1, 2001

F-2

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (1)
[IN THOUSANDS EXCEPT SHARE AMOUNTS]

DECEMBER 31, DECEMBER 31,
-------------- --------------
ASSETS: 2000 1999
-------------- --------------

Investment in Hotel Properties, Net of
Accumulated Depreciation $ 87,671 $ 51,908
Cash and cash equivalents -- 124
Escrow Deposits 1,178 --
Lease Payments Receivable - Related Party 2,877 2,116
Intangibles, Net of Accumulated Amortization 1,720 855
Due from Related Party 849 1,028
Other Assets 236 351
-------------- --------------
TOTAL ASSETS $ 94,531 56,382
============== ==============

LIABILITIES AND SHAREHOLDERS' EQUITY:
Cash Overdraft $ -- $ 84
Line of Credit 11,400 6,096
Deposits Payable 1,000 --
Mortgages Payable 50,050 18,658
Dividends Payable 1,209 410
Due to Related Party 1,650 188
Accounts Payable and Accrued Expenses 529 161
-------------- --------------
TOTAL LIABILITIES $ 65,838 $ 25,597
-------------- --------------

MINORITY INTEREST 17,679 18,890
-------------- --------------

COMMITMENTS AND CONTINGENCIES -- --
-------------- --------------
SHAREHOLDERS' EQUITY:
Preferred Shares, $.01 par value, 10,000,000 Shares authorized,
None Issued and Outstanding -- --

Common Shares - Priority Class A, $.01 Par Value, 50,000,000
Shares Authorized, 2,275,000 Shares Issued and Outstanding
at December 31, 2000 and 1999, (Aggregate Liquidation
Preference $13,650) 23 23

Common Shares - Class B, $.01 Par Value, 50,000,000 Shares
Authorized, -0- Shares Issued and Outstanding at December
31, 2000 and 1999 -- --

Additional Paid-in Capital 11,968 11,968
Distributions in Excess of Net Earnings (977) (186)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 11,014 11,805
-------------- --------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 94,531 $ 56,382
============== ==============

<FN>
(1) Operations commenced on January 26, 1999

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.

F-3

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND
1999 (1)
[IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS]

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

REVENUE:
Percentage Lease Revenues $ 12,773 $ 7,264
Interest 50 78
Interest - Related Party 1 28
------------- -------------
TOTAL REVENUE 12,824 7,370

EXPENSES:
Interest expense 4,712 1,428
Land Lease - Related Party 15 20
Real Estate and Personal Property
Taxes and Property Insurance 753 450
General and Administrative 590 363
Early Payment Penalty 107 -
Depreciation and Amortization 3,892 2,064
------------- -------------
TOTAL EXPENSES 10,069 4,325

INCOME BEFORE MINORITY INTEREST 2,755 3,045

INCOME ALLOCATED TO MINORITY INTEREST 1,908 1,707
------------- -------------

NET INCOME $ 847 $ 1,338
============= =============

BASIC EARNINGS PER COMMON SHARE $ 0.37 $ 0.59
============= =============

DILUTED EARNINGS PER COMMON SHARE $ 0.37 $ 0.48
============= =============

WEIGHTED AVERAGE SHARES:
Basic 2,275,000 2,275,000

Diluted 6,715,996(2) 6,326,690(2)

<FN>
(1) Operations commenced on January 26, 1999
(2) Includes 4,440,996 and 4,205,970 units of limited partnership interest that
are redeemable on a one-for-one basis for Class B Common Shares.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.

F-4

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (1)
[IN THOUSANDS, EXCEPT SHARES]

Priority Class A Class B
Common Shares Common Shares Additional Distributions
------------------- ----------------- paid-in in excess of
Shares Dollars Shares Dollars capital net earnings Total
--------- -------- ------- -------- -------- -------------- --------

Balance at January 1, 1999 - - 100 - - - -

Cancellation of Initial Shares - - (100) - - - -

Issuance of shares, 2,275,000 23 - - 11,968 - 11,991
net of offering expenses

Dividends declared - - - - - (1,524) (1,524)
($0.67 per share)

Net Income 1,338 1,338

Balance at December 31, 1999 2,275,000 $ 23 - $ - $ 11,968 $ (186) $11,805

Dividends declared - - - - - (1,638) (1,638)
($0.72 per share)

Net Income 847 847

--------- -------- ------- -------- -------- -------------- --------
Balance at December 31, 2000 2,275,000 $ 23 - $ - $ 11,968 $ (977) $11,014
========= ======== ======= ======== ======== ============== ========

<FN>
(1) Operations commenced on January 26, 1999

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.

F-5

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2000 AND 1999 (1)
[IN THOUSANDS]

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

OPERATING ACTIVITIES:
Net Income $ 847 $ 1,338
--------- --------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 3,892 2,064
Income Allocated to Minority Interest 1,908 1,707
Change in Assets and Liabilities:
(Increase) Decrease in:
Escrow Deposits (1,178) -
Lease Payments Receivable - Related Party (761) (2,116)
Other Assets 115 (351)
Due from Related Party (21) -
Increase (Decrease):
Due to Related Parties 54 188
Accounts Payable and Accrued Expenses 176 245
--------- --------
Total Adjustments 4,185 1,737
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,032 3,075

INVESTING ACTIVITIES:
Purchase of Hotel Property Assets (13,017) (7,209)
Purchase of Intangible Assets (1,078) (940)
Loans to Related Party (800) (1,000)
--------- --------
NET CASH USED IN INVESTING ACTIVITIES (14,895) (9,149)

FINANCING ACTIVITIES:
Cash Overdraft 192 -
Proceeds from Borrowings Under Line of Credit 5,304 6,096
Net Proceeds from Issuance of Stock - 11,991
Borrowings from Mortgages Payable 25,050 -
Principal Repayment of Mortgages Payable (17,016) (5,460)
Dividends Paid (1,638) (1,114)
Limited Partnership Unit Distributions Paid (3,561) (1,580)
Borrowings from Related Party 1,408 -
Repayment of Related Party Loans - (3,735)
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,739 6,198

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (124) 124
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 124 -
--------- --------

CASH AND CASH EQUIVALENTS - END OF YEAR $ - $ 124
========= ========

(1) Operations commenced on January 26, 1999

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.

F-6

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2000 AND 1999(1)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During the Period: 12/31/00 12/31/99
-------- --------
Interest $ 4,445 $ 1,393

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

We have acquired an Investment in Hotel Properties with an approximate value, at
the commencement of operations, of $40,307 in exchange for (i) 4,032,321
subordinated units of limited partnership interest in the Partnership that are
redeemable for the same number of Class B Common Shares with a value of
approximately $24.2 million based on the initial offering price and (ii) the
assumption of approximately $23.3 million of indebtedness of which approximately
$6.1 million was repaid immediately after the acquisition of the hotels and
approximately $2.8 million was repaid prior to June 30, 1999.

On August 11, 1999 we purchased, from Hasu P. Shah and certain affiliates and
other officers and trustees of our Company, [the "Hersha Affiliates"], all the
partnership interests in 3744 Associates, a Pennsylvania limited partnership and
through the ownership of 3744 Associates, a 60- room Comfort Inn hotel located
near the John F. Kennedy International Airport in Jamaica, New York. The
Comfort Inn, JFK was newly constructed and commenced operations on August 12,
1999. We have purchased the Comfort Inn, JFK for $5.5 million.

On September 1, 1999 we purchased, from the Hersha Affiliates, all the
partnership interests in 2844 Associates, a Pennsylvania limited partnership and
through the ownership of 2844 Associates, a 77-room Clarion Inn & Suites hotel
located in Harrisburg, Pennsylvania. We acquired the Clarion Inn & Suites for a
purchase price of $2.7 million. We have assumed a mortgage payable of $2.0
million in connection with the acquisition of this hotel.

On September 1, 1999 we purchased, from the Hersha Affiliates, all the
partnership interests in 3544 Associates, a Pennsylvania limited partnership and
through the ownership of 3544 Associates, a 72-room Hampton Inn hotel located in
Danville, Pennsylvania. The total purchase price was $3.6 million. We have
acquired an Investment in the Hampton Inn, Danville, PA in exchange for (i)
173,359 subordinated units of limited partnership interest in the partnership
that are redeemable for the same number of Class B Common Shares with a value of
approximately $1.0 million based on the initial offering price and (ii) the
assumption of approximately $2.6 million of indebtedness.

On January 1, 2000, we purchased three hotels from the Hersha Affiliates. These
hotels consist of the Hampton Inn, Hershey, the Best Western, Indiana and the
Comfort Inn, McHenry. The purchase prices paid for these hotels were $7.5
million, $2.2 million and $1.8 million, respectively. We have assumed mortgages
payable of $5.0 million, $1.4 million and $1.2 million, respectively in
connection with the acquisitions of these hotels. We have also assumed related
party debt of $1.0 million related to the purchase of the Hampton Inn, Hershey.
The Hersha Affiliates have received cash of approximately $1.5 million, $0.8
million and $0.6 million, respectively, for the remainder of the proceeds from
the sale of these hotels.

F-7

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 2000 AND 1999 (1)
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

On May 19, 2000, we completed the acquisition of four hotels from Noble
Investment Group, Ltd. ("Noble"). We have simultaneously entered into lease
agreements with Noble for the four properties. We lease the properties to
entities owned by Noble pursuant to percentage leases that provide for rent
based, in part, on the room revenues from the hotels. The leases for the
Comfort Suites, Duluth, GA. and the Holiday Inn Express, Duluth, GA. are
effective as of May 19, 2000. The leases for the Hampton Inn hotels located in
Newnan and Peachtree City are effective as of April 20, 2000.

On October 1, 2000, we purchased the Sleep Inn in Corapolis, PA from the Hersha
Affiliates. The purchase price paid for this hotel was $5.5 million. We have
assumed a mortgage payable of $3.8 million. The Hersha Affiliates have received
cash of approximately $1.7 million for the remainder of the proceeds from the
sale of this hotel.

On December 28, 2000 we declared an $0.18 per Class A Common Share dividend of
$410 and a distribution of $0.18 per unit totaling $799 to the holders of
limited partnership units that was paid on January 25, 2001.

We have also issued an additional 235,026 units of limited partnership interest
in connection with final settlement of the purchase prices for the Holiday Inn,
Milesburg, the Comfort Inn, Denver and the Holiday Inn Express, Riverfront. The
total number of units outstanding as of December 31, 2000 was 4,440,996.

F-8

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[1] ORGANIZATION AND BASIS OF FINANCIAL PRESENTATION

Hersha Hospitality Trust [the "Company"] was formed in May 1998 to acquire
equity interests in ten existing hotel properties. We are a self-administered,
Maryland real estate investment trust for federal income tax purposes. On
January 26, 1999, we completed an initial public offering of 2,275,000 shares of
$.01 par value Priority Class A Common Shares. The offering price per share was
$6 resulting in gross proceeds of $13,650. Net of underwriters discount and
offering expenses, we received net proceeds of $11,991.

Upon completion of the initial public offering, we contributed substantially all
of the net proceeds to Hersha Hospitality Limited Partnership the
["Partnership"] in exchange for a 36.1% general partnership interest in the
Partnership. The Partnership used these proceeds to acquire an equity interest
in ten hotels, [the "Initial Hotels"] through subsidiary partnerships, and to
retire certain indebtedness relating to these hotels. The Partnership acquired
these hotels in exchange for (i) units of limited partnership interest in the
Partnership which are redeemable, subject to certain limitations, for an
aggregate of 4,032,431 Priority Class B Common Shares, with a value of
approximately $24.2 million based on the initial public offering, and (ii) the
assumption of approximately $23.3 million of indebtedness of which approximately
$6.1 million was repaid immediately after the acquisition of the hotels. Hasu
P. Shah and certain affiliates the ["Hersha Affiliates"] received units of
limited partnership interests in the Partnership aggregating a 63.9% equity
interest in the Partnership. The Partnership owns a 99% limited partnership
interest and Hersha Hospitality, LLC ["HHLLC"], a Virginia limited liability
company, owns a 1% general partnership interest in the subsidiary partnerships.
The Partnership is the sole member of HHLLC. We began operations on January 26,
1999, therefore, the historical financial statements include activity from
January 26, 1999 to December 31, 2000.

We lease 17 of our hotel facilities to Hersha Hospitality Management, LP,
["HHMLP"], a limited partnership owned by certain members of the Hersha
Affiliates. HHMLP operates and leases the hotel properties pursuant to separate
percentage lease agreements [the "Percentage Leases"] that provide for initial
fixed rents or percentage rents based on the revenues of the hotels. The hotels
are located principally in the Mid-Atlantic region of the United States. We
have also entered into percentage leases with Noble Investment Group, Ltd.
["Noble"], an independent third party management company, to lease and manage
four hotels in the metropolitan Atlanta market.

On May 19, 2000, we completed our acquisition of four hotel properties in
metropolitan Atlanta, Georgia from various entities owned by Noble. The four
properties acquired and their respective purchase prices are as follows:

HOTEL PROPERTY ROOMS LOCATION PURCHASE PRICE

Comfort Suites 85 Duluth, Georgia $ 5,207,857
Holiday Inn Express 68 Duluth, Georgia $ 3,735,413
Hampton Inn 91 Newnan, Georgia $ 7,117,092
Hampton Inn 61 Peachtree City, Georgia $ 3,939,640

F-9

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[1] ORGANIZATION AND BASIS OF FINANCIAL PRESENTATION [CONTINUED]

The Partnership acquired the Hampton Inn, Newnan and Hampton Inn, Peachtree City
through the assumption of existing debt, held by General Electric Capital
Corporation, of $3.6 million and $2.4 million, respectively. In addition,
approximately $5.0 million was utilized from our outstanding line of credit.
The Comfort Suites, Duluth and the Holiday Inn Express, Duluth were purchased
through mortgages from Lehman Brothers Bank totaling $6.0 million in addition to
$3.0 million from our outstanding line of credit.

Since the completion of the initial public offering we have issued an additional
173,539 units of limited partnership interest in connection with the acquisition
of the Hampton Inn, Danville, PA. We have also issued an additional 235,026
units of limited partnership interest in connection with final settlement of the
purchase price of the Holiday Inn, Milesburg, the Comfort Inn, Denver and the
Holiday Inn Express, Riverfront. The total number of units of limited
partnership interest outstanding as of December 31, 2000 and 1999 was 4,440,996
and 4,205,970, respectively.

[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and includes all of our accounts as well as accounts of the Partnership and the
subsidiary Partnerships. All intercompany amounts have been eliminated.

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

INVESTMENT IN HOTEL PROPERTIES - Investment in hotel properties are stated at
cost. Depreciation for financial reporting purposes is principally based upon
the straight-line method.

The estimated lives used to depreciate the Hotel properties are as follows:

Building and Improvements 15 to 40 Years
Furniture and Fixtures 5 to 7 Years

IMPAIRMENT OF LONG-LIVED ASSETS - We review the carrying value of each hotel
property in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121 to determine if circumstances exist indicating an impairment in the
carrying value of the investment in the hotel property or that depreciation
periods should be modified. Long-lived assets are reviewed for impairment
whenever events or changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable. We perform undiscounted cash
flow analyses to determine if an impairment exists. If an impairment is
determined to exist, any related impairment loss is calculated based on fair
value. We do not believe that there are any current facts or circumstances
indicating impairment of any of our investment in hotel properties.

F-10

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]

CASH AND CASH EQUIVALENTS - Cash and cash equivalents are comprised of cash and
certain highly liquid investments with maturities of three months or less when
acquired, carried at cost, which approximates fair value. We had no cash
equivalents at December 31, 2000.

INTANGIBLE ASSETS - Intangible assets are carried at cost and consist of loan
acquisition fees and goodwill. Amortization of loan acquisition fees is
computed using the straight-line method over the two year term of the related
debt and over a 15 year period for goodwill.

REVENUE RECOGNITION - Percentage lease income is recognized when earned from the
Lessees under the agreements from the date of acquisition of each hotel
property. Lease income is recognized under fixed rent agreements ratably over
the lease term. All leases between us and the Lessees are operating leases.

INCOME TAXES - We qualify as a real estate investment trust under Section 856
and 860 of the Internal Revenue Code. Accordingly, no provision for federal
income taxes has been reflected in the financial statements.

Earnings and profits that determine the taxability of dividends to shareholders
differ from net income reported for financial reporting purposes due to the
differences for Federal tax purposes in the estimated useful lives and methods
used to compute depreciation. During 2000 and 1999, none of the distributions
were considered to be return of capital for Federal income tax purposes.

MINORITY INTEREST - Minority interest in the Partnership represents the limited
partners proportionate share of the equity of the Partnership. The limited
partnership interests are owned by numerous individuals and companies. Income
is allocated to minority interest based on weighted average percentage ownership
throughout the year.

EARNINGS PER COMMON SHARE - We compute earnings per share in accordance with
Statement of Financial Accounting Standards ["SFAS"] No. 128, "Earnings Per
Share."

SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings
Per Share," and replaces its primary earnings per share with new basic earnings
per share representing the amount of earnings for the period available to each
share of common stock outstanding during the reporting period. Diluted earnings
per share reflects the amount of earnings for the period available to each share
of common stock outstanding during the reporting period, while giving effect to
all dilutive potential common shares that were outstanding during the period,
such as common shares that could result from the potential exercise or
conversion of securities into common stock.

The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an antidilutive
effect on earnings per share. The dilutive effect of outstanding options and
warrants and their equivalents is reflected in diluted earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon exercise of options and warrants in computing
diluted earning per share. It assumes that any proceeds would be used to
purchase common stock at the average market price during the period. Options
and warrants will have a dilutive effect only when the average market price of
the common stock during the period exceeds the exercise price of the option or
warrants.

F-11

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]

CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject us
to concentrations of credit risk include cash and cash equivalents and rent
receivable arising from our normal business activities. We place our cash and
cash equivalents with high credit quality financial institutions. We do not
require collateral to support our financial instruments. At December 31, 2000
and 1999, we had approximately $-0- and $35, respectively, in financial
institutions that exceeded federally insured amounts.

Rental income is earned from one related party lessee and one unrelated party
lessee. Therefore, the collection of rent receivable and rent income is reliant
on the continued financial health of these Lessees.

STOCK BASED COMPENSATION - We account for employee stock-based compensation
under the intrinsic value based method as prescribed by Accounting Principles
Board ["APB"] Opinion No. 25. We apply the provisions of SFAS No. 123,
"Accounting for Stock Based Compensation," to non-employee stock-based
compensation and the pro forma disclosure provisions of that statement to
employee stock-based compensation.

DISTRIBUTIONS - On December 28, 2000, we declared an $0.18 per Class A Common
Share dividend which was paid on January 25, 2001.

[3] INTANGIBLE ASSETS

At December 31, 2000 and 1999, intangibles consisted of the following:

ACCUMULATED
DESCRIPTION COST AMORTIZATION NET
- ----------- ------ ------------- ------

DECEMBER 31, 2000:
GOODWILL $1,168 $ 450 $ 718
LOAN ACQUISITION FEES 1,144 142 1,002
------ ------------- ------

TOTALS $2,312 $ 592 $1,720
====== ============= ======
DECEMBER 31, 1999:
GOODWILL $ 868 $ 72 $ 796
LOAN ACQUISITION FEES 72 13 59
------ ------------- ------

TOTALS $ 940 $ 85 $ 855
====== ============= ======

Amortization expense was $213 and $85 for the years ending December 31, 2000 and
1999, respectively.

F-12

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[4] INVESTMENT IN HOTEL PROPERTIES

Hotel properties consist of the following at December 31, 2000 and 1999:

2000 1999
------- -------
Land $ 8,574 $ 4,597
Buildings and Improvements 74,830 42,915
Furniture, Fixtures and Equipment 16,108 6,375
------- -------
99,512 53,887

Less Accumulated Depreciation 11,841 1,979
------- -------
$87,671 $51,908
======= =======

Depreciation expense was $3,679 and $1,979 for the years ended December 31, 2000
and 1999, respectively.

The twenty one hotels owned at December 31, 2000 consist of eighteen premium
limited service hotels and three full service hotel properties.

In 2000 and 1999, we acquired the following premium limited service hotels for
the approximate amounts indicated.

NO. OF PURCHASE
2000 ROOMS PRICE
- ---- ------ ---------

Hampton Inn & Suites, Hershey, PA 110 $ 7,500
Best Western, Indiana, PA 96 2,200
Comfort Inn, McHenry, MD 77 1,800
Hampton Inn, Newnan, GA 91 7,117
Hampton Inn, Peachtree City, GA 61 3,940
Comfort Suites, Duluth 85 5,208
Holiday Inn Express, Duluth 68 3,735
Sleep Inn, Pittsburgh, PA 143 5,500
------ ---------
Total 731 $ 37,000
====== =========

1999
- ----
Comfort Inn - JFK, NY 60 $ 5,500
Clarion Inn & Suites, Harrisburg, PA 77 2,700
Hampton Inn, Danville, PA 72 3,600
------ ---------
209 $ 11,800
====== =========

F-13

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[4] INVESTMENT IN HOTEL PROPERTIES [CONTINUED]

On August 11, 1999 we purchased, from the Hersha Affiliates, all the partnership
interests in 3744 Associates, a Pennsylvania limited partnership and through the
ownership of 3744 Associates, a 60- room Comfort Inn hotel located near the John
F. Kennedy International Airport in Jamaica, New York. The Comfort Inn was
newly constructed and commenced operations on August 12, 1999.

On September 1, 1999 we purchased, from the Hersha Affiliates, all the
partnership interests in 2844 Associates, a Pennsylvania limited partnership
and, through the ownership of 2844 Associates, a 77-room Clarion Inn & Suites
hotel located in Harrisburg, Pennsylvania. We also purchased the 72-room
Hampton Inn hotel located in Danville, Pennsylvania from 3544 Associates.

The purchase prices for the Comfort Inn, JFK, Hampton Inn, Danville and the
Clarion Inn & Suites, Harrisburg are $5.5 million, $3.6 million and $2.7
million, respectively. The purchase price valuations for the properties
acquired were based upon the rent to be paid by the Lessee under percentage
leases. The purchase prices of these hotels will be adjusted on December 31,
2001 by applying a pricing methodology to such hotels' cash flows in a manner
similar to that of the other hotels purchased by HHLP from the Hersha
Affiliates. The adjustments must be approved by a majority of the Company's
independent trustees.

On January 1, 2000, we purchased, from the Hersha Affiliates, all the
partnership interests in 3144 Associates, 1844 Associates and 1544 Associates,
all Pennsylvania Limited Partnerships. Through the acquisition of these
partnership interests we have acquired a 110 room Hampton Inn & Suites, a 96
room Best Western and a 77 room Comfort Inn, respectively.

The purchase prices for the Hampton Inn and Suites, Best Western and Comfort Inn
were $7.5 million, $2.2 million and $1.8 million, respectively. The purchase
price valuations for the properties acquired were based upon the rent to be paid
by the Lessee under percentage leases. The purchase prices of these hotels will
be adjusted on December 31, 2001 by applying a pricing methodology to such
hotels' cash flows in a manner similar to that of the other hotels purchased by
HHLP from the Hersha Affiliates. The adjustments must be approved by a majority
of the Company's independent trustees.

On May 19, 2000, we completed our acquisition of four hotel properties in
metropolitan Atlanta, Georgia from various entities owned by Noble Investments
Group, Ltd. ("Noble"). Collectively the four hotels are referred to as the
("Noble Investments Hotels"). We have acquired a 91 and 61 room Hampton Inn in
Newnan and Peachtree City, GA. We have also acquired an 85 room Comfort Suites
and a 68 room Holiday Inn Express in Duluth, GA. The purchase prices paid for
these hotels were $7.2, $3.9, $5.2 and $3.7 million, respectively.

F-14

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[4] INVESTMENT IN HOTEL PROPERTIES [CONTINUED]

On October 1, 2000 we purchased, from the Hersha Affiliates, all the partnership
interests in 1944 Associates, a Pennsylvania limited partnership and through the
ownership of 1944 Associates, a 143 room Sleep Inn hotel located near the
Pittsburgh International Airport in Corapolis, PA. We purchased the Sleep Inn
for $5.5 million.

The above acquisitions were accounted for as purchases, and the results of such
acquisitions are included in the Company's consolidated statements of operations
from the dates of acquisition. No goodwill arose in the transactions. The
purchase prices of these hotels will be adjusted on December 31, 2002 by
applying a pricing methodology to such hotels' cash flows in a manner similar to
that of the other hotels purchased by HHLP from the Hersha Affiliates. The
adjustments must be approved by a majority of the Company's independent
trustees.

[5] DEBT

Debt is comprised of the following at December 31, 2000 and 1999:

2000 1999
---- ----
Mortgages Payable $ 50,050 $ 18,658
Revolving Credit Facility 11,400 6,096
--------- ---------
$ 61,450 $ 24,754
========= =========

Substantially all of our mortgage indebtedness is collateralized by property and
equipment and in certain situations is personally guaranteed by the Hersha
Affiliates. The total mortgages payable balance at December 31, 2000 and 1999,
was $50,050 and $18,658, respectively, and consisted of mortgages with fixed
interest rates ranging from 7.75% to 8.94%. The maturities for the outstanding
mortgages ranged from May 1, 2007 to March 1, 2010.

On August 9, 1999, the Company obtained a $7.0 million credit facility from
Sovereign Bank (the "Line of Credit"). The Line of Credit was extended to $11.5
million as of December 1, 2000. Outstanding borrowings under the Line of Credit
bear interest at the bank's prime rate and the Line of Credit is collateralized
by the Comfort Inn, JFK, Holiday Inn, Milesburg, PA and the Clarion Suites,
Philadelphia, PA. The interest rate on borrowings under the Line of Credit at
December 31, 2000 was 9.50%. The Line of Credit expires on August 8, 2001. We
have the option to extend the Line of Credit for an additional twelve months
upon expiration. The outstanding principal balance on the Line of Credit was
approximately $11.4 million and $6.1 million at December 31, 2000 and 1999,
respectively. The weighted average interest rate on short term borrowings was
9.0 %.

F-15

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[5] DEBT [CONTINUED]

Aggregate annual principal payments for the Company's mortgages payable at
December 31, 2000 are due as follows:

2001 $ 856
2002 1,247
2003 1,359
2004 1,480
2005 1,613
Thereafter 43,495
------------
TOTAL $ 50,050
============

[6] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS

In conjunction with the initial public offering, we acquired the Initial Hotels
and entered into percentage lease agreements with Hersha Hospitality Management,
L.P. ("HHMLP"). We have acquired seven properties from the Hersha Affiliates
that were subsequently leased to HHMLP and four properties from Noble Investment
Group, Ltd. ("Noble") that were leased to Noble, subsequent to our public
offering. Under the percentage leases, the Partnership is obligated to pay the
costs of certain capital improvements, real estate and personal property taxes
and property insurance, and to make available to the lessee an amount equal to
4% [6% for some hotels] of room revenues per quarter, on a cumulative basis, for
the periodic replacement or refurbishment of furniture, fixtures and equipment
at these hotels.

There was no commitment outstanding to the limited partners as of December 31,
2000. For the year ended December 31, 1999 the limited partners were paid
cumulative distributions of $2,039 and there was a commitment outstanding to the
limited partners of $704 as of December 31, 1999. The limited partners were
paid $704 during March 2000 in conjunction with this commitment. The Priority
Class A Common shareholders will be entitled to receive dividends in excess of
the priority distribution [See Note 9] after the limited partners have received
an amount equal to the priority distribution. The holders of the Priority Class
A Common Shares will be entitled to receive further distributions on a pro rata
basis with the holders of the limited partnership units.

We are the sole general partner in the Partnership, which is the sole general
partner in the subsidiary partnerships and, as such, are liable for all recourse
debt of the Partnership to the extent not paid by the Partnerships. In the
opinion of management, we do not anticipate any losses as a result of our
obligations as general partner.

We have entered into percentage leases relating to 17 hotels with HHMLP. Each
percentage lease will have an initial non-cancelable term of five years. All,
but not less than all, of the percentage leases for these 17 hotels may be
extended for an additional five-year term at the Lessee's option. At the end of
the first extended term, the Lessee, at its option, may extend some or all of
the percentage leases for these hotels for an additional five-year term.
Pursuant to the terms of the percentage leases, the Lessee is required to pay
initial fixed rent, base rent or percentage rent and certain other additional
charges and is entitled to all profits from the operations of the hotels after
the payment of certain specified operating expenses.

F-16

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[6] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS [CONTINUED]

We have future lease commitments from HHMLP through October 2005 and with Noble
through May 2003. Minimum future rental income under these non-cancellable
operating leases at December 31, 2000, is as follows:

2001 $ 10,059
2002 8,244
2003 5,966
2004 1,699
2005 1,062
Thereafter 0
------------
TOTAL $ 27,030
============

We have entered into percentage leases relating to 4 hotels with Noble. Each
percentage lease has an initial non-cancelable term of three years. All, but
not less than all, of the Percentage Leases for these 4 hotels may be extended
for an additional three-year term at Noble's option. At the end of the first
extended term, we or Noble may extend all, but not less than all, of the
Percentage Leases for these hotels for an additional three-year term. Pursuant
to the terms of the Percentage Leases, Noble is required to pay initial fixed
rent or percentage rent and certain other additional charges and is entitled to
all profits from the operations of the hotels after the payment of certain
specified operating expenses.

For the year ended December 31, 2000 we earned initial fixed rents of $7,896 and
earned percentage rents of $4,878. For the period January 26, 1999 through
December 31, 1999, we earned initial fixed rents of $4,152 and earned percentage
rents of $3,112.

We have acquired eleven hotel, since the commencement of operations, for prices
that will be adjusted at either December 31, 2000, 2001 or 2002. The purchase
price adjustments are calculated by applying the initial pricing methodology to
such hotels' cash flows as shown on each hotel's audited financial statements.
The adjustments must be approved by a majority of our independent trustees. If
the repricing produces a higher aggregate value for such hotels, the Hersha
Affiliates receive an additional number of units of limited partnership interest
that, when multiplied by the offering price, equals the increase in value plus
the value of any distributions that would have been made with respect to such
units of limited partnership interest if such units of limited partnership
interest had been issued at the time of the acquisition of such hotels. If,
however, the repricing produces a lower aggregate value for such hotels, the
Hersha Affiliates forfeit to the Partnership that number of units of limited
partnership interest that, when multiplied by the offering price, equals the
decrease in value. Any adjustments arising from the issuance or forfeiture of
shares will adjust the cost of the property acquired based on the fair value of
the shares on the date of the adjustment.

On January 26, 1999, we executed an administrative services agreement with HHMLP
to provide accounting and securities reporting services for the Company. The
terms of the agreement provided for a fixed fee of $55 with an additional $10
per property (prorated from the time of acquisition) for each hotel added to the
Company's portfolio. As of December 31, 2000 and 1999, $244 and $155 has been
charged to operations, respectively.

F-17

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[6] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS [CONTINUED]

We owed the Lessee, a related party, $42 and $144 for replacement reserve
reimbursements and $133 and $44 under the administrative services agreement as
of December 31, 2000 and 1999, respectively.

We lease a parcel of real estate to Mr. Hasu P. Shah for a nominal amount per
year.

We leased one parcel of real estate from the Hersha Affiliates for an aggregate
annual rental of $15 during the year ended December 31, 2000. We lease two
parcels of real estate from the Hersha Affiliates for an aggregate annual rental
of $21 during the year ended December 31, 1999.

We paid to Mr. Jay H. Shah, son of Mr. Hasu P. Shah, certain legal fees
aggregating $199 and $153 during the years ended December 31, 2000 and 1999,
respectively. Of this amount $174 and $144 was capitalized as Settlement costs,
respectively.

We have approved the lending of up to $3.0 million to the Hersha Affiliates to
construct hotels and related improvements on specific hotel projects. As of
December 31, 2000 and 1999, the Hersha Affiliates owe us $800 and $1,000 related
to this borrowing. The Hersha Affiliates have borrowed this money from us at an
interest rate of 12.0% per annum. Interest income from these advances was $50
and $28 for the year ended December 31, 2000 and 1999, respectively.

[7] STOCK OPTION PLANS

[A] Prior to the initial public offering, we adopted the Option Plan. The
Option Plan is administered by the Compensation Committee of the Board of
Trustees, or its delegate.

Our officers and other employees generally are eligible to participate in the
Option Plan. The administrator of the plan selects the individuals who
participate in the Option Plan.

The Option Plan authorizes the issuance of options to purchase up to 650,000
Class B Common Shares and subordinated units. The Option Plan provides for the
grant of (i) options intended to qualify as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended, and (ii) options
not intended to so qualify. Options under the option plan may be awarded by the
administrator of the Option Plan, and the administrator will determine the
option exercise period and any vesting requirements. The options granted under
the Option Plan will be exercisable only if (i) we obtain a per share closing
price on the Common Shares of $9.00 or higher for 20 consecutive trading days
and (ii) the closing price per Common Share for the prior trading day was $9.00
or higher. In addition, no option granted under the option plan may be
exercised more than five years after the date of grant. The exercise price for
options granted under the option plan will be determined by the Compensation
Committee at the time of grant.

No option award may be granted under the Option Plan more than ten years after
the date the Board of Trustees approved such Plan. The Board may amend or
terminate the Option Plan at any time, but an amendment will not become
effective without shareholder approval if the amendment (i) increases the number
of shares that may be issued under the Option Plan, (ii) materially changes the
eligibility requirements or (iii) extends the length of the Option Plan. No
amendment will affect a participant's outstanding award without the
participant's consent.

F-18

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[7] STOCK OPTION PLANS [CONTINUED]

We issued options to purchase 500,000 Class B common shares and units under the
Option Plan with an exercise price of $6.00, subject to the price restrictions
mentioned above. Utilizing the Black Scholes option pricing model no
compensation is required to be recorded or disclosed.

[B] Prior to the initial public offering, the Board of Trustees also adopted,
and our sole shareholder approved, the Trustees' Plan to provide incentives to
attract and retain Independent Trustees. The Trustees' Plan authorizes the
issuance of up to 200,000 Class B Common Shares. The Trustees' Plan provides
for, in the event the Class B Common Shares are converted into another or our
securities, the issuance of equivalent amounts of such security and options to
purchase such security into which the Class B Common Shares are converted.

Under the Trustees' Plan, we granted a nonqualified option for Class B Common
Shares to our independent Trustees who were members of the Board on the
effective date of the initial public offering. The exercise price of each such
option is equal to the offering price. Each such option shall become
exercisable over the particular Trustee's initial term, provided that the
Trustee is a member of the Board on the applicable date. An option granted
under the Trustees' Plan will be exercisable only if (i) we obtain a per share
closing price on the Priority Common Shares of $9.00 for 20 consecutive trading
days and (ii) the per share closing price on the Priority Common Shares for the
prior trading day was $9.00 or higher. Options issued under the Trustees' Plan
are exercisable for five years from the date of grant.

A Trustee's outstanding options will become fully exercisable if the Trustee
ceases to serve on the Board due to death or disability. All awards granted
under the Trustees' Plan shall be subject to Board or other approval sufficient
to provide exempt status for such grants under Section 16 of the Securities
Exchange Act of 1934, as amended, as that section and the rules thereunder are
in effect from time to time. No option may be granted under the Trustees' Plan
more than 10 years after the date that the Board of Trustees approved the Plan.
The Board may amend or terminate the Trustees' Plan at any time but an amendment
will not become effective without shareholder approval if the amendment
increases the number of shares that may be issued under the Trustees' Plan
(other than equitable adjustments upon certain corporate transactions).

We issued options to purchase 34,000 Class B Common Shares under the Trustees'
Plan with an exercise price of $6.00, subject to the price restrictions
mentioned above. Utilizing the Black Scholes option pricing model no
compensation is required to be recorded or disclosed.

The fair value of each option grant is estimated on the date of the grant with
the following weighted average assumptions:

Dividend Yield 12.00%
Expected Volatility 10.0%
Risk-Free Interest Rate 5.25%
Expected Lives 3 Years

F-19

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[7] STOCK OPTION PLANS [CONTINUED]

A summary of stock option activity under all plans is as follows:

WEIGHTED AVERAGE
SHARES EXERCISE PRICE
----------------- ---------------

Outstanding December 31, 1998 - $ -
Granted 1,033,975 $ 6.00
Exercised - -
Forfeited/Expired - -
Cancelled (499,975) $ 6.00
----------------- ---------------
Outstanding December 31, 1999 534,000 $ 6.00
================= ===============
Exercisable December 31, 1999 -
=================
Granted - -
Exercised - -
Forfeited/Expired - -
Cancelled - -
----------------- ---------------
Outstanding December 31, 2000 534,000 $ 6.00
=================
Exercisable December 31, 2000 -
=================

OUTSTANDING EXERCISABLE
----------------------------------- ------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE REMAINING EXERCISE EXERCISE
PRICE SHARES CONTRACTUAL LIFE PRICE SHARES PRICE
- --------- ------- ---------------- ----------------- ------ ----------------

6.00 534,000 3.42 $ 6.00 - -

The number of shares available at December 31, 2000 and 1999 for granting of
options was 316,000.

F-20

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[8] EARNINGS PER SHARE

YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2000 1999

Net Income for Basic Earnings Per Share $ 2,755 $ 1,338

Add: Income Attributable to Minority Interest 1,908 1,707
---------- -------------
NET INCOME FOR DILUTED EARNINGS PER SHARE $ 4,663 $ 3,045
- ---------------------------------------- ========== =============

Weighted Average Shares for Basic Earnings Per Share 2,275,000 2,275,000

Dilutive Effect of Limited Partnership Units 4,440,996 4,094,700

WEIGHTED AVERAGE SHARES FOR DILUTED EARNINGS PER SHARE 6,715,996 6,369,700
- ------------------------------------------------------ ========== =============

Potential future dilutive securities include 4,440,996 shares issuable under
limited partnership units and 534,000 shares issuable under outstanding options.

[9] CAPITAL STOCK

The Priority Class A Common Shares have priority as to the payment of dividends
until dividends equal $0.18 per share on a quarterly basis and participates
equally in additional dividends after the Class B Common Shares have received
$.18 per share in each quarterly period. The Priority Class A Common Shares
carry a liquidation preference of $6.00 per share plus unpaid dividends and
votes with the Class B Common Shares on a one vote per share basis. The
priority period of the Class A Shares commenced on the date of the closing of
the initial public offering and ends on the earlier of (i) five years after the
initial public offering of the Priority Common Shares, or (ii) the date that is
15 trading days after we send notice to the holders of the Priority Common
Shares that their Priority Rights will terminate in 15 trading days, provided
that the closing bid price of the Priority Common Shares is at least $7.00 on
each trading day during such 15-day period.

Pursuant to the Hersha Hospitality Limited Partnership Agreement, the limited
partners have certain redemption rights that enable them to cause the
Partnership to redeem their units of limited partnership interest in exchange
for Class B Common Shares or for cash at our election. In the event the Class B
Common Shares are converted into Priority Class A Common Shares prior to
redemption of the units, the units will be redeemable for Priority Class A
Common Shares. If we do not exercise our option to redeem the units for Class B
Common Shares, then the limited partner may make a written demand that we redeem
the units for Class B Common Shares. At December 31, 2000 and 1999, the
aggregate number of Class B Common Shares issuable to the limited partners upon
exercise of the redemption rights is 4,440,996 and 4,205,970, respectively. The
number of shares issuable upon exercise of the redemption rights will be
adjusted upon the occurrence of stock splits, mergers, consolidation or similar
pro rata share transactions, that otherwise would have the effect of diluting
the ownership interest of the limited partners or our shareholders.

F-21

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[9] CAPITAL STOCK [CONTINUED]

The Company's common stock is duly authorized, fully paid and nonassessable.
Common shareholders are entitled to receive dividends if and when authorized and
declared by the Board of Trustees of the Company out of assets legally available
and to share ratably in the assets of the Company legally available for
distribution to its shareholders in the event of its liquidation, dissolution or
winding up after payment of, or adequate provision for, all known debts and
liabilities of the Company. Each outstanding share of common stock entitles the
holder to one vote on all matters submitted to a vote of shareholders. See Note
4 for a discussion of the units issued and the redemption rights of minority
interest shareholders with respect to 4,440,996 units that are redeemable on a
one-for-one basis for shares of Class B common stock. None of the units
discussed in Note 4 have been redeemed.

The holders of the Priority Common Shares will be entitled to a priority with
respect to distributions and amounts payable upon liquidation [the "Priority
Rights"] for a period [the "Priority Period"] beginning on January 26, 1999 and
ending on the earlier of: (i) the date that is 15 trading days after we send
notice to the holders of the Priority Common Shares that their Priority Rights
will terminate in 15 trading days, provided that the closing bid price of the
Priority Common Shares is at least $7.00 on each trading day during such 15-day
period, or (ii) the fifth anniversary of the closing of the Offering.

Upon liquidation of the Partnership during the Priority Period, after payment
of, or adequate provision for, debts and obligations of the Partnership,
including any partner loans, any remaining assets of the Partnership will be
distributed in the following order of priority: (i) first, to us until we have
received any unpaid Preferred Return plus an amount equal to $6.00 per Unit held
us, (ii) second, to the Limited Partners in accordance with their respective
percentage interests in the Partnership until each Limited Partner has received
an amount equal to any unpaid Preferred Return plus $6.00 per Unit held by such
Limited Partner, and (iii) finally, to us and the Limited Partners with positive
capital accounts.

Upon liquidation of the Partnership after the Priority Period, after payment of,
or adequate provision for, debts and obligations of the Partnership, including
any partner loans, any remaining assets of the Partnership will be distributed
to us and the Limited Partners with positive capital accounts in accordance with
their respective positive capital account balances.

Pursuant to the Partnership Agreement, the Limited Partners will receive the
Redemption Rights, which will enable them to cause the Partnership to redeem
their interests in the Partnership in exchange for cash or, at the option of the
Company, Class B Common Shares on a one-for-one basis. In the event that the
Class B Common Shares are converted into Priority Common Shares prior to
redemption of the Subordinated Units, such outstanding Subordinated Units will
be redeemable for Priority Common Shares. The holders of the Priority Common
Shares and the Class B Common Shares have identical voting rights and will vote
together as a single class.

[10] NEW AUTHORITATIVE PRONOUNCEMENTS

The FASB has issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 (as amended by SFAS 138) establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
SFAS No. 133 requires that an entity recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value.

F-22

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[10] NEW AUTHORITATIVE PRONOUNCEMENTS [CONTINUED]

Changes in the fair value of derivative financial instruments are either
recognized periodically in income or shareholders' equity (as a component of
comprehensive income), depending on whether the derivative is being used to
hedge changes in fair value or cash flows. The adoption of FAS 133 on January
1, 2001 is not expected to have a material impact on the financial position the
results of operations of the Company.

SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial relationships must be designated anew and
documented pursuant to the provisions of SFAS No. 133. Earlier application of
all of the provisions of SFAS No. 133 is encouraged, but it is permitted only as
of the beginning of any fiscal quarter. SFAS No. 133 is not to be applied
retroactively to financial statements of prior periods. We do not currently have
any derivative instruments and are not currently engaged in any hedging
activities. In June 1999 the FASB issued SFAS No. 137 which deferred the
effective date of SFAS No. 133 to fiscal quarters of fiscal years beginning
after June 30, 2000.

[11] FAIR VALUE OF FINANCIAL INSTRUMENTS

At December 31, 2000 and 1999, financial instruments include cash and cash
equivalents, lease payments receivable, accounts payable, accrued expenses,
loans to and from related parties, a line of credit and mortgages payable. The
fair values of cash and cash equivalents, lease payments receivable and accounts
payable and accrued expenses approximate carrying value because of the
short-term nature of these instruments. Loans to and from related parties carry
interest at rates that approximate our borrowing cost. The fair value of
mortgages payable and the line of credit approximates carrying value since the
interest rates approximate the interest rates currently offered for similar debt
with similar maturities.

F-23

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[12] PRO FORMA INFORMATION [UNAUDITED]

Due to the impact of the acquisitions, historical operations may not be
indicative of future results of operations and net income per common share.

The following pro forma information is presented for information purposes as if
the acquisition by the Partnership of all hotels either owned by the Partnership
or controlled by the Hersha Affiliates and operational during such period,
including the acquisitions discussed in Note [4] - Investment in Hotel
Properties, and the commencement of the percentage leases had occurred on
January 1, 2000 and 1999, respectively. The information for the year ended
December 31, 2000 includes 21 hotels and the information for the year ended
December 31, 1999 includes 15 hotels which were operational during such periods
and were owned by us or controlled by the Hersha Affiliates. In each case, the
pro forma information is presented as if the Partnership owned all of these
hotels throughout the period. The unaudited pro forma condensed statement of
operations is not necessarily indicative of what actual results of our
operations would have been assuming such operations had commenced as of January
1, 2000 and 1999, respectively, nor does it purport to represent the results of
operations for future periods.

F-24

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[12] PRO FORMA INFORMATION [UNAUDITED][CONTINUED]

PRO FORMA CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

YEARS ENDED
DECEMBER 31,
----------------------
2000 1999
---------- ----------

REVENUE:
Percentage Lease Revenue $ 14,372 $ 8,299
Other Revenue 69 125
---------- ----------
TOTAL REVENUE 14,441 8,424

EXPENSES:
Interest expense 5,303 1,768
Real Estate and Personal Property
Taxes and Property Insurance 828 546
Land lease 15 20
General and Administrative 718 424
Depreciation and Amortization 4,236 2,433
---------- ----------
TOTAL EXPENSES 11,100 5,191

INCOME BEFORE MINORITY INTEREST 3,341 3,233

INCOME ALLOCATED TO MINORITY INTEREST 2,380 1,985
---------- ----------

NET INCOME $ 961 $ 1,248
========== ==========

BASIC EARNINGS PER COMMON SHARE $ 0.42 $ 0.55
========== ==========

DILUTED EARNINGS PER COMMON SHARE $ 0.42 $ 0.50
========== ==========

WEIGHTED AVERAGE SHARES:
Basic 2,275,000 2,275,000

Diluted 6,715,996 6,480,970

. . . . . . .

F-25

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[13] SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

QUARTER
----------------------------------------------------
1ST 2ND 3RD 4TH
------------ ------------- ------------ ---------
(Dollars in thousands, except per share amounts)
FISCAL 1999

Total Revenues $ 1,184 $ 1,912 $ 2,114 $ 2,160
Income Before Minority Interest 409 529 965 1,142
Net Income 277 381 375 305
Basic Earnings Per Common Share $ 0.12 $ 0.17 $ 0.16 $ 0.14
============ ============= ============ =========
Diluted Earnings Per Common Share $ 0.07 $ 0.14 $ 0.16 $ 0.11
============ ============= ============ =========

FISCAL 2000
Total Revenues $ 2,353 $ 3,216 $ 3,687 $ 3,568
Income Before Minority Interest 322 562 993 878
Net Income 294 207 269 77
Basic Earnings Per Common Share $ 0.13 $ 0.09 $ 0.12 $ 0.03
============ ============= ============ =========
Diluted Earnings Per Common Share $ 0.05 $ 0.09 $ 0.12 $ 0.11
============ ============= ============ =========

Quarterly operating results are not necessarily representative of operations for
a full year for various reasons, including the seasonal nature of the lodging
industry and the number of accounting days per quarter.

. . . . . . .

F-26

HERSHA HOSPITALITY TRUST SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 2000
[IN THOUSANDS]

GROSS AMOUNTS AT WHICH
COSTS CAPITALIZED CARRIED AT
INITIAL COSTS SUBSEQUENT TO ACQUISITION CLOSE OF PERIOD
------------------------ ----------------------------- ---------------------------
BUILDINGS AND BUILDINGS AND BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS
- ----------------------------- ------------- -------- -------------- ------------- -------------- ----------- --------------

Holiday Inn,
Harrisburg, PA $ 3,400 $ 412 $ 1,234 $ - $ 1,827 $ 412 $ 3,061
Holiday Inn,
Milesburg, PA - 42 1,158 61 3,256 103 4,414
Holiday Inn Express,
New Columbia, PA 1,800 94 2,510 54 482 148 2,992
Comfort Inn,
Harrisburg, PA 2,500 - 850 - 2,418 - 3,268
Holiday Inn Express,
Hershey, PA 4,700 426 2,645 249 1,950 675 4,595
Clarion Suites,
Philadelphia, PA - 262 1,049 828 3,735 1,090 4,784
Holiday Inn Express & Suites,
Harrisburg, PA 2,030 213 1,934 - 202 213 2,136
Comfort Inn,
Harrisburg, PA 2,400 - 2,720 175 405 175 3,125
Comfort Inn,
Denver, PA - - 782 80 1,610 80 2,392
Comfort Inn - JFK,
Jamaica, NY - 850 4,093 - - 850 4,093
Hampton Inn,
Selinsgrove, PA 3,300 157 2,511 93 2,000 250 4,511
Hampton Inn,
Carlisle, PA 3,950 300 3,109 97 1,006 397 4,115
Hampton Inn,
Danville, PA 2,500 300 2,787 - 71 300 2,858
Hampton Inn,
Hershey, PA 5,398 807 5,714 - - 807 5,714
Comfort Inn,
McHenry, MD 1,202 196 1,328 - - 196 1,328

Best Western,
Indiana, PA 1,362 136 1,846 - - 136 1,846
Hampton Inn,
Newnan, GA 3,508 712 5,504 - - 712 5,504
Hampton Inn,
Peachtree City, GA 2,320 394 3,054 - - 394 3,054
Comfort Suites,
Duluth, GA 3,261 470 4,343 - - 470 4,343
Holiday Inn Express,
Duluth, GA 2,704 432 2,912 - - 432 2,912
Sleep Inn,
Pittsburg, PA 3,715 734 3,785 - - 734 3,785
------------- -------- -------------- ------------- -------------- ----------- --------------
$ 50,050 $ 6,937 $ 55,868 $ 1,637 $ 18,962 $ 8,574 $ 74,830
============= ======== ============== ============= ============== =========== ==============

LIFE
ACCUMULATED NET UPON WHICH
DEPRECIATION BOOK VALUE LATEST INCOME
BUILDINGS AND BUILDINGS AND DATE OF STATEMENT IS
DESCRIPTION TOTAL IMPROVEMENTS IMPROVEMENTS ACQUISITION COMPUTED
- ----------------------------- ------------ -------------- -------------- ----------- -------------

Holiday Inn,
Harrisburg, PA $ 3,473 $ 542 $ 2,931 12/15/1994 15 to 40
Holiday Inn,
Milesburg, PA 4,517 788 3,729 08/15/1985 15 to 40
Holiday Inn Express,
New Columbia, PA 3,140 224 2,916 12/01/1997 15 to 40
Comfort Inn,
Harrisburg, PA 3,268 272 2,996 06/15/1984 15 to 40
Holiday Inn Express,
Hershey, PA 5,270 320 4,950 10/01/1997 15 to 40
Clarion Suites,
Philadelphia, PA 5,874 470 5,404 06/30/1995 15 to 40
Holiday Inn Express & Suites,
Harrisburg, PA 2,349 121 2,228 03/06/1998 15 to 40
Comfort Inn,
Harrisburg, PA 3,300 200 3,100 05/15/1998 15 to 40
Comfort Inn,
Denver, PA 2,472 455 2,017 01/01/1988 15 to 40
Comfort Inn - JFK,
Jamaica, NY 4,943 141 4,802 08/11/1999 15 to 40
Hampton Inn,
Selinsgrove, PA 4,761 388 4,373 09/12/1996 15 to 40
Hampton Inn,
Carlisle, PA 4,512 330 4,182 06/01/1997 15 to 40
Hampton Inn,
Danville, PA 3,158 159 2,999 08/28/1997 15 to 40
Hampton Inn,
Hershey, PA 6,521 182 6,339 01/01/2000 15 to 40
Comfort Inn,
McHenry, MD 1,524 102 1,422 01/01/2000 15 to 40

Best Western,
Indiana, PA 1,982 188 1,794 01/01/2000 15 to 40
Hampton Inn,
Newnan, GA 6,216 97 6,119 04/20/2000 15 to 40
Hampton Inn,
Peachtree City, GA 3,448 54 3,394 04/20/2000 15 to 40
Comfort Suites,
Duluth, GA 4,813 68 4,745 05/19/2000 15 to 40
Holiday Inn Express,
Duluth, GA 3,344 46 3,298 05/19/2000 15 to 40
Sleep Inn,
Pittsburg, PA 4,519 236 4,283 10/01/2000 15 to 40
------------ -------------- --------------
$ 83,404 $ 5,383 $ 78,021
============ ============== ==============

F-27

HERSHA HOSPITALITY TRUST SUBSIDIARIES
NOTES TO SCHEDULE III
[IN THOUSANDS]

2000
---------------

RECONCILIATION OF REAL ESTATE:
Balance at Beginning of Year $ 47,512
Additions During Year 35,892
Deletions During Year -
---------------
Balance at End of Year $ 83,404
===============

RECONCILIATION OF ACCUMULATED DEPRECIATION:
Balance at Beginning of Year $ 1,099
Depreciation for the Year 4,284
Accumulated Depreciation on Deletions -
---------------
Balance at End of Year $ 5,383
===============

The aggregate cost of land, buildings and improvements for
federal income tax purposes is approximately $57,759

Depreciation is computed based upon the following useful lives:
Buildings and Improvements 15 to 40 years

F-28

INDEPENDENT AUDITOR'S REPORT

To the Partners of
Hersha Hospitality Management L.P.
New Cumberland, Pennsylvania

We have audited the accompanying balance sheets of Hersha Hospitality
Management L.P. as of December 31, 2000 and 1999, and the related statements of
operations, partners' capital, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hersha Hospitality
Management L.P. as of December 31, 2000 and 1999, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.

MOORE STEPHENS, P. C.
Certified Public Accountants.

New York, New York
March 1, 2001

F-29

- ----------------------------------------------------------------------------------------------
HERSHA HOSPITALITY MANAGEMENT, L.P.
BALANCE SHEETS(1)
[IN THOUSANDS]
- ----------------------------------------------------------------------------------------------

DECEMBER 31, DECEMBER 31,
-------------- -------------
2000 1999
CURRENT ASSETS: -------------- -------------

Cash and Cash Equivalents $ 623 $ 778
Accounts Receivable, less allowance for doubtful accounts of
$135 and $135 at December 31, 2000 and 1999, respectively
891 817
Prepaid Expenses 13 60
Due from Related Party - HHLP 175 188
Due from Related Parties 1,604 796
Other Assets 281 184
-------------- -------------
TOTAL CURRENT ASSETS 3,587 2,823

FRANCHISE LICENSES [NET OF ACCUMULATED AMORTIZATION OF $28
AND $0 AT DECEMBER 31, 2000 AND 1999, RESPECTIVELY]
307 287
SOFTWARE 17 --
PROPERTY AND EQUIPMENT 1,158 894
-------------- -------------

TOTAL ASSETS $ 5,069 $ 4,004
============== =============

LIABILITIES AND PARTNERS' CAPITAL:
CURRENT LIABILITIES:
Accounts Payable 1,639 1,354
Accounts Payable Related Party 60 30
Accrued Expenses 449 432
Other Liabilities 21 --
Due to Related Parties 331 --
Lease Payments Payable Related Party - HHLP 2,644 2,116
-------------- -------------
TOTAL CURRENT LIABILITIES 5,144 3,932

COMMITMENTS - -

PARTNERS' CAPITAL (75) 72
-------------- -------------

TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 5,069 $ 4,004
============== =============

<FN>
(1) Operations commenced on January 1, 1999.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.

F-30

- ---------------------------------------------------------------------------
HERSHA HOSPITALITY MANAGEMENT, L.P.
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (1)
[IN THOUSANDS]
- ---------------------------------------------------------------------------

YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2000 1999
-------------- --------------

REVENUES FROM HOTEL OPERATIONS
Room Revenue $ 29,297 $ 21,871
Restaurant Revenue 1,963 2,074
Other revenue 1,568 1,354
-------------- --------------
TOTAL REVENUES FROM HOTEL OPERATIONS $ 32,828 $ 25,299
-------------- --------------

EXPENSES:
Hotel Operating Expenses 12,488 9,944
Restaurant Operating Expenses 1,754 1,822
Advertising and Marketing 1,856 1,228
Bad Debts 17 247
Depreciation and Amortization 207 102
General and Administrative 4,791 3,717
General and Admin. - Related Parties 939 1,361
Lease Expense - HHLP 10,923 7,264
-------------- --------------
TOTAL EXPENSES $ 32,975 $ 25,685
-------------- --------------

NET LOSS $ (147) $ (386)
============== ==============
<FN>

(1) Operations commenced on January 1, 1999

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.

F-31

- --------------------------------------------------------------------------------
HERSHA HOSPITALITY MANAGEMENT, L.P.
STATEMENTS OF PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (1)
[IN THOUSANDS]
- --------------------------------------------------------------------------------

GENERAL LIMITED
PARTNER PARTNERS TOTAL
--------- ---------- -------

Partners Capital - December 31, 1998 $ - $ - $ -

Contribution by Partners - 458 458

Net Loss (4) (382) (386)
--------- ---------- -------

Partners Capital - December 31, 1999 $ (4) $ 76 $ 72

Net Loss (1) (146) (147)
--------- ---------- -------

Partners Capital - December 31, 2000 $ (5) $ (70) $ (75)
========= ========== =======

<FN>
(1) Operations commenced on January 1, 1999

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.

F-32

- --------------------------------------------------------------------------------
HERSHA HOSPITALITY MANAGEMENT, L.P.
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (1)
[IN THOUSANDS]
- --------------------------------------------------------------------------------

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

OPERATING ACTIVITIES:
Net (Loss) $ (147) $ (386)
-------------- --------------
Adjustments to Reconcile Net Income to
Net Cash Provided by (Used in) Operating Activities:
Depreciation and Amortization 207 102
Allowance for Doubtful Accounts - 247
Change in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (74) (1,064)
Prepaid Expenses 47 (60)
Other Assets (97) (52)
Due from Related Parties (265) (1,714)
Increase (Decrease):
Accounts Payable 217 660
Accounts Payable - Related Party 30 30
Lease Payments Payable - HHLP 528 2,116
Due to Related Parties (200) -
Accrued Expenses 18 432
Other Liabilities 21 -
-------------- --------------
Total Adjustments 432 697
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 285 311

INVESTING ACTIVITIES
Property and Equipment (448) (217)
Franchise Licenses (60) (10)
-------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (508) (227)

FINANCING ACTIVITIES
Cash Overdraft 68 694
-------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 68 694

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (155) 778

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 778 -
-------------- --------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 623 $ 778
============== ==============

<FN>
(1) Operations commenced on January 1, 1999

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.

- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.
HERSHA HOSPITALITY MANAGEMENT, L.P.
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (1)
[IN THOUSANDS]
- --------------------------------------------------------------------------------

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

On January 26, 1999 we received franchise agreements, property and certain other
assets with book values of $305, $21 and $132, respectively, from our partners.
These amounts were recorded as a contribution to capital.
On January 26, 1999 we recorded property and a liability to a related party of
$730.

(1) Operations commenced on January 1, 1999

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.

F-33

- --------------------------------------------------------------------------------
HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO FINANCIAL STATEMENTS,
[IN THOUSANDS]
- --------------------------------------------------------------------------------

[1] ORGANIZATION

Hersha Hospitality Management, L.P., the ["Lessee"], was organized under the
laws of the State of Pennsylvania in May, 1998 to lease and operate ten existing
hotel properties, principally in the Harrisburg and Central Pennsylvania area,
from Hersha Hospitality Limited Partnership ["HHLP" or the "Partnership"]. The
Lessee is owned by Mr. Hasu P. Shah and certain affiliates, the ["Hersha
Affiliates"], some of whom have ownership interests in the Partnership. We also
manage certain other properties owned by the Hersha Affiliates which are not
owned by the Partnership. We commenced operations on January 1, 1999 and as of
December 31, 2000 leased 17 hotel properties from the Partnership.

[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS - Cash and cash equivalents are comprised of cash and
certain highly liquid investments with a maturity of three months or less when
purchased, carried at cost, which approximates fair value. We have no cash
equivalents at December 31, 2000 or 1999.

INVENTORIES - Inventories of $28, consisting primarily of food and beverages and
which are included in other assets, are stated at the lower of cost [generally,
first-in, first-out] or market.

ACCOUNTS RECEIVABLE - We are required to make certain estimates related to the
allowances for uncollectible accounts. These estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the
financial statements in the period they are determined to be necessary.

PROPERTY AND EQUIPMENT - Property and equipment is stated at cost. Depreciation
for financial reporting purposes is principally based upon the straight-line
method.

The estimated lives used to depreciate the property improvements are as follows:

Building and Improvements 15 to 40 years
Furniture and Equipment 5 to 7 years

FRANCHISE LICENSES - The franchise agreements have lives ranging from 10 to 20
years but may be terminated by either party on certain anniversary dates
specified in the agreements. The franchise fees are amortized over their
respective franchise lives utilizing the straight-line method. Amortization
expense was $39 and $28 for the years ended December 31, 2000 and 1999,
respectively.

REVENUE RECOGNITION - Revenue is recognized as earned which is when services are
rendered.

INCOME TAXES - As a partnership, we are not subject to federal and state income
taxes, however, we must file informational income tax returns and the partners
must take their respective portion of the items of income or loss into
consideration when filing their respective returns.

F-34

[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]

CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject us
to concentrations of credit risk include cash and cash equivalents and accounts
receivable arising from our normal business activities. We place our cash with
high credit quality financial institutions. We do not require collateral to
support our financial instruments. At December 31, 2000 and 1999 we had
approximately $0 and $20, respectively, in financial institutions that exceeded
federally insured amounts.

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

ADVERTISING AND MARKETING - Advertising and marketing costs are expensed as
incurred and totaled $1,856 and $1,228 for the years ended December 31, 2000 and
1999, respectively. In connection with our franchise agreements, a portion of
the franchise fees paid is for marketing services. Payments under these
agreements related to marketing services amounted to $571 and $415 for the years
ended December 31, 2000 and 1999, respectively.

[3] COMMITMENTS AND RELATED PARTY TRANSACTIONS

We have assumed the rights and obligations under the terms of existing franchise
licenses relating to the hotels upon acquisition of the hotels by the
Partnership. The franchise licenses generally specify certain management,
operational, accounting, reporting and marketing standards and procedures with
which the franchisee must comply and provide for annual franchise fees based
upon percentages of gross room revenue. During the years ended December 31,
2000 and 1999 franchise fees totaling $1,612 and $1,182 were charged to general
and administrative expenses, respectively.

We have entered into percentage leases with HHLP. Each percentage lease will
have an initial non-cancelable term of five years and may be extended for an
additional five-year term at our option. Pursuant to the terms of the
percentage leases, we are required to pay the greater of the base rent or the
percentage rent for hotels with established operating histories. The base rent
is 6.5 percent of the purchase price assigned to each hotel. The percentage rent
for each hotel is comprised of (i) a percentage of room revenues up to a certain
threshold amount for each hotel up to which we receive a certain percentage of
room revenues as a component of percentage rent, (ii) a percentage of room
revenues in excess of the threshold amount, but not more than a certain
incentive threshold amount for each hotel in excess of the threshold amount up
to which we receive a certain percentage of the room revenues in excess of the
threshold amount as a component of percentage rent (iii) a percentage for room
revenues in excess of the incentive threshold amount and (iv) a percentage of
revenues other than room revenues. For hotels with limited operating histories,
the leases provide for the payment of an initial fixed rent for certain periods
as specified in the leases and the greater of base rent or percentage rent
thereafter. The leases commenced on January 26, 1999.

F-35

[3] COMMITMENTS AND RELATED PARTY TRANSACTIONS [CONTINUED]

Minimum future lease payments due during the noncancellable portion of the
leases as of December 31, 2000 are as follows:

2001 $ 7,258
2002 5,443
2003 5,024
2004 1,699
2005 1,062
Thereafter 0
------------
TOTAL $ 20,486
============

For the years ended December 31, 2000 and 1999 we incurred initial fixed rents
of $6,045 and $4,152 and percentage rents of $4,878 and $3,112, respectively.

As of December 31, 2000 and 1999, the amount due to the Partnership for lease
payments was $2,644 and $2,116, respectively.

During the years ended December 31, 2000 and 1999, we provided for and were
reimbursed for capital improvements totaling $1,076 and $794 to the hotels which
are the responsibility of HHLP. As of December 31, 2000, $42 remains receivable
and is recorded as Due from HHLP.

On January 26, 1999, we executed an agreement with HHLP to provide accounting
and securities reporting services. The terms of the agreement provided for a
fixed fee of $55,000 with an additional $10,000 per property (prorated from the
time of acquisition) for each hotel added to the Company's portfolio. For the
years ended December 31, 2000 and 1999, we have earned $243 and $155,
respectively for the services provided in accordance with the Agreement. These
fees are included in Other Revenues. At December 31, 2000, $133 remains
receivable and is recorded as Due from HHLP.

We paid to Mr. Jay H. Shah, son of Mr. Hasu P. Shah, certain nominal legal fees
for consultation.

For the years ended December 31, 2000 and 1999, we paid to Hersha Construction
Company $186 and $1,101, respectively, for construction work related to the
renovation of hotel properties.

For the years ended December 31, 2000 and 1999, we paid to Hersha Hotel Supply
$976 and $761, respectively, for hotel supplies of which $60 was in accounts
payable at December 31, 2000. These expenses are included in Hotel Operating
Expenses and Restaurant Operating Expenses.

We provide office space to various related entities. The total rent collected
for the years ended December 31, 2000 and 1999 was $99 and $0.

During the years ended December 31, 2000 and 1999, we had advances to related
parties of $950 and $1,196, respectively. These advances were inclusive of
accrued interest of $0 and $29, respectively, and repayments from related
parties of $473 and $400, respectively. Interest income of $45 and $102,
respectively, was recorded on these loans.

F-36

[4] PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31, 2000 and 1999:

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

Buildings and Improvements $ 682 $ 680
Furniture, Fixtures and Equipment 620 246
Automobiles 118 15
------ -----
Subtotal 1,420 941
Less Accumulated Depreciation 262 74
------ -----
1,158 867
Construction in Progress - 27
Total Property and Equipment $1,158 $ 894
====== =====

Depreciation expense was $168 and $74 for the years ended December 31, 2000 and
1999, respectively.

[5] SHARE APPRECIATION RIGHTS PLAN ["SAR"]

We have established a share appreciation rights plan ["SAR"] to incentivize our
employees to improve the operations of our Lessor, HHLP, and to associate our
employee's interest with those of our Lessor. Officers and employees of our
company are eligible to participate in the SAR. The SAR entitles the holder to
receive, with respect to each Class B Common Share encompassed by the exercise
of such SAR, the amount determined by the Administrator and specified in an
Agreement.

A SAR granted under this Plan will be exercisable only if (i) the General
Partner of the Lessor, Hersha Hospitality Trust, obtains a per share closing
price on the Class A Common Shares of $9.00 or higher for 20 consecutive trading
days; and (ii) the closing price on the Class A Common Shares for the prior
trading day was $9.00 or higher.

The maximum period in which a SAR may be exercised shall be determined by the
Administrator on the date of grant, except that no SAR shall be exercisable
after the expiration of five years from the date such SAR is granted.

The administrator of the plan, Hersha Hospitality Management, Co. [HHMCO],
selects the individuals who participate in the Option Plan and the maximum
aggregate number of Class B Common Shares with respect to which SARs may be
granted under this Plan is 300,000. Hersha Hospitality Trust has issued 300,000
restricted share options for the express purpose of exercising SARs on their
respective exercise dates. As of December 31, 2000 and 1999, we have issued
273,850 and 0 SARs to our employees, respectively.

F-37

[6] EMPLOYEE BENEFIT PLANS

We sponsor a defined contribution employee benefit plan (the "401K Plan").
Substantially all employees who are age 21 or older and have at least six months
of service are eligible to participate in the 401K Plan. Employees may
contribute up to 15% of their compensation to the 401K Plan, subject to certain
annual limitations. Employer contributions to the 401K Plan are discretionary
and we currently do not contribute to the Plan. We do absorb certain
administrative expenses related to the maintenance of the 401K Plan.

[7] NEW AUTHORITATIVE PRONOUNCEMENTS

SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Initial application of SFAS No. 133 should be as of the
beginning of a fiscal quarter; on that date, hedging relationships must be
designated anew and documented pursuant to the provisions of SFAS No. 133.
Earlier application of all of the provisions of SFAS No. 133 is encouraged, but
it is permitted only as of the beginning of any fiscal quarter. SFAS No. 133 is
not to be applied retroactively to financial statements of prior periods. The
lessee does not currently have any derivative instruments and is not currently
engaged in any hedging activities. In June 1999 the FASB issued SFAS No. 137
which deferred the effective date of SFAS No. 133 to fiscal quarters of fiscal
years beginning after June 30, 2000.

[8] FAIR VALUE OF FINANCIAL INSTRUMENTS

At December 31, 2000, financial instruments include cash and cash equivalents,
accounts receivable, accounts payable, accrued expenses and loans to related
parties. The fair values of these instruments approximate carrying value
because of their short-term nature.

F-38

[9] PRO FORMA FINANCIAL INFORMATION [UNAUDITED]

The following pro forma information is presented for information purposes as if
the acquisition by the Partnership of all hotels either owned by the Partnership
or controlled by the Hersha Affiliates and operational during such period and
the commencement of the percentage leases had occurred on January 1, 2000 and
1999, respectively. The information for the year ended December 31, 2000
includes 20 hotels and the information for the year ended December 31, 1999
includes 17 hotels which were operational during such periods and were either
owned by the Partnership or controlled by the Hersha Affiliates. We did not
include any pro forma financial information with respect to the three properties
that either were not operational during 1999 or were not owned by the
Partnership or controlled by the Hersha Affiliates. The unaudited pro forma
condensed statements of operations are not necessarily indicative of what our
actual results of operations would have been assuming such operations had
commenced as of January 1, 2000 and 1999, respectively, nor does it purport to
represent the results of operations for future periods.

- Pro Forma Condensed Statements of Operations

FOR THE YEAR ENDED DECEMBER 31, 2000 AND 1999
---------------------------------------------
[IN THOUSANDS]
------------
[UNAUDITED]
---------

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

Revenue from Hotel Operations:
Room Revenue $29,297 $21,888
Food & Beverage 1,963 2,074
Telephone and Other 1,764 1,415
------- --------
Total Revenue from Hotel Operations $33,024 $25,377

Expenses:
Hotel Operating Expenses 12,488 9,944
Restaurant Operating Expenses 1,755 1,822
Advertising and Marketing 1,856 1,228
Bad Debt 17 247
Depreciation and Amortization 207 102
General and Administrative 4,791 3,717
General and Administrative - Related Parties 939 1,036
Lease Expense Related Party - HHLP 10,923 7,264
Lease Expense - Other Related Parties 0 618
------- --------

Total Expenses $32,976 $25,978
------- --------

Net Income (Loss) $ 48 $ (601)
======= ========

. . . . . . . .

F-39

INDEPENDENT AUDITOR'S REPORT

To the Partners and Shareholders of
The Combined Entities - Initial Hotels

We have audited the accompanying combined balance sheets of the Combined
Entities - Initial Hotels as of December 31, 1998 and 1997, and the related
combined statements of operations, owners' equity, and cash flows for each of
the three years in the period ended December 31, 1998. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Combined
Entities - Initial Hotels as of December 31, 1998 and 1997, and the combined
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.

MOORE STEPHENS, P. C.
Certified Public Accountants.

Cranford, New Jersey
February 19, 1999

F-40

- --------------------------------------------------------------------------------
COMBINED ENTITIES - INITIAL HOTELS
COMBINED BALANCE SHEETS
[IN THOUSANDS]
- --------------------------------------------------------------------------------

DECEMBER 31,
------------------
1 9 9 8 1 9 9 7
-------- --------

ASSETS:
INVESTMENT IN HOTEL PROPERTIES:
Land $ 2,099 $ 2,099
Buildings and Improvements 22,489 19,276
Furniture, Equipment and Other 7,176 6,056
-------- --------

Totals 31,764 27,431
Less: Accumulated Depreciation 4,835 3,356
-------- --------

Totals 26,929 24,075
Construction in Progress 235 1,412
-------- --------

NET INVESTMENT IN HOTEL PROPERTIES 27,164 25,487

Cash and Cash Equivalents 373 694
Accounts Receivable 460 394
Prepaid Expenses and Other Assets 431 182
Due from Related Parties 103 268
Intangible Assets 1,348 1,427
-------- --------

TOTAL ASSETS $ 29,879 $ 28,452
======== ========

LIABILITIES AND OWNERS' EQUITY:
Mortgages Payable $ 19,578 $ 14,713
Accounts Payable and Accrued Expenses 525 1,092
Accrued Expenses - Related Parties 54 153
Due to Related Parties 4,459 9,169
Other Liabilities 149 172
-------- --------

TOTAL LIABILITIES 24,765 25,299

COMMITMENTS -- --

OWNERS' EQUITY:
Net Combined Equity 5,114 3,153
-------- --------

TOTAL LIABILITIES AND OWNERS' EQUITY $ 29,879 $ 28,452
======== ========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE COMBINED FINANCIAL
STATEMENTS.

F-41

- --------------------------------------------------------------------------------
COMBINED ENTITIES - INITIAL HOTELS
COMBINED STATEMENTS OF OPERATIONS
[IN THOUSANDS]
- --------------------------------------------------------------------------------

Y E A R S E N D E D
-----------------------------
D E C E M B E R 31,
-----------------------------
1 9 9 8 1 9 9 7 1 9 9 6
-------- -------- ---------

REVENUES FROM HOTEL OPERATIONS:
Room Revenue $ 15,185 $ 10,880 $ 7,273
Restaurant Revenue 2,111 1,744 2,106
Other Revenue 790 821 610
-------- -------- ---------
TOTAL REVENUE 18,086 13,445 9,989
-------- -------- ---------
EXPENSES:
Hotel Operating Expenses 7,449 5,628 4,538
Restaurant Operating Expenses 1,469 996 1,304
Advertising and Marketing 918 571 532
Depreciation and Amortization 1,543 1,189 924
Interest Expense 1,605 821 605
Interest Expense - Related Parties 386 533 316
General and Administrative 2,065 1,644 1,422
General and Administrative - Related Parties 608 320 364
Loss on Abandonments and Asset Disposals 95 -- 12
Liquidation Damages -- 14 --
-------- -------- ---------
TOTAL EXPENSES 16,138 11,716 10,017
-------- -------- ---------
NET INCOME [LOSS] $ 1,948 $ 1,729 $ (28)
======== ======== =========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE COMBINED FINANCIAL
STATEMENTS.

F-42

- --------------------------------------------------------------------------------
COMBINED ENTITIES - INITIAL HOTELS
COMBINED STATEMENTS OF OWNERS' EQUITY
[IN THOUSANDS]
- --------------------------------------------------------------------------------

Balance - December 31, 1995 $ 2,217

Net [Loss] (28)
Capital Contributions 470
Cash Distributions (470)
--------

Balance - December 31, 1996 2,189

Net Income 1,729
Capital Contributions 59
Cash Distributions (824)
--------

Balance - December 31, 1997 3,153

Net Income 1,948
Capital Contributions 1,159
Cash Distributions (1,146)
--------

Balance - December 31, 1998 $ 5,114
========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE COMBINED FINANCIAL
STATEMENTS.

F-43

- ---------------------------------------------------------------------------------------
COMBINED ENTITIES - INITIAL HOTELS
COMBINED STATEMENTS OF CASH FLOWS
[IN THOUSANDS]
- ---------------------------------------------------------------------------------------

Y E A R S E N D E D
-------------------------------
D e c e m b e r 31,
-------------------------------
1 9 9 8 1 9 9 7 1 9 9 6
--------- --------- ---------

OPERATING ACTIVITIES:
Net Income [Loss] $ 1,948 $ 1,729 $ (28)

Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization Expense 1,604 1,246 966
Loss on Abandonments and Disposal of Assets 95 -- 12
Writeoff of Financing Fees -- 44 --

Changes in Assets and Liabilities:
Accounts Receivable (66) (203) 105
Prepaid Expenses and Other Assets (249) (28) (28)
Accounts Payable and Accrued Expenses (666) 584 241
Other Liabilities (23) (78) 79
--------- --------- ---------
Net Cash - Operating Activities 2,643 3,294 1,347
--------- ---------

INVESTING ACTIVITIES:
Improvements and Additions to Hotel Properties (3,251) (12,821) (5,601)
Payment for Intangibles (46) (166) (117)
Advances to Related Parties (501) (268) (99)
Repayment of Advances to Related Parties 666 107 584
Proceeds from Sale of Assets -- -- 129
--------- --------- ---------
NET CASH - INVESTING ACTIVITIES (3,132) (13,148) (5,104)
--------- --------- ---------

FINANCING ACTIVITIES:
Proceeds from Mortgages Payable 5,639 9,526 3,631
Principal Payments on Mortgages Payable (774) (3,383) (612)
Advances from Related Parties 3,411 6,555 2,756
Repayments of Advances from Related Parties (8,121) (1,622) (1,915)
Capital Contributions 1,159 59 470
Distributions Paid (1,146) (824) (470)
--------- --------- ---------
NET CASH - FINANCING ACTIVITIES 168 10,311 3,860
--------- --------- ---------
Net [Decrease] Increase in Cash and Cash Equivalents (321) 457 103
Cash and Cash Equivalents at Beginning of Years 694 237 134
--------- --------- ---------
Cash and Cash Equivalents at End of Years $ 373 $ 694 $ 237
========= ========= =========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the years for:
Interest [Net of Amounts Capitalized] $ 2,087 $ 1,133 $ 903

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE COMBINED FINANCIAL
STATEMENTS.

F-44

- --------------------------------------------------------------------------------
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS
[AMOUNTS IN THOUSANDS]
- --------------------------------------------------------------------------------

[1] ORGANIZATION, PROPOSED INITIAL PUBLIC OFFERING AND BASIS OF PRESENTATION

ORGANIZATION - Hersha Hospitality Trust [the "Company"] has been
established to own initially ten existing hotels [collectively the "Initial
Hotels"] and to continue the hotel acquisition and operating strategies of Mr.
Hasu P. Shah, Chairman of the Board of Trustees and President of the Company.
The Company intends to qualify as a real estate investment trust [REIT] under
the Internal Revenue Code of 1986, as amended, [the "Code"]. The Initial Hotels
include three hotels operated as Holiday Inn Express(R) hotels, two Hampton
Inn(R) hotels, two Holiday Inn(R) hotels, two Comfort Inn(R) hotels, and one
Clarion Suites(R) hotel with an aggregate of 989 rooms and are located in
Pennsylvania. Upon completion of the proposed initial public offering [see
below], the Company will own an approximate 32% general partnership interest in
Hersha Hospitality Limited Partnership, a Pennsylvania limited partnership [the
"Partnership"]. The Company will be the sole general partner of the
Partnership. The Partnership will own the Initial Hotels and lease them to
Hersha Hospitality Management, L.P. ["Lessee"] under Percentage Leases, each
having a 5 year term with two 5 year renewals, which shall provide for rent
equal to the greater of (i) fixed base rent, or (ii) percentage rents based
upon specific percentages of room and other revenue of each of the Initial
Hotels. The Company will enter into agreements with the Lessee whereby the
Lessee will be required to perform all management functions necessary to operate
the Initial Hotels. Under the administrative services agreement, the Lessee
will be paid a fee equal to $10 per hotel or $100 per year based on the ten
initial hotels [See Note 10].

BASIS OF PRESENTATION - The combined financial statements include the
accounts of various partnerships, individuals, certain other corporations and
Subchapter S corporations which perform property management services and own
property improvements and furniture and fixtures [collectively the "Combined
Entities"] [See Note 5] using their historical cost basis. No adjustments have
been reflected in these combined financial statements to give effect to the
purchase of the Initial Hotels by the Partnership.

The Combined Entities are owned by Mr. Hasu P. Shah and certain affiliates
of Mr. Hasu P. Shah [the "Hersha Affiliates"] for all periods presented. Due to
common ownership and management of the Combined Entities, the historical
combined financial statements have been accounted for as a group of entities
under common control. All significant intercompany transactions and balances
have been eliminated in the combined presentation.

PROPOSED INITIAL PUBLIC OFFERING - The Company has filed a registration
statement with the Securities and Exchange Commission pursuant to which the
Company expects to offer 1,833,334 common shares to the public and 166,666
common shares to Mr. Hasu P. Shah and certain affiliates of Mr. Hasu P. Shah
[the "Offering"]. The Company expects to qualify as a real estate investment
trust under Sections 856-860 of the Code. Under the proposed structure, the
Company will become the sole general partner in the Partnership and the Hersha
Affiliates will be the limited partners.

F-45

- --------------------------------------------------------------------------------
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, SHEET #2
[AMOUNTS IN THOUSANDS]
- --------------------------------------------------------------------------------

[1] ORGANIZATION, PROPOSED INITIAL PUBLIC OFFERING AND BASIS OF PRESENTATION
[CONTINUED]

Upon completion of the Offering, the Company will contribute substantially
all of the net proceeds of the offering to the Partnership in exchange for an
approximate 32% general partnership interest in the Partnership. The
Partnership will use the proceeds from the Company to acquire the Initial Hotels
from the Combined Entities and to repay certain outstanding indebtedness.
Rather than receiving cash for their interests in the Combined Entities upon the
sale of the Initial Hotels, the Hersha Affiliates have elected to receive
limited partnership interests in the Partnership aggregating an approximate 68%
ownership interest in the Partnership.

After consummation of the Offering, the Company's acquisition of an
interest in the Partnership and the Partnership's acquisition of the Initial
Hotels, (a) the Company will own approximately 32% of the Partnership, (b) the
Hersha Affiliates will own an aggregate of approximately 68% of the Partnership,
and (c) the Partnership will own 100% of the equity interest in the Initial
Hotels [See Note 10].

[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS - Operations consist of hotel room rental, conferences
room rental and the associated sales of food and beverages principally in the
Harrisburg and central Pennsylvania area.

INVESTMENT IN HOTEL PROPERTIES - Investment in hotel properties are stated
at cost. Depreciation for financial reporting purposes is principally based upon
the straight-line method for buildings and improvements and accelerated methods
for furniture and equipment acquired prior to the year ended December 31, 1998
and the straight-line method thereafter.

The estimated lives used to depreciate the Initial Hotel properties are as
follows:

Years
----------

Building and Improvements 15 to 40
Furniture and Equipment 5 to 7

Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. Upon the sale or disposition of a
fixed asset, the asset and related accumulated depreciation are removed from the
accounts, and the gain or loss is included in income from operations.

Depreciation expense was $1,432, $1,076 and $819 for the years ended
December 31, 1998, 1997 and 1996, respectively.

Room linens and restaurant supplies are capitalized and amortized utilizing
the straight-line method over periods of three and two years, respectively, and
are charged to Hotel Operating Expenses. Amortization expense was $61, $57 and
$42 for the years ended December 31, 1998, 1997 and 1996, respectively.

F-46

- --------------------------------------------------------------------------------
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, SHEET #3
[AMOUNTS IN THOUSANDS]
- --------------------------------------------------------------------------------

[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]

IMPAIRMENT OF LONG-LIVED ASSETS - Long-lived assets are reviewed for
impairment whenever events or changes in business circumstances indicate that
the carrying amount of the assets may not be fully recoverable. The Company
performs undiscounted cash flow analyses to determine if an impairment exists.
If an impairment is determined to exist, any related impairment loss is
calculated based on fair value.

CASH AND CASH EQUIVALENTS - Cash and cash equivalents are comprised of
certain highly liquid investments with a maturity of three months or less when
purchased.

INVENTORIES - Inventories, consisting primarily of food and beverages and
which are included in prepaid expenses and other assets, are stated at the lower
of cost [generally, first-in, first-out] or market.

INTANGIBLE ASSETS - Intangible assets are carried at cost and consist of
initial franchise fees, loan acquisition costs and goodwill. Amortization is
computed using the straight-line method based upon the terms of the franchise
and loan agreements which range from 5 to 30 years, and over a 15 year period
for goodwill.

INCOME TAXES - The Combined Entities are not a legal entity subject to
income taxes. Hersha Enterprises, Ltd., an entity included in these combined
financial statements, is a taxable corporate entity [See Note 6]. Income taxes
are provided for the tax effects of transactions reported in the financial
statements and consist of taxes currently due plus deferred taxes resulting from
temporary differences. Such temporary differences result from differences in the
carrying value of assets and liabilities for tax and financial reporting
purposes. The deferred tax assets and liabilities represent the future tax
consequences of those differences, which will either be taxable or deductible
when the assets and liabilities are recovered or settled. Deferred taxes are
also recognized for operating losses that are available to offset future taxable
income. Valuation allowances are established to reduce deferred tax assets to
the amount expected to be realized. The Combined Partnerships and S corporations
are not subject to federal or state income taxes; however, they must file
informational income tax returns and the partners must take income or loss of
the Combined Entities into consideration when filing their respective tax
returns. The cumulative difference between the book basis and tax basis of the
Combined Entities' assets and liabilities is approximately $4,620 due primarily
to depreciation and amortization expense on the tax basis in excess of the book
basis.

REVENUE RECOGNITION - Revenue is recognized as earned which is generally
when a guest occupies a room and utilizes the hotel's services.

CONCENTRATION OF CREDIT RISK - Financial instruments that potentially
subject the Company to concentrations of credit risk include cash and cash
equivalents and accounts receivable arising from its normal business activities.
The Company places its cash with high credit quality financial institutions. The
Company does not require collateral to support its financial instruments.

The Company periodically has money in financial institutions that is
subject to normal credit risk beyond insured amounts. This credit risk,
representing the excess of the bank's deposit liabilities reported by the bank
over the amounts that would have been covered by federal insurance, amounted to
approximately $355 and $71 at December 31, 1998 and 1997, respectively.

F-47

- --------------------------------------------------------------------------------
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, SHEET #4
[AMOUNTS IN THOUSANDS]
- --------------------------------------------------------------------------------

[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]

The Company's extension of credit to its customers results in accounts
receivable arising from its normal business activities. The Company does not
require collateral from its customers, but routinely assesses the financial
strength of its customers. Based upon factors surrounding the credit risk of its
customers and the Company's historical collection experience, no allowance for
uncollectible accounts has been established at December 31, 1998 and 1997,
respectively. The Company believes that its accounts receivable credit risk
exposure is limited. Such assessment may be subject to change in the near term.

USE OF ESTIMATES - The preparation of 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 disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

DEFERRED OFFERING COSTS - Costs of $267 associated with the Company's
anticipated public offering are deferred and will be charged against the
proceeds of the offering. If the offering is not consummated, the cost will be
charged to operations [See Note 10].

ADVERTISING AND MARKETING - Advertising costs are expensed as incurred and
totaled $596, $370 and $418 for the years ended December 31, 1998, 1997 and
1996, respectively. In connection with its franchise agreements, a portion of
the franchise fees paid is for marketing services. Payments under these
agreements related to marketing services amounted to $323, $201 and $114 for the
years ended December 31, 1998, 1997 and 1996, respectively, and are included in
Advertising and Marketing.

RECLASSIFICATION - Certain prior year's figures have been reclassified to
conform with the current year's presentation.

F-48

- --------------------------------------------------------------------------------
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, SHEET #5
[AMOUNTS IN THOUSANDS]
- --------------------------------------------------------------------------------

[3] INTANGIBLE ASSETS

At December 31, 1998 and 1997, intangibles consisted of the following:

Accumulated
------------
December 31, 1998: Cost Amortization Net
------ ------------- ------

Goodwill $1,168 $ 294 $ 874
Franchise Fees 374 66 308
Loan Acquisition Fees 196 30 166
------ ------------- ------
TOTALS $1,738 $ 390 $1,348
- ----------------------- ====== ============= ======

Accumulated
------------
December 31, 1997: Cost Amortization Net
------ ------------- ------
Goodwill $1,168 $ 216 $ 952
Franchise Fees 342 46 296
Loan Acquisition Fees 196 17 179
------ ------------- ------
TOTALS $1,706 $ 279 $1,427
- ----------------------- ====== ============= ======

Amortization expense was $111, $113 and $105 for the years ended December 31,
1998, 1997 and 1996, respectively.

[4] MORTGAGES PAYABLE

December 31,
------------------
1 9 9 8 1 9 9 7
-------- --------

Holiday Inn, Harrisburg, Pennsylvania:
- --------------------------------------
Note payable to bank dated August 19, 1997 with monthly payments of
34 including interest at 8.45% until November 1, 2002. Thereafter
the rate is negotiated or the bank's prime rate plus 1/4%. Final payment
is due November 1, 2012. The property previously was financed by
a bank with a note payable with monthly payments of $27
including interest at the prime rate plus 1-1/2% maturing March 2, 2010
and another note payable with monthly payments of $7 plus
interest at 8-1/2% maturing January 5, 2001. $ 3,379 $ 3,500

Holiday Inn, Milesburg, Pennsylvania:
- -------------------------------------
Note payable to bank dated June 2, 1977 with monthly payments of
11 including interest at 8% until June 6, 1999 835 914
-------- --------

Totals - Forward $ 4,214 $ 4,414

F-49

[4] MORTGAGES PAYABLE [CONTINUED]

December 31,
------------------
1 9 9 8 1 9 9 7
-------- --------

Totals - Forwarded $ 4,214 $ 414

Clarion Suites, Philadelphia, Pennsylvania:
- -------------------------------------------
Note payable to a bank dated June 21, 1995 with monthly payments of
16 as adjusted for interest at the prime rate plus 1.25% until July 1,
2010. Guaranteed by PIDC Local Development Corporation and the
Small Business Administration. 1,139 1,195

Note payable to a bank dated June 21, 1995 with monthly payments
of $3 plus interest at the prime rate plus .5%. Principal balance is
due July 1, 2002. 383 419

Hampton Inn, Selinsgrove, Pennsylvania:
- ---------------------------------------
Note payable to a bank dated April 3, 1996 with monthly payments of
24 including interest at 7-3/4% until October 3, 2011. 2,287 2,385

Hampton Inn, Carlisle, Pennsylvania:
- ------------------------------------
Note payable to a bank dated September 6, 1996 with monthly payments
of $28 including interest at 8% until March 6, 2001. Thereafter,
the rate is negotiated or prime rate plus 1%. Final payment is due
June 6, 2012. 2,739 2,848

Holiday Inn Express, New Columbia, Pennsylvania:
- ------------------------------------------------
Note payable to a bank dated September 9, 1997 with monthly payments
of $27 including interest at 8-1/2% until February 1, 2003. Thereafter
interest will be at the prime rate plus 1/4% as of January 1, 2003 and
January 1, 2008. Final payment is due January 1, 2013. 2,613 1,000

Comfort Inn, West Hanover, Pennsylvania:
- ----------------------------------------
Note payable to a bank dated August 28, 1997, drawn May 8, 1998, with
monthly payments of $23 including interest at 8.0% until May 28, 2003.
Thereafter, the rate shall be annually adjusted at the prime rate. Final
payment is due May 28, 2008. 2,450 --

Holiday Inn Express, Harrisburg, Pennsylvania:
- ----------------------------------------------
Note payable to a bank dated September 26, 1997 with monthly payments
of $11 including interest at 8.35% until October 1, 2000. Thereafter, the
rate is as negotiated or at prime plus 1%. Final payment is due
October 1, 2012. 1,071 1,110

Holiday Inn Express, Hershey, Pennsylvania:
- -------------------------------------------
Note payable to a bank dated December 30, 1996 with monthly payments
of $27 including interest at 8.15% until December 31, 2001. Thereafter,
the rate is as negotiated or prime plus 3/4%. Final payment is due
January 1, 2013. 2,682 1,342
-------- --------
TOTALS $ 19,578 $ 14,713
- ------ ======== ========

F-50

- --------------------------------------------------------------------------------
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, SHEET #6
[AMOUNTS IN THOUSANDS]
- --------------------------------------------------------------------------------

[4] MORTGAGES PAYABLE [CONTINUED]

Substantially all the Combined Entities' mortgage indebtedness is
collateralized by property and equipment and is personally guaranteed by the
partners and stockholders of the Combined Entities. Certain of the hotel
properties also collateralize lines of credit of a related party aggregating
$7,500 and $500 at December 31, 1998 and 1997, respectively.

At December 31, 1998 and 1997, the prime rate was 7.75% and 8.5%,
respectively.

As of December 31, 1998, aggregate annual principal payments for the five
years following December 31, 1998, and thereafter are as follows:

Year ending
- ------------
December 31,
- ------------
1999 $ 1,636
2000 878
2001 955
2002 1,260
2003 1,078
Thereafter 13,771
-------
TOTAL $19,578
----- =======

[5] OWNERS' EQUITY

The owners' equity of the Combined Entities by entity is as follows:

December 31,
--------------------
1 9 9 8 1 9 9 7
--------- ---------

244 Associates $ 527 $ 542
844 Associates 488 285
944 Associates 133 29
1244 Associates 228 373
1444 Associates 1,099 829
1644 Associates 321 (72)
2144 Associates 801 833
2244 Associates 472 (54)
2544 Associates 478 (60)
Hersha Enterprises 394 267
MEPS Associates 204 170
Shree Associates (31) 11
--------- ---------
TOTALS $ 5,114 $ 3,153
------ ========= =========

F-51

- --------------------------------------------------------------------------------
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, SHEET #7
[AMOUNTS IN THOUSANDS]
- --------------------------------------------------------------------------------

[6] INCOME TAXES

Included in the Combined Entities for the years ended December 31, 1998,
1997 and 1996 is a corporation which computed its income taxes pursuant to
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Deferred income taxes at December 31, 1998 and 1997 was comprised of
deferred tax assets of $10 and $20, respectively, representing net operating
loss carryforwards, offset by full valuation allowances of $10 and $20,
respectively. Under the transaction contemplated in connection with the
proposed initial public offering, the net operating loss carryforwards will not
be available to the Company. The Combined Entities neither incurred nor paid
any income taxes during the periods presented.

[7] RELATED PARTY TRANSACTIONS

At December 31, 1998 and 1997, the Combined Entities are indebted to
various related entities, partners, and stockholders in the amount of $4,459 and
$9,169, respectively. The loans carry interest ranging from 8.5% on short-term
loans to 10.5% on longer term loans. Accrued interest payable was $54 and $153
at December 31, 1998 and 1997, respectively, and interest expense was $386, $533
and $316 for the years ended December 31, 1998, 1997 and 1996, respectively.

At December 31, 1998 and 1997, various related entities, partners and
stockholders are indebted to the Combined Entities in the amount of $103 and
$268, respectively. The loans carry interest ranging from 0% on short-term loans
to 9% on longer term loans. Accrued interest receivable was $1 and $1 at
December 31, 1998 and 1997, respectively, and interest income was $6, $9 and $1
for the years ended December 31, 1998, 1997 and 1996, respectively.

The Combined Entities have paid or accrued $2,359, $9,433 and $856 during
the years ended December 31, 1998, 1997 and 1996 to related entities for various
hotel construction projects and interest costs during construction. Capitalized
interest amounted to $63, $183 and $10 for the years ended December 31, 1998,
1997 and 1996, respectively.

Certain properties are managed by individual partners or related entities.
Management fees paid to these individuals or related entities were $608, $272
and $97 during the years ended December 31, 1998, 1997 and 1996, respectively.

A related entity rents office space in a hotel owned by the Combined
Entities on a month to month basis. The Combined Entities received rent of $-0-
and $30 for the years ended December 31, 1998 and 1997, respectively. The rent
amount includes an allocation of certain related expenses.

During the year ended December 31, 1996, the Combined Entities sold for
$129, the book value of the assets, certain leasehold improvements to Mr. Hasu
P. Shah.

On September 26, 1997, the Combined Entities acquired from Mr. Hasu P.
Shah, the Holiday Inn Express in Harrisburg, Pennsylvania by paying off the
$1,106 indebtedness on the property. Prior to the sale, the Combined Entities
had rented the property from Mr. Hasu P. Shah under an informal rent
arrangement. Rent paid to Mr. Hasu P. Shah was $48 and $267 for the years ended
December 31, 1997 and 1996, respectively. Mr. Hasu P. Shah owns a parcel of land
on which a hotel is situated for which no land rent is charged.

F-52

- --------------------------------------------------------------------------------
COMBINED ENTITIES - INITIAL HOTELS
NOTES TO FINANCIAL STATEMENTS, SHEET #8
[AMOUNTS IN THOUSANDS]
- --------------------------------------------------------------------------------

[8] COMMITMENTS

FRANCHISE AGREEMENTS - The Initial Hotels have executed franchise
agreements that have initial lives ranging from 10 to 20 years but may be
terminated by either party on certain anniversary dates specified in the
agreements. In addition to initial fees totaling $374, which are being
amortized over the franchise lives, the agreements require annual payments for
franchise royalties, reservation, and advertising services which are based upon
percentages of gross room revenue. Such fees were approximately $1,135, $779
and $524 for the years ended December 31, 1998, 1997, 1996, respectively. The
Initial Hotels will continue to be operated under the franchise agreements.

CONSTRUCTION IN PROGRESS - At December 31, 1998, the Combined Entities had
commenced improvements of a hotel property in Harrisburg, Pennsylvania. These
improvements involve the construction of offices and the installation of a
sprinkler system for the entire property. Through December 31, 1998, the
Combined Entities had incurred expenses of $235. The improvements are being
contracted and funded through a related party and the total construction cost is
expected to be approximately $425. At December 31, 1998, $235 was outstanding to
a related party in relation to the construction project. Interest is payable on
this amount at 9.5% per annum payable quarterly. There is no security provided
against this loan.

At December 31, 1997, the Combined Entities had future obligations under
various hotel construction project in the amount of $255. Through December 31,
1997, the Combined Entities had incurred expenses of $1,412 in connection with
the construction of a hotel property in Harrisburg, Pennsylvania. The
construction is being contracted and funded through a related party and the
total construction cost is expected to be approximately $3,100. The Combined
Entities have obtained a construction/term loan in the amount of $2,500 under
which no borrowings are outstanding at December 31, 1997. The loan bears
interest at 8% for 5 years and 9 months and the Wall Street Journal prime rate
thereafter through maturity 10 years and 9 months from inception. The loan is
collateralized by the property and is guaranteed by certain partners,
stockholders, Combined Entities and related parties. Construction of the
property was completed and the property opened for business May 15, 1998.

[9] FAIR VALUE OF FINANCIAL INSTRUMENTS

At December 31, 1998 and 1997, financial instruments include cash and cash
equivalents, accounts receivable, accounts payable, loans to and from related
parties and mortgage payables. The fair values of cash, accounts receivable and
accounts payable approximate carrying value because of the short-term nature of
these instruments. Loans to and from related parties carry interest at rates
that approximate the Combined Entities' borrowing cost. The fair value of
mortgages payable approximates carrying value since the interest rates
approximate the interest rates currently offered for similar debt with similar
maturities.

F-53

[10] SUBSEQUENT EVENTS

On January 1, 1999, the Combined Entities transferred all management
operations to the Lessee.

In January 1999, the Company completed its offering of common stock whereby a
total of 2.275 million common shares, including the underwriters over allotment,
were issued. Concurrent with the offering, certain assets and partnership
interests of the Combined Entities were exchanged for 4,032,431 units
representing a 63.93% limited partnership interest in the Partnership.

F-54

INDEPENDENT ACCOUNTANT'S REPORT

To the Shareholders and Board of Trustees of
Hersha Hospitality Trust
New Cumberland, Pennsylvania

We have reviewed the accompanying consolidated balance sheet of Hersha
Hospitality Trust and Subsidiaries as of September 30, 2001, and the related
consolidated statements of operations for the three and nine month periods ended
September 30, 2001 and 2000, and consolidated statements of cash flows for the
nine months ended September 30, 2001 and 2000. These consolidated financial
statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the consolidated financial statements
taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.

We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Hersha Hospitality Trust and Subsidiaries as of December 31, 2000, and the
related consolidated statements of operations, change in shareholders' equity,
and cash flows for the year then ended [not presented herein]; and in our report
dated March 1, 2001 we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 2000, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.

MOORE STEPHENS, P.C.
Certified Public Accountants.

New York, New York
November 1, 2001

F-55

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]

SEPTEMBER 30, DECEMBER 31,
--------------- --------------
2001 2000
---------------
ASSETS: [UNAUDITED]
---------------

Cash and Cash Equivalents $ 21 $ --
Investment in Hotel Properties, Net of Accumulated Depreciation 89,307 87,671
Escrow and Lease Deposits 1,415 1,178
Lease Payments Receivable - Related Party 2,235 2,877
Intangibles, Net of Accumulated Amortization 1,570 1,720
Due from Related Party 1,477 849
Other Assets 517 236
--------------- --------------
TOTAL ASSETS $ 96,542 $ 94,531
=============== ==============

LIABILITIES AND SHAREHOLDERS' EQUITY:
Lines of Credit $ 8,984 $ 11,400
Deposits Payable 1,000 1,000
Mortgages Payable 52,951 50,050
Dividends Payable 1,322 1,209
Due to Related Party 1,150 1,650
Accounts Payable and Accrued Expenses 276 529
--------------- --------------
TOTAL LIABILITIES 65,683 65,838
--------------- --------------

MINORITY INTEREST 20,479 17,679
--------------- --------------

Shareholders' Equity:
Preferred Shares, $.01 par value, 10,000 Shares authorized, None Issued and
Outstanding -- --

Common Shares - Priority Class A, $.01 Par Value, 50,000,000 Shares
Authorized, 2,275,000 Shares Issued and Outstanding at September 30, 2001
and December 31, 2000 23 23

Common Shares - Class B, $.01 Par Value, 50,000,000 Shares Authorized, -
0- Shares Issued and Outstanding at September 30, 2001 and December 31,
2000, Respectively -- --

Additional Paid-in Capital 11,968 11,968

Distributions in Excess of Net Earnings (1,611) (977)
--------------- --------------
TOTAL SHAREHOLDERS' EQUITY 10,380 11,014
--------------- --------------

Total Liabilities and Shareholders' Equity $ 96,542 $ 94,531
=============== ==============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS CONSOLIDATED FINANCIAL
STATEMENT.

F-56

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------

REVENUE:
Percentage Lease Revenues $ 4,148 $ 3,667 $ 10,714 $ 9,231
Interest - Related Party 54 - 105 -
Other Revenue 2 20 20 24
------------- ------------- ------------- -------------
TOTAL REVENUE 4,204 3,687 10,839 9,255

EXPENSES:
Interest expense 1,353 1,324 4,065 3,275
Land Lease - Related Party 4 4 11 11
Real Estate and Personal Property
Taxes and Property Insurance 273 187 788 541
General and Administrative 137 147 422 447
Loss on Disposition of Hotel Properties - - 12 -
Early Payment Penalty - - - 107
Depreciation and Amortization 1,132 1,032 3,335 2,790
------------- ------------- ------------- -------------
TOTAL EXPENSES 2,899 2,694 8,633 7,171

INCOME BEFORE MINORITY INTEREST 1,305 993 2,206 2,084

INCOME ALLOCATED TO MINORITY INTEREST 1,071 724 1,611 1,314
------------- ------------- ------------- -------------

NET INCOME $ 234 $ 269 $ 595 $ 770
============= ============= ============= =============

BASIC EARNINGS PER COMMON SHARE $ 0.10 $ 0.12 $ 0.26 $ 0.34
============= ============= ============= =============

DILUTED EARNINGS PER COMMON SHARE $ 0.10 $ 0.12 $ 0.26 $ 0.31
============= ============= ============= =============

WEIGHTED AVERAGE SHARES:
Basic 2,275,000 2,275,000 2,275,000 2,275,000

Diluted 7,346,840(1) 6,715,996(1) 7,274,886(1) 6,715,996(1)

(1) Includes 5,071,840 and 4,440,996 units at September 30, 2001 and 2000,
respectively, that are redeemable on a one-for-one basis for Class B common
shares. See Footnote [5] Earnings Per Share

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS CONSOLIDATED FINANCIAL
STATEMENT.

F-57

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]

NINE MONTHS ENDED SEPT. 30,
2001 2000
-------- ---------

OPERATING ACTIVITIES:
Net Income $ 595 $ 770
-------- ---------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and Amortization 3,335 2,790
Income Allocated to Minority Interest 1,611 1,314
Change in Assets and Liabilities:
(Increase) Decrease in:
Lease and Escrow Deposits (237) (1,386)
Lease Payments Receivable - Related Party 642 (1,399)
Other Assets (281) 331
Due from Related Party (628) (19)
Increase (Decrease):
Due to Related Parties (500) 31
Accounts Payable and Accrued Expenses (253) 71
-------- ---------
Total Adjustments 3,689 1,733
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,284 2,503

INVESTING ACTIVITIES:
Purchase of Hotel Property Assets (4,321) (11,152)
Sale of Hotel Property Assets 8,826
Purchase of Intangible Assets (70) (1,057)
-------- ---------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES 4,435 (12,209)

FINANCING ACTIVITIES:
Proceeds from Borrowings Under Line of Credit 3,984 16,479
Repayment of Borrowings Under Line of Credit (6,400) (11,713)
Borrowings from Mortgages Payable - 25,050
Principal Repayment of Mortgages Payable 491 (16,850)
Dividends Paid (1,229) (1,229)
Limited Partnership Unit Distributions Paid (2,586) (2,763)
Loan to Related Party - (800)
Borrowings from Related Party - 1,408
Repayment of Related Party Loans (2,958) -
-------- ---------
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES (8,698) 9,582

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 21 (124)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD - 124
-------- ---------

CASH AND CASH EQUIVALENTS - END OF PERIOD $ 21 $ -
======== =========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS CONSOLIDATED FINANCIAL
STATEMENT.

F-58

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]

NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
------------ -----------

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- ------------------------------------------------------
CASH PAID DURING THE PERIOD:
Interest $ 4,139 $ 3,013

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

On January 1, 2000, we purchased three hotels from the Hersha Affiliates. These
hotels consist of the Hampton Inn, Hershey, the Best Western, Indiana and the
Comfort Inn, McHenry. The purchase prices paid for these hotels was $7,500,
$2,200 and $1,800, respectively. We have assumed mortgages payable of $5,000,
$1,400 and $1,200, respectively, in connection with the acquisitions of these
hotels. We have also assumed related party debt of $1,000 related to the
purchase of the Hampton Inn, Hershey. The Hersha Affiliates have received cash
of approximately $1,500, $800, and $600, respectively, for the remainder of the
proceeds from the sale of these hotels.

We have issued an additional 235,026 units of limited partnership interest in
connection with the repricing of the Holiday Inn, Milesburg, the Comfort Inn,
Denver and the Holiday Inn Express, Riverfront.

On May 19, 2000, we completed the acquisition of four hotels from Noble
Investment Group, Ltd. ("Noble"). We have simultaneously entered into
purchase-leaseback agreements with Noble for four properties. We lease the
properties to entities owned by Noble pursuant to percentage leases that provide
for rent based, in part, on the room revenues from the hotels. The leases for
the Comfort Suites, Duluth, and the Holiday Inn Express, Duluth, are effective
as of May 19, 2000. The leases for the Hampton Inn hotels located in Newnan and
Peachtree City are effective as of April 20, 2000.

We have issued an additional 531,559 units of limited partnership interest in
connection with the repricing of the Holiday Inn Express, Hershey, Hampton Inn,
Carlisle, Holiday Inn Express, New Columbia and the Comfort Inn, Harrisburg.

On April 1, 2001, we have sold the Best Western, Indiana for $2,200. In
conjunction with this transaction we have received cash proceeds of $400 and
have redeemed 76,252 limited partnership units valued at $457. The buyer also
assumed the outstanding mortgage balance of $1,342.

On May 1, 2001, we have sold the Comfort Inn, Denver for $1,873. In
conjunction with this transaction we have received cash proceeds of $465 and
have paid down the outstanding mortgage balance of $1,408 to Shreenathji
Enterprises, Ltd.

On June 1, 2001, we have sold the Comfort Inn, JFK for $7,000. In conjunction
with this transaction we have received cash proceeds of $6,653 after certain
settlement costs. Based upon the initial repricing formula, we have issued an
additional 175,538 limited partnership units in conjunction with this
transaction.

F-59

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000 [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AMOUNTS]

On June 1, 2001, we have purchased the Mainstay Suites and Sleep Inn in King of
Prussia. We have purchased these assets for $9,445 and leased them to Hersha
Hospitality Management, LP. In conjunction with this transaction, we have
assumed the mortgage indebtedness of $6,738 and funded the remainder of the
proceeds from our outstanding line of credit.

On September 28, 2001 we declared an $0.18 per Class A Common Share dividend of
$410 that was paid on October 26, 2001 and a distribution of $0.18 per limited
partnership unit holder of $912 that was also paid on October 26, 2001.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS CONSOLIDATED FINANCIAL
STATEMENT.

F-60

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[1] ORGANIZATION AND BASIS OF FINANCIAL PRESENTATION

Hersha Hospitality Trust was formed in May 1998 to acquire equity interests in
ten existing hotel properties. We are a self-administered, Maryland real estate
investment trust for federal income tax purposes. We completed an initial
public offering of two million of our Class A Priority Common Shares at $6.00
per share and commenced operations on January 26, 1999. On February 5, 1999, we
sold an additional 275,000 Class A Priority Common Shares pursuant to an over
allotment option granted to the underwriter in our initial public offering. The
offering price per share was $6 resulting in gross proceeds of $13,650. Net of
underwriters discount and offering expenses, we received net proceeds of
$11,991.

Upon completion of the initial public offering, we contributed substantially all
of the net proceeds to Hersha Hospitality Limited Partnership [the
"Partnership"] in exchange for a 36.1% general partnership interest in the
Partnership. The Partnership used these proceeds to acquire an equity interest
in ten hotels [the "Initial Hotels"] through subsidiary partnerships, and to
retire certain indebtedness relating to these hotels. The Partnership acquired
these hotels in exchange for (i) units of limited partnership interest in the
Partnership which are redeemable, subject to certain limitations, for an
aggregate of 4,032,431 Priority Class B Common Shares, with a value of
approximately $24.2 million based on the initial public offering, and (ii) the
assumption of approximately $23.3 million of indebtedness of which approximately
$6.1 million was repaid immediately after the acquisition of the hotels. Hasu
P. Shah and certain affiliates [the "Hersha Affiliates"] received units of
limited partnership interests in the Partnership aggregating a 63.9% equity
interest in the Partnership. The Partnership owns a 99% limited partnership
interest and Hersha Hospitality, LLC ["HHLLC"], a Virginia limited liability
company, owns a 1% general partnership interest in the subsidiary partnerships.
The Partnership is the sole member of HHLLC.

We lease 16 of our hotel facilities to Hersha Hospitality Management, LP,
["HHMLP"], a limited partnership owned by certain members of the Hersha
Affiliates. HHMLP operates and leases the hotel properties pursuant to separate
percentage lease agreements that provide for initial fixed rents or percentage
rents based on the revenues of the hotels. The hotels are located principally
in the Mid-Atlantic region of the United States. We have also entered into
percentage leases with Noble Investment Group, Ltd. ["Noble"], an independent
third party management company, to lease and manage four hotels in the
metropolitan Atlanta market.

Since the completion of the initial public offering we have issued an additional
173,539 units of limited partnership interest in connection with the acquisition
of the Hampton Inn, Danville, PA. We have also issued an additional 942,123
units of limited partnership interest in connection with the final settlement of
the purchase price of several hotels. We have redeemed 76,253 units of limited
partnership interest in connection with the sale of the Best Western, Indiana,
PA. The total number of units of limited partnership interest outstanding as
of September 30, 2001 and 2000 was 5,071,840 and 4,440,996, respectively.

[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION - Percentage lease income is recognized when earned from the
Lessee under the agreements from the date of acquisition of each hotel
property. Contingent rent is recognized when the contingency is met. Lease
income is recognized under fixed rent agreements ratably over the lease term.

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

EARNINGS PER COMMON SHARE - We compute earnings per share in accordance with
Statement of Financial Accounting Standards ["SFAS"] No. 128, "Earnings Per
Share."

F-61

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[2] SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [CONTINUED]

The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an antidilutive
effect on earnings per share. The dilutive effect of outstanding options and
warrants and their equivalents is reflected in diluted earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon exercise of options and warrants in computing
diluted earning per share. It assumes that any proceeds would be used to
purchase common shares at the average market price during the period. Options
and warrants will have a dilutive effect only when the average market price of
the common shares during the period exceeds the exercise price of the option or
warrants.

Potential future dilutive securities include 5,071,840 shares issuable under
limited partnership units and 534,000 shares issuable under outstanding options.

[3] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS

The Priority Class A Common Shares have priority as to the payment of dividends
until dividends equal $0.72 per share on a cumulative basis and share equally in
additional dividends after the Class B Common Shares and have received $0.72 per
share in each annual period. The Priority Class A Common Shares carry a
liquidation preference of $6.00 per share plus unpaid dividends and votes with
the Class B Common Shares on a one vote per share basis. The Priority period of
the Class A Shares commenced on January 26, 1999 and ends on the earlier of (i)
five years after the initial public offering of the Priority Common Shares, or
(ii) the date that is 15 trading days after we send notice to the holders of the
Priority Common Shares that their Priority Rights will terminate in 15 trading
days, provided that the closing bid price of the Priority Common Shares is at
least $7.00 on each trading day during such 15-day period.

Pursuant to the Hersha Hospitality Limited Partnership agreement, the limited
partners have certain redemption rights that enable them to cause the
partnership to redeem their units of limited partnership interest in exchange
for Class B Common Shares or for cash at our election. In the event the Class B
Common Shares are converted into Priority Class A Common Shares prior to
redemption of the units, the units will be redeemable for Priority Class A
Common Shares. If we do not exercise our option to redeem the units for Class B
Common Shares, then the limited partner may make a written demand that we redeem
the units for Class B Common Shares. These redemption rights may be exercised
by the limited partners. At September 30, 2001 and September 30, 2000, the
aggregate number of Class B Common Shares issuable to the limited partners upon
exercise of the redemption rights is 5,071,840 and 4,440,996, respectively. The
number of shares issuable upon exercise of the redemption rights will be
adjusted upon the occurrence of stock splits, mergers, consolidation or similar
pro rata share transactions, that otherwise would have the effect of diluting
the ownership interest of the limited partners or our shareholders.

We are the sole general partner in the Partnership, which is the sole general
partner in the Subsidiary Partnerships and, as such, are liable for all recourse
debt of the Partnership to the extent not paid by the subsidiary partnerships.
In the opinion of management, we do not anticipate any losses as a result of our
obligations as general partner.

F-62

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[3] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS [CONTINUED]

In conjunction with the initial public offering, we acquired ten hotels and
entered into percentage lease agreements with HHMLP for these hotels.
Subsequent to our public offering, we have acquired nine properties from the
Hersha Affiliates that were subsequently leased to HHMLP and acquired four
properties from Noble that were leased back to Noble. As of September 30,
2001, we have divested three hotels from our portfolio and we own twenty
properties. Under the percentage leases, the Partnership is obligated to pay
the costs of certain capital improvements, real estate and personal property
taxes and property insurance, and to make available to the lessee an amount
equal to 4% [6% for some hotels] of room revenues per quarter, on a cumulative
basis, for the periodic replacement or refurbishment of furniture, fixtures and
equipment at these hotels.

We have entered into percentage leases relating to 16 hotels with HHMLP. Each
percentage lease has an initial non-cancelable term of five years. All, but not
less than all, of the percentage leases for these 16 hotels may be extended for
an additional five-year term at HHMLP's option. At the end of the first
extended term, HHMLP, at its option, may extend some or all of the percentage
leases for these hotels for an additional five-year term. Pursuant to the terms
of the percentage leases, HHMLP is required to pay either initial fixed rent,
base rent or percentage rent and certain other additional charges and is
entitled to all profits from the operations of the hotels after the payment of
certain specified operating expenses.

We have future lease commitments from HHMLP through June 2006. Minimum future
rental income under these non-cancelable operating leases at September 30, 2001,
is as follows:

September 30, 2001 $ 6,483
September 30, 2002 5,419
September 30, 2003 3,006
September 30, 2004 1,184
September 30, 2005 409
------------

TOTAL $ 16,501
============

We have entered into percentage leases relating to four hotels with Noble. Each
percentage lease has an initial non-cancelable term of three years. All, but
not less than all, of the percentage leases for these four hotels may be
extended for an additional three-year term at Noble's option. At the end of the
first extended term, we or Noble may extend all, but not less than all, of the
percentage leases for these hotels for an additional three-year term. Pursuant
to the terms of the percentage leases, Noble is required to pay either initial
fixed rent or percentage rent and certain other additional charges and is
entitled to all profits from the operations of the hotels after the payment of
certain specified operating expenses.

We have future lease commitments from Noble through May 19, 2003. Minimum
future rental income under these non-cancelable operating leases at September
30, 2001, is as follows:

September 30, 2002 $ 2,801
September 30, 2003 1,652
------------
TOTAL $ 4,453
============

F-63

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[3] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS [CONTINUED]

For the period January 1, 2001 through September 30, 2001, we earned initial
fixed rents of $5,247 and earned percentage rents of $5,467. For the period
January 1, 2000 through September 30, 2000, we earned initial fixed rents of
$5,527 and earned percentage rents of $3,704.

The hotel properties are operated under franchise agreements assumed by the
lessee that have 10 to 20 year lives but may be terminated by either the
franchisee or franchisor on certain anniversary dates specified in the
agreements. The agreements require annual payments for franchise royalties,
reservation, and advertising services, which are calculated as a percentage of
gross room revenues. These fees are paid by our lessees.

We have acquired seven hotels, since the commencement of operations, for prices
that will be adjusted at either December 31, 2001 or 2002. The purchase price
adjustments are calculated by applying the initial pricing methodology to such
hotels' cash flows as shown on each hotel's audited financial statements. The
adjustments must be approved by a majority of our independent trustees. If the
repricing produces a higher aggregate value for such hotels, the Hersha
Affiliates receive an additional number of units of limited partnership interest
that, when multiplied by the offering price, equals the increase in value. If,
however, the repricing produces a lower aggregate value for such hotels, the
Hersha Affiliates forfeit to the Partnership that number of units of limited
partnership interest that, when multiplied by the offering price, equals the
decrease in value. Any adjustments arising from the issuance or forfeiture of
shares will adjust the cost of the property acquired based on the fair value of
the shares on the date of the adjustment.

The purchase prices for the Holiday Inn, Milesburg, Comfort Inn, Denver and the
Holiday Inn Express, Riverfront were adjusted based upon the financial results
of the hotels for the twelve months ended December 31, 1999. Based upon the
financial results of these hotels and their respective cash flows the properties
were repriced at higher aggregate values of $588, $471 and $351, respectively.
Based upon the $6.00 offering price, the Hersha Affiliates received an
additional 98,050, 78,427 and 58,549 units of limited partnership interest for
the three hotels, respectively. These hotels gave rise to an additional
investment in hotel properties of $485, $388 and $290, respectively.

The Hersha Affiliates and the independent trustees have revised the return
criteria upon which the repricings are to occur going forward. The revised
pricing methodology has been established in order to ensure that we receive a
minimum return of 11.5% and a maximum return of 12.5% based upon audited results
for the property and the pre-established percentage lease formulas.

Based upon this revised repricing formula, the purchase prices for the Hampton
Inn, Carlisle, Comfort Inn, West Hanover, Holiday Inn Express, New Columbia, and
Holiday Inn Express, Hershey were adjusted based upon the financial results of
the hotels for the twelve months ended December 31, 2000. Based upon the
financial results of these hotels and their respective cash flows the properties
were repriced at higher aggregate values of $1,083, $694, $200 and $1,212,
respectively. Based upon the $6.00 offering price, the Hersha Affiliates
received an additional 180,566, 115,657, 33,370 and 201,966 units of limited
partnership interest for the three hotels, respectively. These hotels gave rise
to an additional investment in hotel properties of $1,017, $651, $188 and
$1,137, respectively.

F-64

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[3] COMMITMENTS AND CONTINGENCIES AND RELATED PARTY TRANSACTIONS [CONTINUED]

On January 26, 1999, we executed an administrative services agreement with HHMLP
to provide accounting and securities reporting services for the Company. The
terms of the agreement provided for us to pay HHMLP a fixed fee of $55 with an
additional $10 per property (prorated from the time of acquisition) for each
hotel added to our portfolio. HHMLP has reduced the administrative services fee
by $75 pursuant to the revised repricing methodology discussed above. As of
September 30, 2001 and 2000, $91and $110 has been charged to operations,
respectively.

We have approved the lending of up to $3,000 to the Hersha Affiliates to
construct hotels and related improvements on specific hotel projects at an
interest rate of 12.0%. As of September 30, 2001 and 2000, the Hersha
Affiliates owed us $1,800 and $800, respectively. Interest income from these
advances was $51.5 and $19 for the nine months ended September 30, 2001 and
2000, respectively.

We borrowed certain funds from Shreenathji Enterprises, Ltd. ("SEL"), an
affiliated company, during the nine months ended September 30, 2001. Our total
borrowings outstanding from SEL at September 30, 2001 were $1,059. We borrow
from SEL at a fixed rate of 9% per annum. We incurred related party interest
expense of $17.2 for the nine month period ending September 30, 2001.

[4] DEBT

Debt is comprised of the following at September 30, 2001 and December 31, 2000:

2001 2000
------- -------
Mortgages Payable $52,951 $50,050
Revolving Credit Facility 8,984 11,400
------- -------
Total Long Term Debt $61,935 $61,450

SUBSTANTIALLY ALL OF OUR LONG-TERM DEBT IS COLLATERALIZED BY PROPERTY AND
EQUIPMENT AND IN CERTAIN SITUATIONS IS PERSONALLY GUARANTEED BY THE HERSHA
AFFILIATES. DURING MARCH 2000, WE COMPLETED A PORTFOLIO REFINANCING OF $22,050
WITH LEHMAN BROTHERS BANK. WE HAVE REPAID $15,450 OF MORTGAGES PAYABLE AND
$2,000 OF RELATED PARTY DEBT WITH PROCEEDS FROM THE REFINANCING. THE REMAINDER
OF THE FUNDS WAS UTILIZED FOR ACQUISITION OF HOTEL PROPERTIES AND GENERAL
CORPORATE PURPOSES. THESE FUNDS ARE COLLATERALIZED BY SEVEN OF OUR HOTEL
PROPERTIES.

OUTSTANDING BORROWINGS UNDER THE REFINANCING BEAR INTEREST AT A ANNUAL INTEREST
RATE OF 8.94% AND HAVE A TOTAL LOAN AMORTIZATION PERIOD OF 23.5 YEARS. THE
FIRST EIGHTEEN MONTHS OF THE LOAN PERIOD IS STRUCTURED TO BE INTEREST ONLY
FINANCING WITH NO PRINCIPAL PAYOFF DURING THE PERIOD. WE HAVE INCURRED ONE-TIME
EARLY PREPAYMENT PENALTIES OF $107 IN CONNECTION WITH THE PORTFOLIO REFINANCING.

F-65

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[5] EARNINGS PER SHARE

THREE MONTHS ENDED NINE MONTHS ENDED
----------------------- ------------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2001 2000 2001 2000
---------- ----------- ----------- -----------

Net Income for Basic Earnings Per Share $ 234 $ 269 $ 595 $ 770

Add: Income Attributable to Minority Interest 1,071 724 1,611 1,314
---------- ----------- ----------- -----------

NET INCOME FOR DILUTED EARNINGS PER SHARE $ 1,305 $ 993 $ 2,206 $ 2,084
- ---------------------------------------- ========== =========== =========== ===========

Weighted Average Shares for Basic Earnings Per Share 2,275,000 2,275,000 2,275,000 2,275,000

Dilutive Effect of Limited Partnership Units 5,071,840 4,440,996 5,071,840 4,440,996
---------- ----------- ----------- -----------

WEIGHTED AVERAGE SHARES FOR DILUTED EARNINGS PER SHARE 7,346,840 6,715,996 7,274,886 6,715,996
- ------------------------------------------------------ ========== =========== =========== ===========

Options to purchase 534,000 shares of Class B common shares for the nine months
ended September 30, 2001 and September 30, 2000, respectively, were outstanding
but were not included in the computation of diluted earnings per share because
the options' exercise prices were greater than the average market price of the
common shares and, therefore, the effect would be antidilutive.

F-66

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[6] PRO FORMA INFORMATION

The following pro forma information is presented for information purposes as if
the acquisition and disposition of all hotels by the Partnership and the
commencement of the Percentage Leases had occurred on January 1, 2001 and 2000,
respectively. The unaudited pro forma condensed statements of operations are
not necessarily indicative of what actual results of operations of the Company
would have been assuming such operations had commenced as of January 1, 2000 and
1999, respectively, nor does it purport to represent the results of operations
for future periods.

PRO FORMA CONDENSED STATEMENT OF OPERATIONS
-------------------------------------------
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
---------------------------------------------------------------
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]
---------------------------------------------------
[UNAUDITED]
-----------

THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- ----------------------
SEPT. 30 SEPT. 30 SEPT. 30, SEPT. 30,
2001 2000 2001 2000
---------- ---------- ---------- ----------

REVENUE:
Percentage Lease Revenue $ 4,148 $ 3,667 $ 10,933 $ 10,200
Interest Revenue 54 - 105 -
Other Revenue 2 20 20 44
---------- ---------- ---------- ----------
TOTAL REVENUE 4,204 3,687 11,058 10,244

EXPENSES:
Interest expense 1,353 1,324 4,153 3,641
Real Estate and Personal Property
Taxes and Property Insurance 273 187 818 541
Land lease 4 4 12 11
General and Administrative 137 147 423 567
Depreciation and Amortization 1,132 1,032 3,401 3,034
---------- ---------- ---------- ----------
TOTAL EXPENSES 2,899 2,694 8,807 7,794

INCOME BEFORE MINORITY INTEREST 1,305 993 2,251 2,450

INCOME ALLOCATED TO MINORITY INTEREST 1,071 724 1,567 1,763
---------- ---------- ---------- ----------

NET INCOME $ 234 $ 269 $ 684 $ 687
========== ========== ========== ==========

BASIC EARNINGS PER COMMON SHARE $ 0.10 $ 0.12 $ 0.30 $ 0.30
========== ========== ========== ==========

DILUTED EARNINGS PER COMMON SHARE $ 0.10 $ 0.12 $ 0.30 $ 0.30
========== ========== ========== ==========

Weighted Average for Basic EPS 2,275,000 2,275,000 2,275,000 2,275,000
Weighted Average Shares for Diluted EPS 7,346,840 6,715,996 7,346,840 6,715,996

F-67

HERSHA HOSPITALITY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
[IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS]

[7] UNAUDITED INTERIM INFORMATION

The accompanying financial statements have been prepared in accordance with the
instructions to Form 10-Q and accordingly, do not include all of the disclosures
normally required by generally accepted accounting principles. The financial
information has been prepared in accordance with our customary accounting
practices. In the opinion of management, the information presented reflects all
adjustments [consisting of normal recurring accruals] considered necessary for a
fair presentation of our financial position as of September 30, 2001, and the
results of our operations for the interim periods presented. The results of
operations for the nine months ended September 30, 2001 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001. The unaudited financial statements should be read in conjunction with the
financial statements and footnotes thereto included in Hersha Hospitality
Trust's Annual Report on Form 10-K for the year ended December 31, 2000.

[8] SUBSEQUENT EVENTS

The quarterly dividend pertaining to the third quarter of 2001 was paid on
October 26, 2001 at the rate of $0.18 per share, which represents an
annualized rate of $0.72 per annum.

On November 1, 2001, we sold the Holiday Inn, Milesburg for $4.7 million
less property improvements, broker fees and transfer costs that are estimated at
$0.7 million.

On November 1, 2001, we sold the Comfort Inn Riverfront, Harrisburg for
$4.0 million less property improvements, broker fees and transfer costs that are
estimated at $0.5 million.

On November 1, 2001, we sold the Comfort Inn, McHenry for $2.0 million.

On November 1, 2001, we purchased the Holiday Inn Express, Long Island
City, New York for $8.5 million.

[9] NEW AUTHORITATIVE PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) has issued Statement No.
141, Business Combinations, and Statement No. 142, Goodwill and Other
Intangible Assets, in July 2001. Those Statements will change the
accounting for business combinations and goodwill in two significant ways.
First, Statement No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Use of
the pooling-of-interests method will be prohibited. Second, Statement No.
142 changes the accounting for goodwill from an amortization of goodwill to
an impairment-only approach. Thus, amortization of goodwill, including
goodwill recorded in past business combinations, will cease upon adoption
of that Statement, which for companies with calendar year ends, will be
January 1, 2002.

The FASB has also issued Statement No. 143, "Accounting for Asset
Retirement Obligations" and Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Statements no. 143 and 144
will be effective for calendar year end companies on January 1, 2003 and
January 1, 2002, respectively.

We expect that adoption of the new Statements will not have a material
impact on our financial statements.

. . . . . . .

F-68

INDEPENDENT ACCOUNTANT'S REPORT

To the Partners of
Hersha Hospitality Management L.P.
New Cumberland, Pennsylvania

We have reviewed the accompanying balance sheet of Hersha Hospitality
Management L.P. as of September 30, 2001, and the related statements of
operations for the three and nine months ended September 30, 2001 and 2000 and
statements of cash flows for the nine months ended September 30, 2001 and 2000.
These financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying financial statements referred to above for
them to be in conformity with generally accepted accounting principles.

We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet of Hersha
Hospitality Management L.P., as of December 31, 2000, and the related statements
of operations, changes in partners' capital, and cash flows for the year then
ended [not presented herein]; and in our report dated March 15, 2001, we
expressed an unqualified opinion on those financial statements. In our opinion,
the information set forth in the accompanying balance sheet as of December 31,
2000, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.

MOORE STEPHENS, P.C.
Certified Public Accountants.

New York, New York
November 1, 2001

F-69

HERSHA HOSPITALITY MANAGEMENT, L.P.
BALANCE SHEETS
[IN THOUSANDS]

SEPTEMBER 30, DECEMBER 31,
--------------- --------------
2001 2000
--------------- --------------
CURRENT ASSETS: [UNAUDITED]

Cash and Cash Equivalents $ 667 $ 623
Accounts Receivable, less allowance for doubtful accounts of
$240 and $135 at September 30, 2001 and December 31, 2000,
respectively 1,206 891
Prepaid Expenses 153 13
Due from Related Party - HHLP 442 175
Due from Related Parties 847 1,604
Other Assets 295 281
--------------- --------------
TOTAL CURRENT ASSETS 3,610 3,587

FRANCHISE LICENSES [NET OF ACCUMULATED AMORTIZATION OF $167
AND $137 AT SEPTEMBER 30, 2001 AND DECEMBER 31, 2000,
RESPECTIVELY] 285 307
SOFTWARE 15 17
PROPERTY AND EQUIPMENT 1,034 1,158
CONSTRUCTION IN PROGRESS 22 -
--------------- --------------
TOTAL ASSETS $ 4,966 $ 5,069
=============== ==============
LIABILITIES AND PARTNERS' CAPITAL:
CURRENT LIABILITIES:
Accounts Payable $ 1,391 $ 1,639
Accounts Payable Related Party - 60
Accrued Expenses 516 450
Accrued Contingent Lease 214 -
Other Liabilities 15 20
Due to Related Party - HHLP 1,233 331
Lease Payments Payable - Related Party - HHLP 2,021 2,644
--------------- --------------
TOTAL CURRENT LIABILITIES 5,390 5,144

COMMITMENTS - -

PARTNERS' CAPITAL (424) (75)
--------------- --------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 4,966 $ 5,069
=============== ==============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.

F-70

HERSHA HOSPITALITY MANAGEMENT, L.P.
STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000 [UNAUDITED]
[IN THOUSANDS]

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------ -------- -------- -------

REVENUES FROM HOTEL OPERATIONS
Room Revenue $7,993 $ 9,677 $21,115 $22,425
Restaurant Revenue 499 477 1,295 1,513
Other Revenue 455 569 1,329 1,280
------ -------- -------- -------
TOTAL REVENUES FROM HOTEL OPERATIONS $8,947 $10,723 $23,739 $25,218

EXPENSES:
Hotel Operating Expenses 3,256 3,286 9,054 8,827
Restaurant Operating Expenses 463 435 1,121 1,279
Advertising and Marketing 585 543 1,527 1,552
Bad Debts (Recoveries) 100 (25) 111 -
Depreciation and Amortization 61 47 178 133
General and Administrative 897 1,489 3,238 3,641
General and Admin. - Related Parties - 821 82 842
Lease Expense - HHLP 2,681 2,695 8,401 8,110
Lease Expense - Other Related Parties 353 - 353 -
------ -------- -------- -------
TOTAL EXPENSES $8,396 $ 9,291 $24,065 $24,384
------ -------- -------- -------

NET INCOME (LOSS) $ 551 $ 1,432 $ (326) $ 834
====== ======== ======== =======

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.

F-71

HERSHA HOSPITALITY MANAGEMENT, L.P.
STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000 [UNAUDITED]
[IN THOUSANDS]

SEPTEMBER 30, SEPTEMBER 30,
2001 2000
--------------- ---------------

OPERATING ACTIVITIES:
Net Income (Loss) $ (326) $ 834
--------------- ---------------
Adjustments to Reconcile Net Income to
Net Cash Provided by (Used in) Operating Activities:
Depreciation and Amortization 178 133
Allowance for Doubtful Accounts - (40)
Change in Assets and Liabilities:
(Increase) Decrease in:
Accounts Receivable (315) (508)
Prepaid Expenses (140) 60
Other Assets (14) (117)
Due from Related Parties 490 (3,255)
Increase (Decrease):
Accounts Payable (248) 317
Accounts Payable - Related Party (60) 690
Lease Payments Payable - HHLP (622) 1,399
Due to Related Parties 902
Accrued Expenses 279 362
Other Liabilities (6) -
--------------- ---------------
Total Adjustments 444 (959)
--------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 118 (125)

INVESTING ACTIVITIES
Property and Equipment (31) (149)
Franchise Licenses (43) (56)
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (74) (205)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 44 (330)

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 623 778
--------------- ---------------

CASH AND CASH EQUIVALENTS - END OF YEAR $ 667 $ 448
=============== ===============

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THIS FINANCIAL STATEMENT.

F-72

HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS]

[1] ORGANIZATION

Hersha Hospitality Management, L.P., ["HHMLP" or the "Lessee"], was organized
under the laws of the State of Pennsylvania in May, 1998 to lease and operate
existing hotel properties from Hersha Hospitality Limited Partnership ["HHLP" or
the "Partnership"]. The Lessee is owned by Mr. Hasu P. Shah and certain
executive officers and inside trustees, [the "Hersha Affiliates"], some of whom
have ownership interests in the Partnership. We also manage certain other
properties owned by the Hersha Affiliates that are not owned by the Partnership.
We commenced operations on January 1, 1999 and as of September 30, 2001 leased
16 hotel properties from the Partnership.

[2] COMMITMENTS AND CONTINGENCIES

We have assumed the rights and obligations under the terms of existing franchise
licenses relating to the hotels upon acquisition of the hotels by the
partnership. The franchise licenses generally specify certain management,
operational, accounting, reporting and marketing standards and procedures with
which the franchisee must comply and provide for annual franchise fees based
upon percentages of gross room revenues.

We have entered into percentage lease agreements ["Percentage Leases"] with
HHLP. Each Percentage Lease has an initial non-cancelable term of five years
and may be extended for an additional five-year term at our option. Pursuant to
the terms of the Percentage Leases, we are required to pay the greater of the
base rent or the percentage rent for hotels with established operating
histories. The base rent is 6.5 percent of the purchase price assigned to each
hotel. The percentage rent for each hotel is comprised of (i) a percentage of
room revenues up to a certain threshold amount for each hotel up to which we
receive a certain percentage of room revenues as a component of percentage rent,
(ii) a percentage of room revenues in excess of the threshold amount, but not
more than a certain incentive threshold amount for each hotel in excess of the
threshold amount up to which we receive a certain percentage of the room
revenues in excess of the threshold amount as a component of percentage rent
(iii) a percentage for room revenues in excess of the incentive threshold amount
and (iv) a percentage of revenues other than room revenues. For hotels with
limited operating histories, the leases provide for the payment of an initial
fixed rent for certain periods as specified in the leases and the greater of
base rent or percentage rent thereafter. The leases commenced on January 26,
1999.

Minimum future lease payments due during the noncancellable portion of the
leases as of September 30, 2001 is as follows:

September 30, 2001 $ 6,483
September 30, 2002 5,419
September 30, 2003 3,006
September 30, 2004 1,184
September 30, 2005 409
---------
TOTAL $ 16,501
=========

On January 26, 1999, we executed an agreement with HHLP to provide accounting
and securities reporting services. The terms of the agreement provided for a
fixed fee of $55 with an additional $10 per property (prorated from the time of
acquisition) for each hotel added to the Company's portfolio. We have reduced
the administrative services fee by $75 pursuant to a revised repricing
methodology between the Hersha Affiliates and the Partnership. As of September
30, 2001, $133 and $174 has been earned from operations, respectively.

For the nine months ended September 30, 2001 and 2000 we incurred lease expense
of $10,715 and $8,110, respectively. As of September 30, 2001 and 2000 the
amount due to the Partnership for lease payments was $2,235 and $3,515,
respectively.

F-73

HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS]

[3] PRO FORMA FINANCIAL INFORMATION [UNAUDITED]

The following pro forma information is presented for information purposes as if
the acquisition and disposition of all hotels by the Partnership and the
commencement of the Percentage Leases had occurred on January 1, 2001 and 2000,
respectively. The unaudited pro forma condensed statements of operations is not
necessarily indicative of what actual results of operations of the Lessee would
have been assuming such operations had commenced as of January 1, 2001 and 2000,
respectively, nor does it purport to represent the results of operations for
future periods.

- Pro Forma Condensed Statements of Operations

For the nine months ended September 30, 2001 and 2000
-----------------------------------------------------
[In Thousands]
------------
[Unaudited]
---------

2001 2000
---------- -----------

REVENUES FROM HOTEL OPERATIONS
Room Revenue $ 20,148 $ 22,425
Restaurant Revenue 1,267 1,513
Other Revenue 1,207 1,476
---------- -----------
TOTAL REVENUES FROM HOTEL OPERATIONS $ 22,622 $ 25,414

EXPENSES:
Hotel Operating Expenses 8,642 8,827
Restaurant Operating Expenses 1,098 1,279
Advertising and Marketing 1,486 1,552
Bad Debts (Recoveries) 11 -
Depreciation and Amortization 61 133
General and Administrative 3,194 3,641
General and Admin. - Related Parties (283) 842
Lease Expense - HHLP 8,295 8,110
Lease Expense - Other Related Parties 353 -
---------- -----------
TOTAL EXPENSES $ 22,857 $ 24,384
---------- -----------
NET INCOME (LOSS) $ (235) $ 1,030
=========== ==========

F-74

HERSHA HOSPITALITY MANAGEMENT, L.P.
NOTES TO FINANCIAL STATEMENTS [UNAUDITED]
[IN THOUSANDS]

[4] UNAUDITED INTERIM INFORMATION

The accompanying financial statements have been prepared in accordance with the
instructions to Form 10-Q and accordingly, do not include all of the disclosures
normally required by generally accepted accounting principles. The financial
information has been prepared in accordance with the Lessee's customary
accounting practices. In the opinion of management, the information presented
reflects all adjustments [consisting of normal recurring accruals] considered
necessary for a fair presentation of our financial position as of September 30,
2001 and the results of our operations for the interim periods presented. The
results of operations for the nine months ended September 30, 2001, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001. The unaudited financial statements should be read in
conjunction with the financial statements and footnotes thereto included in
Hersha Hospitality Trust's Annual Report on Form 10-K for the year ended
December 31, 2000.

[5] NEW AUTHORITATIVE PRONOUNCEMENTS

We expect that adoption of the new Statements will not have a material
impact on our financial statements.

F-75

No dealer, salesperson or other individual has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by us or the Underwriters. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any securities in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to do so, or to
any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in our
affairs or that information contained herein is correct as of any time
subsequent to the date hereof.

TABLE OF CONTENTS page
----
PROSPECTUS SUMMARY 1
RISK FACTORS 6
THE COMPANY 15
USE OF PROCEEDS 15
DISTRIBUTIONS 16
SELECTED FINANCIAL INFORMATION 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 18
BUSINESS AND PROPERTIES 22
MANAGEMENT 36
PERFORMANCE GRAPH 42
CERTAIN RELATIONSHIPS AND TRANSACTIONS 43
HERSHA HOSPITALITY MANAGEMENT LIMITED PARTNERSHIP 46
PRINCIPAL SHAREHOLDERS 48
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST 49
CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR DECLARATION OF
TRUST AND BYLAWS 55
PARTNERSHIP AGREEMENT 58
FEDERAL INCOME TAX CONSEQUENCES OF OUR STATUS AS A REIT 62
OTHER TAX CONSEQUENCES 76
PLAN OF DISTRIBUTION 79
EXPERTS 81
REPORTS TO SHAREHOLDERS 81
LEGAL MATTERS 81
INDEX TO FINANCIAL STATEMENTS F-1

Until __________, 2002 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters.

2,000,000 SHARES

HERSHA HOSPITALITY
TRUST

PRIORITY CLASS A COMMON SHARES
OF BENEFICIAL INTEREST

______________

PROSPECTUS
______________

_______________, ____

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the costs and expense, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of priority common shares being registered. All amounts are
estimates.

AMOUNT TO BE PAID
-----------------

SEC registration fee $ 2,945

Legal fees and expenses $ 30,000

Accounting fees and expenses $ 1,800

Miscellaneous $ 5,255
---------
Total $ 40,000

ITEM 32. SALES TO SPECIAL PARTIES.

There are none, except to the extent that shares may be acquired pursuant
to the exercise of options.

ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.

There have been no sales of unregistered securities by the registrant in
the past three years.

ITEM 34. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

The Declaration of Trust and Bylaws of the Registrant provide that the
Registrant shall indemnify its directors, officers and certain other parties to
the fullest extent permitted from time to time by the Maryland General
Corporation Law (the "MGCL"). The MGCL permits a corporation to indemnify its
directors, officers and certain other parties against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service to or at the request of the Registrant, unless it is established
that the act or omission of the indemnified party was material to the matter
giving rise to the proceeding and (i) the act or omission was committed in bad
faith or was the result of active and deliberate dishonesty, or (ii) in the case
of any criminal proceeding, the indemnified party had reasonable cause to
believe that the act or omission was unlawful.

ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.

Not applicable.

ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.

(a) Financial Statements included in the prospectus.

(b) Exhibits

3.1 Amended and Restated Declaration of Trust of the Registrant.*

3.2 Bylaws of the Registrant.*

II-1

4.1 Form of Common Share Certificate*
5.1 Opinion of Hunton & Williams
8.1 Opinion of Hunton & Williams with respect to tax matters
10.1 Amended and Restated Agreement of Limited Partnership of Hersha
Hospitality Limited Partnership*
10.2 Option Agreement dated as of June 3, 1998, among Hasu P. Shah, Jay H.
Shah, Neil H, Shah, Bharat C. Mehta, K.D. Patel, Rajendra O. Gandhi,
Kiran P. Patel, David L. Desfor, Madhusudan I. Patni and Manhar
Gandhi, and the Partnership*
10.3 Amendment to Option Agreement dated December 4, 1998*
10.4 Contribution Agreement, dated as of June 3, 1998, between Hasu P. Shah
and Bharat C. Mehta, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror*
10.5 Contribution Agreement, dated as of June 3, 1998, between Shree
Associates, JSK Associates, Shanti Associates, Shreeji Associates,
Kunj Associates, Devi Associates, Neil H. Shah, David L. Desfor,
Madhusudan I. Patni, Manhar Gandhi and Shreenathji Enterprises, Ltd.,
as Contributor, and Hersha Hospitality Limited Partnership, as
Acquiror*
10.6 Contribution Agreement, dated as of June 3, 1998, between JSK
Associates, Shanti Associates, Shreeji Associates, Kunj Associates,
Devi Associates, Neil H. Shah, David L. Desfor and Shreenathji
Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror*
10.7 Contribution Agreement, dated as of June 3, 1998, between 2144
Associates, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror*
10.8 Contribution Agreement, dated as of June 3, 1998, between JSK
Associates, Shanti Associates, Shreeji Associates, Kunj Associates,
Neil H. Shah, David L. Desfor, Madhusudan I. Patni, Manhar Gandhi and
Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality
Limited Partnership, as Acquiror*
10.9 Contribution Agreement, dated as of June 3, 1998, between JSK
Associates, Shanti Associates, Shreeji Associates, Kunj Associates,
Neil H. Shah, Madhusudan I. Patni and Shreenathji Enterprises, Ltd.,
as Contributor, and Hersha Hospitality Limited Partnership, as
Acquiror*
10.10 Contribution Agreement, dated as of June 3, 1998, between 2144
Associates, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror*
10.11 Contribution Agreement, dated as of June 3, 1998, between JSK
Associates, Shanti Associates, Shreeji Associates, Kunj Associates,
Neil H. Shah, David L. Desfor and Shreenathji Enterprises, Ltd., as
Contributor, and Hersha Hospitality Limited Partnership, as Acquiror*
10.12 Contribution Agreement, dated as of June 3, 1998, between 2144
Associates, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror*
10.13 Contribution Agreement, dated as of June 3, 1998, between 144
Associates, 344 Associates, 544 Associates and 644 Associates, Joint
Tenants Doing Business as 2544 Associates, as Contributor, and Hersha
Hospitality Limited Partnership, as Acquiror*
10.14 Contribution Agreement, dated June 3, 1998, between Shree Associates,
as Contributor, and Hersha Hospitality Limited Partnership, as
Acquiror*
10.15 Contribution Agreement, dated June 3, 1998, between 2144 Associates,
as Contributor, and Hersha Hospitality Limited Partnership, as
Acquiror*
10.16 Contribution Agreement, dated June 3, 1998, between 144 Associates,
344 Associates, 544 Associates and 644 Associates, Joint Tenants Doing
Business as 2544 Associates, as Contributor, and Hersha Hospitality
Limited Partnership, as Acquiror*
10.17 Contribution Agreement, dated June 3, 1998, between Shree Associates,
Devi Associates, Shreeji Associates, Madhusudan I. Patni and
Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality
Limited Partnership, as Acquiror*

10.18 Contribution Agreement, dated June 3, 1998, between Shree Associates,
as Contributor, and Hersha Hospitality Limited Partnership, as
Acquiror*
10.19 Contribution Agreement, dated August 11, 1999, between Shree
Associates, JSK II Associates, Shreeji Associates, Kunj Associates,
Shanti III Associates, Neil H. Shah, David L. Desfor, Manish M. Patni
and Shreenathji Enterprises, Ltd., collectively as Contributor, and
Hersha Hospitality Limited Partnership, as Acquiror (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
filed on August 26, 1999)
10.20 Contribution Agreement, dated September 1, 1999, between 2844
Associates, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror (incorporated by reference to Exhibit 10.3 to
the Company's Current Report on Form 8-K filed on August 26, 1999)
10.21 Purchase Agreement, dated September 1, 1999, between 2544 Associates,
as Seller, and 3544 Associates, as Purchaser (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
filed on September 14, 1999)
10.22 Contribution Agreement, dated January 1, 2000, between 1544
Associates, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror (incorporated by reference to Exhibit 10.3 to
the Company's Current Report on Form 8-K filed on March 23, 2000)
10.23 Contribution Agreement, dated January 1, 2000, between 1844
Associates, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror (incorporated by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K filed on March 23, 2000)
10.24 Contribution Agreement, dated January 1, 2000, between 3144
Associates, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K filed on March 23, 2000)
10.25 Contribution Agreement, dated October 1, 2000, between 1944
Associates, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K filed on November 9, 2000)
10.26 Purchase Leaseback Agreement entered into as of May 19, 2000 between
Hersha Hospitality Limited Partnership and each of Noble Investments
Newnan, LLC, Millennium Two Investments Duluth, LLC, Noble Investments
RMD, LLC and Embassy Investments Duluth, LLC, entities owned by Noble
Investment Group, Ltd. (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K filed on June 5, 2000)
10.27 Form of Ground Lease*
10.28 Form of Percentage Lease*
10.29 Administrative Services Agreement, dated January 26, 1999, between
Hersha Hospitality Trust and Hersha Hospitality Management, L.P.*
10.30 Warrant Agreement, dated January 26, 1999, between Anderson &
Strudwick, Inc. and Hersha Hospitality Trust*
10.31 Warrant Agreement, dated June 3, 1999, between 2744 Associates, L.P.
and Hersha Hospitality Limited Partnership*
10.32 Hersha Hospitality Trust Option Plan*
10.33 Hersha Hospitality Trust Non-Employee Trustees' Option Plan*
10.34 Loan and Security Agreement between 1444 Associates and MEPS
Associates and Sovereign Bank (incorporated by reference to Exhibit
10.25 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999)
10.35 Note executed by 1444 Associates and MEPS Associates in connection
with the Loan and Security Agreement (incorporated by reference to
Exhibit 10.26 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999)
10.36 Purchase Agreement, dated December 4, 2001, between Metro Two Hotel,
LLC, as Seller, and HHLP Hunters Point, LLC, as Purchaser
(incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K filed on December 7, 2001)

10.37 Purchase Agreement, dated December 4, 2001, between Hersha
Hospitality Limited Partnership, as Seller, and Riverfront Hotel
Associates, as Purchaser (incorporated by reference to Exhibit 10.3 to
the Company's Current Report on Form 8-K filed on December 7, 2001)
10.38 Contribution Agreement, dated December 4, 2001, between Hersha
Hospitality Limited Partnership and Hersha Hospitality, LLC, as
Contributors, and Shree Associates, JSK II Associates, Shreeji
Associates, Kunj Associates, Shanti III Associates, Devi Associates,
Neil H. Shah, David L. Desfor and Shreenathji Enterprises, Ltd., as
Acquirors (incorporated by reference to Exhibit 10.4 to the Company's
Current Report on Form 8-K filed on December 7, 2001)
10.39 Contribution Agreement, dated December 4, 2001, between Hersha
Hospitality Limited Partnership and Hersha Hospitality, LLC, as
Contributors, and Shree Associates, JSK II Associates, Shreeji
Associates, Kunj Associates, Shanti III Associates, Devi Associates,
Neil H. Shah, David L. Desfor and Shreenathji Enterprises, Ltd., as
Acquirors (incorporated by reference to Exhibit 10.5 to the Company's
Current Report on Form 8-K filed on December 7, 2001)
15 Letter Regarding Unaudited Interim Financial Information
21 List of Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21.1 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000)
23.1 Consent of Moore Stephens, P.C.
23.2 Consent of Hunton & Williams (included in Exhibit 5)
24 Power of Attorney (included on signature page of the Registration
Statement)**

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

* Filed with the SEC as an exhibit to Hersha Hospitality Trust's
registration statement on Form S-11, as amended, Registration No. 333-56087.

** Previously filed.

ITEM 37. UNDERTAKINGS.

The undersigned Registrant hereby undertakes as follows:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post- effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in this registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate
the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement; and

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this registration
statement or any material change to such information in this
registration statement;

provided, however, that paragraphs a(i) and a(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in the periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in this
registration statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of these securities being registered which remain unsold at the termination
of the offering.

The undersigned Registrant hereby further undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part of
this registration statement in reliance under Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in New Cumberland, State of Pennsylvania, on December
28, 2001.

HERSHA HOSPITALITY TRUST
(Registrant)

By: /s/ Hasu P. Shah
------------------------------------
Hasu P. Shah
Chairman, Chief Executive Officer,
and Trustee
(Principal Executive Officer)

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on December 28, 2001.

SIGNATURE TITLE
- -------------------------- -----

/s/ Hasu P. Shah Chairman, Chief Executive Officer and
- -------------------------- Trustee
Hasu P. Shah (Principal Executive Officer)

/s/ Ashish R. Parikh Chief Financial Officer
- -------------------------- Principal Financial and Accounting
Ashish R. Parikh Officer)

/s/ Kiran P. Patel* Secretary
- --------------------------
Kiran P. Patel

/s/ Rajendra O. Gandhi* Treasurer
- --------------------------
Rajendra O. Gandhi

/s/ Kanti D. Patel* Trustee
- --------------------------
K.D. Patel

/s/ L. McCarthy Downs, III* Trustee
- --------------------------
L. McCarthy Downs, III

/s/ Michael A. Leven* Trustee
- --------------------------
Michael A. Leven

/s/ William Lehr, Jr.* Trustee
- --------------------------
William Lehr, Jr.

/s/ Thomas S. Capello* Trustee
- --------------------------
Thomas S. Capello

/s/ Donald J. Landry* Trustee
- --------------------------
Donald J. Landry

*By: /s/ Ashish R. Parikh
- ----------------------------
Ashish R. Parikh in his
capacity as attorney-in-fact

EXHIBIT INDEX

EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
3.1 Amended and Restated Declaration of Trust of the Registrant.*
3.2 Bylaws of the Registrant.*
4.1 Form of Common Share Certificate*
5.1 Opinion of Hunton & Williams
8.1 Opinion of Hunton & Williams with respect to tax matters
10.1 Amended and Restated Agreement of Limited Partnership of
Hersha Hospitality Limited Partnership*
10.2 Option Agreement dated as of June 3, 1998, among Hasu P. Shah, Jay H.
Shah, Neil H, Shah, Bharat C. Mehta, K.D. Patel, Rajendra O. Gandhi,
Kiran P. Patel, David L. Desfor, Madhusudan I. Patni and Manhar
Gandhi, and the Partnership*
10.3 Amendment to Option Agreement dated December 4, 1998*
10.4 Contribution Agreement, dated as of June 3, 1998, between Hasu P. Shah
and Bharat C. Mehta, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror*
10.5 Contribution Agreement, dated as of June 3, 1998, between Shree
Associates, JSK Associates, Shanti Associates, Shreeji Associates,
Kunj Associates, Devi Associates, Neil H. Shah, David L. Desfor,
Madhusudan I. Patni, Manhar Gandhi and Shreenathji Enterprises, Ltd.,
as Contributor, and Hersha Hospitality Limited Partnership, as
Acquiror*
10.6 Contribution Agreement, dated as of June 3, 1998, between JSK
Associates, Shanti Associates, Shreeji Associates, Kunj Associates,
Devi Associates, Neil H. Shah, David L. Desfor and Shreenathji
Enterprises, Ltd., as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror*
10.7 Contribution Agreement, dated as of June 3, 1998, between 2144
Associates, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror*
10.8 Contribution Agreement, dated as of June 3, 1998, between JSK
Associates, Shanti Associates, Shreeji Associates, Kunj Associates,
Neil H. Shah, David L. Desfor, Madhusudan I. Patni, Manhar Gandhi and
Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality
Limited Partnership, as Acquiror*
10.9 Contribution Agreement, dated as of June 3, 1998, between JSK
Associates, Shanti Associates, Shreeji Associates, Kunj Associates,
Neil H. Shah, Madhusudan I. Patni and Shreenathji Enterprises, Ltd.,
as Contributor, and Hersha Hospitality Limited Partnership, as
Acquiror*
10.10 Contribution Agreement, dated as of June 3, 1998, between 2144
Associates, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror*
10.11 Contribution Agreement, dated as of June 3, 1998, between JSK
Associates, Shanti Associates, Shreeji Associates, Kunj Associates,
Neil H. Shah, David L. Desfor and Shreenathji Enterprises, Ltd., as
Contributor, and Hersha Hospitality Limited Partnership, as Acquiror*
10.12 Contribution Agreement, dated as of June 3, 1998, between 2144
Associates, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror*
10.13 Contribution Agreement, dated as of June 3, 1998, between 144
Associates, 344 Associates, 544 Associates and 644 Associates, Joint
Tenants Doing Business as 2544 Associates, as Contributor, and Hersha
Hospitality Limited Partnership, as Acquiror*
10.14 Contribution Agreement, dated June 3, 1998, between Shree Associates,
as Contributor, and Hersha Hospitality Limited Partnership, as
Acquiror*
10.15 Contribution Agreement, dated June 3, 1998, between 2144 Associates,
as Contributor, and Hersha Hospitality Limited Partnership, as
Acquiror*

10.16 Contribution Agreement, dated June 3, 1998, between 144 Associates,
344 Associates, 544 Associates and 644 Associates, Joint Tenants Doing
Business as 2544 Associates, as Contributor, and Hersha Hospitality
Limited Partnership, as Acquiror*
10.17 Contribution Agreement, dated June 3, 1998, between Shree Associates,
Devi Associates, Shreeji Associates, Madhusudan I. Patni and
Shreenathji Enterprises, Ltd., as Contributor, and Hersha Hospitality
Limited Partnership, as Acquiror*
10.18 Contribution Agreement, dated June 3, 1998, between Shree Associates,
as Contributor, and Hersha Hospitality Limited Partnership, as
Acquiror*
10.19 Contribution Agreement, dated August 11, 1999, between Shree
Associates, JSK II Associates, Shreeji Associates, Kunj Associates,
Shanti III Associates, Neil H. Shah, David L. Desfor, Manish M. Patni
and Shreenathji Enterprises, Ltd., collectively as Contributor, and
Hersha Hospitality Limited Partnership, as Acquiror (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
filed on August 26, 1999)
10.20 Contribution Agreement, dated September 1, 1999, between 2844
Associates, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror (incorporated by reference to Exhibit 10.3 to
the Company's Current Report on Form 8-K filed on August 26, 1999)
10.21 Purchase Agreement, dated September 1, 1999, between 2544 Associates,
as Seller, and 3544 Associates, as Purchaser (incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
filed on September 14, 1999)
10.22 Contribution Agreement, dated January 1, 2000, between 1544
Associates, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror (incorporated by reference to Exhibit 10.3 to
the Company's Current Report on Form 8-K filed on March 23, 2000)
10.23 Contribution Agreement, dated January 1, 2000, between 1844
Associates, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror (incorporated by reference to Exhibit 10.2 to
the Company's Current Report on Form 8-K filed on March 23, 2000)
10.24 Contribution Agreement, dated January 1, 2000, between 3144
Associates, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K filed on March 23, 2000)
10.25 Contribution Agreement, dated October 1, 2000, between 1944
Associates, as Contributor, and Hersha Hospitality Limited
Partnership, as Acquiror (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K filed on November 9, 2000)
10.26 Purchase Leaseback Agreement entered into as of May 19, 2000 between
Hersha Hospitality Limited Partnership and each of Noble Investments
Newnan, LLC, Millennium Two Investments Duluth, LLC, Noble Investments
RMD, LLC and Embassy Investments Duluth, LLC, entities owned by Noble
Investment Group, Ltd. (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K filed on June 5, 2000)
10.27 Form of Ground Lease*
10.28 Form of Percentage Lease*
10.29 Administrative Services Agreement, dated January 26, 1999, between
Hersha Hospitality Trust and Hersha Hospitality Management, L.P.*
10.30 Warrant Agreement, dated January 26, 1999, between Anderson &
Strudwick, Inc. and Hersha Hospitality Trust*
10.31 Warrant Agreement, dated June 3, 1999, between 2744 Associates, L.P.
and Hersha Hospitality Limited Partnership*
10.32 Hersha Hospitality Trust Option Plan*
10.33 Hersha Hospitality Trust Non-Employee Trustees' Option Plan*
10.34 Loan and Security Agreement between 1444 Associates and MEPS
Associates and Sovereign Bank (incorporated by reference to Exhibit
10.25 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999)

10.35 Note executed by 1444 Associates and MEPS Associates in connection
with the Loan and Security Agreement (incorporated by reference to
Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999)
10.36 Purchase Agreement, dated December 4, 2001, between Metro Two Hotel,
LLC, as Seller, and HHLP Hunters Point, LLC, as Purchaser
(incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K filed on December 7, 2001)
10.37 Purchase Agreement, dated December 4, 2001, between Hersha Hospitality
Limited Partnership, as Seller, and Riverfront Hotel Associates, as
Purchaser (incorporated by reference to Exhibit 10.3 to the Company's
Current Report on Form 8-K filed on December 7, 2001)
10.38 Contribution Agreement, dated December 4, 2001, between Hersha
Hospitality Limited Partnership and Hersha Hospitality, LLC, as
Contributors, and Shree Associates, JSK II Associates, Shreeji
Associates, Kunj Associates, Shanti III Associates, Devi Associates,
Neil H. Shah, David L. Desfor and Shreenathji Enterprises, Ltd., as
Acquirors (incorporated by reference to Exhibit 10.4 to the Company's
Current Report on Form 8-K filed on December 7, 2001)
10.39 Contribution Agreement, dated December 4, 2001, between Hersha
Hospitality Limited Partnership and Hersha Hospitality, LLC, as
Contributors, and Shree Associates, JSK II Associates, Shreeji
Associates, Kunj Associates, Shanti III Associates, Devi Associates,
Neil H. Shah, David L. Desfor and Shreenathji Enterprises, Ltd., as
Acquirors (incorporated by reference to Exhibit 10.5 to the Company's
Current Report on Form 8-K filed on December 7, 2001)
15 Letter Regarding Unaudited Interim Financial Information
21 List of Subsidiaries of the Registrant (incorporated by reference to
Exhibit 21.1 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000)
23.1 Consent of Moore Stephens, P.C.
23.2 Consent of Hunton & Williams (included in Exhibit 5)
24 Power of Attorney (included on signature page of the Registration
Statement)**

- --------------------
* Filed with the SEC as an exhibit to Hersha Hospitality Trust's
registration statement on Form S-11, as amended, Registration No. 333-56087.

** Previously filed.